The interest of the company as key to the corporate purpose discussion. Historic concepts in German company law revisited
By Anne-Christin Mittwoch, 15 April 2021
Anne-Christin Mittwoch is Associate Professor at the faculty of Law, University of Marburg and Visiting Professor at the faculty of Law, Economics and Business, University Halle-Wittenberg.
The interest of the company forms the yardstick for the actions of the board members of stock corporations in Germany. Although this concept is not legally defined, the non-binding German Corporate Governance Code (GCGC) offers some details in its foreword: There it is stated that the code highlights the obligation of management and supervisory boards – in line with the principles of the social market economy – to take into account the interests of the shareholders, the enterprise’s workforce and the other groups related to the enterprise to ensure the continued existence of the enterprise and its sustainable value creation. The code calls all this the enterprise’s best interests.
This modern and non-binding definition seems to engage with the dichotomy of the shareholder and stakeholder value theories and to decide it in favour of the latter. Yet, this understanding is misleading. In this blog post based on a paper presented at the Daughters of Themis conference on 16 April 2021, I present how the shareholder-stakeholder dichotomy has historically played a relatively small role in German company law. The concept of the interest of the company has been more significant and covers a much broader scope. Indeed, the wording in the foreword of the GCGC demonstrates that the interest of the company refers to the bigger picture of the enterprise’s role in and its responsibility towards society. It might therefore serve as a key to the purpose discussion in the light of corporate sustainability.
Company interest reloaded in light of corporate sustainability and purpose
The international corporate sustainability debate examines if and how company law provisions should be specified in order to foster sustainable corporate behavior. The concept of the corporate purpose has attracted much attention in that respect. However, the shareholder-stakeholder dichotomy offers a very limited perspective on understanding the corporate purpose. Thus, the ‘purpose discussion’ could benefit considerably by opening up to the concept of the company interest. There is a substantive link between the discussion of the company interest and the meaning of public interests in corporate law. The multiple legal manifestations of the public interests have created a theoretical foundation for the development of the relationship between the company and the public sector and thus between companies and society as a whole. To understand this, we have to take a closer look at the historic development of the company interest as a legal concept.
Lessons learnt from legal history: the company’s role in society as a whole
The company interest has a tradition of almost a hundred years, its roots dating even further back. The intersection between private and public interests has its origin in ancient Roman law that had been absorbed by German legal scholars since the 12th century. This tradition has made it difficult to align private and public interests explicitly within the definition of the corporate purpose – until today, public and private law are considered separate. Thus, the early phase of German stock corporation regulation in the 19th century was characterized by a sharp dichotomy of public and private interests (rather than shareholder and stakeholder interests). They seemed so incompatible with each other that the German octroi and concession system sought to interweave them in regulatory terms in order to provide protection for society against the unbridled pursuit of private interests of corporate managers and to deal with the threat this posed to the public good. As a result, it was not possible to incorporate in Germany between 1794 and 1843 if not for the purpose of the common or public good.
The common benefit as a condition for incorporation
This strict precondition was abandoned in 1870, but in the 20th century, the discourse on the common good in company law gained ground again with the debate on the concept of the ‘company per se’. This discussion was initiated by Rathenau's writings and aimed at a practical independence of the company from its governing bodies and their individual interests. Due to their considerable macroeconomic importance, Rathenau considered stock corporations no longer the sole objects of the private interests of shareholders but demanded that they should be detached from the purely private sector and linked to the interests of the state and civil society. Consequentially, the Stock Corporation Act of 1937 stipulated: ‘The Management Board shall, under its own responsibility, manage the company in such a way as […] the common benefit of the people and the state demand’.
The 1965 amendment to the Stock Corporation Act erased this statement from the wording of the law, because of its Nazi connotations and because it was deemed unnecessary to spell out the obvious. The continued validity of the common benefit as an unwritten principle of stock corporation law has since then been discussed and the development of codetermination in the 1970s intensified this discussion.
Where is the concept of company interest today?
In the following decades, various understandings of the interest of the company were put forward by academics and shaped this concept that until today is considered the major guideline for board members’ actions. Since the 1990s, the debate has opened up to the Anglo-American shareholder-stakeholder dichotomy and its influences can be seen in today’s foreword of the GCGC. However, binding standards of conduct for corporate bodies as well as for an associated liability were not developed. Does this render the concept of the company interest useless? No. It offers a framework, an overarching normative idea, in which different legal obligations for board members can be placed and interpreted. And its dynamic offers flexibility: it constantly poses the questions of the ‘right’ relationship between company and society and between public regulation and private interests. But currently, flexibility is accompanied by legal uncertainty.
Towards a better framework for the corporate purpose?
Without an explicit definition, the concept of the company interest seems to be at a crossroads. Thus, a legal clarification of its relevance is much needed. This clarification should connect to its historical core: the relation between public and private interests that have to be continuously balanced within corporate decision-making. And the responsibility of the company for the common good as its background. Yet a conclusive definition of its scope will not be possible: History has shown that none of the above-mentioned interest groups dominates over another on an abstract level. And what is in the company interest depends also on the object and the articles of association of the respective enterprise together with the individual situation. Nevertheless, the law can and should make explicitly clear that corporate boards are committed to the company interest. This clarification is not only needed in order to reject the shareholder-stakeholder dichotomy. It can also serve as a reference point for further obligations of the board to foster corporate sustainability. Because ultimately, it is in the enterprise’s best interests, that boards ensure a sustainable value creation within the planetary boundaries.
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