The foundations of governance: implications of entity theory for directors’ duties and corporate sustainability

Lynn Buckley ()
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Lynn Buckley: University of Auckland

Journal of Management & Governance, 2022, vol. 26, issue 1, No 5, 29-53

Abstract: Abstract This paper examines two distinct corporate theories, shareholder primacy and entity theory, as foundations of corporate governance and their implications for corporate sustainability. Specifically, the purpose of this paper is to argue for a shift in perspective away from shareholder primacy towards an alternative approach—entity theory. It considers why shareholder primacy as a foundation for governance is problematic for facilitating sustainable business decisions and suggests that conceptualizing the company as an entity would provide a more appropriate theoretical foundation for governance which lends itself to sustainable corporate conduct. Although abstract in isolation, such corporate theories can have real world influence on governance and subsequently director behavior. This point is illustrated by contrasting the extent to which directors, as part of their duty to act in good faith in the best interests of the company, can factor sustainability interests into their business decisions across a shareholder orientated jurisdiction, the United Kingdom, and an entity orientated jurisdiction, Canada. The analysis demonstrates the implications of entity theory for sustainable director decisions when acting in the best interests of the company; namely, a reduction of the pressures associated with the shareholder primacy drive, broader notions of what constitutes corporate interest, and a recognition of the entity’s role in society to behave as a good corporate citizen.

Keywords: Corporate governance; Corporate legal theory; Directors’ duties; Sustainable business (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10997-021-09580-y

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