The Role of a Company in Modern-Day Society: Revisiting Berle and Dodd in the South African Context.
In the 1930s, a pivotal debate unfolded in corporate law academia between scholars Adolf Berle and E. Merrick Dodd. This debate was centred on whether corporations should focus solely on profit-making or if they also bear a broader social responsibility. The backdrop of this debate was set against the Wall Street Crash and the concentration of wealth with 200 companies controlling 42% of America's wealth.
Berle argued that the primary purpose of a corporation is to maximize profits for its shareholders, viewing the corporation as property owned by shareholders and managed by directors with a fiduciary duty to ensure profitability. This perspective, known as shareholder maximisation theory, emphasised that company law should prioritize shareholder interests.
In contrast, Dodd believed that corporations should also consider the interests of their customers, employees, and other stakeholders. This view, known as stakeholder theory, advocated for a broader interpretation of corporate purpose, incorporating public interest alongside profit.
As we advance into the 21st century, the role and responsibilities of corporations have evolved significantly.
Revisiting this debate is crucial to understanding how contemporary corporations navigate their roles within modern society to address this, we must examine the role of companies from three perspectives:
(a) the community perspective,
(b) the corporate perspective, and
(c) the legal perspective.
Corporate Perspective: The Triple Bottom Line Approach
In the 1990s, the Triple Bottom Line (TBL) concept emerged, emphasising that companies should balance their social, environmental, and economic performance. Over the past three decades, the TBL approach has gained traction among management, consulting firms, and NGOs. Institutional investors have increasingly adopted this perspective, recognizing that companies must integrate social and environmental responsibilities into their business models alongside profit-making. Today, many companies view social responsibility as integral to their performance, incorporating it into their strategic scorecards and operations.
Social Perspective: South African Communities’ Point of View
In South Africa, communities expect companies to uphold public interest and contribute positively to their local areas. This expectation is evident from the activism of civil society groups and community protests against perceived ethical violations. For instance, local communities often demand that companies employ residents from the areas where they operate, even in the absence of specific legislation requiring such practices. These demands can lead to protests, sometimes violent, that threaten the smooth operation of businesses. Therefore, it is crucial for companies to engage effectively with local stakeholders to ensure harmonious operations and address community concerns proactively. Shareholders also increasingly expect companies to uphold public interest issues. Divestments from companies that violate human rights are becoming more common, and stock market shares for certain companies have suffered due to such violations.
Legal Perspective: The Companies Act 71 of 2008
In South Africa, the Companies Act 71 of 2008 recognizes the importance of stakeholder interests and aims to promote transparency and high standards of corporate governance. Its Key aspects include:
Purpose of the Companies Act: Section 7(b)(iii) emphasises promoting the economy through transparency and strong corporate governance. Section 7(e) aims to enhance South Africa's economic welfare within the global economy. Section 7(k) focuses on the efficient rescue and recovery of financially distressed companies while balancing the rights and interests of all stakeholders.
Business Rescue: Section 136(1) introduces business rescue proceedings, allowing employees to apply for business rescue to prevent job losses and protect employment. This provision underscores the recognition of stakeholder interests in corporate recovery.
Social and Ethics Committee: Regulation 43 mandates the establishment of a Social and Ethics Committee for certain large companies listed on the JSE. This committee monitors compliance with BBBEE laws, environmental practices, social issues, and OECD principles. Regulation 43 codifies corporate social responsibility as a legal obligation, extending directors' duties to include public interest considerations alongside profit maximisation.
The role of companies today is multifaceted. While it may be unrealistic to expect small businesses with limited resources to prioritize corporate social responsibility to the same extent as larger corporations, there is a growing expectation for major companies—those with substantial profits and significant societal impact—to go beyond mere profit-making. These larger entities are increasingly expected to consider their broader impact and responsibilities to various stakeholders, reflecting a more holistic approach to corporate governance and social responsibility.
AUGUST 2024
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