Free market capitalism vs company law

A key tenet of free market capitalism is that businesses should focus exclusively on maximising shareholder value and not allow other considerations, apart from compliance with the law, to intrude on their business activities. As demonstrated in ‘The Rise and Fall of Management’, approaches such as corporate philanthropy, corporate social responsibility and business ethics, are only justifiable if they add to profitability. This appears to be a clear and simple model for businessmen to work.

But the law, for example the 2006 Companies Act, charges company directors with the duty to care for the best long term interests of their company, having regard to the interests of all its stakeholders, not just its shareholders. In fact this has been the case since mid-nineteenth century when limited liability was first established.

The conflict between free market custom and practice and corporate law is illustrated in ‘The Rise and Fall of Management’ by the case of a company facing a takeover bid. To act in the best long term interests of the company, rather than its shareholders, would require directors to reject the bid and pursue strategies to ensure the company’s survival and long term prosperity. This response is further required by the law which establishes directors’ responsibilities to have regard to the interests of employees, customers, the local community and the environment. The free market capitalist model, on the other hand, would require directors to maximise shareholder wealth by negotiating the highest price for the company’s shares, thus realising an immediate windfall for shareholders which they can invest elsewhere to make further gains.

Why would directors conform to free market practice rather than comply with the law? Firstly, because, practice has become so ubiquitous, they can defy the law with impunity. Secondly, because the same free market theory suggests that company bosses must be converted into director-‘owners’ who could be relied on, according to the free market model, to act solely in their own interests ie those of shareholders. The means of that conversion is the various share option incentive schemes which have led to so much greed and excess in the run up to the present crisis.

Even that process of share bonus incentives breaks corporate law which lays great stress on directors’ behaviour in the case of conflicts of interest, ie conflicts between the interests of the company and their own personal interests. Even beyond that there is the simple matter of insider dealing, ie dealing in company shares on the basis of information which is not available to all shareholders. If insider dealing is criminal how is it top management are allowed to enjoy equity pay outs from strategies they not only know about ahead of other shareholders, but actually themselves devise? How is it such strategies are adopted when their authors gain from the successes but, unlike other equity holders, have no risk of loss from the failures?

The justification for much of this illegality is an economic theory which denies the existence of the company as a separate legal entity and places company directors merely as the agents of the shareholders.The theory is simply false. The company is not a legal fiction.It is carefully and deliberately set up as a legal entity in its own right with directors having the legal duty to act for and on behalf of the company in its best long term interests.

2 thoughts on “Free market capitalism vs company law”

  1. But surely directors are simply the agents of the shareholders and should therefore always act solely in the shareholders’ best interests.


  2. Directors are agents of the company rather than the shareholders. Shareholders merely own share certificates which entitle them to a capital return plus dividends, both of which are at risk. They don’t own the company itself. The company is a legal entity in its own right which has conmtracts with all its employees who should be working in the best interests of the company, as spelled out in company law all over the globe – eg the British Companies Act 2006.


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