State-owned enterprises (SOEs) can help cause but also solve the climate crisis. A lot depends on the controlling shareholders of SOEs – governments – which wield significant legal and economic power over SOEs’ actions. If we are serious about holding SOEs accountable, then we cannot merely treat them as ordinary companies subject to corporate law. For example, imposing due diligence obligations on them and requiring their directors to consider how their decisions affect sustainability are insufficient. We need to develop a theory and a mechanism for holding governments, as the controlling shareholders of SOEs, accountable.
In a forthcoming paper, I advance a new theory that can provide a theoretical and legal basis for evaluating the conduct of a government controller and for bringing a cause of action against it. I argue that the ultimate controlling shareholder of SOEs – the government – should owe members of the polity fiduciary duties to act in good faith in their best interests and to avoid conflicts of interest. I further argue that the direct controlling shareholder of an SOE – the government agency or the company that the government interposes between itself and the SOE – should owe both first order fiduciary duties to the government (the ultimate controller) and second order fiduciary duties (which include acting in good faith in the public interest).
My theory challenges the prevailing orthodoxies in the U.S., U.K., and Commonwealth corporate law and governance. For U.S. corporate law, the government controlling shareholder should owe fiduciary duties to act in the public interest. For U.K. and Commonwealth corporate law, my theory calls into question the principles that only directors should be regarded as fiduciaries, and that shareholders can generally vote as they please even if doing so is antithetical to the company’s interest.
Why and How Fiduciary Duties Can Be Imposed
I begin by evaluating the theoretical arguments in favor of characterizing the government as a fiduciary. Briefly, the government represents the people when it exercises its discretionary powers because it has the mandate to do so. That power can of course, be abused. I argue that an equally strong case can be made for a government controlling shareholder of SOEs to be treated as a fiduciary given the limited constraints on the exercise of the government controller’s significant and substantial voting rights and its potential abuse of power and conflicts of interest. Next, I examine to whom the government controlling shareholder should owe fiduciary duties with reference to two types of SOE structures: first, when the government is the controlling shareholder of the SOE, and second, when the government interposes a wholly controlled entity between itself and the SOE. Where the government shareholder is the ultimate or direct controller, it should owe the people fiduciary duties to act in good faith in their best interests and to avoid conflicts of interest. If there is a breach of those duties, the law should create a public ombudsman to enforce them. This is akin to the attorney general bringing a claim, on behalf of the public, against the trustee of a charitable trust for breach of fiduciary duties.
One objection to my analysis may be that the fiduciary duty to act in the public interest exposes the government shareholder to multiple principals or beneficiaries with divergent interests. This objection incorrectly assumes that there is or ought to be only one, or one class of, beneficiary (or principal), and within that class, there is a common goal or interest. For example, the corporate laws of two of the largest economies outside the U.S. – India and China – require directors to act in the interests of employees, the community, and the environment, in addition to those of shareholders. And even within the class of shareholders, different types have differing interests, investment strategies and engagement practices.
Another objection is that subjecting the government controller to fiduciary duties is redundant because, under administrative law, the government’s exercise of its discretionary powers is already constrained by the requirements to include relevant considerations and exclude irrelevant ones, and the government must act for proper purposes. This objection rests, however, on the questionable assumption that the government controlling shareholder will necessarily be subject to judicial review. But there is case law showing that unless the entity has exercised power that is governmental in nature, as evidenced by its origin, history, constitution, and conduct, its exercise of power will not be invalidated.
A third possible objection is that corporate mechanisms such as derivative actions are sufficient to hold the government accountable. However, these mechanisms are intended to remedy harms done to the company and not to the public. These corporate mechanisms do not address the problem of conflicts of interest by the government shareholder.
Implications for Climate Change Management and Litigation
As for the implications of my arguments for climate change management and litigation, ultimate and direct government controlling shareholders may breach their fiduciary duties if they fail to address climate-related risks as part of their investment approaches, governance structures, monitoring actions, engagement practices, and management of conflicts of interest. I then explain the benefits of having breach of fiduciary duties as a possible cause of action in climate change litigation, the most important of which is that it may be easier for the causation requirement to be satisfied. Claimants must usually prove “but for” causation – the breach of duties by the defendants actually caused the losses or damage suffered by them. However, for breaches of certain kinds of fiduciary duties, once the claimant has shown that the defendant has breached its duty, the defendant is required to prove that the claimant would have suffered the losses without the breach.
Broader Implications for Corporate Law, Fiduciary Law, and Private Law
My arguments may have significant ramifications for corporate law, fiduciary law, and private law. As to corporate law, it needs to address the neglected issue of holding the government controlling shareholder accountable, and a key mechanism for doing so is to subject it to fiduciary duties. As to fiduciary law, it can illuminate the administration of an important social and economic institution, the SOE – which has been overlooked in the fiduciary law literature – as the example of climate change management and litigation shows. As to private law, perhaps fiduciary duties can and should be used to control the exercise of discretionary powers in the public realm, specifically the governmental exercise of social and economic powers through SOEs. After all, despite the differences in the structure, nature and scope of public and private law, their similarities have led courts in other contexts to use public law principles to regulate private business relationships. It makes sense, then, to consider whether corporate fiduciary law should be used to regulate the governmental shareholder.
This post comes to us from Professor Ernest Lim at the National University of Singapore – Faculty of Law. It is based on his recent article, “The Government Controlling Shareholder as a Fiduciary: Implications for Climate Change Management and Litigation,” available here.