Directors and a company's best interests
Pinsent Masons
Company law requires a director of a company to act in the way they consider, in good faith, would be most likely to promote the success of their company (section 172 of the Companies Act 2006).
In doing so, the Companies Act gives us a starter for ten, setting out factors that should be considered in decision making: the long term consequences, the interests of any employees, relationships with suppliers and customers, the impact of operations on the local community and the environment, reputational impact and, if there is more than one shareholder, the need to act fairly between them.
This is a fundamental of stewardship. It encapsulates what is known as enlightened shareholder value – the idea that while profits are important, other issues can (and should) be just as important to shareholders and need to be considered in the sensible running of a modern company.
But although a director is obliged to act in this way, how do shareholders and other interested parties know they really are? What demonstrates it? It could be argued that the company's actions and results will speak for the quality of decisions made, but to many investors this is too nebulous especially in the context of high profile corporate failures. After considering the matter, the government legislated that from FY2019 large companies must include a statement about how directors have carried out this duty.
These statements are now beginning to appear, as the 2019 financial year is reported.
Of course, this isn't as simple as it sounds.
In some ways, nothing has changed and directors are still subject to the same obligations. Yet expressing how they fulfil those obligations requires a subtle change of approach: an ongoing process of reflection and consideration by the board.
To complicate matters further, large companies often span jurisdictions and are run on divisional lines. This means it can be difficult to work out – or at least put into words – quite what the input of statutory directors has been.
Fortunately lots of guidance has been made available. The Financial Reporting Council revamped its guidance, as did the Chartered Governance Institute. The GC100, the voice of general counsel and company secretaries in FTSE 100 companies, published a worked example.
Most recently, the FRC's Financial Reporting Lab published a two-page summary on how companies might approach reporting. The emphasis is on authenticity: how have directors interacted with their stakeholders and how did that influence decision making?
The main tip for writing the statement is to break it down. Who are the key stakeholders and how has the board engaged with them? Following engagement, how has it applied what was learnt and how did that impact on major decisions? Choose two or three such decisions by way of example and describe what happened. Importantly, keep records throughout the year – the statement will write itself.
This blog provides a personal view only and is not intended to be, and should not be taken to be, legal advice.