Relational companies: Towards responsible capitalism

• Jurisdiction: South Africa
• Published date: 16 August 2019
• Citation: (2017) 3(1) JCCL&P 49
• Date: 16 August 2019
• Author: Jonathan Rushworth
• Pages: 49-71

49

RELATIONAL COMPANIES:

TOWARDS RESPONSIBLE

CAPITALISM*

Jonathan Rushworth†

ABSTRACT

There is growing public dissatisfaction with the short-term,

financially driven approach of listed companies, particularly in the

United Kingdom. Shareholders demand ever-increasing payments by

way of dividends and share buy-backs. As a consequence, directors

are not encouraged to invest in companies for the long term and

the financial imperative can lead to low wages, with little incentive

and encouragement for employees, lack of support of suppliers (who

are often paid beyond the contract date), impersonal dealings with

customers, and minimal tax payments where profits are earned.

Meanwhile remuneration levels of senior employees regularly

increase along with growing pay differentials. These practices have

led to a loss of trust and confidence by society in the business world.

There is little understanding that some of the shareholders who

collectively have the ownership interest and voting rights in these

companies represent members of the public through managed funds,

pensions and other investments. The introduction of limited liability

in Victorian times meant that, if the company failed, shareholders

would lose the amount of their investment but had no liability for

the underlying debts and liabilities of the company itself.

The development of share trading and markets meant that over

time shares became just another tradable commodity with investors

* The author acknowledges with thanks the support and contribution of Associate

Professor Tshepo Mongalo PhD, Head of the Department of Law, Monash South

Africa.

† LLB (Hons). Jonathan Rushworth is a retired solicitor, whose legal career was at a

major City of London law firm. He was a partner in the firm with a broad ranging

company and finance practice. He was on a number of professional committees

and wrote and lectured extensively on legal topics. In addition to pursuing

charity and history interests since retiring from legal practice, he has worked with

Dr Michael Schluter and others on the analysis and practical approach to put

relationships and the interests of others at the heart of society rather than a focus

on the rights and interests of the individual with a narrow materialistic approach.

His particular interest has been to analyse the development of corporate structures

and behaviour and how companies can be encouraged to serve the interests of

and create value for all stakeholders, including shareholders and society generally,

in a way that will restore trust and confidence in the corporate world.

(2017) 3(1) JCCL&P 49

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50 (2017) 3 (1) JOURNAL OF CORPORATE AND COMMERCIAL LAW & PRACTICE

having little interest in the underlying business of a company and its

treatment of employees, suppliers and others beyond the requirement

for a financial return on their shares. This has led to a significant

reduction in investment in research and development, which has

been to the detriment of the long-term value of the company.

There is an increasing recognition of the value and importance

of relationships with all stakeholders in companies, beyond a focus

on the financial interests of shareholders. Putting the interests of

stakeholders at the heart of company decision making and operations

will lead to the company being more sustainable, competitive and

successful. One way to encourage the practical application of this

is by measuring the extent of the relational ethos of a company

against a set of principles set out in a Relational Business Charter.

These principles reflect the standard expected of a company with

a relational approach in its dealings with shareholders, employees,

suppliers, customers, lenders, the local community and wider

society. A published index would compare the standard achieved

by companies in different business sectors and would encourage

companies to embrace an inclusive approach to stakeholder interests.

This approach to stakeholder recognition and engagement reflects

that taken by the King IV corporate governance code in South Africa,

which has developed a stakeholder inclusive approach, as compared

to the enlightened shareholder value approach in UK legislation.

An analysis of the approach taken on this aspect of corporate

governance in South Africa, where it is contained largely in the code,

contrasts with that in the United Kingdom, where it is mainly found

in company law as part of the duties of directors.

I SETTING THE SCENE

The role of business in society is under scrutiny; there are challenges

to its legitimacy1. The financial crisis in 2008 heightened awareness

over problems in business practices of globally operating banks

but it also shone a light on the behaviour of the corporate world

generally. Although many companies operate in a responsible way,

there is sufficient concern overall that society has in many respects

lost confidence and trust in large businesses2. Headline disquiet over

increasing pay differentials, the short-term nature of shareholding,

the treatment of employees and suppliers, and non-payment of tax

1 This article is written from a UK perspective, with references to law and practice

in South Africa where indicated.

2 Recent and current examples of corporate behaviour under particular scrutiny

include BP, Tesco, Volkswagen, BHS and Sports Direct.

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