The law will force directors to consider the interests
of 'stakeholders' in a firm, such as employees, the environment and
the local community. The changes are among the directors' duties
listed in the Companies Act 2006. The relevant sections of the
Act come into force in a few weeks' time.
"Effectively, the Companies Act introduces on to the statute
book for the first time the concept of the 'stakeholder' – that is,
someone other than a shareholder who has an indirect interest in
what a company may be doing," said Martin Webster, an expert in
company law at Pinsent Masons, the law firm behind OUT-LAW.COM.
Webster is author of The Director's Handbook, whose second edition
contains guides to the new Companies Act.
"The duty to promote the success of the company is not simply a
codification of an old law, but the introduction of a new one,"
said Webster. "To fulfil this duty, the legislation says that
directors must have regard to six factors [listed below] that
demonstrate what BERR calls
“responsible business behaviour” in reaching their decisions.
Webster said that the new law will be likely to change
directors' attitudes, but does not alter the existing fundamental
duty of directors to promote the success of the company.
"There is no requirement that any one factor is given precedence
over another, that employees must be favoured over the environment,
for example, or the community over customers," he said. "The final
decision might ignore all six factors – but the board needs to be
able to demonstrate that it has at least thought about them."
The codification of duties changes the basis of one of the most
fundamental of directors' duties, adding a wider obligation to the
old one of acting in the interests of the company itself.
"This is a new duty, a re-casting of the old law that imposed a
duty to act in good faith in the best interests of the company as a
whole," said Webster. "The language is now subtly different; a
director of a company must act in the way they consider, in good
faith, would be most likely to promote the success of the company
for the benefit of its members as a whole."
Webster said that the new codification will not involve any
change for many modern businesses. "For many companies the concept
of enlightened shareholder value is nothing revolutionary; they
have been thinking about these factors, or something like them, for
years. The duty merely gives statutory force to something that
responsible boards of directors should be doing anyway," he
said.
Other provisions of the Act that come into force on 1st October
will make it easier for shareholders to take action against the
directors of a company. Previously, shareholders could only take
action in the name of the company as a whole, except in some
specific cases.
The new laws allow shareholders to take action against directors
who breach their duties.
"This is enshrining an old common law procedure where a
shareholder can take action in the company name where there's been
a fraud on minority shareholders," said Emma Flower, a commercial
litigation expert at Pinsent Masons, the law firm behind
OUT-LAW.COM. "A minority shareholder couldn't take action in their
own right."
The new law clarifies that process, broadens it beyond pure
fraud and gives it a basis in legislation, said Flower.
"This is a new procedure which will allow a shareholder to
pursue an action where there's been some kind of negligence, a
breach of duty," she said. "Shareholders will ask the court to
allow them to step into the shoes of the company and bring the
acton on behalf of the company."
The process of seeking a court's permission to take an action
will be the critical part of the legislation, said Flower. The
courts will look to decide if the action is in the best interests
of the company as a whole but will want to stop the law becoming a
vehicle for activists, she said.
"It should be quite a high threshold because they want to try to
weed out frivolous actions and activist shareholders using these
actions as a litigation strategy," she said.
"We might see some interesting test cases, you can imagine an
environmental activist group buying into a company to use it as a
route because you don't need to have a long standing interest in
the company to take an action."
Among other provisions on directors' duties, secton 172 of the
Companies Act states:
A director of a company must
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, and in doing so 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.
Editor's note, 04/09/2007: This story has been
updated since it first appeared. The first version implied that a
Code of Directors' Duties was to be published. This is not the
case: the new Act simply codifies certain duties. We apologise
for any confusion.
