Social issues - A new duty for directors?

The first codified step for company law to be socially and environmentally conscious is likely to enter the UK statute books in 2007.

          The draft Company Bill contains a new duty on directors to "promote the success of the company" (in good faith) for the benefit of the shareholders (s.173 of the July 2006 draft).  The matters (in (a)-(f)) that directors must have regard to when promoting such success include the impact of the company’s operations on the community and the environment.

          This is perhaps the first time that statute has imposed on directors a requirement for consideration of wider social issues.

          However, there seems little point in getting too excited over this section.  What constitutes "promotion" and "success" are hugely subjective, and if no successes are made no promotion is required.  It is difficult to think of a situation where the director may fall foul of this section by not promoting the success of the company (even half a sentence in the annual accounts may suffice to meet the duty), or where promoting the success of the company will be in bad faith (potentially giving rise to a cause of action in misrepresentation, or breach of shareholder's agreement).

          There is pressure for a company to have greater transparency with its investors (the Transparency Directive), as well as being aware of its social and environmental impact.  Coupled with the increasing accountability of public bodies to implement the principles of fair competition when awarding public contracts, it would appear that public and private law are converging. 

          The Public Contracts Regulations 2006 (SI 2006/5) sets out the requirements for public bodies to enter into contracts in accordance with competitive principles in an open market.  This legislation pressurises public bodies to be subject to the same market forces that maintain value for money in the private sector.  Besides strengthening the requirement for open and fair competition in the public sector, the new regulations codify the option for public bodies to include relevant social and environmental considerations (as technical specifications) in an award of a public contract.

          It is arguably the legacy of Enron and Worldcom that greater transparency is to be increasingly important in company law, rather than as a result of any social trend.  When both private and public bodies are obliged to be environmentally and socially responsible, without restricting competition in any way, we will be much closer to a permanently fixed legal landscape.  In this "Star Trek Utopia", value will be measured by cost and profit to all stakeholders (including the community and environment), and such value will be kept in place by open and competitive market forces. 

           Although environmental and social concerns are clearly more prominent than 10 years ago, Corporate Blawg UK expects that these are not the first steps in that gravitation towards a social centre, but a unitary crowd-pleasing appeasement without any real teeth.

Comments

[Cora Powell]

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Good Tip