CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 112
2.2. SCHOOLS OF THOUGHTS UNDERLYING THEORIES OF CORPORATE GOVERNANCE
24
2.2. SCHOOLS OF THOUGHTS UNDERLYING THEORIES OF CORPORATE
25
suggests that parties must be free to “opt out” of the rules where they are not comfortable.78 The nexus of contracts theory has been criticised by many scholars as they are against the idea of regarding a company as a nexus of incomplete contracts.79 Contractarianism however has been quite influential in shaping company law doctrines of corporate governance. It is thus argued by some scholars that the contractarian school of thought as developed by law and economics scholars dominates the theory of corporate law.80
There are two forms of contractualism ideologies namely legal contractualism and economic contractualism.81 Legal contractualism creates an entity that is free from mandatory corporate laws and upholds the view that an entity is a result of consensual contracts between the corporate entity and its members to the exclusion of other stakeholders.82 Other scholars beg to differ as they suggest that there is scope for recognition of contractual terms between the company and non-shareholder constituencies within contractarianism.83The latter is a wider view of Contractarianism as it is based on this school of thought that creditors cannot be protected by corporate laws since they enjoy protection from contract laws. On the other hand, economic contractualism avers that the nature and form of the corporation is explained on the basis of bargaining issues, rather than legislation, which is considered to have only limited impact on any corporation.84 Thus, an entity is seen as an association of shareholders with a view to pursue economic gain and thus contracting with the corporate entity.
Contractarianism opposes the protection of creditors by corporate laws as it asserts that protective measures for creditors’ interests are limited to terms in the actual contract
78Keay, opcit note 16, pp 672-3.
79See S. Deakin and A. Hughes ‘Economic Efficiency and the Proceduralisation of Company Law’(1999) Vol. 3 Carlifonia Law Review,169; W. Bratton Jr ‘The ‘‘Nexus of Contracts Corporation’’: A Critical Appraisal’ (1989) Vol 74 Cornell Law Review,407, 412.
80 Whincop “Painting the Corporate Cathedral: The Protection Entitlements in Corporate Law” (1999) Vol. 19, Oxford Journal of Legal Studies, 30.
81Dine, opcit note 74, pp 3-12.
82 Ibid, 6. For a statutory manifestation of this concept see section 65(2) of the repealed 1973 Act which states that The memorandum and articles shall bind the company and the members thereof to the same extent as if they respectively had been signed by each member, to observe all the provisions of the memorandum and of the articles, subject to the provisions of this Act. Same applies with 15 (6) of the 2008 Act which states that a company's Memorandum of Incorporation, and any rules of the company, are binding between the company and each shareholder; between or among the shareholders of the company; and between the company and each director or prescribed officer of the company; or any other person serving the company as a member of the audit committee or as a member of a committee of the board, in the exercise of their respective functions within the company.
83 J Dean ‘Stakeholding and Company Law’ (2001) Vol. 22 No. 3, The Company Lawyer, 66, 67.
84 B. R. Cheffins ‘Company Law: Theory, Structure and Operation’ (1997) Vol. 41, Canadian Business law Journal, 233.
26
between them and the company.85 In other words, creditors enjoy protection from contract laws and they are therefore entitled to make use of contractual remedies should their rights in terms of the contract be infringed. The contractarian school of thought is therefore an inspiration to the shareholder value approach as it recognises the contractual relationship of shareholders and the corporate entity to the exclusion of other stakeholders. Thus, stakeholders, other than shareholders, are expected to derive their protection from separate laws other than corporate laws.
2.2.2. Communitarianism
This school of thought is an opposite of contractarianism which primarily values the rights of shareholders of the company. Under this school of thought, directors’ duties are redefined as being in the interests of various corporate stakeholders. This school of thought suggests that mutually benefiting and productive relationships will only be optimised where directors are allowed to balance shareholders’ interests with those of other important but non- shareholder constituencies.86 A company should therefore have as its objective the conduct of business activities with a view to enhancing the economic success of the corporation, taking into account, as appropriate, the legitimate interests of other stakeholder constituencies.87
This school of thought is criticised mainly because the granting of the company`s status is modelled by the state and thus creating an instrument for the state to utilise for its own ulterior motives. The aims of the company should therefore be identified with those of the society and that is a misdirection of the company from commercial goals in favour of politically diffused goals.88 When it comes to protection of stakeholders by corporate laws, it must be noted that creditors deserve as much as shareholders because they also have a financial stake in the company. Employees at least are protected by both contract and statute in South Africa which gives them much security. The society is protected by different laws such as environmental laws as well as policies of social responsibility and sustainable development related measures. It is thus argued that since the company is more of an economic oriented vehicle than a social orientation more and better protection should be given to stakeholders with a financial stake in the company.
85 Keay, opcit note 16, 673.
86 DTI, opcit note 4, 25.
87Ibid.
88 Dine, opcit note 74, 17.
27
Communitarianism however has its arms wide open to accommodate protection of all stakeholders of the company. A company in a jurisdiction that is inspired by this school of thought may be prone to diffusion of goals and thus losing the economic essence of a company. Holding directors accountable to all stakeholders may be a burdensome duty which may be incapable of being fulfilled.89 Although this school of thought has a positive impact on protection of creditor interests, it still proves not to be ideal for business and thus not investor friendly. Thus, save for shareholders and creditors, other stakeholders should be protected by different laws other than corporate laws which are, according to the researcher`s view, prescribed for those stakeholders with a direct financial stake in the company.
2.2.3. Dual-Concessionarism
With this school of thought, a company is regarded as an economic arena where contractors convene for business adventures yet conceding to the fact that a company has a separate legal identity. The wishes of the original owners can no longer be considered paramount.90 Proponents of this school of thought recognise the separate legal existence status of a company and the operation and existence of the company is viewed as a concession by the state wherein the company`s shareholders enjoy limited liability subject to terms and conditions.91 The difference between communitarianism and concessionarism is that supporters of the latter accept that the state has a limited role to play in ensuring that corporate governance structures equally cater for all stakeholders but do not force the company to realign its aims to reflect the social goals of the state.92
This school of thought has influence on the enlightened shareholder value approach as it suggests that the interests of the company can no longer be assumed to be those of the original contracting partners, thus creating the opportunity for shareholders, as well as other stakeholders, to have their interests considered.93 The other difference between this school of thought and communitarianism is that the company still maintains its commercial goals unlike in communitarianism where commercial goals are diffused with state driven political goals. In other words, the original notion of a company realising profits for the benefit of shareholders is maintained while at the same time catering for interests of other stakeholders although subjected to shareholder interests. The flaw in this school of thought
89 B. Chapman ‘Corporate Stakeholders, Choice Procedures and Committees’ (1995-6) Vol. 26 Canadian Business Law Journal, 211-213.
90Dine, opcit note 74, p 26.
91Ibid, 22.
92 Ibid, 21.
93Ibid, 28.
28
are such that it does not determine the extent to which interests of various corporate constituencies are to be considered. This therefore leaves creditors uncertain as to the degree to which their interests may be regarded.
2.2.4. Associativism
According to Wishart, this school of thought considers a company as an association of members who aim at contributing capital and the capital that they contribute determines the purpose, organisation and criteria of membership.94 Of crucial importance to the protection of creditors is the notion behind this school of thought; it asserts that contributors of capital are not limited to shareholders but also creditors who provides the debt capital in times of need and hence they form part of the company`s membership.95 These ideologies therefore place creditors and other stakeholders on an equal footing with shareholders to the extent their contribution allows them to form part of the company`s membership.
The issue of creditors being part of members by virtue of their capital contribution however remains unclear as each particular association should determine whether to include any stakeholder as a member upon their contribution. It is however suggested that membership should be determined with reference to the financial situation of the company; shareholders as members where the company is financially stable, and creditors where the company is financially distressed.96 Corporate governance benefits should therefore be available to particular persons or groups when they can show that their interests should be considered as part of the company’s interests rather than because they belong to a particular group.
Having explored the various schools of thoughts, the researcher notes the different influences that each school of thought has on the interests of creditors. Further, one may come to the realisation of the source or schools of thoughts that inspire a choice of a particular theory of corporate governance in a particular jurisdiction. As earlier observed, a jurisdiction that is predisposed to the shareholder value approach certainly derives its strength from the contractarian school of thought. Also, a jurisdiction that follows the pluralist approach would have drawn its impetus from possibly the communitarian and associative school of thoughts. Finally, a jurisdiction that is predisposed to the enlightened shareholder value approach could be aligned to the dual concessionarism school of thought.
94Wishart, opcit note 74, p 348.
95Ibid.
96 Ibid.
29
2.3. THEORIES OF CORPORATE GOVERNANCE AND THEIR EFFECTS ON