<\/p>\n
For global economies like the UK, a shift towards codified duties aimed at corporate governance\u00a0[1<\/a>]<\/span>\u00a0seems inevitable. Anglo-American business management practices have often been challenged for focusing on short-termism and profit maximisation at the expense of other interests \u2013 as witnessed by the recent financial crisis. So living in an era where major corporations shape the way we live our lives, the endurance of companies to sustain long-term relationships and acknowledge social responsibility is vital. Thus company directors have been long placed under pressure to encapsulate a variety of interests. The active rejection of stakeholder value gave birth to enlightened shareholder value via s.172 Companies Act 2006.<\/p>\n The purpose of this essay is to consider the effectiveness of s.172 in compelling directors to address stakeholder interests thus enhancing corporate governance. It will be found that while the advancement of CSR via enlightened shareholder value (ESV) is attractive and innovative, \u201cthe devil is in the detail”\u00a0[2<\/a>]<\/span>\u00a0; the language of S.172 is ripe for misinterpretation. Directors may be morally inclined to adhere to s.172 as it will benefit the company, but the lack of adequate consequences fails it entirely.<\/p>\n Margaret Hodge MP\u00a0[3<\/a>]<\/span>\u00a0claims that the overreaching duty of directors is to promote the success of the company (s.170). s.172 is praised for equating the \u2018best interests of the company\u2019 with primarily the collective interests of the shareholders, confirming the Greenhalgh v Arderne Cinemas Ltd\u00a0[4<\/a>]<\/span>\u00a0principle that a company is not distinct from its shareholders. Codification invites better business practices by clarifying the duty requirements. Nevertheless s.172 formulated from soft law is accused of being \u201cthe same with modern formulation”\u00a0[5<\/a>]<\/span>\u00a0, hence whether s.172 \u2018develops\u2019 the law becomes questionable. Furthermore, it is heavily criticised for not being fit for its purpose\u00a0[6<\/a>]<\/span>\u00a0while it appears to enhance CSR, the sad reality remains that no legal cure for breach is implemented. The crux of why s.172 remains highly controversial is due to the lack of adequate protection.<\/p>\n While \u2018good faith\u2019 mirrors the old \u2018bona fide\u2019 rule in Re Smith & Fawcett Ltd\u00a0[7<\/a>]<\/span>\u00a0, the new ambiguous concept \u2018success\u2019 concerns long term financial increase and the ultimate objective of the company. Accordingly the decision of what will promote the success of the company is for the directors\u2019 good faith judgement. Subjectivity is possibly the downfall for this provision conferring powerful unfettered discretion to directors. Yet it safeguards business decisions undertaken as directors possess expert knowledge to make a suitable decision with good faith. Regardless, \u2018good faith\u2019 is not an absolute factor; directors must exercise their powers for a proper purpose (s.171): directors cannot exercise their power to allot shares to prevent a takeover bid\u00a0[8<\/a>]<\/span>\u00a0irrespective of good faith. Additionally, objective criteria may be introduced in interpreting s.172 through preserving common law principles under s.170(3), and by complying with their duty to exercise reasonable care, skill and diligence (s.174). Pennycuick J considered in a group context whether \u2018an intelligent and honest man\u2019 as director would reasonably believe that the transaction was for the benefit of the company\u00a0[9<\/a>]<\/span>\u00a0. However Prof. Keay notes that the subjective test in the statute will carry some weight.<\/p>\n This duty burdens not only executive directors but shadow directors, nominee directors and non-executive directors. The potentially broad range of liable corporate persons can seem unfair. Nominee directors further interests of the shareholder they represent, therefore fettering their discretion which may prove contradictory. It is argued that non-executive directors lack sufficient control to be liable. The law is silent in this respect.<\/p>\n These factors educate directors on the necessity of CSR, indicating that corporations do not exist in a vacuum and their actions impact a variety of stakeholders. BP\u2019s oil well explosion in the Gulf of Mexico directly addressed the problem of CSR and demonstrated that a \u201ccorporation\u2019s most important asset \u2013 the only one it cannot create or replace on its own \u2013 is its acceptance within society as a legitimate institution”\u00a0[10<\/a>]<\/span>\u00a0. Professor Cerioni indicates the significance of s.172(1) by paralleling them to the company\u2019s \u2018assets\u2019 (since each factor directly or indirectly contributes to the survival of business activity). He believes long term success can be maintained by considering each factor through a strategic managerial strategy. He finds that each factor safeguards shareholders\u2019 right to continuing income. With envisioning long term profits with better management, directors will have an incentive to adhere to the Act thus it can be a positive development as identifying constituencies as important \u2018assets\u2019 which will increase the turn-over of a company.<\/p>\n Prima facie stakeholder management seems to be immersed, albeit via the \u2018backdoor\u2019, granting unpoliced discretion to directors, making decision-making cumbersome and costly. The CLRSG rejected stakeholder value for such reasons, and on close reading, the provision evidently upholds shareholder value. Ss.170(3) and (4) are interesting provisions which replace pre-existing case law and require the duties to be interpreted like case law. With the flexible nature of case law, these duties can evolve with changing societal norms. The status of any principles deriving from this window is unclear since courts cannot alter statute. This can also preserve traditional shareholder value, so where a conflict arises shareholder benefit is prioritised. A recent case\u00a0[11<\/a>]<\/span>\u00a0confirms this by ruling that RBS directors did not breach s.172 by lending to companies who engage in environmentally damaging practices. Sales J rejected judicial review proceedings and felt that the directors complied with s.172 since ranking the factors is for the directors’ good faith judgment, thus would be difficult to challenge. Prioritising within the list of interests is difficult. If benefitting the environment results in employees losing jobs, which factor should carry more weight? The subjective definition of \u2018have regard to\u2019 allows directors to benefit from it. Professor Alcock identifies that the difficulty in reconciling interests \u201calmost give rise to a Catch-22 for directors\u00a0[12<\/a>]<\/span>\u00a0“. Concentrating on secondary interests leave directors open to challenge for breach of their primary duty towards shareholders, yet not upholding these secondary interests may fall foul under s.174 for lack of reasonable care, skill and diligence. Professor John thus adopts the view that companies are unique changing entities thus should be accountable to those stakeholders mostly effected by the behaviour of the company. This approach to the decision-making process would better determine what interests deserve more consideration in each case. Additionally nothing prevents directors in \u2018box ticking\u2019 or giving \u2018lip service\u2019 to the factors, thus it could act as a window dressing instrument avoiding litigation. However the s.417 Business Review compels directors to justify their decision-making therefore avoiding such acts.<\/p>\n Business leaders feared that the ill-defined provision would increase litigation resulting in defensive business management practices. However in reality s.172 fails as \u201ca right without a remedy”\u00a0[13<\/a>]<\/span>\u00a0. The Act has not codified any remedies and one is thrown back to case law under s.178(1). Additionally since directors are required to act wholly in the best interests of the company, it is the company that has locus standi to remedy a breach. Consequently on breach, only shareholders can bring a derivative claim on behalf of the company against a director (s.260). There are two problems with this; firstly a derivative action is difficult to invoke so is usually a last resort weapon; and secondly it leaves remaining stakeholders toothless against any breach.<\/p>\n To qualify for a derivative action, shareholders require court approval entailing many hurdles. Also a shareholders\u2019 right to sue only arises in limited exceptions noted in Foss v Harbottle\u00a0[14<\/a>]<\/span>\u00a0. Additionally, directors will only be found liable if the company has suffered loss due to the breach of duty. Furthermore, breach under s.172 is very hard to prove, directors could easily escape liability by arguing that they had regard to the factors in good faith. This wide scope of personal assessment can create a defensive attitude, where the directors essentially use s.172 as a \u2018get-out-of-jail-free-card\u2019. Even where a claim can be proved, shareholders lack incentive to invoke this remedy since damages awarded by the courts will go to the company.<\/p>\n For protecting stakeholders s.172(1) has been heavily criticised. Firstly for omitting creditor interests and merely following case law under s.172(3). Thus directors only owe a duty to account creditors when financial difficulties arise. The legislature nevertheless feels that the rights of the liquidator, who enforces the duty for creditors, are sufficient in protecting their interests. On insolvency, under s.213-214 Insolvency Act, liquidators may find that the directors engaged in fraudulent or wrongful trading practises. Moreover creditor investment is protected via capital maintenance rules, ensuring sufficient funds are available to meet their investment. Yet as significant stakeholders of the company, s.172 fails to adequately protect them. An Australian case\u00a0[15<\/a>]<\/span>\u00a0emphasises that directors must account for creditor interests when discharging their duties. This duty again fails employees (previously under s.309) for having no real substance. As the social capital of a company, they are essential for its functioning. Indeed, if they are also members they can bring an action under derivative claims. Injunctive relief seems to be the only possible alternative for the constituencies in s.172(1), preventing directors from continuing their act. Yet as non-members it is difficult to see whether their claims will succeed. CLRSG confines non-member stakeholder rights outside company law: under labour law, contract law or health and safety regulations etc. Again these are imperfect ex-post safeguards – once the breach has occurred there is very little that the constituencies can do, thus ex-ante protection is necessary. S.172 fails to hold directors accountable for their actions because there may be no one able or willing to bring an action. Consequently directors may be more inclined to take a risk rather than comply. However, the true impact of s.172 lies in reading the duties together; more than one duty can apply to a breach (s.179): to exercise their powers for a proper purpose (s.171) directors must act with reasonable care, skill and diligence (s.174) and must have regard to at least the factors in s.172\u00a0[16<\/a>]<\/span>\u00a0. The lack of case law surrounding s.172 seems to indicate that shareholders are more confident by invoking another director duty on breach.<\/p>\n Where a law is clear on its substance, the norm to adhere accordingly is easily created. But there are difficulties in the s.172 factors accompanied by inadequate sanctions upon breach. Hence a barrier to its proper use is inevitable. This may strengthen the Board rather than deter them from breach providing them with a get-out-of-jail-free-card. Lord Goldsmith however believes the importance of s.172(1) rests not with the issue of enforceability, but in its value as a normative function: the \u201clong term should predominate over the short, both should be evaluated and balanced in determining what contributes best to company success”\u00a0[17<\/a>]<\/span>\u00a0. Also most corporations voluntarily engage in CSR as it serves to strengthen their reputation and increases investment in the company, e.g. Tesco\u2019s customer focus.<\/p>\nThe position of s.172<\/h2>\n
S.172(1) Factors<\/h2>\n
Problem of Accountability<\/h2>\n
Conclusion<\/h2>\n