Achieving Long-Term Value Through Stakeholder Theory: Proposed Amendments to the Companies Act 1993

Abstract

This paper begins by proposing that the objective of the company should be to maximise its long-term value. The paper then discusses Shareholder Value Theory, which requires directors to prioritise the short-term interests of shareholders over the goal of maximising the company’s long-term value. The paper considers how Shareholder Value Theory is supported in New Zealand by the Companies Act 1993 and the structure of the company itself. The paper then discusses the alternate theory known as Stakeholder Theory, which requires directors to consider the interests of all affected stakeholders. It postulates that Stakeholder Theory is consistent with long-term value maximisation and should be implemented into New Zealand’s legislation. Finally, the paper recommends two amendments to the Companies Act 1993 which would encourage directors to act in accordance with Stakeholder Theory. Firstly, broadening the definition of ‘entitled persons’ who may bring a derivative action against directors who breach their duty to further the interests of the company under s 131. Secondly, amending s 131 of the Act to include a list of stakeholders’ interests and guidance on how and when directors ought to consider them. These amendments, by encouraging directors to implement Stakeholder Theory, will lead to long-term value maximisation.

Keywords: K00, K20

JEL Classification: "long-term value", "stakeholder theory", "shareholder value"