Kenya firms should pick new view of shareholder primacy

From the onset of modern corporations, the doctrine of shareholder primacy has been the holy grail of corporate law. Shareholder primacy gives priority to equity owners in both economics and governance of a corporation.
Milton Friedman, a proponent of this theory, went further to hold that boards should only focus on maximising shareholder value.
This cue from Friedman set the stage for the craze of leveraged buyout of the 1980s, which evolved to current regime of private equity whose obsession is shareholder returns. The dominance of stock buybacks especially in markets in the West, where companies repurchase their own stock in the open market, is one of the clearest examples of the rough edges of shareholder primacy.
The shareholder wealth maximisation norm is important because people are in business, amongst others, to make money. However, there is a question that has lingered for ages, what is the purpose of the corporation? Should shareholder profits be maximised at the expense of other interests? Do corporate entities have a soul, or they are just wealth generating automatons? A debate on these matters has been typically moot in the background.
However, early this month something significant happened that might signal the final crumble of the shareholder primacy. There in Washington, 181 CEOs of Business Roundtable, a club of rich companies in the United States, released a statement abandoning the shareholder primacy theory and committing to lead their companies for the benefit of all stakeholders.
In this declaration, the CEOs affirmed that the purpose of a company supersedes mere creation of value for shareholders, and consecutively committed to five ideals that would anchor the purpose of corporations. These commitments are as follows:
First, is to deliver value to customers by meeting or exceeding their expectations.
Second, is to invest in employees by compensating them fairly, providing important benefits, supporting them through trainings and supporting them to develop new skills for a rapidly changing world.
Third, is dealing fairly and ethically with suppliers by serving as good partners to the other companies that facilitate their missions. Fourth, is supporting the local communities by protecting the environment and embracing sustainable practices. Lastly, is to generate long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate.
This announcement is highly significant. It underlines a modern standard for corporate responsibility and deviates from the previous norm of rooting for returns of equity to shareholders.
It has to be appreciated that businesses play a vital role in the economy. They create jobs, foster innovation and provide essential goods and services. It is businesses that make a country. While individual companies serve their own corporate purposes, business ecosystems ought to share the same fundamental commitment.
Indeed, attempts have been made over the years to abandon strict ideals of shareholder primacy. For instance, Amazon has been increasing base pay for employees and share buybacks have been on the decline. Further, politicians such as Elizabeth Warren and Bernie Sanders have been hitting corporations hard, calling on them to reduce income inequalities for employees.
Regulators such as Kenya’s Capital Markets Authority have formulated a code of corporate governance for issuers of securities to the public, in an effort to improve environmental, social, and governance standards in capital markets. But despite these efforts, managerial corporatism has triumphed over ideals of corporate governance.
An assumption that corporate prosperity should only benefit shareholders hurts the ability of employees to bargain for a share of corporate profits and growing the economy. It hinders a brighter economic future for today’s workers and entrenches allure of short-termism that holds back the long-term prosperity of corporations themselves.
In the spirit of this new declaration by world corporate leaders, corporate managers in Kenya should counter entrenched shareholder primacy with reforms that rebalance the relationship between their corporate boards, employees, and society.
A starting point is to democratise the ownership of private corporations. In view that a company serves a bigger purpose than capital returns to owners, corporates should strive to spread their ownerships to general public through public offerings.
The Nairobi Securities Exchange has a thin spread of listed entities, because a culture of spreading ownership hasn’t taken root. This will affirm that indeed, the corporates serve a bigger purpose and will go along towards creating a democracy of finance.
A second step is for corporations to pay their taxes. It is nowadays commonplace for modern corporations to create intricate corporate structures, with subsidiaries in tax havens, all designed to minimise tax liabilities.
These tactics are not so clever as consultancies that specialise in them proclaim. A corporation guided by stakeholder values should be able to pay its rightful portion of taxes without playing a game of poker with its corporate structures.
The third step is for corporations to have conscience in delivering their mission. In this, they should deliver quality products, and desist from polluting the environment or exploiting their customers.

POWERFUL CEOs
In conclusion, this new stance by world’s powerful CEOs is welcome. A genuine sense of broader responsibility will lead corporate leaders to welcome these new ideals. However, we have to appreciate that even though corporate managers may want to do the right thing, there is competition in the market they have to deal with.
This is where the government should step in to create a level playing field and ensure the firms with a conscience are not undermined by those that don’t.
This could be achieved by having clear laws that protect the environment and workplace health and safety for workers.
Further, financial reporting rules should evaluate managers’ performance on other ideals beyond accounting ratios focusing on return on capital. It is therefore a revolution time aiming at birthing corporations with a soul.

Gatuyu is an Advocate of the High Court. @gatuyu