A significant new research paper which draws expertise from a cross-sector team of individuals at Harvard, Linklaters, the UN Global Compact, and the American Bar Association, is shedding new light on this entrenched notion of fiduciary duty.  Using legal opinions from some of the most prestigious global law firms in 20 countries, the paper, authored by Harvard's Bob Eccles and Tim Youmans, provides a clear exposition and understanding of the fiduciary duty of board directors. The result is enlightening, and maybe even surprising:  in every country examined, the law is that the board’s duty is first to the corporation as a separate legal entity, distinct and separate from shareholders.

Also, it appears that countries align in the following four groups regarding directors’ fiduciary duty to stakeholders, which could be shareholders, but also could be suppliers, society, government, employees, creditors, the natural environment, or any other entity that is important to preserving or growing the value of the corporation.

According to Eccles and Youmans, the four groups are as follows:
1) “specifically required”, for example in Brazil, where this duty to a broad group of stakeholders is a deep and specific governance requirement;
2) “expressly allowed”, for example in the UK and China, where duties to society and specific stakeholders should be considered;
3) “interpretively allowed”, for example in the US, where the business “judgement rule” gives boards wide latitude to consider stakeholder impacts; and
4) “passively allowed”, for example in Columbia, where boards considering stakeholder audiences is neither prohibited nor discussed in law.

The importance of transparency

What does this mean?  It means that corporations, as entities that can endure for an unlimited amount of time with an unlimited amount of impact on their communities and environment, have at a minimum permission to consider a broad array of significant stakeholders.  This pool of stakeholders almost certainly includes shareholders, but not necessarily to the detriment of other members of the stakeholder pie.  Crucial in all of this is transparency.  Who is, and who is not, a member of the circle of significant stakeholders? 

According to Eccles and Youmans, an important first step is companies disclosing who their significant audiences are, and, they hasten to add, this must be a fairly limited number. No corporation—no matter how big—can satisfy all the demands of its many stakeholders .They call this new kind of disclosure a "Statement of Significant Audiences and Materiality" which should be issued by the company’s board of directors on an annual basis  According to them, an early adopter of this approach is the 170-year-old Dutch insurance firm Aegon, which  in its 2014 Review set out a matrix of stakeholders that combines insight from its statement on important stakeholders with insight from their process to define important issues. The result is a set of issues that meet or exceed the threshold for overall materiality to the corporation.

The Aegon study is impressive, but according to Eccles and Youmans, there is no “cookie-cutter approach” that needs be followed. The point is to use a rigorous and selective methodology to determine and make transparent the significant audiences of the corporation.  As an ultimate goal, the authors call for the board of directors of every listed company in the world to issue an annual “Statement of Significant Audiences and Materiality” by 2025.  

It will be very interesting to see who is in the next wave of early adopters, and how stakeholders of all stripes, including investors, start to integrate such disclosure, or not, into their own selection criteria. At the very least, perhaps this is the beginning of the end of the notion that the board has a fiduciary duty solely to the shareholder. Its duty is to the corporation and, in doing so, it should identify what audiences it deems as most significant for the corporation’s interests and the timeframes in which it evaluates its impact on these audiences.

More hopefully, perhaps the investment community will start to call for this kind of rigorous, contextual analysis of the social value-drivers for investments, and so reward entities that are correspondingly focused and transparent. 

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.