Reforming Directors’ Duties
| Date | 01 May 2001 |
| Published date | 01 May 2001 |
| DOI | http://doi.org/10.1111/1468-2230.00329 |
REPORTS
Reforming Directors’ Duties
Sarah Worthington*
Taken together, the English and Scottish Law Commissions,1the Department of
Trade and Industry (DTI)2and the Company Law Review Steering Group
(CLRSG)3have produced hundreds of pages on the subject of directors’ duties
during the last three years. All of this work is just a small part of the DTI’s current
review of the whole system of core company law, a review billed as the most
comprehensive ever undertaken in the United Kingdom (UK). This note cannot do
justice to the detailed work of all these bodies, but aims simply to summarise the
principal directions of the work so far produced – and only so far as it relates to
directors’ duties – and to highlight some aspects which give cause for concern. In
doing that, it is consciously biased towards consideration of the perceived
problems, rather than praise for noteworthy advances. The reason is simple. This
mammoth review process is not yet completed. The CLRSG is due to produce its
final report in Spring 2001. Before that date, it seems important to cast a critical
eye over the work completed so far. That said, it would be surprising if the CLRSG
did not already intend to address some of the issues raised here. Its work to date has
always been presented as part of a consultation process aimed at discovering the
optimum solution.
The need for a comprehensive reform of UK company law is not doubted. The
UK rules have long ceased to provide an enviable model for other countries to
adopt. The current companies legislation is widely regarded as being too complex
and detailed, and as containing rules which are now either obsolete or
unwarranted.4The DTI’s stated aim is to produce a simple, rational framework
which is modern and competitive, and which facilitates enterprise and promotes
transparency and fair dealing.5It is against this that its efforts need to be judged.
ßThe Modern Law Review Limited 2001 (MLR 64:3, May). Published by Blackwell Publishers,
108 Cowley Road, Oxford OX4 1JF and 350 Main Street, Malden, MA 02148, USA. 439
* London School of Economics and Political Science; member of the Company Law Review Working
Group on Sanctions. The views expressed here are personal, and do not reflect the views of this Working
Group.
1 Law Commission, Company Directors: Regulating Conflicts of Interest and Formulating a Statement
of Duties (1998, Law Com No 153, Scot Law Com No 105) (‘LCCP’); Law Commission, Company
Directors: Regulating Conflicts of Interest and Formulating a Statement of Duties (1999, Law Com
No 261, Scot Law Com No 173) (‘LCR’).
2 DTI, Modern Company Law for a Competitive Economy (1998) (‘MCL’).
3 CLRSG, Modern Company Law for a Competitive Economy: The Strategic Framework (1999, URN
99/654) (‘SF’); CLRSG, Modern Company Law for a Competitive Economy: Developing the
Framework (2000, URN 00/656) (‘DF’); CLRSG, Modern Company Law for a Competitive Economy:
Completing the Structure (2000, URN 00/1335) (‘CS’).
4 MCL 6–7.
5 MCL Foreword and para 3.8.
Summary of critical conclusions
The CLRSG recognises that the issue of directors’ duties lies at the heart of
corporate governance.6It says its proposals ‘go a long way towards sketching out a
radically improved framework of company law for the new Century.’7True, its
proposals involve major changes to the legal presentation of directors’ duties (a
statutory enactment of both the existing common law duties and their remedies is
recommended), but they recommend little conscious change to the substance.
Perhaps the most controversial and hard fought debate relates to the ‘scope’ issue:
for what purposes and in whose interests should companies be run? The CLRSG
concluded that the overall objective of wealth generation and competitiveness for
the benefit of all could best be achieved through adopting an ‘inclusive’ or
‘enlightened shareholder value’ approach, rather than a ‘pluralist’ or ‘stakeholder’
approach.8The former approach puts shareholders at centre stage: companies are
to be run primarily for the benefit of shareholders, although directors are required
to take relevant decisions in an ‘inclusive’ fashion, so as to recognise best practices
in relation to a broad range of interested groups (be they employees or customers,
or the wider community which might be affected by social or environmental
concerns). The ‘pluralist’ view, on the other hand, would give shareholders no
inevitable primacy, but would require the directors to balance the interests of all
the relevant stakeholder groups in determining whether a course of action was in
the ‘interests of the company’. This issue is taken up later.
In the end, this inclusive, enlightened shareholder value regime appears to be
distinctly pluralist in objective, even if avowedly traditionalist in substance. This
view is reinforced by the arguments advanced for adoption of a related strategy, the
imposition of an enhanced reporting regime for listed and large private9
companies.10 This new report (part of the Annual Report), called the Operating
and Financial Report (OFR), is designed to be a full account by the directors of the
performance and direction of the company’s business, including a review of
achievements, trends and strategic direction. In addition, however, the OFR is to
include a report on the company’s wider relationships, risks and opportunities, and
social and environmental impacts, where these are relevant to an understanding of
the business.11 This proposal for a broad-ranging mandatory OFR seems to mark a
formal recognition of the increasing interest of a wide range of stakeholders in the
greater public disclosure of corporate functions and activities.12
Otherwise little is to change. There is no recommendation for institutional
changes in board structure (often seen as a necessary component of a pluralist
governance regime).13 There is no discussion of the divided loyalty problems
experienced by both nominee directors and directors of companies forming part of
a group. There is scant discussion of the relationship between directors and third
6 DF para 3.2.
7 DF para 1.8.
8 Much has been written on this debate. See, for example, J. Parkinson, Corporate Power and
Responsibility (Oxford: OUP, 1993); P. Ireland, ‘Corporate Governance, Stakeholding and the
Company: Towards a Less Degenerate Capitalism’ (1996) 23 Journalof Law and Society 287; J. Kay
and A. Silberston, ‘Corporate Governance’ (1995) National Institute Economic Review 84; F.
Easterbrook and D. Fischel, Economic Structure of Corporate Law (Boston: Harvard, 1991) ch 1.
9 An annual turnover in excess of £500 million is suggested: CS para 3.2.
10 DF paras 5.79 ff; CS ch 3.
11 SF paras 2.16–2.18; CS paras 3.1–3.4, 3.32–3.42.
12 eg DF para 2.21.
13 DF paras 3.138–3.141, although also see para 2.24 on enabling structures.
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