The START Column
Pointers from the Companies Act, 2019 (Act 992)
A company is a creation of statute implying that its form, operation and continued existence are prescriptions of law. All aspects of company formation and management are also regulated by law. However, the primary company law regulation – the Companies Act, 2019 (Act 992) has not definitively provided for how and in whose interest, a company should pursue its “Corporate Purpose” – a concept distinguishable from the practice of registering a company with an “object”.
The need to know whether to follow the traditional view that a company’s sole purpose is the pursuit of shareholders’ economic interest – shareholders’ primacy or to embrace the growing call for corporate purpose to include other non-shareholders interest can be of immeasurable value to a company.
The importance of a defined corporate purpose has been acknowledged succinctly by BlackRock’s CEO Larry Fink “…without a sense of purpose, no company either public or private can achieve its full potential”. Therefore, the demand for companies to articulate and pursue a clear “corporate purpose” must be viewed as an opportunity to plan and execute their full potentials.
Although analysis of Act 992 seems to favour the pursuit of shareholders’ primacy, it also provides some pointers that advocates for a balance with other non-shareholder interests for sustainable long-term benefits for a company.
In this article, I shall demonstrate the distinction between “corporate purpose” and the “object” of a company, discuss the legal effects of provisions of Act 992 on the determination and pursuit of a company’s corporate purpose whilst underscoring the usefulness of corporate purpose.
Corporate purpose and objects of a company
There is a high tendency to assume “corporate purpose” and “objects” of a company imply the same thing. That confusion is pardonable following the closely related nature of the two concepts, but they mean and represent two distinct corporate practice issues.
Corporate Purpose encompasses a broader outline of defined “reasons” for the formation and operation of a company. It looks at the “why” or “for what” of a company’s existence within the permission of lawful reasons – whilst its dimensions will vary from company to company. In all, it is prudent and consistent with the law to argue that the “reason” for the establishment and running of a company is to promote economic returns for shareholders.
Also, it is legally tenable to accommodate the emerging view that, the pursuit of shareholders’ primacy as a corporate purpose must be leveraged to create value for the benefit of other non-shareholders. Regardless, the search for “corporate purpose” in essence is the search for the reason(s) for a company’s existence – simply put, “why is the company in business?”
On the other hand, an “object” of a company does not imply reasons for its establishment and continuous operation. An object simply indicates “what a company has been incorporated to do or engage in” but not why it was set up. It offers the “vehicle” for the promotion or realisation of the corporate purpose – addressing the “how” and “what” than the “why” of a company’s existence.
This reflection on an “object” of a company is more accurate when one considers the provisions of Act 992 which allows for the incorporation of a company without an object. The resultant company cannot be said not to have a “purpose” for the failure of stating its “object” at the stage of incorporation – a significant statement of the law on the distinction between the two concepts.
Corporate purpose is a higher norm which essentially influences the “objects” of a company. It provides the benchmark for determining what a company should be engaged in. Therefore, the exercise of defining and pursuing a corporate purpose could simply not be likened to the statement of what “an object” of a company is – corporate purpose is not just the umbilical cord supporting a company’s birth, it is its lifeline deserving an uninterrupted commitment.
Legislative predictions of corporate purpose
Under Act 992, companies are not required to state their corporate purpose before or after incorporation. A statement of corporate purpose is neither a requirement for the continuous existence of companies. However, Act 992 provides some pointers on defining and pursuit of corporate purpose by companies. The identifiable broad categories of corporate purpose are discussed below:
- Shareholders’ primacy
Shareholders are considered “owners” of companies. Although this view has legal limitations, the incorporation arrangement including the beneficial ownership requirement of Act 992 makes shareholders residual claimants in a company entitling them to payment of dividends (share of profits), distribution or return of assets.
This view holds despite regulatory requirements that these entitlements – the economic values of shareholders can only be honoured on the fulfilment of some conditions including the demonstration of a company’s ability to honour its debts and liabilities when they fall due.
In the interest of maximising shareholders’ economic values, some obligations are imposed on directors that suggest the management of companies for the benefit of shareholders and not any other stakeholder. In order to advance shareholders’ primacy, directors have been clothed with fiduciary obligations and mandated to observe the utmost good faith in all dealings with or on behalf of the company – the interest of shareholders.
Further, directors are expected at all times to act in ways they believe advance the best interest of a company as a whole (in the interest of all shareholders) so as to preserve the assets, further the business, and promote the purposes for which the company was formed – with benchmarks to measure the propriety of directors’ decision-making in this regard.
Additional obligations of care, disclosure, avoidance of conflict of interest and compliance on directors coupled with limitations on their powers demonstrate great attempts by Act 992 to advance and promote shareholders’ primacy.
It is logical to conclude that the current position of our laws regarding corporate purpose is the primary pursuit of shareholders’ interest. The provisions of Section 41 of the Companies Act provides further justification if not a conclusive one for this view. To make directors jointly and severally liable for the payment of all debts and liabilities during the period when a company carried on business without a member (shareholder) is to endorse the existence of a company only for the pursuit of shareholders’ interest – without shareholders, a company technically cannot carry on business.
Therefore, in defining and pursuing corporate purpose, satisfying shareholders’ primacy must be promoted as a deliberate policy if not as a priority. I anticipate future judicial actions on this subject matter where shareholders primacy is not proactively pursued by companies.
- Other non-shareholders’ interests
The call to consider and pursue other non-shareholders interest is not to make shareholders’ primacy subservient to other interests. It is to recognise the impact satisfying other non-shareholder interests like employees, consumers, creditors and the general public will have on the ultimate pursuit of shareholders’ primacy.
A company by design interfaces with several stakeholders with varying needs. The satisfaction of these needs may not be the priority but remain key to a successful operation of a company – thus must be considered as part of the broad corporate purpose.
For instance, whilst the satisfaction of employees’ interests holds significant outcomes for a company’s operational efficiency and productivity, satisfying consumer interests will also drive revenue and profitability. The competing demands on managers to balance the fulfilment of these interests sometimes result in decisions regarding product development, marketing, sales and service initiatives vis-à-vis employees’ interest satisfaction programs.
Also, the demands of Environmental, Social and Governance (ESG) oriented purpose on companies is becoming a wake-up call for an enhanced approach at satisfying all interests and creating value for the benefits for all stakeholders. The duty imposed on directors to consider the impact of the operations of a company on the community and the environment offers legal support for ESG purpose articulation.
The characterisation of a company as an “artificial person” in itself places moral and ethical responsibilities on companies to do right and act with integrity in their dealings with other stakeholders. A duty imposed on directors to ensure a company attains a desirable reputation for high standards in its business engagements cannot be ignored.
Additionally, other regulatory requirements are compelling companies to prioritise the interests of employees (labour laws), consumers (consumer protection laws) and the general public (good corporate citizenship) in their business dealings. The overall effect is to create an engaged stakeholder environment for the long-term benefit of a company.
The opportunity for directors to act on the pursuit of some of these interests have been provided by Act 992. The directors’ discretion to make any voluntary contribution to a charitable or any other fund within the permission of law demonstrates the recognition of Act 992 to the pursuit of social impact interests. Also, the opportunity is provided in directors’ management discretion -the business judgment rule to design corporate purpose that promotes the interest of all non-shareholders in ways that will not jeopardise shareholders’ primacy.
Benefits of the pursuit of a balanced corporate purpose
No conclusive list of benefits could be provided for a balanced pursuit of corporate purpose – one which takes account of both shareholders’ primacy and other non-shareholder interests. Just as the definition and pursuit of personal purpose offers enormous benefits for one’s goals, investment and fulfilment, corporate purpose creates value and drive commitment from all stakeholders towards a sustainable operation of a company.
However, the opportunity to define and pursue a corporate purpose should not be considered as another marketing initiative. Its implementation should form part of a company’s operational activities and reflect in all engagements – for sustained benefits.
The risk a company faces is to adopt strategies that promote one broad category of interest at the expense of the other – sometimes resulting from lack of planning. It will not be surprising thus to have companies operating without a clearly defined purpose. In responding to the call to develop one, managers must fashion a careful balance of shareholders and other non-shareholder interests – with a detailed implementation and review regimes.
When Socrates said, “the unexamined life is not worth living”, he was cautioning against living a life without “meaning” and “purpose” – reason. It was a call for everything with “existence” to identify or discover the true essence of why they exist. Companies are no different. Laws guarantee their existence, and they are expected to exist for a “purpose”. The knowledge of why a company exists offers invaluable benefits for its operations and the full realisation of its potentials.
Fortunately, Act 992 offers some pointers on how to define a corporate purpose and pursue the same. The only recommendation is for managers to endeavour to define and pursue a balanced corporate purpose serving all stakeholder interests.
>>>The author, Richard Nunekpeku is a lawyer and reachable at [email protected]