If you believe much of the commentary surrounding the Companies Act 2006 (see right) you would think that the phrases 'enlightened shareholder value' and 'corporate social responsibility' must be repeated on every page. The truth is that neither appears once in its 1,300 sections and 16 schedules. But the concepts nonetheless play a vital part in the legislation and cannot be ignored.
Attention has been drawn to section 172, which has been reworded to spell out the duty of directors to promote the success of their company. It is the first-ever statement in statue of their duties in respect of the environmental and social impact of the business and establishes a link between responsible corporate behaviour and business success.
The words may be new but the sentiment is not: there is little practical change from the former duty, derived from old case law, to act in the best interests of a company's shareholders, present and future. Now in promoting the success of their company, directors must have regard to a number of factors which include: the long-term consequences of any decision; the company's employees; the need to foster business relationships with suppliers, customers and others; the impact of the com- pany's operations on the community and the environment; the desirability of maintaining a reputation for high standards of business conduct; and the need to act fairly between shareholders.
The main point here is the obligation to 'have regard' to these factors. None takes precedence over the others. All must be considered, where relevant, but the overriding obligation is to 'promote the success of the company'. If closing a factory or choosing a less environmentally-friendly solution is, in the considered view of the board, the best option for the company as a whole, that must be the option followed.
If directors fail even to consider these elements when reaching a decision, they risk personal liability for any loss to the company from their breach of duty to promote the success of the company. But it is a duty owed direct to the company not to individual shareholders and only the company itself can bring a claim. That does not mean the duty can be ignored. Individual directors may think their colleagues are unlikely to cause the company to sue them. But boards change, and so do shareholders. The directors of Equitable Life would not have expected a new board to turn against them and sue them for millions to the point of bankruptcy.
The obligations apply to all directors of all companies, not just main board directors. And that includes HRDs. And, if a board is considering a major proposal, it will often be the 'marzipan' executives, those just below board level preparing the key materials for the board to consider, who need to be aware of these factors and to include them in the papers that go to the board.
This is where HRDs play a crucial role. As directors not only do they need to be aware of their own responsibilities, they also must ensure other directors understand them too. Training on these duties needs to extend to senior executives and subsidiary company directors. A failure to train can lead to a liability for a listed company.
There is nothing new about the obligation with regard to a company's employees. It has lain hidden in the Companies Acts since the late 1960s, largely ignored because it is unenforceable by employees themselves. That remains the case, though some fear a trade union could buy shares in a defaulting company and persuade a court that the directors have acted in breach of their duty. But they could only be liable for any loss suffered by the company as a result of the breach, not for the harm done to the employees.
There are other references to employees and green issues: if a company's shares are quoted on the main list in London, the annual business review in its directors' report must include information on environmental matters, employees, and social and community issues. Many companies do that in a separate CSR report. Wherever the information appears, the emphasis from government is to avoid a formulaic response and instead to use a type of narrative reporting to promote a genuine understanding of the com- pany's performance in these areas.
- Martin Webster is a partner, Pinsent Masons.
THE COMPANIES ACT 2006
Changes to directors' duties in respect of stakeholders
- Includes (section 172) the first ever statement in statute of directors' duties in respect of the environmental and social impact of their companies' business
- Establishes a link between responsible business behaviour and business success
- Justifies as well as requires a broader view
Source: Herbert Smith.
