In the United Kingdom (UK), institutional investors (pension funds and insurance companies) have sought to add climate-related shareholder proposals to the voting ballot at annual general meetings, with the aim to improve the sustainability strategy of listed companies they invest in. Supported by a record number of institutional investors, a shareholder coalition united by Follow This – an organization that empowers ‘green’ and responsible shareholders to push for change in big oil companies – has tabled a resolution at Shell’s general meeting of 21 May 2024. The resolution urges Shell’s board to align the company’s targets for scope-3 emissions with the Paris Agreement. This UK-investor conduct aligns with the supranational proposition of shareholder engagement in environmental, social and governance (ESG)-aspects: institutional investors are expected to be actively involved in their investee companies and use their shareholder rights to encourage the company’s long-term non-financial performance. In the Netherlands, however, such investor attempts to improve companies’ strategic climate action plans are rare.[1] This differentiation in investor influence can be explained by the corporate governance theories employed in the legal systems. The national corporate laws in the UK, that allow for shareholder interference to drive environmental improvement in the company’s strategy, are based on shareholder primacy, while the more restrictive national corporate laws in the Netherlands are based on stakeholder theory. While shareholder primacy is oftentimes perceived as the main barrier to sustainable corporations, this article argues that this corporate governance approach can in fact facilitate institutional investors to drive an investor-induced transition in the sustainability strategy of listed companies, for the benefit of society as a whole.
Law as a vehicle for corporate ESG-improvement
Based on the European legislative framework on sustainable finance (the Shareholder Rights Directive II, the Sustainable Finance Disclosure Regulation and the Taxonomy Regulation), institutional investors are expected to play an active role in the sustainability transition of listed companies by encouraging investee companies to enhance their ESG-performances. This supranational proposition presumes that law can serve as a vehicle for long-term sustainability improvement in the corporate world, by assigning shareholders with certain tasks and responsibilities to move companies towards change. But the extent to which this is translated into actual investor conduct at the national level is determined by the (re)distribution of rights and the allocation of legal tools to shareholders by national corporate laws.[2] These national corporate laws are rooted in the social, political, and economic context of the jurisdiction at hand. Therefore, the degree of a shareholder-say in the company’s socio-ecological strategy in turn depends on the national conceptualization of the role of shareholders in the corporate governance of listed companies. The two main corporate governance theories, reflecting the jurisdictional perceptions on the company’s main purpose (i.e. for whom does the company create value and what interests does it serve?) and the relevant actors therein, are stakeholder theory and shareholder primacy.
Stakeholder theory as an obstacle to investor-induced change
National laws can facilitate but also obstruct social and environmental change. Dutch corporate law provides very limited legal tools to institutional investors to influence the climate transition strategies of investee companies. The Dutch corporate governance approach is based on stakeholder theory. According to this approach, the company’s management-board should aim at generating social welfare in the interest of multiple stakeholders involved in the company. This institutional view perceives Dutch listed companies as independent legal entities separate from its shareholders. Hence, the management-board is considered to be the competent organ to weigh all stakeholder interests equally and is legally installed with the power to make strategic decisions without priorly informing or consulting the shareholders.[3] Thus, the determination and implementation of the company’s strategic plan is a board-prerogative.
At first glance, the Dutch institutional approach to corporate interest, defined by promoting the continued success of the company in which due care is taken of all stakeholder-interests involved, seems to offer a basis for allocating national corporate law to bestow public duties on companies, including to serve broader social interests such as the environment.[4] However, this article argues that Dutch corporate law hinders shareholder-initiated sustainability improvements in the company’s strategy. The Dutch legislator is reluctant to grant rights to institutional investors to influence the corporate ESG-policy, as it would allow shareholders to improperly intervene in the management’s powers.[5] Moreover, in the Wennex-case, the Dutch Supreme Court ruled that shareholders may pursue their own interests and are permitted to exercise their (voting) rights at their own discretion, even when in conflict with the interests of other stakeholders. This indicates the Dutch skeptical attitude towards investors: they are considered to be unable to weigh broader public interests against their own interests and are not regarded to be the suitable drivers of the pursuit of societal interests in listed companies. The mandate on this matter is placed with the board and shareholders may not sidestep board-authority by urging it to make ESG-improvements. With that, it can be observed that, surprisingly, the Dutch corporate governance system (based on stakeholder theory) does not facilitate a shareholders’ push towards improved sustainability-standards in investee companies.
Shareholder primacy: a promise rather than a barrier
On the other side of the spectrum, British corporate law is based on shareholder primacy. This article interprets shareholder primacy as a social norm expressing the interaction between company organs: the board’s tasks and responsibilities alongside the strength of shareholders’ rights and interests. In this context, according to shareholder primacy, the management-board should promote the company’s success and profit maximalization for the benefit of its shareholders. Other interests than the shareholder interest, such as society and environment, are relevant only to the extent that they are instrumental in generating financial return to the shareholders’ advantage. In exercising their (delegated) tasks, the board members act as agents of the shareholders. Therefore, shareholders hold the ultimate authority in the company.
The premise of shareholder primacy in UK corporate law, which prioritizes shareholder interest and the creation of profit maximization for the benefit of the shareholders, is often identified as a barrier to the sustainability transition in listed companies, because it allows shareholders to promote their short-term financial interests which can have a negative impact on the long-term non-financial performance of the company. Yet, ironically, this approach actually grants room for activist shareholders who wish to push for ESG-improvements in the company’s strategy, as it is perceived as a prerequisite for return optimization. With the shareholder meeting to function as the ‘sovereign’ corporate organ, institutional investors face few legal obstacles in voicing their sustainability aspirations to the board. Hence, based on the notion of shareholder primacy, UK law grants shareholders with the unrestrained competence to voice their dissatisfaction with and exert influence over the company’s climate action plan,[6] which allows for an investor-led sustainability transition in investee companies.
What the Dutch can learn from the British
While the Wennex-rule in the Netherlands is oftentimes regarded as an impediment to move towards corporate sustainability, because it allows shareholders to pursue their own financial gain which obstructs the movement of companies towards an adequate long-term ESG-strategy, a similar approach of shareholder primacy in the UK instead allows for an investor-led sustainability transition in investee companies. The latter has emerged from the underlying notion that if the shareholders themselves wish to improve the company’s ESG-strategy for whatever reason (being the pursuance of their own financial interests or that of a broader public), UK company law provides them with the tools to act accordingly.
We must move away from the assumption that shareholders, in pursuing their ‘own interests’, will seek short-term financial returns at all costs. The ‘own interest’ of the shareholder may very well encompass broader public interests, such as seeking for the long-term improvement of the corporate strategy on ESG.
Therefore, we may want to nuance the traditional view that national corporate laws based on shareholder primacy contribute to “environmentally harmful and socially unjust” outcomes. Indeed, we need to recognize the potential of a shareholder primacy-approach in allowing for an investor-led sustainability transition in listed companies. Namely, according to that view, sustainability improvements in the company’s strategy are deemed to be instrumental for the creation of shareholder value. This may in turn foster social and environmental change for the benefit of society as a whole.
[1] S. Cools, ‘Climate proposals: ESG shareholder activism sidestepping board authority’ in: T. Kuntz (red): Research handbook on environmental, social and corporate governance, 2023, p. 2.
[2] M.H.C. Bakker, ‘Shareholder proposals and sustainability: An empirically-based critical reflection’, European Company and Financial Law Review (ECFR) (20) 2023, afl. 2, pp. 281-282, 312.
[3] Unless shareholders have legal or statutory rights. For example, shareholders in public limited companies may have the right to approve certain important decisions (Art. 2:107a Dutch Civil Code) or they may be granted the statutory right to instruct the board on the general lines of the company strategy (Art. 2:129(4) Dutch Civil Code).
[4] B. Kemp, ‘Naar een werkbaar en realistisch model voor stakeholder governance en de rol van aandeelhouders daarin’, Maandblad voor Ondernemingsrecht 2022, afl. 1 & 2, pp. 31-32.
[5] P. J. van der Korst, ‘Bestuur en de algemene vergadering’, Ondernemingsrecht 2019/81, afl. 8, p. 440.
[6] S. Cools, ‘Climate proposals: ESG shareholder activism sidestepping board authority’ in: T. Kuntz (red): Research handbook on environmental, social and corporate governance, 2023, p. 2.
(Photo: RGY23)
