There is increasing pressure on directors/their companies to make a positive contribution to society. This comes from institutional investors as well as from the UK Government – for example, in March 2018, the Prime Minister declared that housebuilding companies “should do their duty for Britain and build the houses our country needs”.
The idea that companies owe a duty to a country is, for the moment, only political rhetoric. But the draft revised UK Corporate Governance Code has taken up this theme. It begins with a new expanded principle:“A successful company is led by an effective and entrepreneurial board, whose function is to promote the long-term sustainable success of the company, generate value for shareholders and contribute to wider society. The board should establish the company’s purpose, strategy and values, and satisfy itself that these and its culture are aligned.” Principle A
For the most part, there should be no conflict or tension between s.172 duties (see panel) and the sentiments set out in the proposed Principle A. Enlightened shareholder value theory says that doing the right things by community, customers and other shareholders will usually deliver the best shareholder returns, so there is no conflict. But this is not always the case. Take a takeover situation or other strategic turning point, for instance, where shareholders have the opportunity for immediate returns that would not be possible if the directors continued to pursue a longer-term strategy. In such a case, directors need to make finally balanced judgments but their duty is always to the company, not specific shareholders or stakeholders.
The Government is not proposing to amend s.172, but it would like to nudge companies towards being more receptive to the concerns of employees and wider stakeholders. Both the Code and new legislation (applicable to larger companies) will require disclosure on how stakeholder interests have been taken into account in decision-making. So on the one hand nothing has changed in terms of the legal duties directors owe, but as we have seen with gender pay reporting, the very act of reporting can cause greater awareness and discussion of issues at board and management level. It will be interesting to see whether the obligation to describe engagement with stakeholders and its effect on decisions will make tangible differences to business outcomes or simply introduce further boilerplate text into annual reports.
