Relational companies: Towards responsible capitalism

Authors Jonathan Rushworth

ISSN: 2521-2575
Affiliations: Member of the Court of Appeal of England and Wales
Source: Journal of Corporate and Commercial Law & Practice, The, Volume 3 Issue 1, 2017, p. 49 – 106


There is growing public dissatisfaction with the short-term, financially driven approach of listed companies, particularly in the United Kingdom. Shareholders demand ever-increasing payments by way of dividends and share buy-backs. As a consequence, directors are not encouraged to invest in companies for the long term and the financial imperative can lead to low wages, with little incentive and encouragement for employees, lack of support of suppliers (who are often paid beyond the contract date), impersonal dealings with customers, and minimal tax payments where profits are earned. Meanwhile remuneration levels of senior employees regularly increase along with growing pay differentials. These practices have led to a loss of trust and confidence by society in the business world. There is little understanding that some of the shareholders who collectively have the ownership interest and voting rights in these companies represent members of the public through managed funds, pensions and other investments. The introduction of limited liability in Victorian times meant that, if the company failed, shareholders would lose the amount of their investment but had no liability for the underlying debts and liabilities of the company itself. The development of share trading and markets meant that over time shares became just another tradable commodity with investors having little interest in the underlying business of a company and its treatment of employees, suppliers and others beyond the requirement for a financial return on their shares. This has led to a significant reduction in investment in research and development, which has been to the detriment of the long-term value of the company. There is an increasing recognition of the value and importance of relationships with all stakeholders in companies, beyond a focus on the financial interests of shareholders. Putting the interests of stakeholders at the heart of company decision making and operations will lead to the company being more sustainable, competitive and successful. One way to encourage the practical application of this is by measuring the extent of the relational ethos of a company against a set of principles set out in a Relational Business Charter. These principles reflect the standard expected of a company with a relational approach in its dealings with shareholders, employees, suppliers, customers, lenders, the local community and wider society. A published index would compare the standard achieved by companies in different business sectors and would encourage companies to embrace an inclusive approach to stakeholder interests. This approach to stakeholder recognition and engagement reflects that taken by the King IV corporate governance code in South Africa, which has developed a stakeholder inclusive approach, as compared to the enlightened shareholder value approach in UK legislation. An analysis of the approach taken on this aspect of corporate governance in South Africa, where it is contained largely in the code, contrasts with that in the United Kingdom, where it is mainly found in company law as part of the duties of directors.