THEORIES RELATED TO CORPORATE PERSONALITY There are five principal theories, which are used to explain corporate personality, namely, the fiction theory, realist theory, the purpose theory, the bracket theory and the concession theory. The fiction theory of corporation is said to be promulgated by Pope Innocent IV (!"#$!%"&. This theory is supported by many famous 'urists, particularly, Von avigny, )oke, *lackstone and almond. +ccording to this theory, the legal personality of entities other than human beings is the result of a fiction. The famous case of alomon v + alomon )o td is a proof of the -nglish court adoption of the fiction theory. In this case, ord alsbury stated that the important /uestion to decide was whether in truth an artificial creation of the legislature had been validly constituted. It was held that as the company had fulfilled re/uirements of the )ompanies +ct, the company becomes a person at law, independent and distinct from its members. 0nder the concession theory, the state is considered to be in the same level as the human being and as such, it can bestow on or withdraw legal personality from other groups and associations within its 'urisdictions as an attribute of its sovereignty. ence, a 'uristic person is merely a concession or creation of the state. )oncession theory is often regarded as the offspring of the fiction theory as it has similar assertion that the corporations within the state have no legal personality except as it is conceded by the state. -xponents of the fiction theory, for example, avigny avigny,, 1icey and almond are found to support this theory. 2onetheless, it is obvious that while the fiction theory is ultimately a philosophical theory that a corporation is merely a name and a thing of the intellect, the concession theory is indifferen indifferentt as regards to the /uestion of the reality of a corporation in that it focus on the sources of which the legal power is derived. 2ext, is the purpose theory (also known as the theory of 3weckvermogen& . The advocates who are associated with this theory theor y are -.I *ekke *ekker, r, +loys +loys *rin4 and 1em 1emilius ilius.. imi imilar lar to the fiction and conce concession ssion theories, theories, it decla declares res that only human beings can be a person and have rights. 0nder this theory, 'uristic person is no person at all but merely as a 5sub'ectless6 property destined for a particular purpose and that there is ownership but no owner. The 'uristic person is not constructed round a group of person but based on the ob'ect and purpose. The property of the 'uristic person does not belong to anybody but it may be dedicated dedicated and legally bound by certain ob'ects. ob'ects. The ymbolist theory is also known as the 5bracket6 theory. It was set up by 7hering and later developed particularly by 8ar/uis de Vareilles$ommi9res. *asically, this theory is similar to the fiction theory in that it recogni4es that only human beings have interests and rights of a legal person.#: +ccording +ccording to 7hering, the conception of corporate personality is indispensable and merely an economic device by which simplify the task of coordinating legal relations. ence, when it is neces necessary sary,, it is emphasi4ed emphasi4ed that the law should look behin behind d the entity to discover the real state of affairs. affairs. This is clearly in line with the principle of lifting of the corporate veil. The realist theory, founded by ;erman 'urist, 7ohannes +lthusius has been most prominently advocated by
possesses a will and life of its own. +s such, being a 'uristic person and as =alive> as the human being, a corporation is also sub'ected to rights. 0nder the realist theory, a corporation exists as an ob'ectively real entity and the law merely recogni4es and gives effect to its existence. The realist 'urist also contended that the law has no power to create an entity but merely having the right to recogni4e or not to recogni4e an entity. + corporation from the realist perspective is a social organism while a human is regarded as a physical organism. + corporation from the realist perspective is a social organism while a human is regarded as a physical organism.
Shareholder and stakeholder theory The )adbury )ommittee ??! defined corporate governance as @the system by which companies are directed and controlled.@ 2umerous theories have been proposed on corporate governance best practice, none more popular than the shareholder and stakeholder theories. Shareholder Theory
The shareholder theory was originally proposed by 8ilton Ariedman and it states that the sole responsibility of business is to increase profits. It is based on the premise that management are hired as the agent of the shareholders to run the company for their benefit, and therefore they are legally and morally obligated to serve their interests. The only /ualification on the rule to make as much money as possible is 5conformity to the basic rules of the society, both those embodied in law and those embodied in ethical custom.6 The shareholder theory is now seen as the historic way of doing business with companies realising that there are disadvantages to concentrating solely on the interests of shareholders. + focus on short term strategy and greater risk taking are 'ust two of the inherent dangers involved. The role of shareholder theory can be seen in the demise of corporations such as -nron and Borldcom where continuous pressure on managers to increase returns to shareholders led them to manipulate the company accounts. Stakeholder Theory
takeholder theory, on the other hand, states that a company owes a responsibility to a wider group of stakeholders, other than 'ust shareholders. + stakeholder is defined as any personCgroup which can affectCbe affected by the actions of a business. It includes employees, customers, suppliers, creditors and even the wider community and competitors. -dward Areeman, the original proposer of the stakeholder theory, recognised it as an important element of )orporate ocial Desponsibility ()D&, a concept which recognises the responsibilities of corporations in the world today, whether they be economic, legal, ethical or even philanthropic. 2owadays, some of the worldEs largest corporations claim to have )D at the centre of their corporate strategy. Bhilst there are many genuine cases of companies with a 5conscience6, many others exploit )D as a good means of PD to improve their image and reputation but ultimately fail to put their words into action. Decent controversies surrounding the tax affairs of well$known companies such as tarbucks, ;oogle and Aacebook in the 0F have brought stakeholder theory into the spotlight. Bhilst the measures adopted by the companies are legal, they are widely seen as unethical as they are utilising loopholes in the *ritish tax system to pay less corporation tax in the 0F. The public reaction to tarbucks tax dealings has led them to pledge GHm in taxes in each of the next two years in an attempt to win back customers. Enlightened Shareholder Value - A Happy Medium?
-nlightened shareholder value (-V& states that 5corporations should pursue shareholder wealth with a long$run orientation that seeks sustainable growth and profits based on responsible attention to the full range of relevant stakeholder interests6. -ssentially, it focuses on generating shareholder value, whilst having regard to the long term external impacts of the wealth generation. The importance of the concept was recognised in the 0F when it was adopted into law in the)ompanies +ct !HH. The move represents an important development in corporate governance and a clear move away from the shareholder theory.
