The Impact of Theory on Practice

Nowhere in British or United States law are directors (and/or managers) of the incorporated limited liability company, claimed to be the agents of shareholders. The principal, for which directors act as agent, is the company itself. And as agents of the company, directors have a legal duty to act in its best interests at all times. But the business, academic and media worlds have bought the theoretical economists’ lie that company directors are the agents of shareholders and must act in their interests, which are interpreted as solely short term financial, even if it means selling the company down the river.

An interesting example is BBC business editor Robert Peston’s interpretation of BP’s business in America following the disastrous Gulf of Mexico fiasco. The company’s image in the United States is now so tarnished that its American assets could be worth more to almost any other company than they are to BP. Peston argued that it would therefore, under those circumstances, be the BP board’s duty to its shareholders to dispose of those American assets.

But the BP board’s real legal duty, despite Robert Peston and like minded, is to act in the company’s best long term interests. That may well be to pass up the opportunity of a quick buck for the shareholders, and instead work to rebuild its reputation in the United States and elsewhere and so create a solid American BP business.

Why is the BBC arguing the shareholder case? Surely, it should be taking a politically neutral stance, rather than making the free market fundamentalist argument about agency.