“An ordinary day ended as the biggest manmade ecological disaster in history,” says one of the taglines.

Trailers for the new disaster movie Deepwater Horizon, based on the April 2010 disaster, which will be released later this month, quickly shift from sickly sweet family scenes of Mark Wahlberg bidding farewell to his wife and daughter as he goes off to work on a huge oil drilling in the Gulf of Mexico to a desperate fight for survival, as panicked workers scramble to escape the burning oil rig.

The Hollywood marketeers are right with their tagline. It was a global disaster with far-reaching human and environmental consequences. Eleven people were killed and about 4.9m barrels of crude oil leaked into the Gulf in the worst spill in US history.

The story of Deepwater Horizon is also “tragedy on an epic scale” for BP, which operated the rig, according to the US corporate governance expert Lynn Stout. The oil company was later found to have been grossly negligent in its handling of the well and has faced billions of dollars in penalties.

Stout, a professor of corporate and business law at Cornell Law School, chose the story of how profit-driven decisions at BP led to disaster to open her 2012 book The Shareholder Value Myth.



In her view, there are wider lessons to learn from BP’s tale about how costcutting and skimping on safety procedures to secure short-term shareholder gains ended up costing investors in the long run.

The Deepwater Horizon disaster is one example of a problem that afflicts many companies, she says. That problem is the idea that the company belongs to its shareholders and exists for one purpose only: to maximise wealth for those shareholders.

Six years on from the deadly blowout, you do not have to look far for more examples of companies misbehaving and cutting corners, which subsequently hurts shareholders.

Last week, Sports Direct faced anger from shareholders after the company accepted that it had not treated employees properly. The admission followed months of pressure on the retailer’s founder, Mike Ashley, and Sports Direct after the Guardian highlighted a climate of fear at the company’s Shirebrook warehouse in Derbyshire. As the revelations about the company began to batter its reputation, the share price fell and previously quiet stockholders emerged to voice their disquiet.

Everyone loses here. The workers, the shareholders and business at large.



Many companies, particularly smaller ones, will tell you they exist for their employees and customers, as much as for shareholder gains. Yet those who want to serve a wider base of stakeholders may find themselves hamstrung by a legal system that appears to put shareholder interests centre stage. For all their willingness to do good, is it not the primary duty of company directors to create value for shareholders?

There does not appear to be a straightforward answer. Lawyers will disagree over how company directors should interpret the 2006 Companies Act, which states in section 172 (pdf) that “a director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members”. But for Andy Haldane, the Bank of England’s chief economist, there is no question that this statement makes shareholder primacy explicit. As he put it in a speech exploring company ownership last year: “For the first time in history, shareholder primacy had been hardwired into companies’ statutory purposes.”

This idea of shareholder primacy is seen in the way that a company’s share price performance has increasingly become the key measure of success.

As in Stout’s Deepwater Horizon example, the pitfalls of this are obvious. When chief executives manage the share price rather than the company itself, short-termism can quickly take over. Investment suffers as shareholders hungry for dividends demand ever increasing payouts, while risk taking rises, as demonstrated to disastrous global effect by the financial crisis.

When the shareholder is king, a company’s long-term success and impact on those around it take a back seat.

But campaigners for a different kind of capitalism say it does not have to be this way. A growing movement is putting forward a new model, where directors answer to a range of stakeholders, such as employees and the environment, not just investors. Those pushing for change may dare to hope their calls will be answered now that Theresa May is vowing tackle corporate irresponsibility and “reform capitalism so that it works for everyone not just the privileged few”.

The good news for the prime minister is that a simple amendment to company law could make a big difference.

The charity B Lab UK is urging the government to pass “benefit company” legislation. The reform would give companies the option to reject shareholder primacy and be managed for the benefit of all stakeholders, according to the charity, which represents a growing number of so-called B Corps, or benefit corporations. This model has three mandatory elements: a broadened purpose, director accountability and stakeholder transparency.

The movement behind benefit corporations started a decade ago in the US to pioneer the idea that companies are “best for the world”, rather than best in the world. The movement has spread to include 1,800 B Corps in 50 countries.

In some places, laws have been changed for companies to turn themselves into B Corps, but in others, no such change has been deemed necessary. Some corporate governance experts argue that the UK is one such case and the law already allows for a wide range of stakeholders to be considered by company chiefs. At the moment, when a UK company becomes a B Corp, it changes its constitution.

However, B Lab UK says a small amendment to the law would clear things up. As the charity’s co-founder James Perry says, for directors worried about where their legal duties lie, a law “gives you a fighting chance, or a platform” to act in the interests of society and the environment.

Perry, who helped set up the frozen ready meals retailer Cook, insists that the change would still leave companies with the option to continue putting shareholders first. But ultimately, the market will decide, he says. Those who choose the broader stakeholder model may find that it makes more business sense. The hope is that a sense of purpose raises longer-run success, helps recruit and retain skilled staff, and appeals to customers. The B Corps movement in the UK likes to say it is to business what Fairtrade certification is to coffee.

If the new government is serious about shaking up capitalism, this is an easy win. Companies’ corporate and social responsibility programmes can do good, but they do not address the root causes of corporate misbehaviour, misjudgments or recklessness. For that, we must move beyond a world where shareholders reign supreme.