The Knowledgebase

Inspiration

Shared understanding

Bringing purpose to life

Exploring views on and interpretations of corporate law

Be mindful that some people can seek to use corporate law as a way to close down the conversation about the role of business in society.

Until recently, and in many companies still today, there is a view that the role of directors is to maximise shareholder value. This is in fact not the law either in the US or the UK, where the duties of directors are owed to the company itself.

In our view, which has been confirmed by corporate lawyers, s172 of the UK companies act (see below) is permissive of a purpose-led approach. The duty of directors is owed to the company not to the shareholders, and it does not require directors to maximise shareholder value. The duty in s172(1) requires directors to “promote the success of the company” but crucially leaves that phrase undefined.

Duty to promote the success of the company (S172 (1) of the UK Companies Act, 2006)

A director of a company must act in the way 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 have regard (amongst other matters) to:

a) the likely consequences of any decision in the long term,
b) the interests of the company’s employees,
c) the need to foster the company’s business relationships with suppliers, customers and others,
d) the impact of the company’s operations on the community and the environment,
e) the desirability of the company maintaining a reputation for high standards of business conduct, and
f) the need to act fairly as between members of the company.

This flexibility in the current law has allowed the latest FRC corporate governance code and stewardship codes to develop and, for example, require listed companies now to establish their purpose. 

However there are differing viewpoints on the interpretation of s172. Some of these are discussed in this article: FT, Stakeholders incorporated: Can capitalism change if company charters stay the same? 

Some people feel the current law in the UK hampers the growth of purpose-led business and are therefore pushing for further clarification or for a change to the law to make it more supportive. See:

There is also the argument made by some, including Catherine Howarth CEO of Share Action, that whilst s172 may be permissive of purpose led business in the UK, a change in the law could help create a level playing field for all UK businesses.

See the course on Governance for more on this.