Although the term is loaded with negative connotations, the "pursuit of profit" by partners is at the very essence of the legal definition of the company, be it a non-profit entity or a trading company. It is the "purpose or motive" of the company's partnership agreement, the raison d'être of its incorporation, and profit may be pursued through any legal activity (corporate purpose). It is also the core of what the regulations (hard law) and the recommendations of good governance (soft law) call corporate interest or the interest of the company.
When two or more persons enter into a partnership agreement, what they agree to is achieving a profitable business and sharing the revenue between them.
Respecting these agreements is to exercise the rights of ownership and freedom that are fundamental to our political system and also essential in order to guarantee the legal security of capital markets and the economy in general. Company directors must hold this objective as a guiding force in their actions. Today, it is preferred to talk about “creation of value” rather than “profit”, but the basic meaning is the same.
However, relatively recent economic and social crises have made it clear that businesses (and their owners, trading companies) need to gain legitimacy in the eyes of society through what is known as “creation of shared value”. Society – citizens in general – are not indifferent to the way in which this objective of creating value for the partners is accomplished.
Companies have to gain legitimacy in order to be accepted:
- through the goods and services they bring to the community with their particular activity;
- through the honest and ethical way in which their activity creates wealth;
- through consideration and respect for the interests of others involved in and affected by the business activity (stakeholders);
- and through the conduct with which they contribute in some way to the solution of global problems (sustainability).
The general concern to find urgent solutions to global problems (including the deterioration of the environment, growing inequality, the corruption of institutions, and discrimination on the grounds of race, religion or gender) has led government authorities to put pressure on the private sector to make a decisive contribution to the solution of these problems.
It is not solely a matter of balancing corporate interests with those of stakeholders, for beyond this, the company is being asked to contribute to the solution of problems which, to a greater or lesser extent, are unconnected to it.
Some companies had already been addressing these issues from a perspective of risk (there are some companies that are more affected by global warming and they had already been considering this problem in their strategic approaches), and other companies from a perspective of opportunity.
But this is not sufficient. A contribution is demanded that is positive, altruistic if you like, which is also expressed in the preferences of the consumers, the expectations of the employees, the positions of the institutional investors and, in short, in the firm's social reputation, one of the principal intangible assets of a company.
For all these reasons, it is very likely that the concept of corporate interest will end up becoming established as a broader, more comprehensive and more complex concept than that of the mere procurement of profit for the partners, although, let us not forget, this continues to be an indisputable objective, which is not subject to the rules of the majority.
Any damage to the common interest of sharing profits or to any other communal advantage is tantamount to damaging the corporate interest
Thus there is a need for Corporate Governance to understand and be¬tter integrate some of the aforementioned trends into the corporate-legal arena, and Boards of Directors are focused on adopting a new stance in view of this change of perspective.
The crucial issue lies in knowing how far the Board of Directors will go to consider these other interests, which are different from (and often not aligned with) those of the shareholders. Hence the relevance of the concept of corporate interest, because it is the basis for construction of the entire institutional framework of the partnership agreement, the configuration of the rights and duties of partners and directors, and the regime of liability applicable to them.
First, let us remember that directors must exercise their powers in accordance with two basic general duties, expressed in Spain's Corporate Enterprises Act (CAE) with two non-specific legal concepts: “the diligence of an orderly entrepreneur” and “the loyalty of a faithful representative”. While each of these concepts is considered as an independent source of obligations, they originate from the fiduciary relationship between directors and partners, by virtue of which the partners place their trust in the directors to perform their managerial and administrative duties according to strict standards of good faith. According to our legal system, the loyalty of the directors is towards the partners. In order to guarantee this loyalty and the priority of the corporate interest over any other interest (be this a personal interest of the directors or the interest of a third party), an entire system to prevent conflicts of interest is established.
Placing the profitability of the company at risk does not benefit anyone, neither the partners, the clients, the workers, nor society in general
Secondly, as a consequence of the aforesaid, the concept of corporate interest (or interest of the company) operates in law as defining the liability of the directors. Let us remember that the CEA:
- Establishes the liability of the directors and the possibility of instituting corporate action when they infringe the corporate interest (Art. 239 CEA).
- Stipulates that the decisions of governing bodies may be challenged when they are detrimental to the corporate interest to the benefit of one or several partners or third parties (arts. 251 and 204 CEA).
- Considers the eventuality of dismissal of the directors at the General Meeting of the PLC when they have interests opposing those of the company (art. 244.2 CEA).
In the references made by the CEA to corporate interest or interest of the company, the legislator appears to use the terms interchangeably, without offering a precise definition of these important concepts. Nevertheless, doctrine and jurisprudence overwhelmingly support the premise that contractual theory is the established theory in our legislation.
Hoping that each company's pursuit of profit will finally converge in the common good, however much support this theory may gain among economists, is not very credible
The corporate interest is simply the sum total of shareholders' individual interests, so that any damage to the common interest of sharing profits or to any other communal advantage is tantamount to damaging the corporate interest. The Good Governance Code of 2015 outlines this concept more clearly, considering that it is not the common interest of the partners (it is difficult for everyone to have the same interest), but the interest of “the common partner”, another non-specific legal concept, but with the advantage that there is the opportunity to tone down and even on occasions oppose the absolute and abusive power of the majority.
Corporation law focuses on one aspect of the partnership agreement – the aspect that represents business between parties which takes place at a given moment and causes certain legal mutations and ties. Therefore, it is not surprising that it identifies corporate interest as the short or long-term interest of the partners, relegating the protection of the other stakeholders to sectorial laws.
However, the partnership agreement has another very important aspect, since it also creates and regulates a long-lasting collective entity, marking out its future destiny.
This long-lasting collective entity, the company, can be seen from several angles, such as from the angle of the partners, who have a right of ownership over the company, and from the angle of the organisation, where there are a great many ties between employees, directors, suppliers and clients, among others, also protected by contracts and agreements which generate a convergence of legitimate interests that are not always easy to align and often in conflict.
We do not believe that these two aspects can be separated to the point that the concept of corporate interest “is not contaminated” by the organisational dimension. The relevance of the organisation to ownership is of particular note in listed public limited companies, and reducing the corporate interest to the “creation of value for shareholders” does not solve all the problems of the organisation.
Sustainability must be included in the DNA of business strategy, essentially out of an important moral duty
However, at present, we do not see another way of taking the interests of the stakeholders into account, other than to apply the criterion of balancing their interests with the long-term interests of the shareholders, as recommended in the Good Governance Code1. We believe they should be given the importance they deserve, as demanded by the companies, but it is a question of finding a balance and seeking their compatibility. Placing the profitability of the company at risk does not benefit anyone, neither the partners, the clients, the workers, nor society in general.
We can point to numerous examples in the business world which show that consideration of the interests of other agents who are directly involved in or affected by the business activity (employees, clients, creditors, etc.) has generated enormous advantages for the creation of long-term value for shareholders. If it is sought to balance these interests with those of shareholders, there is a clear point of convergence based on consideration of the long term versus the short term.
It becomes more difficult to balance the corporate interest with the company's contribution to the solution of global problems, such as climate change or poverty and exclusion, a contribution which, on the other hand, we consider to be necessary if we believe in the need to resolve such problems.
Hoping that each company's pursuit of profit will finally converge in the common good, however much support this theory may gain among economists, is not very credible. As the Nobel Prize winner in Economics Amartya Sen writes, “Taking universal selfishness as read may well be delusional, but to turn it into a standard for rationality is utterly absurd”2.
The conclusion we should draw is that sustainability must be included in the DNA of business strategy, essentially out of an important moral duty. Nevertheless, the imperative of the regulation cannot be replaced by some kind of moral duty without explicit recognition in law. Therefore, independently of the ethical grounds that may support this change of paradigm and the need to make the company a transformative and cooperative agent in seeking to achieve a fairer world for everyone, the Board of Directors has to act within the framework established by the law and make progress in CSR and Sustainability strategy, in the knowledge that this is compatible with its fiduciary role.
It is true that, nowadays, our company law subordinates all other interests to that of creating long-term value for shareholders, but it is also becoming increasingly clear, and it is even required by sectorial law regulations, that showing respect for the interests of stakeholders, acting in accordance with values, and contributing to the solution of global problems is the best path to take in order to achieve this value.
Notes
- Recommendation 12: The Board of Directors should perform its duties with unity of purpose and independent judgement, according the same treatment to all shareholders in the same position. It should be guided by the corporate interest, understood as the creation of a profitable business that promotes its sustainable success over time, while maximising its economic value. In pursuing the corporate interest, it should not only abide by laws and regulations and conduct itself according to principles of good faith, ethics and respect for commonly accepted customs and good practices, but also strive to reconcile its own interests with the legitimate interests of its employees, suppliers, clients and other stakeholders, as well as with the impact of its activities on the broader community and the natural environment.
- Sen, A. Sobre ética y economía, p. 33
Bibliography
- Comisión Nacional del Mercado de Valores (2020). Código de Buen Gobierno. Disponible para su consulta en el siguiente enlace
- Sen, A. (1987). Sobre ética y economía, Alianza Editorial (Madrid).