Cost Internalization as a Corporate Purpose: A Myth or Reality in Corporate Africa?

By Nojeem Amodu and Ibukun Iyiola-Omisore, 19 April 2021

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Nojeem Amodu, Legal Counsel Total E&P Nigeria Ltd, and Research Associate, Centre for Comparative Law in Africa, Faculty of Law, University of Cape Town, South Africa.

Ibukun Iyiola-Omisore, Ph.D. Candidate and Graduate Teaching Assistant at the Centre for Business Law and Practice, University of Leeds, United Kingdom.

In corporate governance, cost externalization entails situations where corporate executives transfer corporate costs to stakeholders while retaining resulting benefits for shareholders. In late 2009 for instance, despite a fall in corporate profits, Shell decided to increase dividend value for shareholders by simply axing about 5,000 jobs. Such unsustainable activities are not uncommon in corporate Africa. These are largely facilitated by the shareholder primacy model of corporate law which dominates corporate legislations on the African continent. As a result, many corporate stakeholders including employees, host communities, creditors, and governments continue to suffer environmental neglect, crumbling infrastructure and services, high unemployment, and abject poverty.

But what measures have African states adopted (or are adopting) towards cost internalization especially through corporate legislation this past decade? Beyond corporate Africa, understanding cost internalization mechanisms is a corporate purpose question which remains open-ended and deeply rooted in sustainability discourse. Some answers have been attempted within the business management literature. However, many commentators look for answers in company law. Accordingly, different corporate objective formulations grounded in the stakeholder theories of corporate law (as an alternative to the shareholder primacy model) have emerged. In this blog post based on a paper presented at the Daughters of Themis conference on 16 April 2021, we discuss whether cost internalization as a corporate purpose is a reality or a myth within the context of approaches in corporate legislation of the selected African jurisdictions of Nigeria, South Africa, and Kenya.

Corporate Nigeria and Kenya

The Nigerian and Kenyan approaches are similar, and comparable to the enlightened shareholder value (ESV) approach adopted in the United Kingdom corporate law system.

In Nigeria, the main corporate legislation is the recently enacted Companies and Allied Matters Act 2020 repealing the Companies and Allied Act 1990 (1990 CAMA). Historically, under the corporate purpose section 279 of the 1990 CAMA, directors were enjoined to act in the best interests of the company, ensuring that the interests of the company’s employees are also safeguarded which seemingly insulated employee interests against cost externalization. However, the efficacy of that provision is weakened by the requirement that, that even in clear cases of socio-economic and environmental cost externalization to the employee constituent, remedy is only available for the ‘company’.  

Traditionally, the ‘company’ is assumed to mean members or shareholders as a whole, and the best interest or success of the company is taken to mean what is beneficial to the (economic) interests of the shareholders as a whole (see e.g. Hutton v West Cork Railway Co (1883) 23 Ch D 654). Within the context of the 1990 CAMA, therefore, shareholder interests trumped other constituent interests (including employee interests).

The adoption of the 2020 CAMA (section 305(3)) appears to improve the situation, enjoining directors to act in the best interests of the company and in doing so, ‘have regard to the impact of the company’s operations on the environment.’ This is a positive legal duty on boards to internalise environmental costs in boardroom decisions. However, with the use of ‘have regard to’, the improvement is at best, a confirmation of a mere transition from the crude adoption of the traditional shareholder primacy model to the much-criticised modern variant, the ESV. In light of the above, achieving effective cost internalization as a corporate purpose in corporate Nigeria is clearly still a myth.

The lot of corporate stakeholders in Kenya is not entirely different from their counterparts in Nigeria. For instance, the 2015 Companies Act notably prescribes directors to promote the success of the company for the benefit of its members and have regard to other constituents’ interests including employees, suppliers, customers, the environment, among others. However, the use of the phrase ‘have regard to’ in the Kenyan corporate purpose provision only confirms the dominance of the ESV approach, just as in Nigeria and the UK, with attendant criticisms.

Republic of South Africa

In contrast, some cost internalisation attempts can be found within the South African corporate legislation framework. The South African Companies Act 71 of 2008 (SACA) accommodates the interests of all corporate stakeholders.  It imposes duties on directors to act in good faith and in the best interests of the company, and to establish a social and ethics committee to reduce externalities. However, this framework has not provided clear terms of reference for the social and ethics committee to function, especially towards safeguarding against cost externalization. The legislation provides no indication as to which interests are accommodated within the definition of the corporate interest, or which factors should be taken into consideration to determine the ‘best interests of the company’.

A careful reading of relevant corporate purpose provisions in the SACA indicates that the compelling emphasis placed on the pluralist approach in its introductory segment was overlooked, if not contradicted, in the eventual formulation of directors’ duties. Therefore, even though there are efforts to guarantee that other stakeholders’ interests are protected as a corporate objective in South Africa, legislative provisions are still far from really safeguarding the rights of stakeholders against cost externalization

Cost Internalization as a Reality

We find that policy makers in the three selected countries clearly recognize the significance of stakeholders and cost internalisation in corporate governance discourse. However, these countries continue to struggle with finding an effective framework with real value to victims of corporate cost externalization. For instance, one common trend is that directors are to promote ‘the interests of the company’ without any clarifications regarding the extent to which the interest of other non-shareholder constituents will be safeguarded alongside those of the shareholders.

Effective cost internalization approach can be a reality in corporate Africa. To achieve this, we recommend the adoption of wordings in relevant laws clarifying that the ‘company’s interest’ encompasses the interest of all relevant stakeholders, in their own right, and not for the sake of safeguarding another. In other words, explicit language must be used in corporate legislation giving proven victims of externalities recourse against unsustainable corporate decisions.

Nevertheless, in a world where many corporations still fancy the capitalist shareholder primacy model, we remain somewhat sceptical as to how motivated (in terms of political will and sincerity of purpose) African countries are to making effective cost internalization a reality, considering the increasing power, influence and control of corporations in these jurisdictions.

 

Tags: Daughters of Themis, Business and global value chains, Sustainability
Published Apr. 19, 2021 3:47 PM - Last modified Apr. 29, 2021 2:59 PM
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