The UK Company Law Reform Bill,
published last month, upholds the primacy of shareholders, but says
directors need to consider the interests of other parties
What stage are we at with the Company Law Reform Bill?
It was introduced in the House of Lords last month and is expected to pass into law next autumn, coming into effect in 2007.
Anything in the Bill that relates to corporate social responsibility?
Two clauses are of direct relevance. Clause 156 enshrines in
statute the principle of what the government calls ‘enlightened
shareholder value’. Directors must promote the success of their company
‘for the benefit of its members ’, but this can only be achieved by
having regard ‘so far as is reasonably practicable’ to ‘the interests
of the company’s employees’, the impact of the company’s operations ‘on
the community and the environment’, and its ‘reputation for high
standards of business conduct’. In accompanying guidance, the
government warns that ‘it will not be sufficient [for directors] to pay
lip service’ to such social and environmental matters, and that in many
cases directors ‘will need to take action to comply with this aspect of
the duty’.
Is that not an attack on shareholder primacy?
No. The matter is left to directors’ ‘good faith judgment’ and
the government says the prime obligation of directors will still be to
satisfy shareholder interests. But it hopes to send a strong message to
the corporate world. CSR minister Malcolm Wicks told parliament the
government could not go further without ‘muddying the waters
unhelpfully’ for directors, who would otherwise ‘lack clarity about
what they were meant to be doing’. He added that an ‘extremely
pluralist approach’ to the duties of directors risked making directors
accountable to no one.
What do the experts say?
That the clause will not change the law as such, but will help
to clarify in whose interest companies should be run. ‘It has been
established in case law that directors do have secondary duties other
than to shareholders, but this Bill will put that into statutory law
for the first time,’ says Roger Mason, a consultant in company law. ‘To
an extent that doesn’t make much difference, but it does make things
more certain because you will actually be able to go to the Act and see
it written down, though it won’t get any directors trembling.’
What about enforcement?
Simon Witney, partner in the law firm SJ Berwin, says: ‘Although
the Bill states that directors should have regard to all stakeholders,
it doesn’t give direct rights to any of those stakeholders to enforce
that. The situation remains that only the company [shareholders] are
allowed to sue the directors. What the Bill is mainly doing is making
it clear what the law requires from directors, and to that extent I
think it will have a positive impact. It will educate and remind them
of the fact that they must discharge their duties by taking into
account all the people they have an impact on.’ Those who favour a
tougher approach, among them the Corporate Responsibility Coalition
(Core) of pressure groups, say the clause is inadequate. Sarah
McCarthy, a Labour MP who recently secured a debate on the issue in the
House of Commons, says it is too ‘woolly’.
You mentioned two clauses. What’s the other one?
Clause 866 will give ministers the power to force institutional
investors, if necessary, to declare their voting record at
company meetings.
That sounds controversial
Mandatory disclosure on voting is opposed by the Association of
British Insurers and The National Association of Pension Funds because
compliance will increase costs and they think the benefits are
uncertain. Rob Lake, head of SRI at Henderson Global Investors, which
is one of a dozen or so fund managers that already voluntarily disclose
the way they vote on key issues, says the clause would encourage some
investors to take a more proactive role in the governance of companies,
especially on social and environmental matters. ‘This is basically a
shot across the bows, saying that the government would like much more
disclosure on voting and that if things don’t improve on a voluntary
basis then it will have the power to force investors to do it,’ says
Lake. ‘I think [the government] will give [investors] a couple of
years’ grace before taking action.’ Fidelity International, one of the
UK’s largest fund managers, last month began publishing its voting
record for the first time. If more fund managers follow suit, ministers
may never exercise the power.
Anything else?
In any Bill, especially one as complex as this, the devil is in
the detail. The general intent is clear, but the text is not yet cut
and dried. Indeed, the Operating and Financial Review, recently dumped
unexpectedly by chancellor of the exchequer Gordon Brown, was
originally part of it, but was brought forward to meet the timetable
for implementation of a European directive on modernizing company
accounts. There have been suggestions that it may yet find its way back
in to the Company Law Reform Bill.
