This article reviews a recent webinar held by The Hong Kong Institute of Chartered Secretaries (the Institute) exploring the implications of the shift away from shareholder primacy as an underpinning philosophy of corporate governance.

In August 2019, the Business Roundtable, a grouping of 181 CEOs representing about one-third of US market cap, published a new Statement on the Purpose of a Corporation. The statement mentions ‘generating long-term value for shareholders’ as one of the purposes of corporations, but at the end of a list that commits to delivering value to all stakeholders – including customers, employees, suppliers and communities. While the shift towards a more stakeholder-responsive approach to governance is nothing new, it is significant that such a staunch defender of shareholder primacy – the Business Roundtable has been promoting this approach since 1978 – has signed up for the principle that shareholder returns are only one among many stakeholders’ interests that directors need to consider.

What are the implications of this trend for the governance profession? ‘Agency theory’ – which used to provide the theoretical framework underpinning corporate governance – was based on the idea that it is the duty of managers to maximise returns to shareholders and it is the duty of directors to oversee managers in their performance of that duty. Are we in need, then, of a revised governance model? As you might expect on an issue so fundamental to the future of governance, the Institute has been keen to take part in this debate and this article reviews the webinar, Purposeful Governance – An Applied Stakeholder-Responsive Approach to Governance, which was held on 30 October 2020 as part of the Institute’s Enhanced Continuing Professional Development (ECPD) programme.

What legal mandate do directors have?

Gillian Meller FCIS FCS, Institute President and Legal and European Business Director of MTR Corporation Ltd, acted as the moderator and speaker at the webinar. At the outset, she highlighted the business case for the stakeholder-responsive approach. ‘Ultimately, I don’t believe there is a conflict between addressing long-term shareholder value and taking stakeholder concerns into account, because the long-term sustainability of the company and its social licence to operate depends on it meeting at least the basic requirements of a good corporate citizen,’ she said. She added that companies that don’t address the needs of their employees and their impact on the environment, that fail to meet the expectations of customers and don’t have the support of the communities in which they operate, don’t tend to be around for very long and will not therefore be a good value proposition for shareholders.

Webinar speaker, Peter Brien, Senior Partner, Slaughter and May Hong Kong, and Chairman of the Listing Committee of the Main Board and Growth Enterprise Market of The Stock Exchange of Hong Kong Ltd (the Exchange), pointed out however, that many companies are still run on the assumption that the overriding duty of directors remains to shareholders. ‘If you look at the way they behave, companies still generally put shareholders at the top of the line,’ he said. He followed this up with a look at the extent of the legal mandate directors have to address stakeholder concerns.

Many jurisdictions around the world, Hong Kong included, have sought to give expanded scope to directors to consider stakeholder interests, as well as long-term environmental, social and governance (ESG) factors. This has largely been through corporate governance codes, but the primary legal requirement in Hong Kong, as in many other jurisdictions, is for directors to act in good faith for the benefit of the company as a whole. Mr Brien therefore took issue with the Business Roundtable commitment to act in the interests of all stakeholders – requiring directors to deliver value to all stakeholders would be tantamount to ‘moving the goalposts of corporate governance’, he said.

Mr Brien also emphasised the benefit for companies of having clear guiding principles regarding the purpose of the company. This makes it clearer what mandate the board has to make decisions to realise the company’s purpose.

Getting the balance right

Getting the balance right between the competing interests of different stakeholder groups, including shareholders, is no easy task, and both Ms Meller and Mr Brien offered guidance on this difficult question.

‘Everything, I think, is about getting the balance right. Directors clearly have a duty to ensure their company is around for the next 50 years and to do that companies need to give more regard to their stakeholders and the societies in which they operate. There is nothing wrong in seeking to benefit a wider society, but where does this stop?’ Mr Brien asked.

Deciding the level of priority to give to ESG concerns is a case in point. Most companies recognise that making money to the detriment of the society in which they operate contravenes their licence to operate, but how far should companies be responsible for affirmative action on issues such as ending poverty, reducing inequality and promoting gender equality? The United Nations’ Sustainable Development Goals (SDGs) were set up to encourage the private sector to play a part in addressing these and other global problems.

‘Companies can’t fix all of the issues in the SDGs,’ Ms Meller pointed out, adding that this is where a consideration of materiality becomes crucial. Materiality has been a central theme of the latest ESG frameworks published locally by the Exchange and globally by standard-setters such as the Global Reporting Initiative (GRI). Ms Meller gave recommendations on how companies can go about identifying their material issues. She shared the MTR Materiality Matrix, which grades issues via an assessment of what is most material to stakeholders and what is most material to the MTR.

The roles of governance professionals

Directors and the governance professionals advising them are in the front line when it comes to the changes discussed above. Both Ms Meller and Mr Brien pointed out that the advice of governance professionals is all the more important in a context where board decisions cannot be made simply by looking at a company’s legal obligations. In particular, advice concerning the expectations of stakeholders and the ethical issues relevant to board decisions can make a huge difference to outcomes.

Ms Meller cited the example of the dilemma companies in Hong Kong have had regarding whether to apply for the various forms of financial support the government has made available to help companies through the COVID-19 pandemic. Not applying for these funds could be seen as contrary to the directors’ duty to act in the best interests of the company – what company would not benefit from an infusion of free cash? But some companies have actually done well out of the pandemic – should they also apply for this support? The intention behind the government’s handouts, after all, are to help firms in financial difficulties. Ms Meller suggested that this is the type of ethical dilemma that governance professionals should be highlighting for the board.

Mr Brien acknowledged the work of the Institute in promoting business ethics. Through its research reports, continuing professional development services and guidance notes, the Institute has made business ethics and high professional standards a central theme. ‘This is where the Institute can make a difference,’ Mr Brien said. He acknowledged, however, that being the guardian of corporate ethics is not an easy role to play. While company secretaries, general counsels and in-house lawyers have a role to play in ensuring that ethical issues are considered by the board, this will not always guarantee that the right ethical decision will be made.

The hardest assignment for governance professionals will be where lax ethics are part of the culture of the organisation. Mr Brien cited the 2015 Volkswagen emissions scandal as an example of this. Developing diesel engines to activate their emissions controls only during laboratory emissions testing requires numerous engineers, not to mention managers, to sign off on. Stopping this kind of entrenched lax ethics requires a culture change and this is where having clear ethical guidelines set by the board can make a huge difference, he said.

The art of listening

The investors’ perspective on these issues was provided at the webinar by Pru Bennett, Partner, Brunswick, and formerly Managing Director at BlackRock and Head of BlackRock’s Investment Stewardship team for the APAC Region based in Hong Kong. She highlighted the trend towards incorporating risks around ESG issues into the investment process. She pointed out that as ESG factors are increasingly considered by asset managers in their investment decisions, this should be a powerful argument in favour of companies going beyond minimum disclosure compliance with ESG requirements. ‘Sticking to compliance won’t be helpful in the long term since companies will need to stay ahead of the ESG screening process,’ she said.

Institutional investors in particular have been increasingly ready to screen out companies with poor records in stakeholder engagement and ESG performance. Ms Bennett emphasised that improving performance in these areas should not be regarded as coming at the expense of profit. On the contrary, good stakeholder engagement and ESG performance leads to long-term sustainable returns.

She also highlighted the gradual convergence of the various global ESG reporting frameworks. Many standard-setters – including the Sustainability Accounting Standards Board, GRI, CDP (formerly the Carbon Disclosure Project), the Climate Disclosure Standards Board and the International Integrated Reporting Council – have been working to develop standardised frameworks. ‘I hope in the next few years, this will lead to clearer guidelines in terms of reporting non-financial information,’ Ms Bennett said. She added that there are also moves to merge many of the different standard-setting organisations themselves. ‘I think we will eventually see the creation of a single organisation for ESG disclosures similar to the International Accounting Standards Board, called something like the International Non-financial Reporting Standards Board, which will make life easier for companies,’ she said.

Finally, Ms Bennett cited a recent scandal involving the mining firm Rio Tinto as a good example of just how damaging being on the wrong side of these trends can be. Despite not doing anything illegal, the mining firm destroyed ancient caves that were highly important to first nation groups in Australia. The subsequent outcry from first nation groups and institutional investors was only made worse when the board sought to placate these stakeholders by reducing the bonuses of senior executives. The poor response to the issue eventually led to the resignation of the CEO and two senior executives.

‘We have moved away from a world where CEOs are king,’ Ms Bennett said, adding that listening to stakeholders has become an essential part of doing business. Rio Tinto chose to ignore stakeholder objections to its proposed destruction of the caves. The subsequent fallout demonstrates that companies and executives that don’t listen to their stakeholders will be held to account.

The webinar reviewed in this article was held on 30 October 2020 as part of the Institute’s Enhanced Continuing Professional Development (ECPD) programme. Information on forthcoming webinars is available on the Institute’s website:


SIDEBAR: What impact is COVID-19 having?

The webinar also addressed the question of whether COVID-19 helped or hindered the shift to stakeholder-responsive governance. Companies in financial difficulties, Mr Brien pointed out, will be primarily focused on the survival of the company. ‘At the end of the day, the directors’ guiding light is to ensure long-term survival of the company; that is their job. Sometimes that may require them to take decisions against the interests of certain of the company’s stakeholders,’ he said.

He cited the examples of companies having to make job cuts or changes to employment terms, or taking the decision to suspend the payment of dividends to shareholders. These decisions will be understandably unpopular with employees and shareholders but may need to be made in the long-term interests of the company.

Ms Meller pointed out that COVID-19 has also brought into sharper relief some of the environmental and social concerns that companies were already aware of before the pandemic struck. Cities around the world have been enjoying cleaner air, for example, as economic activity has been reduced. Moreover, on a social level, the pandemic has highlighted the value of human capital.

‘When times get tough, the people we really need are the cleaners, the nurses, the carers and so on, so issues like the need for a living wage to ensure that these people are fairly paid given their contribution to society have gained more attention. So I’m hoping COVID-19 has accelerated the trend towards taking broader stakeholder concerns into account,’ Ms Meller said.