- Corporations, Globalisation and the Law series
Chapter 8: Allocation of Profits
8. Allocation of profits 1. INTRODUCTION Clearly it is hoped that companies will make profits. Indeed, many see profits as the feature which distinguishes companies from other human organisations.1 If companies do not make profits then they are going to be in serious trouble. One of the main issues in dealing with the corporate objective is resolving what directors are to do with the profits that their company makes. The issue does not go to the determination of the objective of the company, but it is so critical that it cannot be ignored in any serious consideration of the objective of the company. Enlightened shareholder value, the concept introduced by s.172 of the Companies Act 2006, captures the importance of dealing with what companies earn, in saying that the directors are to manage so as to promote the success of the company, but it then qualifies this by stating ‘for the benefit of the members as a whole.’2 Under s.172, the success of the company and the benefit of the members cannot be separated, and this suggests that the fruits of the company’s business will go to the members/shareholders. In contrast EMS purports to separate the benefits to shareholders and benefits to the company. Maximising entity wealth should benefit the members (and all investors in some way), but indirectly. When companies make profits there is the possibility of squabbling amongst the investors and an attempt to engage in rent-seeking.3 Effectively shareholder primacy provides that the money that remains after discharging...
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