Many conversations about business sustainability come back to a more fundamental question of the role of corporations. Are corporations pure money-making instruments, or do they serve a larger purpose?

The rise of corporations as a business vehicle enables mankind to pool different forms of capital together to achieve common objectives.

A separate legal personality means that the corporation can enter into contracts and sue in its own right, while perpetual succession means that the corporation can long outlive any of its initial subscribers. Limited liability allows for more calculated risk-taking – an entrepreneur can segregate the liabilities of the corporation from his or her own, and have more confidence in taking business risks.

As businesses become more complex, corporations become more sophisticated and a specialised model for governance emerges. There arises the segregation of the roles of the board of directors and management, to achieve bigger endeavours.

In many jurisdictions, the board of directors works for the best interest of the corporation. But the corporation is an inanimate legal fiction – ultimately, people and lives stand behind the corporate form. To paraphrase Hemingway, for whom does the corporation toil?

As Klaus Schwab and Peter Vanham elaborate in their book “Stakeholder Capitalism: A Global Economy that Works for Progress, People and Planet”, there are two prevailing economic systems in the world today: shareholder capitalism and state capitalism.

Shareholder capitalism places shareholders’ interests at the centre of the economic endeavours, as the driving force for the allocation of factors of production. It has as its mantra the maximisation of shareholder value, and Milton Friedman as its key proponent.

State capitalism, on the other hand, considers the state as the dominant force, which controls the distribution of resources. What this means is that the interests of individual entities are subservient to the greater good of the state.

In recent times, a third form has gained prominence – that of stakeholder capitalism.

This refers to a system which places attention on all private actors in society. It seeks to protect and guide their economic activities to ensure that the overall direction of economic development is beneficial to society, and no actor can freeride on the efforts of others.

A key proponent is the Business Roundtable, a group comprising of 200 chief executives of the largest corporations. In 2019, the Business Roundtable called on corporates to embrace the goal of managing companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders.

But stakeholder capitalism is not itself a new idea. Adolf Berle and Gardiner Means, in their 1932 seminal text “The Modern Corporation and Private Property”, advocated that public companies should have professional managers who would balance the needs of different stakeholders, taking into account public policy considerations.

Further, managers need to watch how such needs and considerations change over time.

Take climate change as an example. The understanding of its impact on businesses has evolved tremendously in the last five years. In addition to the physical risks of climate change, the business community is also asked to consider transition risks. For example, changing consumer preferences, emerging new technologies, and new regulatory policies on companies to take responsibility for climate impacts.

Notably, a legal opinion commissioned by the Commonwealth Climate and Law Institute opined that directors must understand what climate change entails and how it would impact on their corporation’s activities, strategies and financial planning. Directors must also consider steps to prevent legal challenges to business practices, especially given the risk of climate litigation. In New Zealand, for example, a court has raised the possibility of expanding the existing law of torts, to include an inchoate duty to minimise greenhouse gas emissions.

The best interests of a corporation, properly understood, naturally extend beyond just shareholders’ interest. it also encompasses the interests of stakeholders in the communities in which the corporation operates. The duty of the director therefore involves the balance in serving all of a corporation’s stakeholders, to reach a suitable compromise.

Many of today’s problems – including climate change – are seemingly intractable, with critics on all sides of the debate. Part of the problem lies in existing entrenched power dynamics, which prevent or restrict us from changing the status quo. Another part lies in how some view the tactics of change advocates as provocative and radical.

The better way is to engage in conversation with all stakeholders about our respective interests and focus on how we can transform the common good.

Michael Tang

Executive Director and Head, Listing Policy & Product Admission and Sustainable Development Office, Singapore Exchange Regulation

Michael Tang is the Head of Listing Policy & Product Admission at Singapore Exchange Regulation (SGX RegCo), a subsidiary of Singapore Exchange (SGX Group) that undertakes frontline regulatory functions. He also heads the Sustainable Development Office at SGX RegCo. In his two roles Michael oversees listing policy and rules development, administers the admission of securities products, coordinates sustainability-related issues on the regulatory front as well as leads efforts to promote sustainability across stakeholder groups. Michael graduated from the National University of Singapore (NUS) with a Bachelor of Laws degree and is admitted to the Singapore bar. He is a member of the Advisory Board of the NUS Business School’s Centre for Governance and Sustainability (CGS), a Management Committee member of Global Compact Network Singapore (GCNS) and a member of the Environmental, Social and Governance Committee of the Singapore Institute of Directors (SID).