atthefrontiers oflabour law and corporate law: …

AT THE FRONTIERS OF LABOUR LAW AND CORPORATELAW: ENTERPRISE BARGAINING, CORPORATIONS AND

EMPLOYEES

Jennifer Hill*

INTRODUCTION

Nam tua res agitur, paries cum proximus ardet - For it is your business, when the wall nextdoor catches fire. Horace

No two areas of law-in Australia are moving with quite the breathless pace of corporatelaw and labour law. Changes under the Corporate Law Simplification project promiseto be fundamental and far-reaching. And in Australian labour law, the enterprisebargaining regime under the Industrial Relations Reform Act 1993 is charting newwaters. Lord Wedderburn has referred to the "unaccustomed proximity"l of corporatelaw and labour law, and indeed, little recognition of the other's significance is evidentin the reforms unfolding in each of these vital fields. This article focuses on therelevance of corporate law to labour lawyers. Its message, however, might just as easilybe reversed.

The new enterprise bargaining regime under the Industrial Relations Reform Act1993 (Cth) represents a sharp break with Australian labour law's evolutionary past.Not only does it constitute a major shift away from our characteristic award-basedsystem of industrial relations,2 it also mirrors a burgeoning international trend towards

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BA LLB (Hons) (Syd), BCL (Oxon), University of Sydney. An earlier version of this paperwas presented at the Third Annual Labour Law Conference, Sydney, 1995 and will bepublished in a forthcoming book of conference proceedings entitled Enterprise Bargaining,Trade Unions and the Law. I would like to thank Jonathan Morrow for his researchassistance and a number of people who generously gave their time to discuss some of theissues in this paper. These include Katherine Stone, Harry Katz, John Colvin, GregMcCarry, Ron McCallum, Angus Corbett, Dimity Kingsford Smith and Edward Wright.Research Assistance for this project was provided by the Australian Research Council andthe Law Foundation of New South Wales.K W Wedderburn, "Companies and Employees: Common Law or Social Dimension?"(1993) 109 LQR 220 at 221. For examples of recent "colonisations" of formerly distinct areasof legal study, however, see H Collins, "Organizational Regulation and the Limits ofContract" in J McCahery, S Picciotto, C Scott (eds), Corporate Control and Accountability:Changing Structures and the Dynamics ofRegulation (1993) 91.See R C McCallum, "The Internationalisation of Australian Industrial Law: The IndustrialRelations Reform Act 1993" (1994) 16 Syd L Rev 122.

1995 Enterprise Bargaining, Corporations and Employees 205

decentralisation of collective bargaining power.3 While commentators disagree on theprimary forces driving this international trend,4 its significance is not in doubt.

Australia's new enterprise bargaining regime exemplifies the "unaccustomedproximity" of corporate and labour law, continuing the tradition of segregationbetween these two fields of legal study. The regime accords virtually no significance tothe issue of whether an employer is a corporation. This indifference is consistent with acontractual paradigm, under which the identity of the parties is not per se a matter ofimportance. While it is true that the enterprise flexibility agreement provisions, whichallow agreements to be negotiated in individual workplaces without unioninvolvement,S apply only to corporate employers, this is merely a constitutional matter,deriving from use of the corporations power as a basis for these provisions.6 Nosubstantive consequences flow from the employer's corporate status.7

The effect of the new enterprise bargaining provisions is to focus attention onindividual workplace bargains, through which employees are responsible forprotection of their interests. Implicit in the contractual model underpinning this regimeare a number of assumptions. Perhaps the most significant of these is that the employerand employee are separate parties with distinct interests. For example, the onlyrestriction on content of enterprise flexibility agreements under the Act is that theagreements concern "matters pertaining to the relationship between employers andemployees",8 words which treat the parties and their interests as distinguishable. Thisreflects labour law's traditional treatment of employers as natural persons. It is atradition, however, which is now anachronistic. The commercial reality is thatemployers tend overwhelmingly to be corporations. Indeed, true commercial realismwould recognise that the majority of employers are companies within corporate

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See H C Katz, "The Decentralization of Collective Bargaining: A Literature Review andComparative Analysis" (1993) 47 Industrial and Labor Relations Review 3, for an examinationof manifestations and implications of this trend in Australia, Sweden, Germany, Italy, theUnited Kingdom and the United States. According to Professor Katz, Australia andSweden had the most highly centralised bargaining structures prior to the trend todecentralisation.Various hypotheses for the decentralisation trend exist. These include conjecture that thetrend results from, and maintains, increased management power; that it reflects theemerging importance of "fast and innovative reactions to changing market conditions",particularly in times of economic crisis (see W Streeck, "Neo-Corporatist IndustrialRelations and the Economic Crisis in West Germany" in J H Goldthorpe (ed), Order andConflict in Contemporary Capitalism (1984) 291 at 293-294); or that it emanates from thedecentralisation of the corporate organisational structure, in which responsibility forindustrial relations is shifted to lower-level managers. See generally H C Katz, above n 3 at12-17.Industrial Relations Reform Act 1993 (Cth), ss 170NA-NP.See s 51(xx) of the Constitution, which grants the federal parliament power to make lawswith respect to "foreign corporations, and trading or financial corporations formed withinthe limits of the Commonwealth". On the scope of the corporations power regardingindustrial matters, see the recent decision Re Dingjan; Ex parte Wagner (1995) 128 ALR 81.For some of the consequences of constructing enterprise flexibility (or Division 3)agreements on the corporations power, as opposed to the industrial power unders 51(xxxv) of the Constitution, see R Naughton, "The New Bargaining Regime Under theIndustrial Relations Reform Act" (1994) 7 Aust JLabour Law 147 at 156-158.Industrial Relations Reform Act 1993 (Cth), ss 170NA(1)(b) and 170NC(1)(a). See alsoIndustrial Relations Act 1988 (Cth), s 3(a).

206 Federal Law Review Volume 23

groups, often transnational corporate groups, adding yet another layer of complexity tothe picture.9

Where the employer is a corporation, the "separate interest" logic of theindividualistic bargaining paradigm requires that employees be treated as outsiders tothe corporation, bargaining in this capacity with management, who are insiders, or theembodiment of the enterprise. The parties to this bargain are then assumed to haveaccommodated their own separate interests through compromise by the process ofcontractual negotiation under this model.10

This paper attempts to bring labour law and corporate law into proximity, byarguing that the corporate status of employers is of vital significance to labour lawyers.Policy issues in labour law, as in other areas of law, are distorted when corporationsare treated as indistinguishable from natural persons. The law must take account oftheir special features and internal system of corporate governance if it is to haverelevance and credibility in the modem world. This was recognised in the recent HighCourt decision in Environment Protection Authority v Caltex Refining Co Pty Ltd,11concerning the entitlement of corporations to the privilege against self-incrimination. Indenying corporations the privilege, the majority of the High Court insisted on the needto focus on the special characteristics of corporations and their role in society, ratherthan treating them as equivalent to natural persons.12

This paper also argues that the resolute focus of the enterprise bargaining regimeon employees as outsiders to the enterprise is controversial within corporate law. Moreimportantly, it acts as a trompe-l'oeil, disguising a range of very different techniquesunder co~orate law through which employee interests may be protected andadvanced. 3 It diverts attention from ways in which employees might be implicated inthe "game of corporate govemance"14 itself. Focusing on this internal world of thecorporation, there are two primary means by which employee interests can bepromoted from within the enterprise - either through the medium of fiduciary dutiesor through substantial participatory rights in the governing of the corporation itself. IS

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See eg K W Wedderburn, "Trust, Corporation and the Worker" (1985) 23 Osgoode Hall LI203 at 250-251, noting that "[t]ransnational collective bargaining scarcely exists"; see alsoK W Wedderburn, above n 1 at 222. For a discussion of the problems engendered by thecorporate group structure, see H Collins, "Ascription of Legal Responsibility to Groups inComplex Patterns of Economic Integration" (1990) 53 MLR 731.K Stone, "The Post-War Paradigm in American Labor Law" (1981) 90 Yale LI 1509 at 1511and 1545. See also K W Wedderburn, "Trust, Corporation and the Worker", above n 9 at236, stating that collective bargaining is predicated upon "the conflicting interests ofworkers and employers" (original emphasis).(1993) 178 CLR 477.See generally J Hill, "Corporate Rights and Accountability - The Privilege Against SelfIncrimination and the Implications of Environment Protection Authority v CaItex Refining CoPty Ltd" (1995) 7 Corp & Bus LI 127.See generally K Stone, "Labor and the Corporate Structure: Changing Conceptions andEmerging Possibilities" (1988) 55 U Chi L Rev 73.JC Coffee, "Unstable Coalitions: Corporate Governance As A Multi-Player Game" (1990) 78Ceo LI 1495 at 1496.This parallels issues concerning protection of shareholder interests. See, generally, J Hill,"The Shareholder as Cerberus: Redefining the Shareholder's Role in Modern AustralianCorporate Law" 1995 National Corporate Law Teachers Conference (Volume I) 7.


IMPLICATIONS OF THE CONTRACTUAL MODEL OF ENTERPRISEBARGAINING.

Necessity never made a good bargain. Benjamin Franklin

The new enterprise bargaining regime in Australia focuses upon contracts forged bythe parties themselves. Classical contract theory, reflecting ideals of individualism andthe market,16 is underpinned by a number of key assumptions. It is assumed, forexample, that the parties are bargaining at arm's length, that the parties owe nofiduciary duty or duty to volunteer information to each other (their goal is to protecttheir own interests; they are not the other party's keeper), and that the partiesthemselves control the subject-matter and other terms of their agreement.17 Underthese principles of freedom of contract, the law is unconcerned whether equivalence ofbargaining power in fact exists. Classical contract was one of the cornerstones of"private law", in that, by arming the parties with the meallS to determine their ownrights and obligations, the state was effectively held at bay. Or if full privatisation ofthe arrangement were not feasible, at least the role of the court was limited to that ofenforcement of the parties' intentions,18 with its discretion thereby severely curtailed.19

In the industrial law context, these principles treat the parties themselves as bestjudges of their interests and as able to promote better and more flexible arrangementswithin the workplace. This was clearly one of the motivating ideals of the shift towardsdecentralised bargaining in Australia, where, in contrast to a number of other countriesin which this decentralising trend is evident, bargaining reform proposals receivedboth corporate and union support.20 The consensual basis of the contractual paradigm- the idea that it is underpinned by voluntary exchange - both privatises andpurports to legitimate arrangements determined in this way.21

A number of scholars, however, have viewed the employment relationship as lessvoluntary than many other forms of association, on the basis that employment isgenerally a matter of "economic necessity".22 They have criticised the notion of the "free

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P S Atiyah, The Rise and Fall ofFreedom of Contract (1979) at 398ff.Ibid at 402-404.On the argument that public power is always inherent in "private" arrangements, seeM J Horwitz, "The History of the Public/Private Distinction" (1982) 130 U Pa L Rev 1423 at1426; A J Jacobson, "The Private Use of Public Authority: Sovereignty and Associations inthe Common Law" (1980) 29 Buffalo L Rev 600; W W Bratton, "The 'Nexus of Contracts'Corporation: A Critical Appraisal" (1989) 74 Cornell L Rev 407 at 438-439.On the dichotomy between rules and standards in limiting judicial discretion, seeK M Sullivan, "Foreword: The Justices of Rules and Standards" (1992) 106 Harv L Rev 24 at64, who states that "[r]ules embody a distrust for the decisionmaker they seek to constrain".Rules are perceived to promote formal justice, whereas standards, by granting broaderdiscretion to courts, are perceived to promote substantive equality and fairness.H C Katz, above n 3 at 7.For criticism of the pawer of the "nexus of contracts" model of the corporation to privatiseand legitimate the corporation, see W W Bratton, above n 18; D Millon, "Theories of theCorporation" [1990] Duke LJ 201; R M Buxbaum, "Corporate Legitimacy, Economic Theory,and Legal Doctrine (1984) 45 Ohio St LJ 515; G Teubner, "Enterprise Corporatism: NewIndustrial Policy and the 'Essence' of the Legal Person" (1988) 36 Am JComp L 130 at 131.On legitimation in the industrial realm, see K Stone, above n 10 at 1525.See, for example, P Selznick, Law, Society and Industrial Justice (1969) at 39-40; K M Sullivan,"Rainbow Republicanism" (1988) 97 Yale LJ 1713 at 1714 n 8. See also P I Blumberg,


labour contract", claiming that where there exists great asymmetry of the ~arties'

resources, freedom of contract is illusory, with fiat merely disguised as contract. 3 Thecourts too have considered whether injured employees should be regarded asvoluntary creditors, or rather as tort creditors, of a corporate employer. In the NewSouth Wales Court of Appeal decision, Briggs v James Hardie and Co Pty Ltd,24 RogersAJA rejected an argument that an employee who is injured in the workplace can beregarded as a freely contracting party to the employment arrangement.25

In the United States context, Professor Katherine Van Wezel Stone has identifiedsuch principles of freedom of contract as informing the traditional American model of"industrial pluralism", under which collective bargaining is treated as creating a minidemocracy - a frivatised sphere into which the government has very limited powersof intervention.2 She has strongly criticised the assumption of equality of bargainingpower which underpins the whole of this delicate theoretical framework and hasclaimed that the pervasive assumption that workers have equal power in theworkplace obscures consideration of the very palpable ways in which they do not, thuspreventing the implementation of strategies designed to improve the balance in power.Although caution is desirable in exercises of comparative law, particularly where, as inthe labour law context, significant differences exist between jurisdictions in theunderlying social and political matrix,27 Professor Stone's concerns about theimbalance of power in the workplace have resonance in regard to Australia's newenterprise bargaining regime.

To be sure, a number of specific provisions of the Australian legislation do appearto take account of the possibility of predatory conduct arising from unequal bargainingpower, and seek to introduce protective measures designed to blunt the full force of thefree contractual paradigm. Provisions of this kind include the "good faith" bargainingrequirement, the establishment of a separate Bargaining Division of the AustralianIndustrial Relations Commission (IRC) invested with powers and res~onsibilities

concerning enterprise agreements, and the requirement of a prior award. 8 However,as with any legal regulation, the effectiveness of these safeguards will depend upon thevigour with which they are enforced and the extent to which the IRC is prepared to

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"Limited Liability and Corporate Groups" (1986) 11 JCorp L 573 at 618. Cf F H Easterbrookand D R Fischel, "Limited Liability and the Corporation" (1985) 52 U Chi L Rev 89 at 104.W Streeck, "Status and Contract: Basic Categories of a Sociological Theory of IndustrialRelations" in D Sugarman and G Teubner (eds), Regulating Corporate Groups in Europe(1990) 105 at 106.(1989) 7 ACLC 841.According to Rogers AJA, an injured employee, while perhaps able to choose whether ornot to be employed by a particular employer, in general has "no real input in determininghow the business will be conducted and whether reasonable care will be taken" in mattersof safety (ibid at 864). This parallels Max Weber's comment that "the formal right of aworker to enter into any contract whatsoever with any employer whatsoever does not inpractice represent for the employment seeker even the slightest freedom in thedetermination of his own conditions of work" (quoted in W Streeck, above n 23 at 105).K Stone, above n 10; K Stone, "Re-Envisioning Labor Law: A Response to Professor Finkin"(1986) 45 Md L Rev 978.o Kahn-Freund, "On Uses and Misuses of Comparative Law" (1974) 37 MLR 1; R Romano,"A Cautionary Note on Drawing Lessons from Comparative Corporate Law" (1993) 102Yale LJ 2021.See, generally, R Naughton, above n 7 at 150, 159 and 162 ff.


take an interventionist approach in fulfilling its guardian role. The danger is that theunderlying philosophy of the decentralised bargaining scheme - namely, that themost flexible and adaptive work practices can be decided by the parties themselves inindividual workplaces - will lead the IRC to adopt a hands-off approach, in spite ofthe possibility of unequal bargaining power or predatory conduct.

The recent decision in Asahi Diamond Industrial Australia Pty Ltd and AFMEU29

acutely raises these concerns. In reversing an earlier decision of the IRC requiringAsahi to "negotiate in good faith" with the Automotive, Food, Metals and EngineeringUnion (AFMEU), the Full Bench of the IRC not only distanced unions from thebargaining process, but also presented a curiously insipid vision of the IRC's ownpowers in the bargaining process. Before this case, one commentator30 suggested thatunder the new provisions, the Bargaining Division of the IRC could make a number ofrobust orders requiring the parties to negotiate in "good faith".31 An evisceratedversion of the Commission's powers emerged, however, from the conclusions of theFull Bench in the Asahi case. It was held that, for example, the Commission cannotorder a person to negotiate (it may merely order dates for the parties to meet orconfer), that the Commission's role is facilitative rather than interventionist, and thatprimary responsibility for reaching agreement is on the parties themselves. Under itsarticulated self-perception in the Asahi case, the IRC is accorded a peripheral role onlyin the bargaining process and the protection offered by the "good faith" bargainingrequirement, however it is interpreted,32 must be regarded as aspirational at best.

FIDUCIARY DUTIES AND CORPORATE THEORY

. Everything old is new again. Allen/Sager

The critical aspect of the bargaining paradigm in the context where the employer is acorporation is the assumption that employees are outside the enterprise and that theinterests of employer and employees are separate, distinct and divergent. This is apowerful image, which obstructs other rrlodels and ways of visualising the role ofemployees within the enterprise. Although labour law's traditional treatment ofemployer and employee as natural persons supports such an approach, the validity oftreating employees as outsiders to the enterprise is far more problematical andcontroversial under principles of corporate law. Shifting to this inner realm ofcorporate governance, there are two classic ways in which the interests of groupsassociated with corporations may be taken into account - first, via the mechanism offiduciary duties and secondly, via rights of participation in the corporate decisionmaking process itself.

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C No 24187 of 1994 (Decision of the Full Bench, 1 March 1995). Cf, however, Re AluminiumIndustry (Comalco Bell Bay Companies) Award 1983 (1994) 56 IR 403 at 439-442,demonstrating the measure of ambivalence concerning the Commission's appropriate roleunder the new industrial regime.R Naughton, above n 7 at 165.Industrial Relations Reform Act 1993 (Cth), s 170QK.For different possible interpretations of good faith bargaining, see R Brownsword, "TwoConcepts of Good Faith" (1994) 7 JContract Law 197.


In spite of recent arguments to the effect that fiduciary duties in the corporatecontext are themselves merely manifestations of contractual bargaining,33 contract andfiduciary duty differ fundamentally.34 The central issue concerning fiduciary dutieshere is the extent to which directors are able, or indeed required, to take into accountthe interests of employees in fUlfilling their fiduciary duty to act "bona fide for thebenefit of the company as a whole".3 This question is itself part of a larger issue incorporate law, namely the social responsibility debate: are directors bound by a narrowversion of fiduciary duties to promote exclusively the interests of shareholders throughprofit-maximisation, or can directors pay regard to a much broader constituency inpromoting the interests of the enterprise, including employees?

Perhaps the most famous debate in corporate law involved just this point. Thedebate, occurring over 50 years ago between two doyens of corporate law, ProfessorsBerle and Dodd,36 is as relevant today as it was then. Both Berle and Dodd weretroubled by the increasing lack of accountability of management and sought to ensurethat managerial power was not untrammelled. The net with which they sought toconstrain management was that of trust law, and their method was to stress that thepowers of management are not its own, but are to be exercised on behalf of itsbeneficiaries. Where Berle and Dodd differed was in determining precisely the identityof those beneficiaries - that is, whose interests constituted "the company as a whole".

Berle adopted a "minimalist"37 version of fiduciary duties in which shareholderswere to be the single-minded focus of directors' fiduciary duties and "profitmaximisation" was to be the guiding buzzword for directors in exercising theirpowers.38 Dodd took a very different approach, allowing directors far more discretionin the exercise of their fiduciary powers on the basis that they were not held in trustjust for shareholders, but for a range of other constituencies associated with theenterprise, such as employees, creditors and consumers.

The difference between Berle and Dodd on this issue epitomises an even morefundamental schism in corporate theory as to the nature of the corporation itself.

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See, for example, F H Easterbrook and D R Fischel, "Contract and Fiduciary Duty" (1993)36 J Law & Econ 425.See D A DeMott, "Beyond Metaphor: An Analysis of Fiduciary Obligation" [1988] Duke LJ879; V Brudney, "Corporate Governance, Agency Costs, and the Rhetoric of Contract"(1985) 85 Colum L Rev 1403.See generally J D Heydon, "Directors' Duties and the Company's Interests" in P D Finn(ed), Equity and Commercial Relationships (1987) 120. See also G Teubner, "Company Interest:The Public Interest of the Enterprise 'in Itself''' in R Rogowski and T Wilthagen (eds),Reflexive Labour Law (1994) 21.A A Berle, "Corporate Powers as Powers in Trust" (1931) 44 Harv L Rev 1049; E M Dodd,"For Whom Are Corporate Managers Trustees?" (1932) 45 Harv L Rev 1145; A A Berle, "ForWhom Corporate Managers Are Trustees: A Note" (1932) 45 Harv L Rev 1365.G Teubner, "Corporate Fiduciary Duties and Their Beneficiaries: A Functional Approach tothe Legal Institutionalization of Corporate Responsibility" in K J Hopt and G Teubner(eds), Corporate Governance and Directors' Liabilities (1985) 149 at 150.Single-minded dedication to the pursuit of profit-maximisation is typified by MiltonFriedman's famous statement that "[t]he social responsibility of business is to increase itsprofits". See K W Wedderburn, "The Social Responsibility of Companies" (1985) 15 MULR4.


Berle's theory, for example, envisaged the corporation as an aggregate39 of itsshareholders, with employees and other groups treated as outsiders, whose interestscould not trump those of shareholders. The famous case of Dodge v Ford Motor Co40

remains the exemplar of this approach. Henry Ford's plan to benefit employees andconsumers by relllvesting corporate profits to expand the business was challenged byminority shareholders, complaining of the conlpany's failure to declare adequatedividends. The court upheld the minority shareholders' claim on the basis thatdirectors were not entitled to promote the interests of other groups over those ofshareholders.41

Professor Dodd's treatment of managerial powers relied upon a differentconception of the corporation. Dodd based his model of managerial duties on an entitytheory of the corporation as an institution and an autonomous legal entity, with longterm interests transcending those of any single group within its boundaries.42 Hismodel could also have relied upon an aggregate model of the corporation, providedthat it included a more capacious range of interests than simply those ofshareholders.43

Another axis on which this difference of approach can be analysed is upon apublic/private divide.44 Berle's model, by treating shareholder proprietary interests asparamount, constructed a private model of the corporation, which effectively restrictedcorporate law to the ll1ternal relationship between shareholders and managers.45

Dodd's approach, on the other hand, envisaged a more public model of thecorporation.46 He claimed that public opinion, which ultimately makes the law,47

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The modern "nexus of contracts" theory of the corporation, which views the firm as a legalfiction constituting a nexus for contractual relations between individual factors ofproduction, embodies an aggregate approach. Although the nexus of contracts theoryrejects the notion of shareholders as owners (characterising them as simply one of anumber of suppliers of inputs), the theory, with its strong "private" focus, nonethelessgenerally accords predominance to their interests, as did Berle's model. See, for example,JR Macey, "An Economic Analysis of the Various Rationales for Making Shareholders theExclusive Beneficiaries of Corporate Fiduciary Duties" (1991) 21 Stetson L Rev 23. Seegenerally W W Bratton, above n 18 at 427ff; D Millon, above n 21 at 229-231.(1919) 170 NW 668."A business corporation is organized and carried on primarily for the profit of thestockholders ... The discretion of directors is to be exercised in the choice of means to attainthat end, and does not extend to a change in the end itself, to the reduction of profits, or tothe non-distribution of profits among stockholders in order to devote them to otherpurposes". Ibid at 684.E M Dodd, above n 36 at 1160. For a modern variation of this approach, see G Teubner,above n 35 at 27 and 31.See, for example, A Chayes, "The Modern Corporation and the Rule of Law" in E S Mason(ed), The Corporation in Modern Society (1959) 25 at 41; P Selznick, The Moral Commonwealth:Social Theory and the Promise ofCommunity" (1992) at 346-347.See generally D Millon, above n 21; W T Allen, "Our Schizophrenic Conc~ption of theBusiness Corporation" (1992) 14 Cardozo L Rev 261; M JHorwitz, above n 18; G E Frug, "TheCity As a Legal Concept" (1980) 93 Harv L Rev 1057.Under this approach, the corporation's relationships with non-shareholder constituenciesare relegated to other bodies of law such as labour law, anti-trust law etc. See D Millon,above n 21 at 202.For modern commentaries emphasising the public aspects of the corporation, see, eg,P Selznick, above n 22, ch 2; G Teubner, above n 21; R M Buxbaum, above n 21.


increasingly viewed the business corporation as an economic institution with a socialservice as well as profit-making function.

The Berle/Dodd debate directly affects the issue of the ability of directors toconsider employee interests. The consequence of Berle's view is that any managerialdecision promoting employee interests would constitute a breach of fiduciary duty,unless the benefit to employees was merely a by-product of profit-making forshareholders. Such an approach is one of "enlightened self-interest".48 Dodd's view,however, recognising that directors have responsibilities to employees,49 would permitdirectors to prefer the interests of employees over shareholders in certaincircumstances, without a breach of fiduciary duty.50 Yet, even this is a relativelymodest advance, since this ~proach does not require directors to prefer or even toconsider employee interests; it simply protects the directors if they do take intoaccount these interests.

Since the Berle/Dodd debate, corporate doctrine has shifted in diverse ways fromthe narrow Berle approach to one which is more consonant with Dodd's vision. This isso in spite of the fact that no alternative constraints on managerial discretion offeringthe clarity of the profit test have been developed.52 One famous early decision took theview that there should be no "cakes and ale" for company employees "except such asare required for the benefit of the company",53 clearly promoting an enlightened selfinterest approach. However, in later cases the courts have applied this benefit test soliberally as to render it simply a "camouflage".54 Thus, even relying on the Berle model,the courts have been able to find that ultimate benefit for the company (interpreted ascomprising its shareholders) existed in all but very extreme circumstances, such as inParke v Daily News Ltd.55 In that case, the directors sought to make ex gratia payments toworkers, when in fact the company was being wound up and would cease to be an ongoing concern, nullifying any possible argument of ultimate benefit to shareholders.

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EM Dodd, above n 36 at 1148.P I Blumberg, "Corporate Responsibility and the Social Crisis" (1970) 50 Boston UL Rev 157at 161."Modern large-scale industry has given to the managers of our principal corporationsenormous power over the welfare of wage earners and consumers, particularly the former.Power over the lives of others tends to create on the part of those most worthy to exercise ita sense of responsibility". EM Dodd, above n 36 at 1157.Dodd, however, later conceded that business obligations to employees had ultimately beenaccomplished by statutory rights rather than fiduciary duties. See J L Weiner, "The BerleDodd Dialogue on the Concept of the Corporation" (1964) 64 Colum L Rev 1458 at 1463.Ironically, Berle considered subsequent history to have proven Dodd's thesis correct. Ibidat 1464.Compare the position under German law where, although a mandatory duty was imposedearly upon management to be socially responsible, lack of enforcement diminished it to a"norm without sanction". G Teubner, above n 37 at 154.K W Wedderburn, "The Legal Development of Corporate Responsibility: For Whom WillCorporate Managers Be Trustees?" in K J Hopt and G Teubner (eds), Corporate Governanceand Directors' Liabilities (1985) 3 at 9.Hutton v West Cork Rly Co (1883) 23 Ch D 654 at 673.P I Blumberg, above n 48 at 176.[1962] Ch 927.


The result in even this situation has, however, now been addressed and reversed inEngland under a provision of the Companies Act 1985 (UK).56

It is also difficult to argue that directors can only act for the benefit of the company'sshareholders given that, under the division of powers doctrine, shareholders, bymajority vote or even unanimous consent, are not entitled to interfere with or overruledecisions made by the board in lawful exercise of managerial powers.57 Shareholdershave no power under Australian corporate law to pass advisory resolutions.Furthermore, previous narrow restrictions on corporate interests and powers have nowbeen jettisoned by the abolition of the ultra vires doctrine and recognition under theCorporations Law that corporations possess the powers of a natural person.58 Directorsthemselves appear to view their duties as owed to broader constituencies of theenterprise.59

Another way in which the law on fiduciary duties has moved closer to the Doddposition arises through some important developments concerning directors' duties tocreditors, another group whose interests are within the scope of the enterprise on theDodd approach, but outside it on the Berle model. Recent case law on directors' dutieshas challenged conventional doctrine by holding that, in circumstances where thecompany is in a state of doubtful solvency, creditor interests will become paramountover those of shareholders, and directors will actua~ breach their fiduciary duties ifthey fail to take into account the interests of creditors. 0

This goes further than Dodd, by actually requiring directors to consider, and not toprejudice,61 the interests of creditors in circumstances wllere creditors are particularlyaffected by decisions. Significantly, too, it has been held that when such a breach ofduty affecting creditors occurs, the shareholders are deprived of their usual ability tocure breaches of fiduciary duty.62 Could this type of reasoning, as yet restricted tocreditors, be used to require the board to take into account the interests of employees,when considering, for example, a proposed transaction which will have a particularlyacute impact on employees? The focus by Street CJ in Kinsela's case on the question ofwhose interests within the corporate enterprise are actually at risk at a given time63

would certainly seem capable of supporting such an approach. Even if the reasoningwere extended to cover employees, however, it must be acknowledged that problems

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Companies Act 1985 (UK), s 719. See also Companies Act 1955 (NZ), s 15A(1)(g).See, for example, Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch34. See also J D Heydon, above n 35 at 125.Corporations Law, ss 160 and 161.K W Wedderburn, above n 9 at 230; see also L S Sealy, "Directors' 'Wider' Responsibilities- Problems Conceptual, Practical and Procedural" (1987) 13 Monash UL Rev 164 at 174.See, for example, Walker v Wimborne (1976) 137 CLR 1; Nicholson v Permakraft (NZ) Ltd (inliq) (1985) 3 ACLC 453; Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 ACLC 215; Jeffree vNCSC (1989) 7 ACLC 556. For developments in other jurisdictions, see J S Ziegel,"Creditors as Corporate Stakeholders: The Quiet Revolution - An Anglo-CanadianPerspective" (1993) 43 U Tor LJ 511.See Kinsela v Russell Kinsela Fty Ltd (in liq) (1986) 4 ACLC 215 at 221.Ibid at 223. See JHill, "Duties of Directors Towards Creditors" (1986) 60 ALJ 525 at 527."Where ... the interests at risk are those of creditors I see no reason in law or in logic torecognise that the shareholders can authorise the breach": Kinsela v Russell Kinsela Pty Ltd(in liq) (1986) 4 ACLC 215 at 223.


of enforcement of duties by employees would still exist,64 just as they currently existfor creditors.65

Creditor protection has been further bolstered under the Corporations Law, by theimposition of personal liability for corporate debts on directors who permit thecompany to engage in insolvent trading.66 There is a parallel between this form ofcreditor protection and a recent Opposition Bill, seeking to strengthen employeeprotection by lifting the corporate veil to expose the directors to liability. Thus theIndustrial Relations (Protection for Employees of Subcontractors) Amendment Bill 1993embodied a proposal to make directors and other persons involved in the managementof corporations personally liable for amounts unpaid in award wages.

The idea that managers owe special responsibilities to employees has been explicitlyrecognised by corporate statutes in some jurisdictions. The English Companies Act, forexample, expressly stipulates that "[t]he matters to which the directors of a companyare to have regard in the performance of their functions include the interests of thecompany's employees in general, as well as the interests of its members".67 Although astrong interpretation of this provision could elevate employees to the position of jointstakeholders in the corporate enterprise, and restrict the power of shareholders to ratifybreaches of duty by directors adversely affecting employee interests,68 mostcommentators view the provision as having minimal impact69 or, paradoxically,increasing difficulties of enforcing managerial duties.70 The very existence of theprovision is, however, not without significance, particularly in the case ofemployee/directors, to whom it grants explicit power to consider employee interests.In contrast to the United States, where the influence of the law and economics school incorporate law has contributed to a shareholder-centred model of directors' duties, inEurope the adequacy of such a model of the corporation has been undermined by theintroduction of issues of industrial democracy into corporate law reform as a modernresponse to the question: "For whom are corporate managers trustees?"71

Another factor which suggests that, as a practical matter, directors are able to takeinto account a broader range of interests than shareholders' alone if they so wish relates

64

6566

67

68

69

70

71

L S Sealy, above n 59 at 176-177 and 184. If the employee were also a shareholder, it ispossible that a cause of action might lie under Corporations Law, s 260 by virtue ofs 260(5)(b) and (c).J D Heydon, above n 35 at 131. See also Sycotex Pty Ltd v Baseler (1995) 13 ACSR 766 at 785.See Corporations Law, s 588G and its predecessor, Corporations Law, s 592. Ondevelopments in creditor protection, generally, see J Hill, "Corporate Groups, CreditorProtection and Cross Guarantees: Australian Perspectives" (1995) 24 Can Bus LJ 321.Companies Act 1985, s 309(1). Note, however, that under s 309(2), the duty is expresslystated to be owed to the company and enforceable as such.J E Parkinson, Corporate Power and Responsibility: Issues in the Theory of Company Law (1993)at 82. See also Fulham Football Club Ltd v Cabra Estates pIc [1992] BCC 863 at 876 (CA).P G Xuereb, "The Juridification of Industrial Relations Through ~ompany Law Reform"(1988) 51 MLR 156 at 158-159; see also L S Sealy, above n 59 at 177; K W Wedderburn,above n 9 at 235.P L Davies and K W Wedderburn, "The Land of Industrial Democracy" (1977) 6 ILJ 197 at199.K W Wedderburn, above n 9 at 250; see also F K Kubler, "Dual Loyalty of LaborRepresentatives" in K J Hopt and G Teubner (eds), Corporate Governance and Directors'Liabilities (1985) 429 at 438f£; C M Schmitthoff, "Employee Participation and the Theory ofEnterprise" [1975] J Bus L 265.


to the difficulty of enforcing directors' duties.72 Individual suits by shareholders aresubject to a number of legal obstacles as a result of the rule in Foss v Harbottle73 and arerelatively rare. Even when actions are brought, the courts in general tend to bedeferential to managerial decisions, thus increasing managerial discretion andautonomy. It has become increasingly difficult for courts to interfere with the substanceof managerial decisions, leading several modern commentators to advocate a"procedural" approach to fiduciary duties.74 In the United States, the effect of thebusiness judgment rule is that managerial decisions will generally be protected unlesstainted by self-interest or fraud. 75

In recent years, the Berle/Dodd dichotomy returned to centre-stage in the UnitedStates in an acute and practical way. At issue are the duties of directors of a targetcompany faced with a hostile takeover whicl1, although advantageous to existingshareholders, might end the business through liquidation of company assets orrestructuring and result in employee lay-offs. Contrary to many situations where,under an enlightened self-interest approach, shareholder and employee interests arecongruent, in this situation they diverge radically.76 In responding to this issue, someUnited States courts77 and state legislatures78 have by-passed a shareholder-centredtheory of the corporation's interests, and have conferred on management, via anexpanded concept of the corporate enterprise, power to take into account the interestsof employees, suppliers, customers and local communities. Such redefining of thecorporate interest gives explicit recolf1ition to "other economic groups inherentlyenmeshed with corporate enterprise". 9 Recent corporate literature has focused onthese groups, particularly employees, as "stakeholders"80 in the corporate enterprise.81

From this perspective, it has been argued that employees:are as much members [of the firm] as the shareholders who provide the capital. Indeed,the employees may have made a much greater investment in the enterprise by their years

72

7374757677

78

7980

81

See P L Davies and K W Wedderburn, above n 70 at 201, who argue that there is "nomechanism which will guarantee continuous, profit-maximising behaviour" by corporatecontrollers.(1843) 2 Hare 461.F K Kubler, above n 71 at 441-442.G Teubner, above n 37 at 152-153.W T Allen, above n 44 at 272ff.See D Millon, above n 21 at 234 and 251ff, discussing the decisions in Unocal v MesaPetroleum Co 493 A 2d 946 (Del 1985) and Paramount Communications Inc v Time, Inc. [DelSupr] 571 A 2d 1140 (1989).See, generally, D Millon, ibid at 232ff. It has been argued that protection afforded toemployees under these statutes was inadequate, since most statutes were permissive onlyand did not give employees standing to enforce the fiduciary duties. See K Stone, "PolicingEmployment Contracts Within the Nexus-of-Contracts Firm" (1993) 43 U Tor LI 353 at 375;J W Singer, "Jobs and Justice: Rethinking the Stakeholder Debate" (1993) 43 U ,Tor LI475 at505.R M Buxbaum, above n 21 at 515.See, for example, K Stone, "Employees as Stakeholders Under State NonshareholderConstituency Statutes" (1991) 21 Stetson L Rev 45; K Stone, above n 78.See S Fridman, "Super-Voting Shares: What's All the Fuss About?" (1995) 13 Comp & Sec LI31 at 35, stating that Australian corporate law already recognises several classes ofstakeholder in corporations.


of service, may have much less ability to withdraw, and may have a greater stake in thefuture of the enterprise than many of the stockholders.82

Critics of this approach, such as Professor Macey who favours the touchstone ofshareholder primacy, adopt a sceptical view of the introduction of nonshareholderconstituency statutes, suggesting that, rather than benefiting grou~s such asemployees, they simply operate as management entrenchment devices. 3 AlthoughMacey and others acknowledge that hostile takeovers may seriously harm employeeinterests, they regard employees as capable of protecting their position ex ante throughcontracting, including collective bargaining.84 This faith in the ability of contract toprotect adequately in such circumstances is, however, far from universally held.85

The law in Australia concerning the duties of directors in the face of hostiletakeovers is less than clear. Corporate commentators have taken diametricallyopposing positions on the issue.86 Certain provisions of the Corporations Law suggestthat the corporation is an aggregate of its shareholders. Such a provision is s 260, whichgives a cause of action to a member who believes that "the affairs of the company arebeing conducted in a manner ... that is contrary to the interests of the members as awhole".87 Australian case law has traditionally favoured the view that a director's dutyto act bona fide for the "benefit of the company as a whole" requires consideration of theinterests of the shareholders as a general body and not of the company as a commercialentity.88 Nonetheless, it appears that Australian law is in a state of flux on this issue,with a number of more recent cases in the takeover context supporting a broader focusfor directors' fiduciary duties and the company's interests.89 These judicialdevelopments in Australia, which suggest a more expansive view of directors'fiduciary responsibilities, are functionally equivalent to the legislative changes in theUnited States nonshareholder constituency statutes. One Australian commentator haswelcomed them, on the basis that the old shareholder-centred model of the corporationis "a relic of a less complex age" and is "out of step with the world of business dealings,economics, and even industriallawll

•90

As discussed earlier, even if a trend towards a broader constituency entitled to thebenefit of managerial fiduciary duties can be discerned, enforcement of such duties

82

8384

8586

878889

90

C W Summers, "Codetermination in the United States: A Projection of Problems andPotentials" (1982) 4 I Comp Corp L & Sec Reg 155 at 170 (quoted in K Stone, above n 80 at 4849).See, for example, JR Macey, above n 39 at 26.Ibid; see also J R Macey, "Externalities, Firm-Specific Capital Investments, and the LegalTreatment of Fundamental Corporate Changes" [1989] Duke LI 173.See, eg, K Stone, above n 80 at 54ff; K Stone, above n 78 at 375-377.See, eg, I Renard, "Commentary" in P D Finn (ed), Equity and Commercial Relationships(1987) 137 at 138, who argues in favour of shareholder primacy. Cf G K F Santow,"Defensive Measures Against Company Take-overs" (1979) 53 ALl 374; B H McPherson,"Duties of Directors and the Powers of Shareholders" (1977) 51 ALI 460 at 468.See also Corporations Law, s 461(e).See, for example, Ngurli Ltd v McCann (1953) 90 CLR 425.See, eg, Darvall v North Sydney Brick and Tile Co Ltd (1988) 6 ACLC 154 at 176; aff'd (1989) 7ACLC 659; Pine Vale Investments Ltd v McDonnell and East Ltd (1983) 1 ACLC 1294;Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483.S Corcoran, "Managers and Majorities in Takeover Regulation" in G Walker and B Fisse(eds), Securities Regulation in Australia and New Zealand (1994) 759 at 765-766.


remains a problem under corporate law.9l For example, in spite of acceptance of afiduciary duty to consider the interests of creditors, which duty cannot be waived byshareholders, the courts have stopped short of perfecting the duty with anaccompanying right of enforcement by creditors.92 Although the Companies andSecurities Law Review Committee, in its proposal for a statutory derivative action,recommended that standing to pursue an action should extend to creditors,93 theCompanies and Securities Advisory Committee later advocated standing for anarrower class of applicant, which would exclude creditors.94 Employees were notconsidered under either proposal.

A final matter which has resurrected the significance of the Berle/Dodd debate inrecent times is the phenomenal rise of large institutional investors.95 When Berle firstpropounded an exclusive shareholder focus for managerial duties, it was in recognitionof, and by way of compensation for, the loss of control by scattered and passiveshareholders, who had become separated from their investment. The growth ofinstitutional investment in corporations has challenged, if not undermined, thistraditional image of shareholders.96 If profit-maximisation for shareholders is indeedthe prime duty of management, institutional shareholders are increasingly in a positionto ensure that management fulfils that function.97 This has led to concern thatinstitutional shareholders may exert unacceptable pressure on management to pursueshort-term profitability goals98 and that the interests of such institutional investorsmay, in any case, diverge from other smaller shareholders.99 It is not surprising that, indefining their new role, institutional investors use the rhetoric of long-term corporategrowth. lOO Given the new power of institutional investors,lOl it becomes even morerelevant to define the scope of management's fiduciary duties.

919293

9495

96

97

98

99100

101

See, generally, L S Sealy, above n 59.J D Heydon, above n 35 at 131ff.CSLRC, Enforcement of the Duties of Directors and Officers ofa Company by Means ofa StatutoryDerivative Action (Report No 12, 1990). See also I Ramsay, "Corporate Governance,Shareholder Litigation and the Prospects for a Statutory Derivative Action" (1992) 15UNSWLJ 149 at 165-166.CSAC, Report on a Statutory Derivative Action, July 1993, at 13-14.In the Australian context, see generally J Hill, "Institutional Investors and CorporateGovernance in Australia" in T Baums, R M Buxbaum and K J Hopt (eds), InstitutionalInvestors and Corporate Governance (1994) 583.See, generally, J Hill and I Ramsay, "Institutional Investment in Australia: Theory andEvidence" in G Walker and B Fisse (eds), Securities Regulation in Australia and New Zealand(1994) 289 at 291ff.For examples of aggressive institutional investor activism in Australia, see J Hill, aboven 95 at 600ff.See, for example, M Lipton and S A Rosenblum, "A New System of Corporate Governance:The Quinquennial Election of Directors" (1991) 58 U Chi L Rev 187 at 189 arguing that thegoal of corporate governance is to contribute to the long-term operating success of thecorporation, which "will ultimately be the most beneficial to the greatest number ofcorporate constituents, including stockholders, and to our economy and society as awhole".J Hill, above n 95 at 602-3.See, for example, R H Koppes, "Corporate Governance as a Key to GlobalCompetitiveness", Business Council of Australia and AIMG, Conference on CorporateGovernance and Australian Competitiveness: The Role of Institutional Investors, Sydney, 1993.See further below under "New Trends in Corporate Law".


PARTICIPATION BY EMPLOYEES IN CORPORATE GOVERNANCE

Between the workman and the master there are frequent relations, but no realassociation. Alexis de Tocqueville.

I still feel- kind of temporary about myself.Willy Loman: - Arthur Miller, Death ofa Salesman.

Protection of interests through the mechanism of fiduciary duties and throughparticipation in corporate governance are distinct, yet interrelated, concepts. Berle'streatment of shareholders as beneficiaries under a trust, was premised on theassumption that meaningful participation in corporate governance was not possible,given the separation between ownership and control, and the collective actionproblems facing shareholders. On the other hand, some commentators have denied anyneed for employee participation in corporate governance, on the basis that there areother means of protecting of labour interests, specifically, collective bargaining.l02

As in the above discussion of fiduciary duties, corporate theory's delineation of theboundaries of the corporate enterprisel03 has important implications in determiningwhich groups are entitled to participate in corporate governance.l04 If a model of thecorporation is adopted which treats employee interests as within the enterprise, thensome level of employee participation in corporate governance seems both desirableand important in conferring legitimacy on these decisions.105 This would seemappropriate, at least in relation to decisions which specifically affect employees'interests such as plant closure or technological change. It would seem even moreappropriate in times of recession or economic crisis, where employment is at greaterrisk, yet it is at such times that principles of "industrial democracy" are mosttenuous. l06 It is one thing for employees to react to the employment consequences ofcorporate decisions; it is quite another for employees or unions to have input and alevel of control over the original decision itself. Participation of this kind in corporatedecision-making has been viewed as "part of a more positive programme aimed atsecuring for employees greater control over their working environment"107 - a way toincrease opportunities for self-realisationl08 and to decrease the sense of alienationexperienced by Willy Loman.l09

102103104

105

106107

108109

See discussion in K Stone, above n 78 at 375ff and K Stone, above n 13 at 152ff.See A Chayes, above n 43 at 41; JE Parkinson, above n 68 at 397-398.It might be thought that shareholders at least would be assured of participatory rights incorporate governance. Yet, the twentieth century has seen the gradual erosion of evenshareholder participation. See R M Buxbaum, "The Internal Division of Powers inCorporate Governance" (1985) 73 Cal L Rev 1671; JHill, above n 15.See, for example, JE Parkinson, above n 68 at 402ff; P L Davies, "Employee Representationon Company Boards and Participation in Corporate Planning" (1975) 38 MLR 254 at 256.K W Wedderburn, above n 9 at 248-249.P L Davies, above n 105 at 254. See also R Willis, Minister for Employment and IndustrialRelations, 1984, Employee Participation News, No 3 at 8, supporting a programme ofindustrial democracy, embodying "the right of employees to influence decisions affectingtheir working lives".See JE Parkinson, above n 68 at 406.It is clear that the idea of decentralised enterprise bargaining is itself designed to addresssome of these issues in order to enhance efficiency. So, too, is the removal of layers in thecorporate hiercharchy, such as the dissipation of middle management.


The classic method of participation in corporate decision-making is through boardmembership. Whereas Anglo-American law has traditionally focused on expansion offiduciary duties as a means of protecting employee interests, the European experience,particularly under the co-determination model in Germany,llD has used participationin governance by representation of groups as a means to the same end. Whereas,however, the enforcement of fiduciary duties via private litigation is a relativelyuncertain and cumbersome process, rights of representation and the ability to exertdirect internal pressure in corporate decision-making provide a more potent methodfor protecting employee interests.111

A number of scholars have become increasingly interested in corporateorganisational structures and mechanisms through which employees can directlyparticipate in strategic corporate decision-making.112 In England, it is generallyaccepted that the reach of collective bargaining has been inadequate to influencestrategic decision-making.113 In the United States, despite the primary focus onfiduciary duties and collective bargaining as modes of protection for employeeinterests,114 unions have increasingly negotiated, in exchange for collective bargainingconcessions, for representation on corporate boards or on special advisory committeesto the board.11S A number of Australian statutory corporations provide for labourrepresentation on the boards of directors.

Identification of the key sites for strategic decision-making within the enterprise isobviously essential if employee participation is effectively to influence corporatepolicy. Although the board of directors has traditionally been viewed as the locus ofmanagerial power, this image has undergone revision and refinement in recent times.A distinction is now drawn between executive and non-executive directors. The formerare the managers of the corporation; non-executive directors, on the other hand, arenow recognised as more realistically performing a monitoring role. According toRogers J in AWA Ltd v Daniels,116 "[i]t is something of an anachronism to expect nonexecutive directors ... to contribute anything much more than decisions on questions ofpolicy and, in the case of really large corporations, only major policy".117 In corporategroups, although strategic decisions will often be made at the level of the parentcompany board, this may not necessarily be so in groups where greater autonomy is

110

111112

113

114

115116

117

See generally K JHopt, "New Ways in Corporate Governance: European Experiments withLabor Representation on Corporate Boards" (1984) 82 Mich L Rev 1338.G Teubner, above n 37 at 155.See, for example, K Stone, above n 13; P L Davies, above n 105; P L Davies andK W Wedderburn, above n 70.See, for example, K W Wedderburn, above n 9 at 242; H Collins, above n 1 at 92;P L Davies, above n 105 at 255.See P I Blumberg, "Employee Participation in Corporate Decision-Making" in A F Westinand S Salisbury (eds), Individual Rights in the Corporation (1980) 335 at 335ff, outlining thetraditionally low level of interest in employee participation in the United States.K Stone, above n 13 at 77, 126ff.(1992) 10 ACLC 933 at 988. This distinction is less clearly made however in the Court ofAppeal judgment in Daniels v AWA Ltd (1995) 16 ACSR 607.Parallels have been made between the supervisory role of non-executive directors under aunitary board system and the separation of management and supervisory boards underthe two-tier German board system. See K J Hopt, "Directors' Duties to Shareholders,Employees, and Other Creditors: A View From the Continent" in E McKendrick (ed),Commercial Aspects ofTrusts and Fiduciary Obligations (1992) 115 at 117.


conferred on subsidiaries.11B Similar considerations apply in individual divisions of asingle corporate entity.119 Since strategic participation in corporate decision-makingwill itself of necessity be representative, some commentators, while noting theempowering effects of employee participation, have doubted whether it can addressthe problem of worker alienation. They suggest that more direct workplaceinvolvement, through, for example, autonomous working groups, is better suited tothis purpose.120

Problems of dual or conflicting loyalties of employee directors and ac~uisition ofconfidential information by worker representatives are often stressed. 21 Undertraditional principles of corporate law, employee representation on the board ofdirectors could present difficulties in this regard and, arguably, could confer littlebenefit on labour interests as a result of the formulation of nominee directors' fiduciaryduties. One Australian decision, Bennetts v Board of Fire Commissioners of New SouthWales,122 adopted a rigid and unyielding principle that a nominee director has anoverriding duty to the company, and not to the appointor. Strictly adhered to, thisprinciple would render labour representation on corporate boards either problematicalor useless.123 There are, however, a number of cases which have accepted that, as amatter of commercial reality, the rationale behind the appointment of nomineedirectors is that they will protect the interests of their appointor. In these cases, thecourts have taken a more flexible and pragmatic approach, refusing to intervene eventhough it is clear that the nominee director has ~iven overriding consideration to, oracted solely in the interests of, the appointor. 24 The Australian Companies andSecurities Law Review Committee has further recommended that this more liberal andcommercially attuned approach be adopted by the legislature.125

Labour representation at board level sits uneasily with the underlying tenets ofenterprise bargaining, namely that employer and employee are separate parties withseparate interests. The corporate structure confuses this sim~,le picture. For example,under the new regime for enterprise flexibility agreements,1 6 the only restriction onthe content of such agreements is that they must concern "matters pertaining to therelationship between employers and employees".127 Furthermore, the Commission

lIB

119120

121

122123

124

125126127

J Hill, n 66 at 350; see also G Teubner, "The Many-Headed Hydra: Networks as HigherOrder Collective Actors" in JMcCahery, S Picciotto and C Scott (eds), Corporate Control andAccountability: Changing Structures and the Dynamics ofRegulation (1993) 41.See, generally, J E Parkinson, above n 68 at 408-409.See G Teubner, "Industrial Democracy Through Law? Social Functions of Law inInstitutional Innovations" in T Daintith and G Teubner (eds), Contrac,t and Organisation:Legal Analysis in the Light ofEconomic and Social Theory (1986) 261 at 263-264.For a description of some typical conflict situations, see F K Kubler, above n 71. See alsoK JHopt, above n 117 at 118-119; K J Hopt, above n 110 at 1359-1362; K W Wedderburn,above n 9 at 236ff.(1967) 87 WN (Pt l)(NSW) 307.K J Hopt, "Self-Dealing and Use of Corporate Opportunity and Information: RegulatingDirectors' Conflicts of Interest" in K JHopt and G Teubner (eds), Corporate Governance andDirectors' Liabilities (1985) 285 at 308-309; see also K Stone, above n 13 at 148ff.See, eg, Levin v Clark [1962] NSWR 686; Re Broadcasting Station 2GB Pty Ltd [1964-65] NSWR1648; Berlei Hestia (NZ) Ltd v Fernyhough [1980] 2 NZLR 150.Report No 8, Nominee Directors and Alternate Directors (1989).R Naughton, above n 7 at 156ff.Section 170NA(1)(b).


must satisfy itself that the agreement is only about such matters. If so satisfied, theCommission must approve the implementation of the agreement; if not satisfied, theCommission must not approve it.128 Would a provision, requiring employeerepresentation on the board of directors of the employer company, satisfy therequirement that it pertain to the relationship between employers and employees?Presumably not, if a traditional labour model is adopted where employer andemployee are treated as separate legal persons; board representation simply eludes,and makes little sense on, such a model. As a matter of commercial reality, however,board representation is obviously an important way in which pressure can be appliedto ensure that management considers employee interests, and shOtl1d on that basis becapable of inclusion in an enterprise flexibility agreement. .

It has been said that the prospect of greater employee pressure from within thecorporate enterprise structure effectively blurs the traditional boundaries betweenmanagement and other groups within the corporation.129 Participation of this kind isalso different to enterprise bargaining. The epJerprise bargaining scheme, with itsconferral of the right to take coercive economic action in the negotiation phase,130 isessentially adversarial in nature; participation in strategic decision-making by diversegroups, on the other hand, presumes the need for co-operation between parties.131

Some commentators have argued that a participatory form of labour relations is in factinconsistent with an adversarial collective bargaining model.132 Others, however, denyany inherent contradiction between the two forms of employee protection,133 viewingparticipation in strategic decision-making as an additional technique in the complexworld of labour relations, and perhaps the only technique with the potential to forgeany genuine form of association between employers and workers.

NEW TRENDS IN CORPORATE LAW

Geronte: It seems to me you are locating them wrongly: the heart is on the left and theliver is on the right.Sganarelle: Yes, in the old days that was so, but we have changed all that, and we nowpractise medicine by a completely new method. Moliere, Le Misanthrope.

If employee participation in corporate decision-making has the potential to blur theboundaries between management and employees, other recent developments in thecommercial world challenge the classic division between the investment and labourfunctioIlS within the corporate enterprise.134 Thus, the issue of whether employees fallwithin or outside the bounds of the corporate enterprise might become irrelevant ifemployees were able to protect their interests through the mechanism ofshareownership, although this, of course, would require consideration of the adequacy

128129130131

132133134

Section 170NC(1)(a).K Stone, above n 13 at 120.R Naughton, above n 7 at lSI.K J Hopt, above n 110 at 1348. Cf K Stone, above n 13 at 162, who argues that"[p]articipation is collective bargaining in another form".See discussion by K Stone, ibid at 79-81.Ibid at 82.See, generally, K Stone, above n 13.


of shareholder rights of participation.135 Irrespective, however, of the issue ofparticipation in decision-making via this route, employee shareownership alsocontributes to financial participation in the enterprise.

The first way in which employees can become involved as investors in thecorporation is through employee share plans, which come in a variety of forms andlevels of complexity.136 In recent years, some of Australia's largest companies haveintroduced employee share ownership plans.137 The founder of Lend LeaseCorporation Ltd, a company with approximately 20 per cent of its shares held onbehalf of employees, has described the philosophy underlying employee equityparticipation in corporations in these terms: "[E]quitable employee participation in thebenefit of the enterprise should be seen as a right, on the same basis as women'ssuffrage was recognised at the tum of the century".138

In the past, such lofty aspirations have rarely been met by employee share schemes.Although they clearly achieved some form of financial participation for employees,participation in corporate decision-making was rarely present and the trustee of theplan would often be more closely aligned with managelnent. There are, however, signsof major changes in this regard. A number of progressive companies have nowstructured their plans in such a way as to achieve employee participation in corporategovernance in a range of possible ways, such as pass-through voting of shares,139ability to direct the trustee how to vote, or representation at the level of trustee. It isalso interesting to note that, in the context of occupational superannuation funds, therehas been a strong move towards greater democratisation, with the requirement thatsome funds have equal employer/employee representation on their trusteestructures.140 Clearly there is enormous potential for employee share schemes totransfigure the traditional groupings within the corporate structure.141

135

136

137

138

139

140

141

Note, however, that shareholder consent is increasingly used as a regulatory techniqueunder the Corporations Law. See, generally, J Hill, above n 15. See also AlMA, A Guide forInvestment Managers & A Statement of Recommended Corporate Practice Oune 1995) at 29,supporting employee share schemes on the basis that they improve employee relations by"communicating to employees through the channels normally reserved for shareholders".For a description and assessment of some of the main employee share plan types, seeG Fitton and G Price, Employee Share Planning in Australia (1990), ch 2. See alsoJE Parkinson, above n 68 at 423-426.See "Foreign investors: Would they just fade away like Alice's cat?", Company Director,August 1990, 6.G J Dusseldorp, "Preliminary Note for Employee Share Planners", in G Fitton and G Price,above n 136.For developments on "pass-through" voting in the United States context, see P I Blumberg,above n 114 at 345ff.Occupational Superannuation Funds are far more highly regulated than employee shareplans. There are, for example, stringent restrictions on the level of in-house investmentpermitted by occupational superannuation funds. On equal employee representation onthe trustee board for such funds, see J Hill, above n 95 at 592-594; Butterworths, AustralianSuperannuation Practice: Commentary, Prudential Standards, 70,351f£. See also JE Parkinson,above n 68 at 400.In the United States context, see K Stone, above n 13 at 121-126; D G Olson, "UnionExperiences With Worker Ownership: Legal and Practical Issues Raised by ESOPS,TRASOPS, Stock Purchases and Co-operatives" [1982] Wis L Rev 729.


Furthermore, there are significant developments in the marketplace concerningremuneration, whereby employee share plans and share options are being linked to"pay for performance" schemes within corporations. Pay for performance is perhapsthe most important contemporary trend in remuneration.142 Whereas share optionswere formerly confined to the realm of senior executive compensation, an increasingnumber of United States and English companies143 have now extended their scope, asa component of pay for performance systems, to encompass middle management andindeed all other employees. In the non-managerial levels of the corporation, thisdevelopment has been accompanied by a shift away from the traditional benchmark offinancial performance to a range of less tangible, non-financial criteria for performance,such as quality of work and customer satisfaction.144

The Department of Industrial Relations has endorsed participation by all employeesin profit-sharing or share ownership schemes, on the basis that restricting theseschemes to senior executives only has the effect of entrenching, rather thandismantling, hierarchies within the corporation.145 . Recent proposals under theTaxation Laws Amendment Bill (No 2) 1995, also promote this goal by allowingconcessional treatment through tax deferral or tax exemption for shares and rightsunder employee share acquisition schemes, provided that the scheme is available to allpermanent employees.146

The underlying aim of many of these schemes is deliberately to dissolve an"us/them" mentality in labour relations, by blurring the boundaries between investorsand employees, by giving employees both an interest in the company's success andincentives to remain with the company, and by creating "corporate goals" via aphilosophy based on partnership ideals,147 rather than on conflicting goals betweendifferent groups within the company.148 The strategies are also clearly designed tocounter any perception that employees are "outsiders" to the corporation.

The rise of institutional investment has radical implications for corporate law andtraditional assumptions about shareholders. Of the different types of institutionalinvestment, the spotlight in recent times has been upon pension or superannuationfunds, which have been pivotal in the Labor government's strateflru to increase longterm savings.149 The Superannuation Guarantee Charge (SGC) 0 particularly haswrought a substantial change to this area by transforming superannuation from "avoluntary collective investment used by a minority of the workforce to an almost

142143

144

145146

147148

149150

"Pay For Performance: What's It All About", Equity Strategies Report, May 1995.United States companies include Pepsi Co and Du Pont and English companies includeWellcome and ALPHA Airports Group.See, generally, "Pay For Performance: What's It All About", above n 142. See alsoDepartment of Industrial Relations, Sharing Profits and Growth (1988).Department of Industrial Relations, ibid at 15.See Australian Tax Practice, Bills Explanatory Memoranda, 12 April 1995, at 269. There is alsoa requirement that the employee does not hold more than 5 per cent of shares in thecompany.See G Fitton and G Price, above n 136 at 3. See also AlMA, Appendix B, above n 135 at 29.See also Department of Industrial Relations, Financial Participation by Employees: A Review ofTheoretical and Practical Issues, DIR Research Paper No 8 (1988) at 6-7.See, generally, J Hill, above n 95 at 584ff.Introduced from 1 July 1992.


universal, compulsory retirement savings policy".151 The Australian scheme has beendescribed as "perhaps unique by world standards ... a curious combination ofcompulsory but private sector located funding".152 In the wake of the policy shiftembodied in the SGC legislation, it was predicted that superannuation fund assets,which in 1983 stood at $32.6 billion, would rise to around $1400 billion by the year2010.153 The recent introduction of a 3% employee contribution towardssuperannuation under the 1995-96 Budget is another step in this inexorable movementtowards a de facto national retirement income policy,154 which will have dramatic flowon effects for corporate investment.155

These developments are of great consequence to corporate law. They have quitesimply turned upside down many preconceptions about shareholders. Thedevelopments also challenge key assumptions about the role of shareholders and thenature of corporate law itself. The most powerful image underpinning corporate lawfor much of the twentieth century has been the division between ownership andcontrol, with shareholders assumed to be widely-dispersed, passive and powerless, asa result of collective action problems. The rise of institutional investment potentiallychanges all this, rendering many of these assumptions obsolete.156 The tremendousgrowth of funds available for investment by institutions, particularly superannuationfunds, and the relative concentration of the Australian stock market have led tosubstantial equity holdings by institutions,157 which, given the national retirementincome policy, can only increase with time. The size of holdings and marketconcentration have made exit by share sale more difficult.

Although the traditional image of institutional investors themselves has been one of"short-term profligates",158 the above factors have encouraged institutions in recenttimes to take a stronger, and sometimes activist, role in issues of corporategovemance.159 This change in attitude has been further enhanced by the creation in1990 of the Australian Investment Managers' Association (AlMA), comprising

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ALRC and CSAC, Report No 59, Collective Investments: Superannuation, 31 March 1992, 1ix.Evidence of Association of Superannuation Funds of Australia representative, Senate SelectCommittee on Superannuation, at 643. As such, the scheme appears to place Australiawithin Robert Clark's fourth stage of capitalism, in which the savings-decision function isappropriated by the government. See R C Clark, "The Four Stages of Capitalism:Reflections on Investment Management Treatises" (1981) 94 Harv L Rev 561 at 565-566.See Sherry Committee, Safeguarding Super: The Regulation of Superannuation (1992) at paras[2.51]-[2.52]; V W Fitzgerald, Australians' Superannuation Savings: Nest Egg or Honey Pot?(1991) at 44; L Hall, "Where Will the Superbillions Be Invested in the 1990s?", 20thConference of Economists, Hobart, 1991.The ultimate goal is for every employee to have total superannuation payments of 15 percent of their pay by 2002. See "Welcome to the latest Super revolution", Sydney MorningHerald, 10 May 1995 at 1.On fund flows and investment patterns generally, see R M Buxbaum, "InstitutionalOwners and Corporate Managers: A Comparative Perspective" (1991) 57 Brooklyn L Rev 1;JHill, above n 95 at 584ff.See, generally, JHill and I Ramsay, above n 96 at 291ff.Ibid, Table 1 and Table 2, for statistical information regarding changes in investmentpatterns and levels of institutional investment in Australian companies.R M Buxbaum, above n 155 at 28.For recent examples of activism by Australian institutional investors, see J Hill, n 95 at600ff. The events at Coles Myer are the latest in this trend.


Australia's leading institutional investors. Institutional investors now clearly perceivethemselves as having a role to play in corporate governance.

In the past, the realm behind the corporate veil was inhabited by natural persons, afactor which contributed to the private conception of the corporation under ashareholder-centred model. Today, however, the corporate veil conceals yet another,the institutional veil, beyond which, in the case of superannuation funds, lies a hugeproportion of the country's working population. As one commentator asks: "Does theshareholder interest acquire a new legitimacy if it represents the long-term savingsagainst retirement of millions of working people?"160 Just as a more co-operative modelof management/labour relations has been envisaged through greater employeeparticipation in management decisions, so too has greater co-operation betweenmanagement and these new institutions, whose ownership has a "wage-based origin",been presented as a legitimating ideal.161

The rise of such institutional investors is yet another development which blurs thedistinction between employees and investors. Depending upon the degree of activismengaged in by these institutions and the level of democratisation and employeerepresentation on trustee structures within the funds,162 there is potential in the futurefor the institutional investors to exert pressure on corporations for greater attention toemployment issues. This development is also one which blurs the distinction betweenprivate and public conceptions of the corporation. The investment of funds derivedcompulsorily from the \vorking population, if nothing else, strongly suggests that someaspects of corporate law should be viewed as falling into the realm of public, ratherthan private, law.163 These changes are reshaping corporate law for the next century.Their implications for labour law cannot be ignored.

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See P L Davies, "Institutional Investors in the United Kingdom" in D D Prentice andPRJ Holland (eds), Contemporary Issues in Corporate Governance (1993) 69 at 69.See R M Buxbaum, above n 155 at 28-29.See above n 140. On the issue of institutional investors' legitimacy, see R M Buxbaum, ibidat 40-41, 45; J Hill, above n 95 at 593ff.See comments by R M Buxbaum in R M Buxbaum, T Hertig, A Hirsch and K J Hopt (eds),European Business Law: Legal and Economic Analyses on Integration and Harmonization (1991) at259-260.

atthefrontiers oflabour law and corporate law: …

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