News & Insights

A duty to promote the success of the company… is it not obvious?

Sian Daly, a solicitor in our corporate team, evaluates the GC100 guidance on stakeholder considerations together with the section 172 duty of the Companies Act 2006 to promote the success of the company.

Section 172 requires directors to act in a manner they consider would be most likely to promote the success of the company for the benefit of the stakeholders collectively. You may ask whether this is not general business common sense however, the guidance published via the GC100, suggests it is not.

The GC100 (an independent membership association representing around 85 companies in the FTSE 100) highlights the need to consider the wider reaching, long-term impact that the board’s decisions may have on employees, suppliers, customers and the surrounding community and environment, rather than the more traditional approach focussing solely on a company’s shareholders. The overarching theme this guidance portrays is one of culture; a board of directors must seek to embed a culture which, in its pursuit of success for the benefit of the shareholders, is consistent with the company’s goals in relation to its other stakeholders whether employees, local communities, the environment or others affected by the company’s actions.

The Covid-19 pandemic, for example, has shined the spotlight on how companies have engaged with many of these stakeholders, including the contributions of companies towards communities in need of resources to deal with the pandemic. A particular focus during the past year has also been the treatment of employees and whether adequate policies were introduced to ensure their safety and wellbeing during this period, with immediate reputational and, potentially, financial damage where shortcomings had been exposed.

The duty to promote the success of the company is an important consideration when determining business strategy. A company is dependent on the stakeholders of the business and should place due importance on this when planning its corporate goals. It is easy to get blinded by the immediate issues affecting a company and this recent guidance encourages directors to take a step back and consider the long-term visions of the business.

Adequate induction training for all new directors can be a simple, yet effective, way of discharging this duty. This combined with refresher courses reminding directors, not just of their duty under section 172 but also their wider responsibilities, can help to ensure that the stakeholders ’ interests are sufficiently catered to.

A board needs suitable access to information to allow it to make informed business decisions. It is important to consider whether the board possesses sufficient information regarding the stakeholder interests which may be affected by its actions. Of course, there are going to be times when the directors do not have all the information relevant to a decision, and in these instances it is important to consider the expertise of others; perhaps there is someone within the company better placed to cast judgment on the subject at hand. Care should be taken to assess the source, quality and quantity of information as it is easy to overcomplicate simple issues and lose sight of the fundamental duty to promote the success of the business.

For directors of joint venture and subsidiary companies, the guidance highlights the fact that ultimately, they owe the duty to the subsidiary company of which they are appointed a director of, not the respective joint venture partner or parent company.

Every individual stakeholder within the company is, indirectly, an asset of the shareholders. Promoting a culture which considers the interests of all stakeholders is surely therefore the most effective way of discharging a duty to promote the success of the company. Human nature is such that every company will have its failings, but a system of transparency and certainty to deal with these failings is what will truly serve the success of the business.

This gradual shift towards wider culture promotion and away from the sole objective of profit maximisation for shareholders is also gathering pace outside the UK. In a 2019 meeting of the Business Roundtable, a body that represents the chief executives of 181 of the largest companies in the US, the body concluded that companies should be taking into account a wide range of stakeholders when making decisions, including customers, workers, suppliers and communities. This is a further indication for UK companies that this shift is here to stay and that the necessary steps should be taken to implement the recommendations by the GC100 when complying with their section 172 duty.

However, it is important to recognise that section 172 is not a standalone duty, it is intertwined with the other Companies Act duties, such as the duty to act within powers, exercise reasonable care, skill and diligence and exercise independent judgment, and directors should ensure they are aware of this when fulfilling their role within the company.

If you would like further guidance on the contents of this article, please get in touch with Sian Daly.