For the prevention of any abuse of powers by the directors a number of duties were developed during the years by the courts. Before the enactment of the Companies Act (CA) 2006, director’s duties could be found in common law principles and also in some pieces of legislation. However, the CA 2006 which was given Royal assent on November 8, 2006, had codified these duties and as a result made the law on director’s duties more accessible and clearer. The director’s duties today can be found in sections 170 to 177 of the CA 2006. Among these duties is the duty to promote the successes of the company which can be found in section 172 and on which we are going to concentrate in this essay. In our essay, we are going to analyse section 172 and examine whether the enlightened shareholder value (ESV) approach which section 172 adopts can be consider as a good principle for the various stakeholders of the company.
Before moving on and examine, what section 172 requires from directors, we need first to consider how this section was developed. To start with, before the enactment of the Companies Act 2006 there has been a long debate in the United Kingdom, whether the directors, except from the interests of shareholders should have to take into consideration the interests of those other groups who have stakes in the company such as suppliers, customers, and the environment and the community in general The company law Review Steering Group (CLRSG) which was set up by the government, addressed two approaches which could be adopted by the UK Company Law, the pluralist approach and the enlightened shareholder approach. The pluralist approach requires the directors not to give priority to the interests of the shareholders but balance them with the interests of the other stakeholders. Whereas, the other approach addressed, the enlightened shareholder approach requires from the directors to take decisions for the best interests of the shareholders but in “assessing what might be likely to promote the success of the company for the members benefit directors should take into account the interests of other stakeholders”. The latter was the approach that was preferred and it has been adopted now in the English company law. The decision to introduce into the company law the ESV approach was taken, because according to the CLRSG is an approach that it will better achieve “wealth generation and competitiveness for the benefit of all”Whereas the pluralist approach as the CLRSG supported is not desirable in the English Company law.
Achem Pte Ltd (Achem) was in the business of trading in industrial chemicals. The company was founded by Heng and Tan. Both were directors and shareholders of the company. Other than Heng and Tan, the other shareholders include Heng’s and Tan’s relatives and some of these relatives were also employees of Achem. Employee turnover was low and every employee was treated as part of one big family. ...
As a result of this decision, section 172, known as the duty to promote the success of the company, was developed and replaced the old duty to act bona fide in the interests of the company. The duty to act bona fide in the interests of the company required from directors to take decisions for the interests of the shareholders. However, the shareholder value model on which the English company law was based has been replaced by the ESV principle. The factors which directors have to consider in section 172 of the CA 2006 recognise the ESV principle. Section 172(1) of the companies Act 2006 requires from a director to act in a way that 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 the director should have regard to a number of factors: the likely consequences of any decision in the long term, the interests of the company’s employees, the need to foster the company’s business relationships with suppliers, customers and others, the impact of the company’s operations on the community and the environment, the desirability of the company maintaining a reputation for high standards of business conduct, and the need to act fairly between the members of the company. However, there are some concerns which are related to the fact that there is no guidance on how these factors should be balanced.However, some guidelines were given recently.
Corporate Governance Corporate Governance is the relationship between the shareholders, directors, and management of a company, as defined by the corporate character, bylaws, formal policies and rule laws. The corporate governance system was designed to help oversee the decisions and best interest of the shareholders. The system should works accordingly: The shareholders elect directors, who in ...
To start with there is no guidance in the statute of what means “success”. It was pointed out that what the word success means it will depend from the objective of the company. For example “success” for a commercial company would probably mean to increase in financial value but for a charitable company, “success” would mean something else.What is more, it is for the directors to understand what the objective of the company is and try to promote it. Specifically, director’s have an unfettered discretion, which they can use in order to decide how to act in order to promote the success of the company. However, the decision of the directors to act in a particular way does not need to have as a result the company’s success, provided that the directors believed that their actions would promote the success of the company as a whole. The clause members as a whole have been interpreted to mean the company’s present and future shareholders.
What is more, a director in deciding what it will promote the success of the company must have regard to the factors in section 172(1) of the Companies Act 2006. The government stated that “have regard to”, “it just means given proper consideration to.” The list of factors in section 172 is non- exhaustive. Except from the six factors which are mentioned in section 172 the directors can have regard to any other factor they believe it would promote the success of the company. If a director fails to consider the factors in section 172(1) then it will be liable for a breach of duty. Also, the government made clear that section 172(1) does not introduce a ticking box and also directors are not obliged to keep records. What is more, in an event of conflict of interests there is no guidance on how one of the factors will be priotitise among the other; this is a question for the directors to decide by thinking what it will promote the success of the company.
... on them? Section 14 (CA 1985) makes it clear that there is a contract between the company and its shareholders. However, ... effect of indirectly benefiting the interests of a rival company in which Pender had a substantial interest . The chairman refused to ... directors. Only in exceptional circumstances will the court interfere with a decision taken by the company to sanction the alleged wrongful act ...
Furthermore, another issue that has to be addressed here is the phrase to “act in good faith”. In Re Smith and Fawcett Ltd it was made clear that directors “…must exercise their discretion bona fide in what they consider-not what a court may consider-is in the interests of the company…” The test here is subjective and according to which is for the director and not for the courts to decide what it will better promote the success of the company.The problem here is that we cannot know if the director had acted in good faith, he may assert that he did so but we cannot proof that is true or not. Even in a situation where a director have not acted in good faith, it will not be possible to prove that the director had pay lip service to the factors in section 172. In Regentcrest Plc v Cohen it was pointed out that the question was if a director honestly believed that his act was in the interests of the company. Therefore if an act of the director leads to a detriment for the company, the director must persuade the court that he believed that the act was in the interests of the company.
Except from these, it is important also to see what changes section 172 had made for the employees and the creditors. Before the introduction of section 172, the directors under section 309 of the Companies 1985, among other matters, they were obliged to take into consideration also “the interests of the employees in general”. However, under section 172(1) (b) of the CA 2006, the directors must consider the interests of the employees only in such a way in order to benefit the shareholders. Section 309 of the Companies Act 1985 was repealed because there was a danger that the directors may choose to promote the interests of the employees instead of the interests of the shareholders. Therefore section 172 is less favorable for the employees than it was section 309. Another group of stakeholders whose position must be examined is creditors. Section 172 as we mentioned above requires from the directors to have regard to a number factors but it fails to mention in these factors the creditors. It was argued that maybe the creditors were covered under the word “others” in section 172(1) (c).
However section 172(3) of the CA 2006 provides that the duty imposed under that section “has effect subject to any enactment…requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.” This duty refers to the common law duty of care which can be found in section 214 of the Insolvency Act. Under this duty, the directors of a company must have regard to the interests of the creditors if the company is going into liquidation.
1. Describe Campbell Soup's corporate strategy under Gordon McGovern's tenure. What key changes did David Johnson make? What about Dale Morrison?Joseph Campbell founded Campbell Soup Company in 1869. They are considered a leader in their industry. They employ over 24,500 people and have revenues around 6 billion. Currently they have over 2000 products on the market. Over the years they have ...
As we can clearly see, the ESV approach which section 172 adopted, gives to the interests of the stakeholders more prominence than they had before with the shareholder value approach. It requires from directors to have regard not only to the interests of the shareholders but also to take into consideration the interests of other groups who have stakes in the company. Therefore we can say that the position of the stakeholders under English law is better than it was before the adoption of the ESV approach. Also, the ESV approach does not require from the directors to balance the interests of the various stakeholders, which can be seen as an advantage of the ESV because in situations where directors have to balance the interests of various stakeholders, they can easily take a decision which better achieve their interests rather than the interest of the stakeholders. Moreover, the adoption of the enlightened shareholder value approach brought the UK company law more closer to the pluralist approach, an approach which many European countries have adopted such as Austria, and move it away from the shareholder value approach which took into consideration only the interests of the shareholders. However, one can argue that the ESV approach does not appear to be very different from the shareholder value approach because like the shareholder value, ESV “assumes that making profits for shareholders is the primary corporate purpose.”
What is more, as we can see from the interpretation of section 172, there is no guidance in the statute on how the interests of the various stakeholders are to be weighted, prioritised and taken into consideration. For this reason, Australia rejected the ESV approach which the UK company law adopted. The Australian Committee pointed out that “a non-exhaustive catalogue of interests to be taken into account serves little useful purpose for directors and affords them no guidance on how various interests are to be weighed, prioritised and reconciled …” The committee also stated that “to require or permit directors to have regard to certain matters or the interests of certain classes of stakeholders, could in fact be counterproductive”. Another factor we have to mention here is that, in situations where a group of stakeholders believes that there is a breach of duty by the directors they cannot enforce a legal action against them. Therefore, even in situations where there is a breach of a duty, the stakeholders cannot take them to the court and have their interests’ prevail. Only the shareholders can enforce a legal action against the directors, specifically they can bring derivative proceedings against the directors under s.260 (1) (a) of the CA 2006. The fact that the stakeholders cannot enforce a legal action makes the things worse because the directors can more easily breach their duty by not taking into consideration the factors in section 172.
In this report, purposes of corporations are investigated under two different approaches on corporate value maximization: Shareholder Approach and Stakeholder Approach. So, firstly both approaches are defined briefly. Secondly, compare and contrast of shareholder and stakeholder approaches is made. Keywords: Purpose, Corporation, Value Maximization, Shareholder Approach, Stakeholder Approach. ...
Another issue we have to address here is that the pluralist approach which did not adopted by the UK takes into consideration the interests of various stakeholders including the shareholders equally. Whereas the interests of the various stakeholders under the ESV do not have an independent value. Therefore we can say that the interests of the various stakeholders under the ESV approach does not given the necessary attention which it will be given if the pluralist approach was adopted.
To conclude, the Companies Act 2006 had enshrined into the English Company law the enlightened shareholder value principle. Someone can support that the enlightened shareholder value approach did not bring a huge change in the English Company law and others can say that it is what the English law needed, the shareholders “maintain the profit maximization” and the stakeholders are taken into consideration. However, from the facts we mentioned the balance struck between the interests of various stakeholders is not what someone would expect. Without objective criteria that can be used to assess what the directors have done, we can say that the stakeholders may are in the same way as before the development of section 172.
Introduction In acting as advisors for the Pilot’s Association Australia and Airlines Union Australia, we seek to explore the legality of the various actions of the Jetair Ltd. ’s Board of Directors which ultimately lead to the hiring of a new staff body in New Zealand by JetairNZ Ltd at a lowered salary and the subsequent redundancy of Jetair Ltd. ’s Australian-based senior managers and pilots. ...
[ 1 ]. Andrew Hicks and S.H Goo, Cases and Material on company law, (6th ed. 0UP, New York 2008) p.356.
[ 2 ]. Len Sealy and Sarah Worthington, Cases and Materials in Company law, (8th ed. OUP, New York 2008) p.273.
[ 3 ]. Andrew Keay, Section 172(1) of the Companies Act 2006: an interpretation and assessment, I.C.C.L.R. 2009, 20(2), 44-55.
[ 4 ]. John H Farrar and others, Farrar’s Company law, (4th ed. Butterwoths, London 1998) p.386.
[ 5 ]. Andrew Keay, n 3 above 2.
[ 6 ]. Len Sealy and Sarah Worthington, n 2 above 276.
[ 7 ]. ibid.
[ 8 ]. ibid.
[ 9 ]. Andrew Keay, n 3 above.
[ 10 ]. Gower and Davies, Principles of Modern Company Law, (8th ed. Sweet and Maxwell, London, 2008) p.506.
[ 11 ]. John H Farrar and others, n 4 above 381.
[ 12 ]. Companies Act 2006, section 172.
[ 13 ]. Catherine Baker, Guidance On Directors’ Duties Under The Companies Act 2006,
[ 14 ]. ibid.
[ 15 ]. Gower and Davies, n 10 511.
[ 16 ]. Len Sealy and Sarah Worthington n 2 above 293.
[ 17 ]. ibid.
[ 18 ]. Andrew Keay, n 3 above.
[ 19 ]. ibid.
[ 20 ]. Catherine Baker, n 13 above.
[ 21 ]. ibid.
[ 22 ]. Gower and Davies, n 10 above 514.
[ 23 ]. Catherine Baker, n 13 above.
[ 24 ]. Len Sealy and Sarah Worthington, n 2 above 294.
[ 25 ]. Re Smith & Fawcett Ltd  Ch.304 at 306, CA.
[ 26 ]. Gower and Davies, n 1 above 512.
[ 27 ]. Andrew Keay, n 3 above.
[ 28 ]. Regentcrest Plc v Cohen  2 B.C.L. 80.
[ 29 ]. Derek French and others, Mayson, French &Ryan on Company law (25th ed. OUP, Oxford 2008) p.
[ 30 ]. ibid 471.
[ 31 ]. Andrew Keay, n 3 above.
[ 32 ]. Gower and Davies, n 1 above 520.
[ 33 ]. Ibid.
[ 34 ]. Andrew Keay, Tackling the Issue of the Corporate Objective: An Analysis of the United Kingdom’s ‘Enlightened Shareholder Value Approach’, (2007) SydLRev 23; 29(4).
[ 35 ]. Ibid.
[ 36 ]. ibid 599
[ 37 ]. ibid 610
[ 38 ]. ibid 606
[ 39 ]. ibid 612
[ 40 ]. ibid
[ 41 ]. Andrew Keay, n 3 above
[ 42 ]. Gower and Davies, n 1 above 509
[ 43 ]. Sarah Kiarie , At crossroads: shareholder value, stakeholder value and enlightened shareholder value: Which road should the United Kingdom take? I.C.C.L.R. 2006, 17(11), 329-343