Rigging the Risk






Humans are frightened. For Christians this is the real moral of the Genesis story, God is all benevolent but since the time  of Adam and Eve understood freedom, all people are doomed to live in fear. Of course, other religions have similar doctrines and myths. What does this mean in modern society? How can our economic model cope with the fear factor? During the Soviet regime its theory was  to found an equal polity, sharing the resources of the state, thus minimise risk for the populace. . As we know, it didn’t work well, but the opposite system,  capitalism has also significant problems, a market based economy predicates freedom as a priority. This risk allows powerful actors to become rich, others live in poverty. The paradoxes of both system shows that there needs to be a balance. In capitalism contract is a powerful instrument  to construct society. Contract is fundamental for markets. The reason that contract has such resonance in buying and selling is that the theory of a bargain is supposed to be fair, however powerful forces means that bargains are asymmetric. Therefore ‘markets’ are similarly unfair rigging the risks by powerful traders. Recently the biggest cohort of the riggers are the bankers especially the ‘casino bankers’ and the rating agencies. Sovereign states are in fear because the riggers might change the interest needed by indebted countries. Countries are always frightened since there is no way that a default can be less than disastrous. The IMF did toy with an insolvency regime but this was shelved, why and should it we revisited?




Humans are frightened. For Christians this is the real moral of the Genesis story, God is all benevolent but since the time  of Adam and Eve understood freedom, all people are doomed to live in fear. Of course, other religions have similar doctrines and myths. What does this mean in modern society? How can our economic model cope with the fear factor? Since human beings are social animals, we banded into groups for organising our needs. Each individual fears risk, however each person has different things that she is frightened about. Clearly  basic needs are paramount; they are water, food, warmth and shelter, including the shelter of each other. What does this mean in contemporary society?  One way that human beings have used to lessen their fear is to cooperate in organised groups. However this immediately means that there is another risk which is that each individual person fears other human beings. This is the paradox of the human condition. This is crudely shown by the two opposite ways of organising economic concerns, capitalism and communism which are polar opposites. The risk for people is  lessened by these two diverging concepts. Capitalism fears domination by other people, this means that society is individually based however communism prefers to ameliorate the risk by banding together therefore meeting society’s needs that way. There are paradoxes on paradoxes, because the tension is exacerbated by the way that the opposing societies organises its concerns.  This leads to strains and tensions. It is trite that the communist block tried to organise their affairs in an egalitarian way and that led to dictators, a wonderful paradox itself. On the other hand, capitalism wanted freedom and found that the risk was inequality, leading to poverty which constrains freedom anyway, again there are paradoxes, and they are fundamental. Each system went too far, in the communist system not enough individual autonomy was allowed so that democracy started to shrivel, for capitalism poverty meant that the very poor had no freedom[1], since  if people do not get their basic needs satisfied, this mean also that their political aspirations are thwarted. Both systems were/are extreme meaning that some individuals were/are killed by the regime and human rights violations were rife.  The role of commercial law in a market economy is to allocate risk. Controlled economies attempted to eliminate the risks of commercial transactions to individuals, transferring the risk of failure to the whole community. The move to a market economy from a controlled economy thus entails complex political questions about which market participants shall bear the risk of market transactions. Two very simple examples illustrate this fundamental role: one is the law of contract. At first sight agreement between two individuals to buy and sell might seem a politically neutral transaction and the decision by the state to provide enforcement mechanisms to back such a transaction (such as sanctions for non-performance) might similarly appear to be politically uncontroversial. However, immediately any disparity of bargaining power is taken into consideration, a state decision to provide enforcement mechanisms will clearly benefit the party who started in the more powerful position since that bargaining power will have been used to gain a more beneficial bargain. Only if safeguards such as Unfair Contract Terms legislation are enacted to re-balance the equation can neutrality be regained.

For lawyers contract is one of the most crucial implement of economic management for  in a market based economy.

The theory is that each individual has freedom to trade and this leads to each person getting their needs and desires satisfied. However a contractual system has some problems, one risk has been already identified, that is the difficulty of inequality. The diagrams  emphasises that what  is a benign instrument can get out of hand This illustration shows the way that contract can be a malign construct and the paradox is in the way that freedom can devaluing freedom although the whole idea of contract was to enhance freedom.

Of course, lawyers use contract as an engine of fundamental philosophy: contract is just a exchange of goods or services, such as bartering, marketing , swops, buying-selling etc. Contract has accrued particular resonance because it is a fundamental building block of markets. and therefore governments need to regulate contracts and prioritize sanctions for breaches. Similarly the courts can use some powers to mitigate unfair bargains. The philosophy of western capitalism says that bargains should be equal, this is supposed to lead to a vibrant economy. The whole system is predicated on contract. However the equality equation has been lost in western capitalism because powerful interests stop any vestige of equality, and the most egregious villains of the slide into the inequality morass are the Multinational and Transnational companies. Neo-liberal economic theory posits a theory of rational individual bargaining in perfect harmony, if this is possible this is the best way to allocate all resources, all goods and services. However this is a Utopian dream which has been usurped by the economists’ assumptions. All commercial bargains are asymmetric. The theory predicates the way that markets should work and therefore the economy should be optimised. This is the way that it should (i.e. it is assumed to work) work; rational individual persons bargaining in freedom. For example; think of a bargain to sell and buy a gadget; the bargainers are equal in terms of power relations i.e neither is related to the workplace, since this is often a fraught reason for inequality since the workplace is often hierarchal. Both individual is not related by family ties, both are the same sex, both have equal possessions, intelligence, opportunities and beauty. In this nirvana the transaction would be fair. Therefore there is no way that the theory of Pareto efficiently could work. Reality is more like this:

There is a less rigorous theory which economists use to understand the economy, this is  the Kaldor- Hicks system. This theory is more realistic in understanding the way that  that markets works to the disadvantage of poor people, since immediately a disadvantaged person who has less bargaining power will inevitably get a bad deal. This will snowball in all bargains including international trading; leading to this:

This imbalance is so extreme because of the western universal instrument of contract which is built into the Anglo-American model of companies and the importance of freedom to trade. In Companies, International Trade and Human Rights[2], I wrote that the UK-US model of capitalism  is  the traditional one known as the  neo-liberal economic model which is used to organise companies structures in this country and which informs the structure of many of the biggest corporations in the world. Many scholars believe that the global recession and the financial crisis which hit international money markets shows that we need a different model of economic arrangement. Some people think that it is time to change tack and that the old model which we follow now to arrange company law  is bust! The Anglo-American model is now found in many Multinational and Transnational companies even in developing countries although this model is an aggressive mode of capitalism. Now since the shine of neo-liberalism has been tarnished because of the global recession, it is time to reappraise our ideas. This might be a new reawakening and we should be ready to be at the forefront of the challenge. This might be particularly difficult because of the argument that although there are many different corporate models in the world many scholars believe that the Anglo-American model will be  inevitably triumphant, However European socially based model is not finished, it has been around for many years, unfortunately comparisons are very tricky, since each country has a particular culture and therefore laws which are distinct for that reason. Some scholars have attempted comparisons. Further it is not clear what we want top measure, often it is ‘efficiency’ but what is this? We will see later that the concept of efficiency can be radical reshaped. Using a conventional test Carlin[3] tried to show that the model of corporate governance is not the most important thing, other significant indicators are more crucial. Using a statistical analysis, she firstly uses the slogan ‘The end of history for corporate law’[4] to see whether that it is correct. She eventually concludes that it is not, believing that the two models, shareholder versus blockholder system is too simplistic but she uses two hypothesis  to test the efficiency of the two systems. She says: “A simplified version of Luigi Zingales’ (2000) typology of models of the firm helps to pin down the origins of the two different views about the role that ownership structures play. The ‘ownership is all about finance’ view arises from the corporate finance literature based on the conception of the firm as a nexus of explicit contracts.  . . Hypothesis 1: Unless inefficient resistance intervenes, shareholder-oriented corporate governance leads to convergence in ownership structures and improved performance. . . . Hypothesis 2: Shareholder-oriented corporate governance reforms lead to country-specific responses.”  After her investigation she concludes . . . “How do the reported empirical patterns relate to our hypothesis? . . .  A major impediment to the evaluation of these hypotheses is the absence to date of detailed descriptive data on how ownership and control patterns have changed over the past decade. The fragmentary evidence on ownership changes and on the engagement of different institutional investors assembled in this chapter suggests that the second hypothesis cannot be revealed out.”[5] Thus the investigation is not conclusive, particularly because of the diversification of the variables. Dignam and Galanis  take a different perspective, they believe that open markets make it inevitable that institutional shareholders will be more powerful than managers in the long term, and also that governments might be unable to stem any change of corporate governance[6].  A different tack was taken by Clerc, who questions the legitimacy of shareholder power. He says that a number of faulty arguments are used by people to augment shareholder legitimacy[7]. He argues that many people oppose the shareholder model and wishes to investigate the traditional company  governance structures that we saw in the triumphant literature in which says that all other models will shrivel.[8] Firstly he remembers that  one fundamental foundation of commercial company structure is the institution of limited liability: “Several theoretic reasons help to explain the enthusiasm for limited liability, but the most important and most obvious is that: it enables shareholders to hope for unlimited profits while risking only limited losses. If this were betting, it would be called a ‘winning formula’.[9] Clerc uses a number of examples to show that society must pay for reorganisations and (appositely) oil spills, he says that this means that shareholders have a moral hazard problem: “From a practical point of views , the result of the principle of non liability is clear: society as a whole plays the role of insurer for the risk taken by the shareholders. After all why not? Is you want a dynamic society, it may be desirable to protect entrepreneurs from the risk they take.”[10]

First Clerc realises that in our system the executive managers are not the entrepreneurs, but more importantly, this means that society has all of the risk but no control to limit the risk or the damage . . “there is a major problem of moral hazard: the insurance is free, the risk is largely determined by the behaviour of the insured party, and the insurer is granted no specific role in the internal control of the risk. What private insurer would accept such conditions? . . . how can society minimise its risk?[11]” Clerc doesn’t really find a solution although he does suggest a possibility for society representatives in company boards. However he does not explain any further. We will bring back this train of thought in a later section, of this article where we will use some possible solutions ameliorate of the contractual company structural which could mitigate the equality predicament.

The US/UK model of companies and corporate law has shareholders as the primary focus; the company must serve the interests of shareholders and directors are appointed and dismissed by shareholders. Nevertheless directors are to act in the interest of the company and usually owe no direct duties to shareholders. This structure does not necessarily equate shareholders with the company nor does it equate shareholder interests with ‘profit maximisation’ and impose a duty on directors to achieve such a goal. Nevertheless recent discourse has imposed the concept of profit maximisation on the assumption that this is what shareholders require and the second assumption that shareholders and the company is one and the same thing. Such an understanding of corporate aims has wide implications for their behaviour since all considerations other than profit are seen as ‘negative externalities’ to be adhered to or to be bargained away if possible. There is no doubt that this philosophy was one of the underlying causes of spectacular bankruptcies such as Enron and WorldCom.

Pogge’s concept of ‘moral deflection device,’ it is essentially a way to deflect a morally inconvenient truth because rich humans prefer wealth rather than moral duties.  In terms of moral responsibility the traditional construct of corporations means that they become another method of moral deflection: because the purpose of corporations is to make as much money as possible. Those who tolerate and profit from their existence have no responsibility for the methods they pursue. This ignores the fact not only that companies are structured by national laws but also that those who profit from an activity have a responsibility to prevent that activity harming others. While the damage of the poor nations and the catastrophic raping of the environment are desperate, we need to focus more particularly on the structure of corporations and their governance. There are two misnomers at the root of the Anglo-American model of corporate governance system: one is the illusion of a contractual foundation for companies and the second is the belief that shareholders hold property in the company[12]. I tried to show that one mistake in the contractual model is the way that once the articles of incorporation have been drafted the promoters are redundant. After the company business’s starts all sorts of the stakeholders have a part to play. Thus the contractual model is an illusion[13]. Other scholars have also been worried by the nexus of contracts concept. Clerc argues strongly against the shareholder primacy concept but also exposes the theory of nexus of contracts which he believes is a fiction used by the neo-liberal economists so disguise the monopoly of power of majority shareholders and their agents the directors:

“The theory of the nexus of contacts (which I shall refer to as ‘nexism’’ for the sake of convenience), proceeds differently, . . . On the ground that legal entity is a fiction, nexism defined the company as “ a set of complex arrangements of many sorts that those who associate voluntarily in the corporation will work out among  themselves” (Easterbrook and Fischel, 1991, p. 12).[14]”  Clerc realises that the company is also a fiction but for his argument he is happy to understand there are other institutions which are also fictional but have a profound influence on people.[15] He is more interested by the range of the contracts which are supposed to make the company work: “a theory, which places contracts at the heart of its analysis, is only worthwhile if it examines the real conditions of negotiation, execution and termination of those contracts. In particular, the following questions can be raised. What is the negotiation position of each party (for example, do employees have the choose of whether or not to work, do investors have the choice between investment and consumption) . . .”[16] In fact Clerc is mischievous since the whole philosophy which he calls ‘primacism’[17] is predicated on a sole stakeholder, the shareholders. In a way the contractual model is not useful for primacism as I wrote earlier, because once the company has been founded, the real business starts, and the contractual model falls down if  the company has only a single shareholder[18]? In fact a contractual theory harks back to tired philosophy rather than looking forward to reflexive theories which have a more inclusive reach, using writers and scholars like Teubner or Luhmann[19]. As Teubner rightly says:

“Putting it quite bluntly, a corporate enterprise does not exist simply as a self serving and self-realizing institution for the unique benefits of its shareholders and workers, but rather exists, above all, to fulfill a broader role in society.”[20]

Indeed, large companies have a huge influence  on our social, economic and political lives. In the words of Chayes, “[T]hey are repositories of power, the biggest centers of nongovernmental power in our society.”[21] In the UK, the influence of companies is just as evident as in the United States. The food we eat is dependent on how it is grown, processed, packaged, advertised and sold to us. Every one of these stages is determined or influenced by companies. Increasingly companies are involved in the provision of public services with the government having created mechanisms such as private finance initiatives, and more recently the proposals for community interest companies. Such mechanisms are recognition of the influence of companies and their role in society. In such a context it seems that the two company law assumptions that share the structure of company law and corporate governance are not only anachronistic but in fact wholly inaccurate in their representation of the character of companies today. Teubner argues for a proceduralization of fiduciary duties that enables non-shareholder interest-groups to participate in the monitoring and decision-making functions. The role of the law, in Teubner’s view should be to control indirectly internal organizational structures, through external regulation. The role of the law is external mobilization of internal control resources.[22] The organizational structures should allow for “discursive unification processes as to allow the optimal balancing of company performance and company function by taking into account the requirements of the non-economic environment.” In short, Teubner advocates a constitutionalization of the private corporation to make the corporate conscience work “if that meant to force the organization to internalize outside conflicts in the decision structure itself in order to take into account the non-economic interests of workers, consumers, and the general public.”[23] Teubner highlights the role of disclosure, audit, justification, consultation and negotiation and the duty to organize. He emphasizes the need to proceduralize. Ultimately, the point is to ensure that the decision-making processes allow participation by those affected by the decisions, whether in terms of profit, consumer choice, working conditions, or environmental impact of corporate activities. If the decisions are made jointly with the directors the monitoring role ought to reduce. Teubner’s proceduralization would mean a complete change in conceptualization of the company and directors’ duties.

The following section of this article tries to put some flesh on the bones’ of a skeleton of company structure, in the context of a new look at UK company law. As many have realized, the crunch is the way that directors should prioritize the stakeholders’ risk. Much angst has been written in this quest and there is not yet a solution. This difficulty is one of the most stubborn problems and one of the reasons that the traditional theory endures so strongly. Clerc says; “Given the many doubts inherent in the shareholder primary theory, one may wonder how it has succeeded in becoming dominant-although it has never ceased to be contested.”[24] Unfortunately one of this extremely intractable problem means that the ‘Single Master[25]’ theory has lingered. There seems no other solution: “In stakeholder theory, the managers must take into account not only the interests of shareholders, but also those of employees, customers, suppliers, local communities and so on. Because of the divergences between these different groups, the managers cannot make a rational decision, and so favour their own specific interest.[26]” This problem might be one of the reasons for the huge inequality between managers and employees. “This year, the numbers speak for themselves: while the business world reeled from the worst self-inflicted recession in a generation, those at the top continued to reward themselves disproportionately. Although direct bonuses were hit by the stock market crash, boards compensated by pushing up their salaries three times faster than average pay elsewhere in the country and relied instead on a growing range of fringe benefits such as cash in lieu of pension contributions. Those at the very top, particularly the ten best paid directors in the survey, beat all records. For the first time, the entire FTSE100 directors pay themselves more than £1 billion[27]”.




Job title

Total salary package, £m

1 Bart Becht Reckitt Benckiser CEO 36.76
2 Aidan Heavey Tullow Oil CEO 28.84
3 Chip Goodyear BHP Billiton CEO 23.82
4 Sir Martin Sorrell WPP CEO 19.71
5 Bob Diamond Barclays President 17.48
6 Stanley Fink Man Group Non-Executive 15.38
7 Trevor Reid Xstrata Finance Director 15.34
8 Arun Sarin Vodafone CEO 13.75
9 Santiago Zaldumbide Xstrata Executive 12.56
10 Graham Martin Tullow Oil Executive 11.44
11 John Pluthero Cable & Wireless CEO 10.63
12 Jean-Pierre Garnier GSK CEO 10.33
13 Frank Chapman BG Group CEO 10.1
14 Paul Pindar Capita CEO 9.86
15 Matthew O’Donoghue Tullow Oil Executive 9.21
16 Sir Terry Leahy Tesco CEO 9.11
17 Mike Turner, CBE BAE Systems CEO 7.22
18 Brad Mills Lonmin CEO 7.2
19 Manny Fontenla-Novoa Thomas Cook CEO 7.04
20 Jeroen van der Veer Royal Dutch Shell CEO 7.02
21 Michael Spencer ICAP CEO 6.73
22 Michael McLintock Prudential Executive 6.61
23 Paul Adams British American Tobacco CEO 6.4
24 Mark Bristow Randgold Resources CEO 6.28
25 Tim Mason Tesco Executive 6.28[28]







As we have seen it is a trite observation that the Anglo-American[29] model of companies[30] has been extremely powerful, creating mega empires which have huge economies. The US/UK model of companies and corporate law has shareholders as the primary focus; the company must serve the interests of shareholders and directors are appointed and dismissed by shareholders. Nevertheless directors are bound to act in the interest of the company and usually owe no direct duties to shareholders. This structure does not necessarily equate shareholders with the company nor does it equate shareholder interests with ‘profit maximisation’ and impose a duty on directors to achieve such a goal. Nevertheless recent discourse has imposed the concept of profit maximisation on the assumption that this is what shareholders require and the second assumption that shareholders and the company is the same thing. Such an understanding of corporate aims has wide implications for their behaviour since all considerations other than profit are seen as ‘negative externalities’ to be adhered to or to be bargained away if possible. There is no doubt that this philosophy was one of the underlying causes of spectacular bankruptcies such as Enron and WorldCom

As we have seen this Anglo-American model is simple, modelled on a contractual pattern. Although we have seen that the definition of ‘contractual’ is unclear, roughly it means that the principal negotiators together  design a company, this means that all of the investments and the profit of the enterprise belongs to the members. This model therefore has been in the forefront of the philosophy which became the traditionally economic model, free markets, the Washington Consensus, the neo-liberal economists construct. The Anglo-American model of companies antedated the Washington Consensus but it coincided with the worst aggressive sort of it. Particularly important  it has in it the philosophy of deregulation which allowed huge corporate empires. An excellent history of neoliberalism is found in Glinavos:

“How, then, did a specifically neoliberal version of capitalism built on an  essentially American model of ‘laissez-faire’ become the strand of western free market ideology that won the day. . .  it examines the theoretical underpinnings of neoliberalism, focusing in particular on its underlying assumptions that markets are natural; that the rationality of their operations is threatened by governments intervention ; that the role of law is limited ; that law should be subordinate to markets needs; that the ‘invisible hand’ of the market not only ensures efficiency  but also distributive justice.”[31] What this means for companies is that the shareholders are Kings, profit maximisation is the goal despite the fact that no company law ever says that it must be so.[32] The consequences are clear many testaments are written showing the denigration of the environment, bad labour practices, the displacement of domestic production, the undermining of political systems and the effect of the banking of international money systems[33].

Can the model of Shareholder ‘primacism’ be ousted? One possibility for changing the template might be  a concession company law model.  Concession theory in its simplest form views the existence and operation of the company as a concession by the state, which grants the ability to use the corporate form too, particularly where it operates with limited liability.[34] Thus the Charter of the Newfoundland Company:

“. . . thinking it a matter and action well becoming a Christian King to make true use of that which God from the beginning created for mankind . . . therefore do of our special grace certain knowledge and mere motion . . . give grant and confirm by these presents unto [various persons] their heirs and assigns, and to such and so many as they do or shall hereafter admit to be joined with them in form hereafter . . . That they shall be one body or communality perpetual, and shall have perpetual succession, and one common steal to serve for said body. . .”[35]

The traditional concession model was started by Queens or Kings to allow trade in the colonies, where sovereigns wanted territories and riches, in exchange thrusting entrepreneurs were allowed to trade in goods.  Of course the sovereign took most of the power and money, but the entrepreneurs also got rich. However the sovereign was usually very careful to stop entrepreneurs becoming too powerful since that would threaten his/her authority.  For that reason  the company and its directors had to be sure that the regulations which the sovereign made were meticulously kept, because otherwise the sovereign could  be enraged and the sanctions could her  be savage.

Now this model is an old fashioned one. Now, modern concession company theorists use a different understanding of the foundation of companies with some scholars  using a  bottom-up concept which posits a theory  which says that stakeholders are crucial for the foundation and running of  companies.

There are a number of strands of stakeholder theorists who believe that there is a living entity in companies, and all stakeholders are privy and crucial to the enterprise. Thus companies are a social and political entity.[36] In some ways stakeholder theory embraces the “organic” view of companies.[37] The organic analysis is borrowed from the analysis of states. Wolff[38] cites John Caspar Bluntschli who “found something corresponding in the life of the State not only to every part of the human body but even to every human emotion, and designated e.g., the foreign relations of a State as its sexual impulses![39]

These theorists hold that stakeholders are part of a company even though the shareholders and directors are the paramount managers of the company and administrate the bureaucracy. Employees, customers, consumers, local residents, and many others are within the corporate sphere of influence.[40] However there is another stronger theory which holds that the company is derived from society. In 2000 I suggested I different sort of model arrangement for companies.[41] I called this the ‘dual concession theory’, the idea was that it should be structured from the bottom. i.e instead of the monarch being  the sovereign fount for the enterprise, society itself should be the and remain the foundation for companies. That would mean that the community should have the power to change the organisation and the structure of companies. Companies would be derived from and socially responsible to the democratically organisation community of people. This is a variety of a social contract idea theory.[42] However it has important implications, it is an expression of the search for a new definition of democratically shared ‘common’ (good) beyond the traditional public-private distinction[43]. Perhaps the dual concession approach  is similar to Ruggie’s idea of a social licence for companies[44]. Ruggie doesn’t use examples to tell us how companies could be reformed. He hides in human rights speech, and particularly using egregious violations to illuminate the problem. His report is entitled: “Business and Human Rights: Towards operationizing the “protect, respect and remedy” Framework”[45] It is not fair to expect that the construction of companies would be in a ‘framework document, I hope that Ruggie’s work will have more detailed consideration and be published later. However the radical hypothesis that I suggest has within it a plan which could revolutionise democracy. We are used to a settled idea of democracy which takes a passive voting based situation to allow  governments to define and run the economy, a company structure that actively tells companies how we want goods and services to work would be a fundamental change.

Tilly says that democracy is a process, rather than a thing, a dynamic happening.[46]  Unfortunately although many theorists understand that it would be an excellent democratic ideal, very few have imagined how this might pan out in the real world. One way that this ideal could be visualised is by using the current regulations on companies, not only the company law regulations but all of the regulations which are part of the working of enterprise.  There are multiplicities of regulations that companies must implement and within companies, systems are set up to implement them. A simple example (and the most obvious) is the systems which must be set up to ensure financial control. As we know now the financial crash was partly the fault of lax regulations. The example of financial controls is just a single example of the regulations which impinge on decision making within companies. The company must remain within the criminal law and must have systems which ensure that this happens. This may extend to ensuring consistency between methods of working and achievable targets. For example if time targets for repairs to electric signals on a railway cannot be achieved without electricians working excessively long hours, the inconsistency may in future be identified as a reason for holding the company (and its directors) criminally responsible for an ensuing disaster. Similarly proper systems for implementation of health and safety and environmental regulations must rely on detailed knowledge of the ‘way things actually work’. The requirements of this web of regulation, imposed by society at large, means that the company  gains a greater degree of autonomy from its ‘owners’ because it has discretion in responding to the imposition of control from a source other than the ‘owner’ shareholders. In this way the separation of ownership and control is enhanced[47]. We must recognise that regulations are democratic imposed. implement the systems creates a culture of inclusion which moves away from a simple conception of a company as a contract based institution created by shareholders for their own benefit. This applies not only to financial and employee protection systems but to all systems designed to implement regulations relevant to a particular company’s operation. A key feature of such a legal framework is the imposition of a duty on directors to design and oversee systems which are capable of assessing and controlling the risks run by companies. Financial risks are the most obvious and the law already imposes duties to establish and maintain proper financial control systems. However, companies are at risk from a wide range of pressures imposed by society either directly (by regulation) or indirectly (by, for example, bad publicity). To fully understand the response of companies to regulatory and other pressures such as adverse publicity, we need to formulate a new concept of companies and their structural operation. If we move away from the idea of the company as separate ‘organs’, (shareholders in general meeting, directors with the duties of directors attempting to impose a code of personal conduct on directors) and consider the company as a series of interlocking systems we can see that each system has a distinct role. This normative concept means that companies are not secret legal institutions made by lawyers but a vibrant part of a democracy. People should argue about company regulation in that broad  way. As we will see this vision is already happening, where activists are challenging environmental resolutions in annual general meetings. However, this theory could have some lessons to learn from company law regulations.

The Company Law Act 2006[48]

How can companies be reformed in a democratic way? One possibility for a breakthrough could be the new UK Companies Law Act 2006 which has an interesting definition of director’s duties, but we do not know yet what the definition actually means, since there are not yet any cases about directors’ duties. Section 172 of the Companies Law Act 2006 says that directors have a duty to the company to act in a way, “in good faith, to promote the success of the company for the benefit of its members as a whole.” To do this the director is told that they are to have ‘regard’ to a range of other matters; “the consequences of any decisions in the long term; the company’ employees; the need to foster the company’s business relationship with suppliers, customers; and others, the impact of the company’s operation of the community and the environment; the desirability of the company’s maintaining a reputation for high standards of business conduct; and the need to act fairly between members of the company”. It looks wonderful, but, the rub is in Subsection (1) and (2) where the other interests are clearly shown to be minimal, the paramount interest is focused on the shareholders. We don’t know whether the judges will change the traditional focus of shareholder interests[49] by changing the importance of the other stakeholders. The Human Rights fraternity uses a rubric for encapsulate the crucial rights. They use a slogan which reads; “protect, respect, fulfill”. I think that this human rights idea is stronger that the concept in the directors’ duty in the Company Law Act 2006. ‘Respect’ is stronger than ‘regard’  I think that the judges might not understand that the Act has supposed to be a radical shake up of old concepts and therefore simple use a softer version of the shareholder model or not change anything. The dual concession idea, as a bottom-up concession theory, is a strong version of stakeholder theory and rests on a similar premise. The dual regulations are bottom-up when people demand democratic input of their governance, of course, legislation is top-up eventually then the regulations are enacted. At this point the concession model shadows the old concession model with the sovereign paramount.

Stakeholder theorists believe that there are two categories of stakeholder, a primary stakeholder whose interest is more crucial because the stakeholders’ participation could threaten the company, that is, the company could not survive their involvement.[50] Normally they are the shareholders, employees, customers and suppliers. Some theorists include “public stakeholder group: the governments and communities that provide infrastructures and markets, whose laws and regulations must be obeyed, and to whom taxes and other obligations may be due”[51]. Other academics exclude this category. Secondary stakeholders are then the media, special interests groups and perhaps competitors. The differences in the theories are in the way that the stakeholders are to be allowed to be part of the company. Stakeholder theory says that the company is the fount of the enterprise, instead the stakeholders the dual concession says that society i.e stakeholders are the company. The traditional stakeholder theory has the   focus on the company and, in a way, the stakeholders in that theory, are allowed to be a part of the company, a sort of a charitable concept, where directors are the top-cats, allowing the interests to be shared. On the other hand some scholars believe that the stakeholders are so important that their interests should be an end rather than a means[52], i.e. the company would be subsumed by the stakeholders. This is a radical idea, but it might mean that it would get rid of capitalism, a rather startling idea. It seems that the profit motive would be completely lost, since each stakeholder interest would be and end in itself. Would this mean, for example, would employees’s interests be paramount?  Would their wages be an end itself? How would the balance bestruck? The dual concession avoids this  intractable problem by bypassing the mechanism of regulating companies.

However, there is another interesting approach which could be bolted into the dual concession model. It rests on a new economic theory which has been coined because neo-liberalism has been discredited. Neoliberalism assumes all people (rational actors) want more and more money and goods. We now know what this fuelled the consumer boom and contributed to the world-wide financial crisis. This new theory is behavioural economics. In fact, the concept is not as simple as the Kantian idea proposed in the last  paragraph, the balances of the interests are managed by proportionality. The management will have implicit and explicit limits and if any stakeholder’s interest is legitimate, and if the managers denigrate any legitimate stakeholder interest this should lead to sanctions[53]. However this also leaves problems, because there are significant wiggle rooms in these concepts, indeed, a number of words in this theory is implicit on these; “proportionality; implicit and explicit limits; legitimate interests; etc”. I believe that this theory and the dual concession theory of companies are very similar but it would  be excellent  to unpack these weasel words, to really understand which risk each stakeholders might lose. I know that the financial crisis has rocked the credibility of the FSA (Financial Services Authority)`[54], but there was a simple equation which the FSA used which might still be credible. Of course, assessment of risk is a complex business even if it be accepted that it can be achieved with any degree of objectivity[55]. The technical perception of risk as objective and measurable is loosing ground: “the view that a separation can be maintained between ‘objective’ risk and ‘subjective’ and perceived risk has come under increasing attack, to the extent that it is no longer a mainstream position . . . Assessments of risk, whether they are based upon individual attitudes, the wider beliefs within a culture, or on the models of mathematical risk assessment, necessarily depend on human judgment.”[56], these points to the necessity for directors to exercise their skill and judgment in assessing the exposure of their particular concerns. The FSA created a ‘Risk Assessment’ approach to regulation.[57] The risk posed by a firm to the FSA’s objectives[58] will be assessed by ‘scoring’ probability and impact factors. Probability factors take account of the likelihood of the risk happening and impact factors assess the ‘scale and significance’ of the harm should the risk occur. The FSA expresses it as:

Priority = impact x probability[59]. What I would like to see is to use all of the interests of the director’s duties mentioned by the legislation (Company Law Act 2006) turned into a risk assessment of each interest. For example, what does it mean to analyse the company’s risk vis a vis employees? Of course, remuneration would be a significant focus, but many theorists have realized that the community where workers live is at least as important as a hike of wages. Similarly employees have families and this is an important facet for thriving companies.


[1] Amartya Sen, Development of Freedom, Penguin-Allan Lane, 2010.

[2] J. Dine, Companies, International and Human Rights, CUP, 2005.

[3] Wendy Carlin, “Ownership, “Corporate governance, Specialilization  and Performance: Interpretation  of recent evidence for the OECD countries” ,  in Does Company Ownership Matter, Edited by Jean-Philippe  Touffut, Edward Elgar, Cheltenham, UK, 2009.

[4] Article published by Henry Hansmann and Reinier Kraakman, 89, Georgetown Law Journal, pp 439. 2001.

[5] Carlin, Does Company Ownership Matter, p9-42

[6] A, Dignam and M. Galanis, “Corporate Governance and the Importance of Macroeconomics Context”, Oxford Journal of Legal Studies, Vol. 28. No. 2 (2008) pp201-243.

[7] Christopher Clerc, “Questioning the Legitimacy of Shareholder Power”, Does Company Ownership Matter, p92.

[8] Article published by Henry Hansmann and Reinier Kraakman, 89, Georgetown Law Journal, pp 439. 2001

[9] Clerc Does Company Ownership Matter, p93.

[10] Clerc Does Company Ownership Matter, p94.


[11] Clerc Does Company Ownership Matter, p94-95.


[12] Paddy Ireland, “Property and Contract in contemporary Corporate Theory”, (2004) Legal Studies, 451

[13] J. Dine Governance of Company Groups, CUP 2000.

[14] Clerc Does Company Ownership Matter, p102-103.

[15] Id

[16] Id

[17] Id

[18] The EC  12th Company Harmonisation Directive (667/1989), implemented in the UK by SI 2007/297. see F. Wooldridge (2006) 27 Co Law 309.

[19] See Niklas Luhmann, “Law as a Social System” 83 Northwestern University Law Review1989, p136, and see also Gralf Peter Calliess and Peer Zumbansen, Rough Consensus and Running Code, Hart, Oxford, 2010’

[20].Gunther Teubner, “Corporate Fiduciary Duties and their Beneficiaries: A Functional Approach to the Legal Institutionalization of Corporate Responsibility” in Hopt and Teubner (eds) Corporate Governance and Directors’ Liabilities (1987, de Greuter, Berlin) 149, at p. 157.

[21].Chayes, noted above, at p. 25.

[22].Teubner, noted above, at p. 160.

[23].Teubner, noted above, at p. 165.

[24] Clerc Does Company Ownership Matter, p102.

[25] Clerc Does Company Ownership Matter p101.

[26] Id

[27] Dan Roberts, “FTSE100 directors pay: the £1 billion in boardrooms”, Guardian Monday September 2009.

[28] Id

[29] Australian companies also have a similar model, see Marshall, Shelley D. and Ramsay, Ian, Stakeholders and Directors’ Duties: Law, Theory and Evidence. U of Melbourne Legal Studies Research Paper No. 411. Available at SSRN: http://ssrn.com/abstract=1402143

[30]  Bruner, Christopher M., Power and Purpose in the ‘Anglo-American’ Corporation (March 19, 2010). Virginia Journal of International Law, Vol. 50, No. 3, 2010; Washington & Lee Legal Studies Paper No. 2009-8. Available at SSRN: http://ssrn.com/abstract=1575039. Bruner, shows that there are significant differences between the models.

[31] Ioannis Glinavos Neoliberalism and the Law in Post Communism Transition” Routledge 2010, page 12.

[32] J. Dine “The Governance of Corporate Groups” CUP 2000, page 8 et seq.

[33] J. Dine “The Governance of Corporate Groups” CUP 2000, page 152, See for example T. Larsson The Race to the Top; The Real Story of Globalisation Cato Institute, Washington, 1999, D. Irwin Free Trade Under Fire, Princeton University Press, New Jersey 2002, a slightly more balanced approach in M. Moore World Without Walls Cambridge University Press, 2002,  Ioannis Glinavos Neoliberalism and the Law in Post Communism Transition” Routledge 2010.  

[34] G. Mark, The Personification of the Business Corporation in American Law, [1987] University of Chicago Law Review 1441, examining the Dartmouth College decision (Dartmouth v Woodward (1819) 17 US 518) See also J. Parkinson Corporate Power and Responsibility: Issues in the Theory of Company Law, Oxford University Press, 1993.

[35] Taken from H. Rajak, Sourcebook of Company Law (2nd, Jordans, Bristol, 1995.

[36] Christine Parker, The Open Corporation, Effective Self-Regulation and Democracy, CUP 2002, page4.

[37].M. Wolff ‘On the Nature of Legal Persons’ (1938) Law Quarterly Review 494

[38].‘Nature of Legal Persons,’ 499.

[39] I often use a construct to denote huge transactions of Transnational companies as “penis extensions”

[40] Christine Parker, The Open Corporation, Effective Self-Regulation and Democracy, CUP 2002, page, see also M Blair and L Stout, A production theory of corporate law, Journal of Corporation Law 751-805.

[41]  J. Dine The Governance of Corporate Groups Cambridge University Press, 2000, page 26

[42]  P. Ireland “Property and Contract in contemporary corporate theory” [2004] Legal Studies 453 at 506, Christine Parker, The Open Corporation, Effective Self-Regulation and Democracy, CUP 2002, Simon Deakin, Squaring the Circle? Shareholder Value and Corporate Responsibility, 70 GEO WASHL. Rev.976. 977, (2002). Paddy Ireland, Company Law and the Myth of Shareholder Ownership,. 62 Mad L Rev.1 (1999)  J. Hill, Visions and Revisions of the Shareholder, 48 AN.J. COM. L39 (2000)

[43] I am indebted to Michael Blecher for this insight.

[44] Report of the Special Representive of the Secretary General on the issue of Human Rights and transnational corporations and other businesses enterprises. “Business and Human Rights: Towards operationizing the a “protect, respect and remedy” Framework, UN A/HRC/11/12, 22nd April 2009.

[45] Id

[46] C. Tilly, Democracy, CUP, 2007, see also J. Dine Democratization: the contribution of  Fairtrade and Ethical Trading Movements,  2008, Vol 10 Indiana Journal of Global Legal Studies 1-35

[47] I am grateful to Bob Watt for this point

[48] P. Ireland, ‘Corporate Governance, Stakeholding, and the Company: Towards a Less

Degenerate Capitalism?’ (1996) 23 Journal of Law and Society 287 at 287. Ireland said , “by the time of Blair’s grand pronouncements, ‘stakeholding’ in this

narrower corporate sense, had already been widely embraced in Britain, with both the

Trade Union Congress and the Labor Party enthusiastically backing the ‘modernizing

theory’ of the stakeholding company. Considerable support had also already been

expressed by some in industry, with the final report of the Tomorrow’s Company inquiry,

organized by the Royal Society of Arts and supported by companies such as Cadbury

Schweppes, Guinness, Thorn EMI, and Whitbread, wholeheartedly endorsing the merits of

an ‘inclusive’ conception of the company” (at 288).

[49] See Stephen Copp Corporate Social Responsibility and the Company Act 2006 Volume 29 No 4 Institute of Economic Affairs 2009, Marshall, Shelley D. and Ramsay, Ian, Stakeholders and Directors’ Duties: Law, Theory and Evidence. U of Melbourne Legal Studies Research Paper No. 411. Available at SSRN: http://ssrn.com/abstract=1402143Top of Form.

[50] M. Clarkson, ‘A Stakeholder Framework for Analyzing and

Evaluating Corporate Social Performance’ (1995) 20 Academy of Management Review 92

at 106-7.

[51][51] Marshall, Shelley D. and Ramsay, Ian, Stakeholders and Directors’ Duties: Law, Theory and Evidence. U of Melbourne Legal Studies Research Paper No. 411. Available at SSRN: http://ssrn.com/abstract=1402143Top of Form, page 7.

[52] E. Freeman and W. Evans ‘Corporate

Governance: A Stakeholder Interpretation’ (1990) 19 Journal of Behavioural Economics Page 337.

[53]  E. Freeman and W. Evans ‘Corporate

Governance: A Stakeholder Interpretation’ (1990) 19 Journal of Behavioural Economics



[54] Indeed it is going to be abolished!

[55] Jenny Steele, Risks and Legal Theory, Hart Publishing, 2004, H.Luhmann, Riak Sociology (New York), de Gruyter, 1993, U. Beck, M Ritter, Risk Society London, Sage, 1992, P. Berstein, Agress the Gods, the Remarkable Story of Risk, )New York, Jpn Wiley and Sons 1996

[56] See Royal Society Risk: Analysis, Perception and Management, Royal Society, 1992, p90. See also Julia Black “Perspectives on Derivatives Regulation” in Modern Financial Techniques, Derivatives and Law A. Hudson (ed), Kluwer, London 2000, R. Baldwin “Introduction – Risk: The Legal Contribution” in Law and Uncertainty: Risks and the Legal Processes (R. Baldwin (ed), Kluwer, Berlin, 1997.

[57] Drawing (inter alia) on the work of the Basle Committee on Banking Supervision. See, for example Risk Management Guidelines for Derivatives, bank for International Settlements, basle, July 1994

[58] Sections 2-6 of the FSMA sets out four objectives; to maintain confidence in the financial system, to promote public understanding of that system, to secure “the appropriate degree of protection for consumers and to reduce the extent to which it is possible for a financial services business to be used for a purpose connected with financial crime.

[59] Building the New Regulator (Financial Services Authority, 2000)




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