Should company law serve the interests of only those who contribute capital to companies or should it also consider public interest?

How well a business corporation performs in financial terms is significant for a broad group of people that includes potential/existing investors, creditors, employees or managers. With differing information needs and purposes, each category of stakeholders should be provided with data that is comprehensive, relevant and reliable, so as to allow an informed opinion to be reached on the corporation’s financial performance. However, all too often, the general public is left out of this equation.  A corporation’s operations have direct and indirect effect on the general public, who don’t have a “stake” in the company in the conventional use of the term.  Yet, business corporations are purely economic structures, whose sole purpose is profits and whose foresight stops with the next quarter.  This essay tries to discuss the existing norms of accountability, its deficiencies and areas that need improvement.

The only document that a company in the UK is required to release in the public domain is its Annual Report.  Corporations whose shares are traded publicly issue an Annual Report at the end of each financial year for the perusal of its shareholders and other stakeholders. The stakeholders could be potential investors, creditors, employees, regulating agencies and competitors.  In other words, Annual Reports indicate the financial health of a corporation to all concerned.  It contains such information as financial statements, the Chairman’s statement, and the management’s assessment of prospects in the following years.  The reports comprise a mix of charts, graphics and their descriptions.  Some landmark events such as acquisitions or additional issue of stocks also find a place in these reports.  Company law in the UK does not mandate the publishers of annual reports to explicate their company’s overall performance in relation to the welfare of general public and environment, which is seen as an evasion of responsibility by some ethicists (Wheeler, p.22).

A closer look at the constituent elements of corporate annual reports indicates whose interests they serve.  There are three important financial components to annual reports.  They are the Income Statement, Balance Sheet and the Cash Flow Statement.  Apart from these major financial components, other information of interest is also included.  For example, the Chairman’s Address to the Shareholders, Highlighting of major achievements over the year, Management’s assessment of the year, an auditor’s note and a summary of all financial information.  Having said this, there is no universally accepted format for annual reports within the UK.  This gives opportunity for companies to show an impressive set of numbers, the reality of which can be deciphered only by reading the fine print.  In this case, even the so called ‘stake-holders’ and capital contributors are at risk of being deceived, which makes a strong case for introducing stricter regulations for monitoring and reporting of the activities of a company.  The resultant transparency would then empower the general public to see to it that their genuine interests are not jeopardized by the company’s activities (Chandler, p.45).

Moreover, financial reports have other limitations.  While they can accurately evaluate the values of tangible assets, more often than not the measure of intangible consequences of the company’s operations are not accounted. For example, let us take a company that manufactures cosmetics.  The manufacturing and packaging of the company’s products involves chemical processes, the residues of which are purged into a nearby river stream or sea.  The discharged residual matter is highly toxic and hence harmful for the aquatic life in the waters.  This leads to the diminishing in numbers of many species. Those that survive this hazard and land in fishing nets are consumed by human beings.  So, now the citizenry of the area surrounding the company’s processing unit get affected.  The affectation could be of varying degrees and can manifest slowly over a long period of time.  These are all costs alright, but not for the corporation.  These “externalities” are not accounted for by them (Wheeler, p.22).

So who pays for the “externalities”?  Well, let us say the sickened citizenry are hospitalized for treatment.  The treatment costs could be imposed on the patients themselves (in a highly privatised economy) or by the government (if a public health-care system is in place).  Either way, the corporation that was the culprit in this case goes scot-free.  This is just one externality.  There are others such as “contribution to global warming”, “contribution to the erosion of ozone layer”, “depleting fertile soils by industrial production policies”, “contribution to air and noise pollution”, etc (White, p.177).  The economic structures of many countries (including the advanced ones like the United Kingdom) are not designed to make business corporations pay for the damages induced by them.  This blatant unfairness had gained better awareness over the last decade or so – mainly through the persistent efforts of activists and intellectuals.  The efforts of devoted activists are finally having an impact on the regulatory and legislative branches of governments to improve existing standards of accountability.  While those contributing capital are not affected in a major way as a result of this degradation to the environment, the dependent wildlife and the unsuspecting general population bear the brunt of the consequences.  Hence, it is not sufficient if company law serves the interests of those who contribute capital to companies, they should control the activities of the companies in the interests of the general public (White, p.177).

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