Of Profits And People: A Legal Odyssey Between Shareholder Supremacy And Stakeholderism

Professor Joe Badaracco in the documentary titled 'The Corporation' puts forward the idea that a Corporation is composed of a group of individuals who work for a bouquet of goals, the leading one of which is to earn huge sustainable and lawful return for the proprietors. The Civil War coupled with the Industrial Revolution changed the magnitude at which these corporations operated. The Corporations grew more power hungry, and they wanted to free themselves from the constraints which were imposed on them. By the end of the Civil War, Fourteenth Amendment was enacted in USA which granted equal citizenship and civil rights to African Americans. The Fourteenth Amendment declared that “no one can be deprived of life, liberty or property, without the due process of law”. Seizing the opportunity, the corporations came before the courts of law and put forward the appeal that the corporate entities should also be recognised as a persona, and be entitled to protection within the ambit of the Fourteenth Amendment.^[1]

A total of 307 cases were brought before the court under the Fourteenth Amendment. The corresponding figures are:

A recurring theme which has been raised in The Corporation is highlighting the broader issue that whether orientation of the company should be more inclined towards the stakeholders, instead of the traditional shareholder centric approach adopted by the corporations. This paper is in form of reflection and critiques of the different themes portrayed in the documentary. It goes on to question the structures of corporate law and advocates for more stakeholder inclusive approach. With the advent of modern industry and rise of corporate capitalism, the leaders of these corporations claim that they are all in for stakeholder capitalism, but this paper will seek to reflect the extent up to which these theoretical claims are being implemented.

Exploring Stakeholder Capitalism

Unlike Shareholder Capitalism which prioritises the “principal-agent relationship” between the corporation and its shareholders.^[2] At its core, the stakeholder approach aims to ensure welfare of corporate groups, not only the shareholders. For the purposes of this approach, the performance of the company is not merely analysed by the price of their shares or the growth, distinct and broad parameters are set up to judge the performance of the company. The term Stakeholder has been defined by Freeman as “any group or individual who is affected by the achievements of the firm's objective”.^[3] The term Shareholder's Capitalism did not gain influence before 1980's and its meaning even today is quite ambiguous.

In India, the Companies Act, 2013 tried to incorporate the shift by imposing a statutory obligation on the directors of the company to incorporate stakeholders interest, under Section 166(2). In the Indian landscape the idea of stakeholder capitalism is slowly yet definitely developing as an approach. In countries like Norway, stakeholders interest are given supremacy over the shareholders interest. Stakeholders are expected to determine how they could participate, its more of an interactive process involving both the stakeholders along with the municipal authorities. The public stakeholders have the power to veto the CZ plans if they feel that the initiatives are in conflict with the public benefit or policy.^[4]

Section 166(2) of the Companies Act states that “A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.”^[5] This provision puts forward a neutral approach that strives to balance the interest of all (shareholders as well as stakeholders), on par without installing any hierarchy mechanism. Some argue that section 166(2) provides a superficial umbrella of interests to the non-shareholder parties, yet the magnitude is very minuscule and real legal remedies should be enshrined on the stakeholders as a matter of right.

In the courts of United Kingdom, in case of Percival versus Wright (1902)^[6], it has been established that the Duty of Care is owed by the directors to the company. This is a well-established Company Law principle and Section 166 of the Companies Act, too does not go to the extent of altering the essence of it. There can possibly be two ways to ensure the enforcement of Section 166 towards the stakeholders interest - Class Actions and Derivatives Action.^[7]

The two questions which arise in reference to the Duty of Care, after a bare reading of the text of Section 166(2) are:

• Class Actions: Section 245 of the Company Law provides a mechanism to file a class-action suit by the shareholders, members or depositors, only if they believe that entity is being run in such a way, which is prejudicial to their interests. Class action suits under section 245 cannot be filed on behalf of other stakeholders. Even the members cannot file a class action on behalf of the stakeholders, as this remedy is available only to ultimate beneficiaries.
• Derivatives Actions: Action derived from Derivatives Action has to directly benefit the company and not the petitioner (the initiating party). Also, Derivatives Action is not formally recognised under the Indian legal system.

To summarise, there exists a gap when it comes to enforcement of stakeholder's interest in both the jurisdictions i.e. India and UK. Both Section 166(2) of the 2013 act and Section 172 of the 2006 act lack meaningful resolutions for breach of duties by the directors, concerning interest of stakeholders. Thus, one can put forward the notion that Section 166 merely adopts stakeholders approach academically and gives rise to the question: “Do laws even have the legal effect when it comes to protecting the stakeholders interest in practicality, or are they mere reminders to the Corporation regarding certain concerns, which they should not overlook while making their corporate decisions”?^[8]

The Concept Of Legal Personhood: An Idea Outliving Its Purpose?

Corporations are classified as legal person but, Activist Noam Chomsky in the documentary questions the nature of this personhood which is prevalent with the absence of moral conscience. He further states that this confers a special status on the legal personhood of a Corporation, they are solely focused on maximising the reaps for the shareholders and ignore up to every possible extent the welfare of the stakeholders. Robert Monks makes quite an impactful statement in the documentary saying that “These Corporations have no soul to save, and do not possess a body to incarcerate.”

The decisions which are made by the corporations are not autonomous, rather they are made by individuals who control and own them. The policies and strategies are adopted by these humans, and a scenario might arise where such policies or strategies could be illegal or unethical, but the corporation is not so a human, so it cannot resist their application. The size of a corporation when the jurisprudence of legal personhood was analysed through the case of Salomon versus Salomon (1897) and Lee versus Lee's Air Farming (1960), was relatively smaller than the modern day corporations. The modern day corporations wield an enormous magnitude of unchecked powers and majority of them influence the political roadmaps.^[9] The doctrine of separate legal entity plays a pivotal role in driving economic growth, but with modernisation of business, it has also been used as a media to engage in harmful corporate practices.

The Pitfalls Of Shareholder Centric Models

Tim Ambler and Andrea Wilsson in their paper titled “Problems of Stakeholder Theory”, go on dissecting issues surrounding the upliftment of stakeholder interest:^[10]

• Who are to be accorded as stakeholders?

Under stakeholder theory, these other interests have to be determined from outside to the firm, i.e., it is not based on what management or the firm's board thinks. We don't know how this is going to work or how you determine the various groups. How do we determine the mutual rights and obligations of the firm and the stakeholder group?

• Confusion regarding the purpose?

Various groups of individuals engaged in business will not share the same goals. Some will desire a company to expand, others desire it to remain constant, others will desire it to be acquired by another company, and others even desire it to collapse. A business's objectives can get confused or tangled up because the management is applying policies that serve many interests.

• How will the “Stake” be measured?

Shareholding is easily measurable. In a sense, an absolutely committed supplier earns their living based on the company, same as the employee. By extending the account beyond money into all human and social factors, stakeholder theory renders the "stakes" unquantifiable and hence incommensurable.

• In what order will the distribution take place?

The raison d'être of a company and marketing are together is due to the collaboration. If it was not good for both of them to be together, then they would not be. So, benefits are allocated based on market forces to some extent. Stakeholder theory suggests that social forces, not market forces, decide how limited resources like information, time, and money are allocated to different stakeholders. What this means is that being open with information can be advantageous to one stakeholder but disadvantageous to another. It is hard to decide what norms are to be used in sharing benefits.

Is Participant Stakeholderism The Way Forward To A More Inclusive Corporate Ethic?

Participation is not a single notion. By recognizing the rights of non-shareholder willing parties to the firm in various capacities, this solution may be regarded as a synthesis of classical and neo-classical paradigms, which it actually is. This solution will go along with stakeholder theory for participants, but not for non-participants. Non-participating stakeholder parties, such as the local community, will be contented not due to an inalienable right, but when the objectives of the participants are adequately addressed.

A practical implication, which is interestingly lacking, would involve some sort of registering a desire to join as a participant, either individually or in groups. This is how companies have traditionally functioned, particularly non-commercial associations.

Only once the participants are identified and registered, only then can the pressing issues of power distribution and reward meaningfully be resolved. It is obvious that participants must reach an understanding at the start and adapt the rules of governance with the passage of time. Perhaps even more crucially, registration can be employed to make explicit any understanding of the purpose of the company or any disagreement that may arise.

This option addresses the stakeholder theory to the threshold of engagement. Appropriate acknowledgment necessitates some degree of discussion. Rights should be obtained through contribution and by active engagement in the process of business. Interdependence between obligations and rights demands open acknowledgment. Irrespective of the form of the law, parties acquire the rights, according to society's overall conventions, to determine the way outputs are to be shared.^[11]

In August of 2019 'Business Roundtable Conference' laid emphasis on the purpose of a Corporation, duly affirmed by 181 CEO and highlighted a shift from the traditional orthodox of shareholder priority of the past. The new statement broadens the definition of corporate purpose to include the interests of all stakeholders—customers, employees, suppliers, communities, and shareholders. It highlights the importance of fair treatment, ethical conduct, environmental stewardship, and the creation of long-term value. This shift brings corporate governance into a wider, stakeholder-focused paradigm, launching a new vision of corporate responsibility aimed at creating inclusive economic growth, social equity, and sustainable development. By doing so, it redefines the fiduciary priorities of corporate leadership in the 21st century.^[12]

If corporate executives are genuinely committed to stakeholder capitalism, they must subject them to a rigorous testing of which one they are willing to work on. Each version comes with a different set of commitments and challenges are interdependent. Both have unique practical implications for how companies and their boards operate. Corporate leaders must possess an intimate awareness of what the implications of that are. And they need to be honest about what their version can actually offer for stakeholders, what it does for society, and what it has in the pipeline for shareholders.

Author is an Advocate at Delhi High Court,  views are personal. 

1. The Corporation (Big Picture Media Corporation 2003) (directed by Mark Achbar and Jennifer Abbott)

   https://youtu.be/6v8e7dUwq_Q?si=0UOu291UeQQprzkS accessed 27 April 2025. ↑

2. Fabian Brandt and Konstantinos Georgiou, 'Penn Law: Legal Scholarship Repository Shareholders vs Stakeholders Capitalism' (2016)

   https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=1002&context=fisch_2016 accessed on 20 April 2025. ↑

3. R Edward Freeman, Strategic Management: A Stakeholder Approach (Cambridge University Press 1984). ↑

4. Arild Buanes and others, 'Stakeholder Participation in Norwegian Coastal Zone Planning' (2005) 48 Ocean & Coastal Management 658. ↑

5. Companies Act 2013, s 166(2). ↑

6. Percival v Wright [1902] 2 Ch 401. ↑

7. Mihir Naniwadekar and Umakanth Varottil, 'The Stakeholder Approach towards Directors' Duties under Indian Company Law: A Comparative Analysis' (papers.ssrn.com11 August 2016)

   https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2822109 accessed on 20 April 2025. ↑

8. Camelia Bejan, 'On the Shareholders versus Stakeholders Debate' (2024) 218 Journal of Economic Behavior & Organization.

   https://www.sciencedirect.com/science/article/abs/pii/S0167268123004377 accessed on 22 April 2025. ↑

9. Christian Christodoulides, 'A Thinly-Veiled Critique of Corporate Personhood – Canadian Forum for Business and Human Rights' (Canadianforumforbhr.ca2024) https://canadianforumforbhr.ca/a-thinly-veiled-critique-of-corporate-personhood/ accessed 27 April 2025. ↑

10. Tim Ambler, '(PDF) Problems of Stakeholder Theory' (ResearchGate2006)

    https://www.researchgate.net/publication/229445951_Problems_of_Stakeholder_Theory ↑

11. David Ellerman, 'Lord Eustace Percy's “Unknown State” Lecture' (DAVID ELLERMAN 2025) https://www.ellerman.org/lord-eustace-percys-unknown-state-lecture/ accessed 1 May 2025. ↑

12. Business Roundtable, 'Business Roundtable Redefines the Purpose of a Corporation to Promote “an Economy That Serves All Americans”' (Business Roundtable19 August 2019) https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans accessed 27 April 2025. ↑