This post has been contributed by Professor Chris Riley, Module Convenor for Company law.
UK company law puts shareholders’ interests first. A clear example of this is the duty imposed on directors by s172 Companies Act 2006, which requires directors to ‘promote the success of the company for the benefit of its members’. This is usually understood as instructing directors to maximise shareholder value. The interests of other stakeholders, or the impact of decisions on the environment, must still be considered by the board, but only in order to work out in a more accurate, or ‘enlightened’, way what actions will truly maximise shareholder value. Protecting the environment, or improving the lives of the company’s employees, are not things that directors can pursue at the expense of shareholder value.
In the run up to the enactment of the Companies Act 2006, there was much debate over the form that s172 should take, with many commentators arguing for a more ‘stakeholder friendly’ version of the duty. Those calls have continued ever since, and recently a ‘Private Member’s Bill was introduced into Parliament proposing a rewriting of s172 along these lines.
The Company Directors (Duties) Bill retains the basic structure of the current s172, but charges directors with promoting the company’s success for the benefit not of members alone, but instead of members, the environment and the company’s employees. If enacted, this revised duty would require directors to balance the interests of the three named interests (shareholders, workers and the environment). It would permit directors to take decisions that favour the latter two considerations, even if doing so might leave shareholders worse off.
Although the Bill represents a small nudge towards a more stakeholder-friendly approach, there are at least two significant limits on the likely effectiveness of the reform it proposes. First, no guidance is given as to how directors must balance shareholders, workers and the environment. It would be left to directors to determine what weight to give to each of these three interests, and we know that judges are reluctant to interfere with directors’ exercise of their judgement under s172. Judges will not substitute their own views about what a reasonable director would do. Convincing a judge that directors had given too much weight to, say, profit maximisation, at the expense of environmental protection, would remain extremely difficult.
Second, the reformed duty would still be owed to the company itself. Enforcement, therefore, would require either an action brought by the company (on the decision of the board), or a derivative claim brought on behalf of the company. But shareholders alone can bring a derivative claim. Employees, or say environmental NGOs, have no standing to do so. Given that, the chance of enforcement proceedings being brought to challenge a board that seems to give too much weight to profit maximisation seems very unlikely.
True, in listed companies, representatives of employees or of the environment might easily purchase a few shares so as to give themselves standing to bring a derivative claim. But the courts recent refusal to give ClientEarth permission to continue its litigation against the directors of Shell plc suggests such a strategy would be unlikely to be successful.
The proposed reform, then, would do little to compel directors to change their companies’ priorities, and to balance the pursuit of profit with the protection of employees or the environment. At best, it might give a little more protection for directors who already favour such a balancing, but who might fear liability under the existing shareholder-focused s172.
Yet even this modest change in the law is unlikely to be achieved. As noted, the proposed reform has been introduced as a Private Member’s Bill. The Government has indicated it will not support it, and its chances of being enacted are, therefore, very low. If, as seems likely, it fails to become law, it will serve as a clear reminder of how strongly UK company law remains attached to ‘shareholder primacy’.
Very informative and insightful article. My take on the success of the proposed amendment is that the commitment to shareholder primacy could still prevail, as any action taken by a company’s directors may be interpreted as acting in congruence with the provision. Sustainability is inevitably the goal of any business venture, and balancing the three interests may be interpreted as ensuring the interests of shareholders over an extended period.