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13. This theory drew initial inspiration from, and shares a parallel with, a theory of the corporate objective expressed in: Keay, A ‘Formulating a framework for directors' duties to creditors: an entity maximisation approach’ (2005) 64 CLJ 614 CrossRefGoogle Scholar; Keay, A ‘Ascertaining the corporate objective: an entity maximisation and sustainability model’ (2008) 71(5) MLR 663 CrossRefGoogle Scholar; Keay, A The Corporate Objective (Cheltenham: Edward Elgar, 2011)CrossRefGoogle Scholar. Notwithstanding this, there are many differences as well. It is respectfully submitted that Keay's model has an unarticulated residual grounding in the traditional shareholder-owner model, while our theory purports to offer an unabashed Progressive account of the appropriate corporate purpose.

14. For some of the leading works on the principle, see Macey, JR ‘an economic analysis of the various rationales for making shareholders the exclusive beneficiaries of corporate fiduciary duties’ (1991) 21 Stetson L Rev 23 Google Scholar; Bainbridge, SM ‘in defense of the shareholder maximization norm: a reply to Professor Green’ (1993) 50 Wash & Lee L Rev 1423 Google Scholar; J Fisch ‘Measuring efficiency in corporate law: the role of shareholder primary’ (2006) J Corp L 637; Black, B and Kraakman, R ‘a self-enforcing model of corporate law’ (1996) 109 Harv L Rev 1911 CrossRefGoogle Scholar; Smith, D Gordon ‘the shareholder primacy norm’ (1998) 23 J Corp L 277 Google Scholar; Grantham, R ‘the doctrinal basis of the rights of company shareholders’ (1998) 57(3) CLJ 554 Google Scholar; LA Stout ‘New thinking on “shareholder primacy” ’ (18 February 2011). UCLA School of Law, Law-Econ Research Paper No 11-04. Available at SSRN: http://ssrn.com/abstract=1763944; Stout, LA ‘Bad-and-not-so-bad arguments for shareholder primacy’ (2002) 75 S Cal L Rev 1189 Google Scholar.

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16. A classic example of the use of this argument can be found in the ‘Chicago School’ of law and economics analysis by Easterbrook, FH and Fischel, DR The Economic Structure of Corporate Law (Cambridge: Harvard University Press, 1991)Google Scholar.

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18. The term ‘legal entity’ is sometimes used to refer to a juristic person, an artificial entity that the law treats for some purposes as if it were a person, such as an incorporated organisation. See Salomon v Salomon & Co (1896), [1897] AC 22 (HL).

19. Parkinson, above n 17, pp 33–40.

20. Indeed, it was on this basis that the Company Law Review Steering Group rejected a ‘pluralist’ model of the corporation in favour of one based on ‘enlightened shareholder value’. See Company Law Review, Modern Company Law for a Competitive Economy: Developing the Framework (London: DTI, 2000) at paras 2.7–2.26.

21. This is similar to Berle's opinion, which was to identify the corporation with its shareholders, because this was the only ‘effective way of ordering business affairs so as to minimise managerial over-reaching and self-seeking’, and that extending directors' duties to other parties would not work until ‘such time as one was prepared to offer a clear and reasonably enforceable scheme of responsibilities’ to those parties. See Berle, ‘For whom corporate managers are trustees: a note’, above n 11, at 1367.

22. Keay, ‘Ascertaining the corporate objective’, above n 13, at 675. An emphasis on efficiency, which is the very heart of this theory, is the factor that further characterises law and economics scholarship.

23. M Friedman ‘The social responsibility of business is to increase its profits’New York Times 13 September 1970.

24. Parkinson, above n 17, at 370. This defining and balancing of interests might also be a problem for the courts if they regarded this duty as objectively. It could namely lead to an arbitrary and economically inefficient lack of certainty in law.

25. Gamble and Kelly, above n 15, at 113. See also Keay, ‘Ascertaining the corporate objective’, above n 13, at 671. The problem that one must bear in mind, particularly where there is a conflict of interests between corporate stakeholders, is to avoid ending up with a vague obligation imposed on directors that has little content or provides insubstantial guidance for directors.

26. HJ Glasbeek ‘More direct director responsibility: much ado about…what?’[1985] CBLJ 416 at 421.

27. J Cook and S Deakin ‘Stakeholding and corporate governance: theory and evidence on economic performance’ ESRC Centre for Business Research, University of Cambridge (1999) at 12. It is frequently argued that attempts to mediate stakeholder claims may obscure performance evaluation and therefore facilitate discretionary behaviour by management.

28. See eg the discussion in Keay, A ‘a theoretical analysis of the directors' duty to consider creditor interests: the Progressive School's approach’ (2004) 4 JCLS 307 at 316Google Scholar.

29. Berle, above n 11. The original justification for the shareholder primacy rule was that it afforded a necessary control mechanism without which directors would have unconstrained power to misuse corporate assets.

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31. The literature is too voluminous to cite in full. For some leading works on the principle, see Greenwood, DJH ‘Fictional shareholders: for whom are corporate managers trustees, revisited’ (1996) 69 S Cal L Rev 1021 at 1023Google Scholar (‘[A]ll but the communitarians agree that virtually the sole task of corporate law is to ensure that managers act as agents for the shareholder owners.’); D Millon ‘Theories of the corporation’[1990] Duke LJ 201 at 261 (praising case law that reaffirms directors' discretion to consider non-shareholder interests); Millon, D ‘New directions in corporate law: communitarians, contractarians and crisis in corporate law’ (1993) 50 Wash & Lee L Rev 1373 Google Scholar; Mitchell, L ‘a theoretical and practical framework for enforcing corporate constituency statutes’ (1992) 70 Tex L Rev 579 at 630–643Google Scholar (arguing that courts should modify corporate law to grant stakeholders standing to sue directors when the former are harmed by corporate action); Johnson, L ‘the Delaware judiciary and the meaning of corporate life and corporate law’ (1990) 68 Tex L Rev 865 Google Scholar; O'Connor, MA ‘the human capital era: reconceptulizing corporate law to facilitate labor-management cooperation’ (1993) 78 Cornell L Rev 899 at 936–965Google Scholar (arguing that corporate law should be changed to encourage employee representation on the board and standing to sue); Williams, C ‘Corporate social responsibility in an era of economic globilization’ (2002) 35 UC Davis L Rev 705 Google Scholar. For a critique of the approach, see Bainbridge, SM ‘Community and statism: a conservative contractarian critique of progressive corporate law scholarship’ (1997) 82 Cornell L Rev 856 Google Scholar.

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36. Automatic Self-Cleansing Filter Syndicate Co v Cunninghame[1906] 2 Ch 34 (CA); Ashburton Oil NL v Alpha Minerals NL (1971) 123 CLR 614 at 620 (Aust HC).

37. A Keay ‘Company directors behaving poorly: disciplining options for shareholders’[2007] Journal of Business Law 656; J Armour ‘Enforcement strategies in UK corporate governance: a roadmap and empirical assessment’ (April 2008). ECGI – Law Working Paper No 106/2008. Available at SSRN: http://ssrn.com/abstract=1133542.

38. Zingales, L ‘in search of new foundations’ (2000) 55 Journal of Finance 1623 at 1632CrossRefGoogle Scholar.

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41. On the subject of share prices failing to adjust rapidly to new information, see Bhagat, S and Romano, R ‘Event studies and the law: Part I – technique and corporate litigation’ (2002) 4 ALER 141 at 143Google Scholar. On the fact that it cannot be taken for granted that share prices are a reliable indicator of corporate value, see Shleifer, A Inefficient Markets: An Introduction to Behavioural Finance (Oxford: OUP, 2000) pp 178–184 CrossRefGoogle Scholar; Stout, LA ‘Share price as a poor criterion for good corporate law’ (2005) 3 Berkley Business Law Journal 43 Google Scholar.

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48. Ibid.

49. Karmel, above n 45, at 1171.

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51. Ibid.

52. Freeman, above n 47, p 97.

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58. Ibid, at 9. Notwithstanding the faults highlighted, Sternberg does concede that the stakeholder theory can be valuable as ‘…business can't afford to ignore any stakeholder concern that might affect its ability to generate long-term owner value.’

59. Wood, DJ and Jones, RE ‘Stakeholder mismatching: a theoretical problem in empirical research on corporate social performance’ (1995) 3(3) International Journal of Organizational Analysis 229 at 231CrossRefGoogle Scholar.

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61. Ibid, at 622.

62. Ibid, at 621.

63. E Sternberg, above n 56; Freeman, E and McVea, J ‘A stakeholder approach to strategic management’ in Hitt, M, Freeman, E and Harrison, J (eds) Handbook of Strategic Management (Oxford: Blackwell, 2001) p 194 Google Scholar; Sundram, A and Inkpen, A ‘the corporate objective revisited’ (2004) 15 Organization Science 350 at 353CrossRefGoogle Scholar; Jensen, above n 8, at 168.

64. Freeman and McVea, above n 63, p 194.

65. Sternberg, above n 56, at 6.

66. Jensen, MC ‘Value maximisation, stakeholder theory, and the corporate objective function’ (2001) 14 Journal of Applied Corporate Finance 8 at 8CrossRefGoogle Scholar.

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68. Easterbrook and Fischel, above n 16, at 38.

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73. Macey, JR ‘Convergence in corporate governance’ (1999) 84 Cornell L Rev 1166 at 1172Google Scholar.

74. Mitchell, above n 31, at 630.

75. A good example of this is to be found in the symposium of articles published in volume 31 of the Journal of Corporation Law in 2006 where, among others, Lucian Bebchuk and Henry Hansmann resolutely put forward the shareholder value approach, while Lisa Fairfax, and Jill Fisch responded on behalf of stakeholder theory, and then Robert Clark provided a rejoinder. See also Williams, CA ‘Corporate compliance with the law in the era of efficiency’ (1998) 76 NCL Rev 1265 at 1374Google Scholar (‘This “corporate purpose” debate has remained largely unresolved in the modern shareholder-stakeholder debate between progressive corporate law scholars and contractarians’); Licht, AN ‘the maximands of corporate governance: a theory of values and cognitive style’ (2004) 29 Del J Corp L 649 at 668Google Scholar (‘[T]he shareholder-stakeholder debate will never be settled’).

76. In Credit Lyonnais Bank Nederland NV v Pathe Communications Corp 1991 WL 277613; 1991 Del Ch LEXIS 215; (Delaware Chancery Court) at [34] per Chancellor Allen.

77. This duty, which may be described shorthand as a duty not to harm, is predicated (for several reasons that I will explain) on the presumption that, all else being equal, the corporation is obliged to act in the interests of all constituent classes with legitimate expectations in the corporate affairs of the entity.

78. Galanis, M ‘Vicious spirals in corporate governance: mandatory rules for systemic (re)balancing?’ (2011) 31(2) OJLS 327 at 329CrossRefGoogle Scholar, submitting that power dynamics, which are inherent in the repeated bargains between stakeholders and the corporation, are prone to causing cumulative increases in the relative power of stronger parties and to vicious spirals of relative power loss for weaker ones respectively. For a useful account of how this might affect trade creditors, see Keay, A ‘Wrongful trading and the liability of company directors: a theoretical perspective’ (2005) 25(3) LS 431 at 453Google Scholar.

79. The analysis of this factor has so far received relatively little attention in corporate governance research.

80. Keay, ‘Ascertaining the corporate objective’, above n 13, at 695. The author points up the problem that it is often impossible to determine what are in fact an investor's ‘just desserts’ in a corporate situation.

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90. Laski, H ‘the personality of associations’ (1916) 29 Harv L Rev 404 at 405 and 424CrossRefGoogle Scholar. In a similar vein, see Machen, above n 89, at 363. The learned commentator remarks that ‘[w]e do not need to be instructed to regard a corporation as an entity and to regard that entity as a person: our minds are so constituted that we cannot help taking that view.’

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99. As Ireland et al, above n 91, at 150–151, note, before the 1862 Act there were indications of corporations being regarded as separate from the members, but this was not fully grasped until Salomon in 1897. For example, see Bligh v Brent (1837) 14 LJCP 193.

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101. The Companies Act 2006 s 7(1) states: ‘A company is formed under this Act by[my emphasis added] one or more persons.’ In the US, the Delaware Corporations Code, which is considered to provide greater guidance on matters of corporate law than other States, provides in §101: ‘Any person…singly or jointly with others…may incorporate or organize a corporation.’

102. Ireland et al, above n 91, at 150.

103. Mark, above n 87, at 1465.

104. Ibid, at 1470.

105. Campbell, RB Jr ‘Corporate fiduciary principles for the post-contractarian era’ (1996) 23 Florida State University Law Review 561 at 589Google Scholar. Writers like Whincop, who endorse the economic theory of the corporation, have to go to extreme lengths to repudiate this. See Whincop, MJ ‘Overcoming corporate law: instrumentalism, pragmatism and the separate legal entity concept’ (1997) 15 C&SLJ 411 at 424Google Scholar. This article pre-dated the emergence of the statutory derivative proceedings scheme in Australia (2000).

106. (1844) 2 How 497 at [558], 11 L Ed 353.

107. [1897] AC 22.

108. Ibid, at 30. Also, see Regal (Hastings) Ltd v Gulliver[1967] 2 AC 134 at [157] (HL).

109. Ibid, at 33.

110. Ibid, at 51.

111. [1997] QB 306 (CA) at [359].

112. [2002] 2 AC 1 at [61].

113. (1988) 6 ACLC 154 at [176].

114. [1994] 1 BCLC 363 at [379].

115. (1977) 430 US 564.

116. Ibid, at 568–569.

117. Ibid, at 569 (emphasis added, internal citations and quotations omitted).

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121. Bratton, above n 85, at 1489–1490; Mark, above n 87, at 1457–1464.

122. According to Zingales, some definitions of the nexus only include explicit contracts, while others embrace implicit contracts as well: L Zingales, above n 38, at 1634.

123. Although often law and economics scholars do accept the entity concept when explaining the corporation in legal terms. For examples, see Bainbridge, SM Corporation Law and Economics (New York: Foundations Press, 2002) p 7 Google Scholar.

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125. HO Taylor A Treatise on the Law of Private Corporations Having Share Capital (4th edn, 1884) p viii (emphasis added).

126. Easterbrook and Fischel, above n 16, at 12.

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129. Keay, ‘Ascertaining the corporate objective’, above n 13, at 684.

130. Phillips, above n 128, at 1094 and 1101.

131. Bratton, WW ‘the “nexus of contract” corporation: a critical appraisal’ (1989) 74 Cornell L Rev 407 at 420Google Scholar.

132. Keay, ‘Ascertaining the corporate objective’, above n 13, at 684.

133. Ibid.

134. Machen, above n 89, at 260–261.

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136. Keay, ‘Ascertaining the corporate objective’, above n 13, at 684.

137. Ibid, at 684.

138. Courts concerned with the statutory contract that exists between corporation and member occasionally held that a contract exists between shareholders inter se Rayfield v Hands[1960] ch 1; Hickman v Romney Marsh Sheepbreeder's Ass'n[1915] 1 ch 881. However, in all such cases the corporation was a small, closely held organisation. Ebrahimi v Westbourne Ltd[1973] AC 360.

139. S Griffin ‘Companies Act 2006 s 33 – altering the contractual effect of the articles of association?’ (2010) Company Law Newsletter 1 at 2. The author identifies that, in seeking to give effect to the supposed contractual intent of the provision, the courts construed the provision generally as one which bound both the corporation and its membership to the terms of the corporation's articles.

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147. The presumed hierarchy of human rights over other claims carries over into the corporate realm in only limited situations, such as violations of what are called jus cogen norms, because most corporate-related human rights abuses do not fall into this category. Accordingly, so far as commercial law is concerned, the term ‘legitimate interests’ or ‘legitimate expectations’ is used with greater effectiveness.

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156. If they had perfect information, did not face significant transaction costs, and could be fully confident that the agreements reached would be performed as arranged. Cheffins, BR Company Law: Theory, Structure and Operation (Oxford: Clarendon Press, 1997) p 264 Google Scholar.

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162. Keay, ‘Ascertaining the corporate objective’, above n 13, at 688.

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166. Zingales, above n 38, at 1643.

167. Ibid, at 1624. Also, see MA O'Connor, above n 31; Singer, J ‘the reliance interest in property’ (1988) 40 Stan L Rev 611 at 621CrossRefGoogle Scholar; Millon, D ‘Redefining corporate law’ (1991) 24 Ind L Rev 223 at 234–235Google Scholar.

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169. Zingales, above n 38, at 1641.

170. Drucker, PF Post-Capitalist Society (Oxford: Butterworth-Heinemann, 1993) p 8 Google Scholar, and asserting that ‘[t]he basic economic resource –“the means of production”, to use the economist's term – is no longer capital, nor natural resources (the economist's “land”, not “labor”). It is and will be knowledge.’

171. Zingales, above n 38, at 1645.

172. Ibid, at 1647–1648.

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177. J Cooper, Deputy Chairman of Australian Securities and Investments Commission in a submission to the Australian Parliamentary Joint Committee on Corporations and Financial Services ‘Corporate responsibility: managing risk and creating value’ 21 June 2006, Canberra, para 2.3.

178. Dyllick and Hockerts, above n 175, at 132.

179. Keay, ‘Ascertaining the corporate objective’, above n 13, at 691.

180. Ibid, at 692 noting that ‘[s]eeking merely to survive means there is a lack of ambition.’ Other commentators have criticised the nature of the term: S Jenkins ‘This localism bill will sacrifice our countryside to market forces’Guardian, 29 July 2011, which suggests that ‘[t]he word sustainable…is a weasel word, an adjective not qualifying a noun but lightly dusting it with vague political approval. Sustainability is the sort of Blairism that gave us downsizing for sacking and humanitarian intervention for war.’

181. Ibid, at 692 and referring to C Loomis ‘A house built on sand: John Meriwether's once mighty long-term capital has all but crumbled’ Fortune, 26 Oct 1998 at 110.

182. D Quiroz-Onate and M Aitken ‘Business and human rights: a critical assessment of the notion of CSR and measurement’ (2007) Journal of International Trade Law & Policy 79 at 82.

183. Ehui, SK and Spencer, DSC ‘Measuring the sustainability and economic viability of tropical farming systems: a model from sub-Saharan Africa’ (1993) 9 Agricultural Economics 279 at 283CrossRefGoogle Scholar.

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185. Keay, ‘Ascertaining the corporate objective’, above n 13, at 693, defines the corporation's capital/assets as the financial capital (equity and debt) tangible capital such as plant, land, stock and intangible capital such as reputation, intellectual property, and know-how.

186. This might include, but is not limited to, aiming for conservative financing, decentralisation of management, investment in valuable projects, research and development, and so on.

187. Galanis, above n 78, at 329.

188. Ibid, at 329.

189. Keay, ‘Ascertaining the corporate objective’, above n 13, at 695.

190. The cyclical and uninspiring quality of this debate has been recognised in Branson, DM ‘Corporate governance “reform” and the new corporate social responsibility’ (2001) 62 U Pitt L Rev 605 at 635–639Google Scholar; Karmel, RS ‘the independent corporate board: a means to what end?’ (1984) 52 Geo Wash L Rev 534 at 535–543Google Scholar; Sommer, above n 11, at 33–36.