The
shareholder primacy versus stakeholder theory remains a ongoing debate in
company law. The shareholder primacy promotes the idea that the company should
be run in a way that would fulfil the interests of the shareholders. Where as
the stakeholder value includes taking into consideration the interests of other
stakeholders involved in the company such as, employees rather then prioritising
the shareholders interests alone. Before The Companies Act 20061
was enforced there was no company legislation that provided guidance to
directors on how to manage a company.  As
part of a new statutory framework of the directors duties, s 1722 of
The Companies Act 20063
introduced ‘The Enlightened Shareholder Value'(ESV). This provision seeks to
promote the success of all its members as a whole. Therefore this principle
aims to find a balance between the traditional approach of shareholder value
and stakeholder value and be the happy medium. S 1724
states a  director of a company is
required to ‘act in a 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 matter) to the factors listed in s1725
(1).6 In
this essay I will be examining whether the ESV concept has caused a shift from
the approach adopted by common law and whether or not English company law has
adopted the stakeholder theory.

Test

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S 1727, adopts
a subjective test which states ‘ directors must act in the way they consider, in
good faith, would be most likely to promote the success of the company.’8 At
common law, the case of Re Smith9
held that it was essential for the directors to act in a ‘bona fide way that
would promote the success of the company for the benefit of it’s members as a whole’
(Regentcrest).10  Consequentially,
their actions must be based on what ‘they think, not what the court
think, is for the benefit of it’s members as a whole.’11  S 17212 codifies
this  common law duty to act in a bona
fide manner and now introduces a number of factors that must be taken into
consideration when directors are performing this duty. 13 This
new  approach used in s 17214
is subjective as the company’s success is mainly relied upon the directors
actions in ‘good faith’. However, this opens the doors to criticism as it
results in directors escaping liability easily, by arguing that their actions
was performed in ‘good faith’. This provides the directors a defence when their
actions are questioned and allows them to rely on s 17215
as a ‘get out of jail free card’.16
Therefore, s17217
lacks as it is difficult to prove breach done by the directors. However, there are two conditions that allow the
courts to take a more objective approach. This was highlighted in the case
of  charterbridge18,
where Pennycuick J said that an objective test was applicable where the
director failed to think whether his actions was in the best interests of the company.
He stated “whether an intelligent and
honest man in the position of a director of the company concerned could… have
reasonably believed that the transactions were for the benefit of the company”.19 Although it is unclear whether or not
this objective approach lasts with the enforcement of s 17220,
since there is no clear reference addressing this matter.21 MENTION CONDITIONS kaey 2007. Mention common law did have
objective considerations by court to supplement subjective app.- s172 made no
ref to this.

Traditional approach

In English company Law, The traditional approach is the
shareholder value, where the company should be operated in a way that ensures profit
is maximised for the benefit of it’s shareholders above other members such as customers
and suppliers. ” There is one and only
one social responsibility of business- to use its resources and engage in
activities designed to increase its profits so long as it… engages in open
and free competition, without deception or fraud”.22
This approach is based on the idea that ‘maximising shareholder value is in
principle the best means of securing overall prosperity’.23 Although
the directors have a duty to act in a manner that is in the company’s best
interests and take into consideration the interest of existing and future
shareholders, they are not obliged by law to be held accountable for individual
shareholders.24
This is illustrated in the case of Percival
v Wright25
which  provides that directors are ‘generally responsible to the company and not
to individual shareholders or creditors (or the employees)’.26 This
ruling has often been criticized, for instance in the case of Coleman v Myers27,
Mahone J had refused to follow this ruling due to the following statement “it seems untenable argument to suggest that
the shareholders on an offer to buy their shares are not perforce constrained
to repose a special confidence in the directors that they will not be persuaded
into a disadvantageous contract by non-disclosure of material facts”.28
Furthermore, even though directors may not normally owe a fiduciary duty to
shareholders, it is clear to see that directors are still obliged to owe a duty
to shareholders to some extent. One reason being, that directors have a duty to
allow shareholders to be involved in decision making when their approval is
required, such as ‘approving the duration
of a director’s  service contract with a
guaranteed term of more then two years, removal of a director or giving
authority to directors to issue shares’.29

Moreover it could be
argued that in reality the effect of s17230
had already been articulated by Bowen Lj in common law. In the case of Hutton v
West31,
Bowen Lj, famously stated that “charity
cannot sit at the boardroom table and there are to be no cakes and ale except
for benefit of the company”. 32
The significance of this case was that directors were able to look after their
employees and other stakeholders, if it was a benefit to the company. 33For
that reason it could be argued that the enactment of s17234
is essentially based on a concept that has already been delivered.

The more preferable
approach may be the traditional approach that adopts the Shareholder Value as
it is viewed as being the most efficient. ‘shareholders
have incentives to maximise profits and so they are likely to foster economic
efficiency. It is more efficient if directors operate on the basis of
maximising shareholder wealth, because the least cost is expended in having this
as the object rather then something else’.35
Also without the list of factors that directors must consider in s172(1)36,
they can focus on one key objective rather then numerous. As a result, directors
will make better and solid decisions as they don’t need to ‘balance all of the
divergent interests’.37

Stakeholder theory

The stakeholder theory was
proposed by Freeman (1984). A stakeholder is defined as “an organisation is any
group or individual who can affect or is affected by the achievement of the
organisation’s objectives”.38
This theory provided that the company is responsible to a bigger group of
stakeholders instead of just shareholders. This meant the business must
consider customers, suppliers, employees, communities and shareholders. As
proposed by Freeman (1984) it is the responsibility of the directors to ensure they
‘satisfy the needs of the groups that have a stake in the business.’39
The corporate goal for stakeholder theory is the ‘maximisation of the
shareholder value, however it is acknowledged that all stakeholders have to be
considered to generate this value.’40
Although, this theory provides some useful factors, it has failed to get
implemented in the Company Act 200641.
The key reason for this was due to the fact the theory was unsuccessful in
guiding directors on how to get a balance between the diverse interests of any
of the groups that qualify for the term ‘stakeholder’ such as, employees,
customers, suppliers,  creditors as well
as the wider community and competitors. Even though this theory may have some
issues it can not be denied that it promotes fairness and trust to every body
involved in the company. This encourages the company to gain more loyalty from
its stakeholders which increases efficiency and then enhances the interests of
the stakeholders. This is supported by Freeman and Rawls “at the heart of stakeholder theory is to be found a respect for the
principle of difference. Respect for difference promotes fairness. This means
not only that the organisation should treat stakeholders fairly,…but that
this treatment of difference and inequality will help boost profits”.42
 

The
Enlightened shareholder

The Enlightened Shareholder view was enacted by The
Company’s Act 2006.43 It
is a principle that provides guidance on how companies should be managed. ‘The Company Law Review Steering Group (CLRG),
the committee appointed in 1998 by the Department of Trade and Industry in the
UK to undertake a comprehensive review of UK company law, included much of its discussions
about ESV under a broad corporate governance heading’.44 When
considering the key objective of the company the CLRSG wished ‘to retain the idea of the shareholders
being the ultimate focus of directors, but they wanted to have a greater
emphasis placed on the company’s long term future’.45
They believed by planting the description of ‘Enlightened Shareholder Value’
would certainly differentiate from the traditional shareholder value. The main
difference was that ‘the approach is more enlightened as directors are required
to take into account interests other than those of the shareholders.’46 The
current ESV approach could be described as a balance between The traditional
approach and the Stakeholder theory as the approach requires the directors to
prioritise their actions to result in the company’s success. In support of this
Kiarie (2006) suggests that s17247
is ‘compromise between the shareholder
primacy and the stakeholder theory by maintaining the primacy of shareholders’
interests while considering other stakeholder’ interests’.48 S172(a)49
provides ‘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)’.50 This statement clearly states that
directors are obliged in considering the shareholders and stakeholders
interests as well as any other bodies involved in the company, when deciding what
is in the company’s best interest.

The ESV,
is adopted by the Company’s Act 200651 as an alternative approach, since it
generates better results for wealth maximization. S172 (1)52 sets out a non-exhaustive list that
directors must take into account when making a decision, which helps express
the approach.  Even though, producing
maximum wealth for the shareholders is an essential part in running the company
it is also important that the directors take a balanced approach when reaching
a decision.

Furthermore, even though the ESV provides guidance
to directors in achieving the success of a company, there still remains areas
that are criticized. For instance, Prior to the enforcement of The Company’s Act 2006.53
It was unclear as to who directors owe a duty to. This issue should have been
solved when s17254 was
enforced as it provides a guidance for directors, by listing factors that
directors must have consideration to. However, it has been argued that the
section still lacks in guidance and does not provide detail in how a director
should actually act in practice. ‘The provision sets out a menu of
non-shareholder interests to which directors are to have regard, but fails to
give any guidance as to the form this ‘regard’ should take and as a consequence
gives no indication for directors as to what they must do in order to comply
with the provision’.55

Also
another issue is when referring to the company’s success the act does not provide
any clear definition of the word ‘success’.  This means that the act  leaves an open door, allowing  the directors to interpret the term ‘success’
with their own understanding. Attenborough (2006) expresses that this is a
reason to cause uncertainty as directors may have different interpretations to the
term which may result in directors making decisions with different levels of
standard in regards to the ‘success of the company’.56 During a debate in the House of
Lords, Lord Goldsmith commented on the ‘success of the company’ as follows “The starting point is that it is essentially
for the members of the company to define the objective they wish to achieve.
Success means what the members collectively want the company to achieve. For a
commercial company, success will usually mean long-term increase in value”.57 Also, the fact that s172 (1)58 provides a list of factors that
directors must have regard to may cause the administrative procedure to
increase since directors will need to make sure they have done all that they
can regarding these factors. Which may result in the board investing more time
in reaching decisions. Even though, the list of factors this section provides
is not exhaustive, it has not been made clear whether a director would have
breached their duty when taking into account all the factors except the one in
relation to environment. A problem can also occur when two or more of the
factors clash.59 Another issue with the provision set
out in s172 (1)60 is that although shareholders are
able to raise an action against directors regarding breach of duty, the
procedure lacks in providing stakeholders with power to also raise an action
for breach against directors that fail to take into account their interests.61

In
conclusion, ‘The Enlightened Shareholder Value’ concept introduced by The Company’s
Act 200662
is a balanced approach between the shareholder value and stakeholder theory. The
section delivers guidance for directors in managing a company and the factors
provided in s172 (1)63 can
be viewed as an ‘essential element of directors general duty’. S 17264
encourages directors to take  into
account stakeholder interests in consideration of the ESV. However, it is
argued that shareholder interests remain paramount in the directors decision
making process, leaving stakeholders interests subordinate. Therefore it is
clear, that the English law has failed to adopt a stakeholder theory.

1
The Companies Act 2006

2
The Companies Act 2006 s 172

3
The Companies Act 2006

4
The Companies Act 2006 s 172

5
The Companies Act 2006 s 172

6
John Birds, Annotated Companies
Legislation (Oxford University Press 2012). 196

7
The Companies Act 2006 s 172

8
Susan McLaughlin, Unlocking Company
Law. 338

9
Re Smith & Fawcett Ltd 1942 1 ALL
ER 542

10 Regentcrest plc v
Cohen 2001 2 BCLC 80

11
Andrew Hicks and S. H Goo, Cases And
Materials On Company Law (Oxford University Press 2008). 385

12
The Companies Act 2006 s 172

13
Andrew Hicks and S. H Goo, Cases And
Materials On Company Law (Oxford University Press 2008). 385

14
The Companies Act 2006 s 172

15
The Companies Act 2006 s 172

16
Stephen Judge and Imogen Moore, Company
Law. 95

17
The Companies Act 2006 s 172

18
Charterbridge Corporation v Lloyds
Bank Ltd 1970 Ch 62.

19
H. K Saharay, Company Law (Universal
Law Publishing 2010). 44

20
The Companies Act 2006 s 172

21
Susan McLaughlin, Unlocking Company Law 339

22
Milton Freidman, “Capitalism and Freedom”(Chicago: University of Chicago Press,
1962). 133

23
Company Law Review, Strategic Framework (1999), para 5.1.11.

24
J. A Cassidy, Concise Corporations
Law (Federation Press 2006).218

25
Percival v Wright 1902 2 Ch 401

26
Michael Ottley, Q & A Company Law
(Routledge 2016). 82

27
Coleman v Myers 1977 2 NZLR 225).

28
 David Sagar, Larry Mead and Philippa
Foster Back, Fundamentals Of Ethics, Corporate Governance And Business Law, Certificate
Level (CIMA Publishing 2006). 280

29
‘Resolutions, Regulations & Rights:
Everything You Need To Know About Shareholder Decision-Making | Lexology’ (Lexology.com,
2018)
accessed 18 January 2018.

30
The Companies Act 2006 s 172

31
Hutton v West Cork Railway Co
(1883) 23 Ch D 654

32
Petri Ma?ntysaari, Comparative Corporate
Governance (Springer 2005). 223

33
‘Cork Rail Case ‘Clever And Progressive’ (The
Irish Times, 2018)

accessed 18 January 2018.

 

34
The Companies Act 2006 s 172

35Andrew
Keay, ‘Tackling the Issue of the Corporate Objective: An Analysis of the United
Kingdom’s “Enlightened Shareholder Value Approach” (2007) 29 Sydney Law Review
577.

36
The Companies Act 2006 s 172 (1)

37
ibid

38
J Quist, Backcasting For A Sustainable
Future (Eburon 2007). 48

39
Gregor Gossy, A Stakeholder
Rationale For Risk Management (Gabler 2008). 7

40
ibid

41
The Companies Act 2006

42
Judith-Anne MacKenzie, Textbook On Land
Law. 72

43
The Companies Act 2006

44
Company Law Review, Modern Company Law for a
competitive Economy:  The Final Report,
Volume 1 (2001) at Chapter 3

45
Andrew Keay, ‘Tackling the Issue of the Corporate Objective: An Analysis of the
United Kingdom’s “Enlightened Shareholder Value Approach” (2007) 29 Sydney Law
Review 577.

46
ibid

47
The Companies Act 2006 s 172

48
Law Express Question And Answer: Company Law
(Q&A Revision Guide) (7th edn, Pearson
UK, 2014 2018). 174

49
The Companies Act 2006 s172 (1)(a)

50
‘Companies Act 2006’ (Legislation.gov.uk,
2018) accessed
22 January 2018.

51
The Companies Act 2006

52
The Companies Act 2006 s 172 (1)

53
The Companies Act 2006

54
The Companies Act 2006 s 172

55
Andrew Keay, ‘Tackling the Issue of the Corporate Objective: An Analysis of the
United Kingdom’s “Enlightened Shareholder Value Approach” (2007) 29 Sydney Law
Review 577.

56
Law Express Question And Answer: Company Law
(Q&A Revision Guide) (7th edn, Pearson
UK, 2014 2018). 174

57
Saleem Sheikh, A Guide To The Companies
Act 2006. 431

58
The Companies Act 2006 s 172 (1)

59
Law Express Question And Answer: Company Law
(Q&A Revision Guide) (7th edn, Pearson
UK, 2014 2018). 174

60
The Companies Act 2006 s 172 (1)

61
Andrew Keay, ‘Tackling the Issue of the Corporate Objective: An Analysis of the
United Kingdom’s “Enlightened Shareholder Value Approach” (2007) 29 Sydney Law
Review 577.

 

62
The Companies Act 2006

63
The Companies Act 2006 s 172 (1)

64
The Companies Act 2006 s 172

x

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