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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.
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.
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