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the Committee concluded that adopting the stakeholders‟ maximisation theory in place of
the existing framework would involve radical change to the British corporate cultures and
would not gain support. Nevertheless, the Committee suggested a compromise and it was
then enacted by Parliament. The current section 172 of the Companies Act 2006 requires
directors to take into consideration the wider community‟s interests but at the same time
insists that the primary duty is still owed to shareholders-owners.
Economic literature refers to the relationship between owners of the company
(shareholders) and the persons who manage it (directors) as agency. 30 The integral
characteristic of agency is the divergence of interests between owners and management. 31
The competing interests between parties create agency costs, which are the costs incurred
to monitor the agent. 32 The recognition of the management‟s tendency to diverge from
the interests of shareholders as owners prompts the need for shareholders and company
laws to devise strategies to minimise the agency cost. 33 Economic literature regards
limited liability as efficient in this circumstance because it reduces the monitoring costs
on both the directors and other shareholders. 34 In addition, limited liability allows
investors to make optimal decisions regarding investments which they may otherwise not
take but which are beneficial to society as a whole. 35
30 Rickett at 73; Michael Jensen and William Meckling “Theory of the firm: Managerial behaviour, agency
costs and ownership structure” (1976) 3 J Finan.Econ 305 at 308-310.
31 Ibid.
32 Ibid.
33 Ibid.
34 Paul Halpern Michael Trebilcock and Stuart Turnbull “An Economic Analysis of Limited Liability in
Corporation Law” (1980) 30 Uni. Toronto L.J 117 at 139-142; Easterbrook and Fischel “The Corporate
Contract” above n17 at 1426-1434; Frank H Easterbrook and Daniel R Fischel “Limited Liability and the
Corporation” (1985) 52 Uni. Chi L.Rev 89 at 103-109; Ian M Ramsay “Holding Company Liability for
the Debts of an Insolvent Company: A Law and Economic Perspective” (1994) 17 UNSWLJ 520 at 535-
537; Eugene F Fama “Agency Problems and the Theory of the Firm” (1980) 88 J. Polit. Economy 288 at
290-292.
35 Ibid.
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