The bulk of this code will come into force in October 2007 though
particular rules relating to conflicts of interest will come into force
only in October 2008.
The new statutory code (largely contained in Part 10 of the Act) is in
many respects intended to be a consolidation of the existing common law
but it does contain some new thinking to reflect the growing importance
of Corporate Social Responsibility. In particular, Section 172 (Duty to
Promote the Success of the Company) of the Act provides that when
fulfilling his duty to act “in the way he considers, in good faith,
would be most likely to promote the success of the company for the
benefit of its members as a whole”, a director of a UK company must
“have regard (amongst other matters) to –
(a) the likely consequences of any decision in the long term,
(b) the interests of the company’s employees,
(c) the need to foster the company’s business relationships with suppliers, customers and others,
(d) the impact of the company’s operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company”.
The UK Government has very unusually, in the writer’s experience,
issued in June 2007 an edited collection of “Ministerial Statements on
the new law of directors’ duties which are intended to show what was in
Government Ministers’ minds when seeking to interpret the above-quoted
words and also other provisions of the new statutory code, at the time
that the Bill, which eventually became the Companies Act 2006, was
going through Parliament.
Margaret Hodge, the Government Minister, says in the Introduction to the publication, that:-
“There was a time when business success in the interests of
shareholders was thought to be in conflict with society’s aspirations
for people who work in the company or in supply chain companies, for
the long-term well being of the community and for the protection of the
environment. The law is now based on a new approach. Pursuing the
interests of shareholders and embracing wider responsibilities are
complementary purposes, not contradictory ones.”
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It is now clear, therefore, that though the principal purpose of a
commercial company may be to make money for its shareholders, directors
must nevertheless consider the wider implications of their actions on
behalf of the company for society as a whole when executing their
duties.
In addition to the Ministerial Statements, the Government has issued
Explanatory Notes to clarify directors’ duties in more detail and it is
clear from the Notes that the Government is reacting to concerns within
the director community that the law will require them to face in all
directions at the same time.
The purpose of the Ministerial Statements is to reassure directors that
normal principles of commonsense and propriety should apply but that in
applying these changing principles directors should have regard to the
changing world about them where corporate social responsibility,
environmental awareness and concerns for employees all have their part
to play.
For larger UK companies, directors will from October 2007 have to
include within their Annual Directors’ Report a “business review” the
purpose of which will be to inform members of the company and help them
assess how the directors perform their duty under Section 172 of the
Act referred to above.
In the case of fully listed companies the business review must contain
detailed information about environmental employee and social and
community issues affecting the company and some of this information
must also be included in the “Key Performance Indicators” section of
the business review of larger unquoted companies.
It is clear that the nature and extent of directors’ duties will evolve
as society changes but, bearing in mind that most such directors’
duties will in the first instance remain enforceable mainly by the
company itself rather than by outside bodies or individuals, the law
does continue to recognise that a director’s primary responsibility is
to its company and its shareholders rather than as guardian for the
world at large. It will be interesting to see how, if at all, these
dynamics change and develop over time.
© July 2007 David Glass
All Rights Reserved.
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