There is no universal legal
definition on the term of stakeholders.
Cambridge Dictionaries defines stakeholder as:
(a) A person or group of people who
own a share in a business
(b) A person such as employee,
customer, or citizen who is involved with an organisation, society, etc. and
therefore has responsibilities towards it and an interest in its success.
Freeman defines stakeholders as ‘all those who could affect or be
affected by the company’.
Generally it is accepted that
non-shareholder stakeholders include suppliers, employees, creditors, customers
and others. On the other hand, by virtue of section 172, the directors are also require to have regard to
environmental matters, long-termism and the reputation of the company while
carrying out their duties.
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Shareholder value approach (SHVA)
requires directors to place focus on maximizing the interests of the
shareholders above the interests of others.
This is a reflection of the nature
of business, since the shareholder is the rightful owner of the company, the
primary objective of the company is to maximize their profit in return of their
investments.
This approach ensures the
efficiency and the commercial growth of the company by making it clear that
their primary duty is to maximize profits.
However, some disadvantages may
come along where directors may be motivated by immediate return and scarifying
long term benefits. This would eventually lead to the collapse of corporation
and the interests of stakeholders would thereby be affected.
The pluralist approach, which can
be seen in light of enlightened shareholder value approach, which its approach
is based on inclusive theory that the company is not meant for the shareholders
alone but other stakeholder like employees, creditor, suppliers, customers and
even the society.
Under the enlightened shareholder
value approach, the shareholders’ interests again take precedence, but the
interests of the stakeholder, ethics and environment also come into play in a
respectable manner.
The approach stood that
corporation should pursue shareholder’s wealth in long termism that seek
sustainable growth and profits based on are responsible attention to the full
range of relevant stakeholders’ interests.
Section 172 of the Companies
Act 2006 was enacted in reflection of this approach.
You can download Companies Act 2006 here: http://www.legislation.gov.uk/ukpga/2006/46/pdfs/ukpga_20060046_en.pdf
Section 172 Companies Act 2006
Section 172 provides that a director must act in the way he or she
considers in good faith, would be most likely to promote the success of the
company for the benefit of its member as a whole. In doing so, the director
should have regard to the factors listed in section 172(1), typically the interests of stakeholders.
Section 172 is restatement of Lord
Grenne MR’s formulation of the duty in Re
Smith & Fawcett Ltd, namely the directors must exercise their
discretion bona fide in what they
consider – not what a court may consider – is in the interests of the company.
However, objective considerations
must also be taken into account, and a non-exhaustive list was provided in section 172(1).
Section 172(3) provides that section
172 applies, in certain circumstances, to consider or act in the interests
of creditors of the company.
Locus Standi
According to the majority rule
or proper claimant rule as stated in the case of Foss v Harbottle, when a wrong has
been committed against the company, the proper claimant in respect of that
wrong is the company itself.
It is settled that the section 172 duty is owe to the company
as a whole, but not to the shareholders personally (Percival v Wright and section
170(1)). The duty is not to promote the success of the shareholder, but the
company as a whole. In other words, a breach of the duty may give rise to an
action between the directors and the company, and the stakeholders who suffer
injuries appear to have no locus standi.
Interest of employee
Similar to section 172 CA 2006, under section
309 CA 1985, the interests of shareholders would have priority over
interests of others, and the directors were also asked to have regard to the
interests of employee while performing their duties.
Both section 172 and section 309
are subject to the majority rule. There is no enforcement mechanism on the part
of the stakeholders.
In Stimpson v Southern Landlords Association, which is a case
concerning derivative claim, where the claimants seeking to prevent a merger of
the business. One of the factors that have been raised includes injustice to
employees. The action failed anyway, but the court did recognised that the
interests of the employees are one of the considering factors.
Section 172(3) provides that section
172 applies, in certain circumstances, to consider or act in the interests
of creditors of the company.
Section 172(3) is essentially giving effect of the common law
principle that, where the company is insolvent, or is of doubtful solvency, the
interests of the creditors have priority over the interests of the shareholder
(per Nourse LJ in Brady v Brady). In such circumstances,
the shareholders do not have the power to absolve directors from a breach of
duty to the creditors as to bar the liquidator’s claim (West Mercia Safetywear Ltd v Dodd (1988)).
In Winkworth v Edward Baron Development Co Ltd (1986), Lord Templeman explained that directors
owe a fiduciary duty to the company and its creditor, present and future, to
ensure that its affairs are properly administered and keep the company’s
property inviolate and available for the repayment of its debts.
In the event of insolvency, the
fiduciary duty under section 172(3)
is owed to the general body of creditors, but not to any individual
creditor. If the directors act consistently with the interests of the general
creditors but inconsistently with the interest of an individual creditor or
section of creditors with special rights in a winding-up, the directors in
question are not in breach of duty to the company (per Richard Reid QC in Re
Pantone 485 Ltd). This was confirmed by the court recently in GHLM Trading v Maroo (2012).
In Colin Gwyer and Associates Ltd v London Wharf (Limehouse) Ltd
(2003), it was held that a resolution of the board of directors passed without
proper consideration (to the interest of the creditor) being given by certain
directors would be open to challenge if the company had been insolvent at the
date of the resolution. Leslie Kosmin QC
expressed that in relation to an insolvent company, the directors when
considering the company’s interests must have regard to the interests of the
creditors. Modifying the test in Charterbridge
Corpn Ltd v Llyod’s Bank Ltd (1970), he stood that the test of the general
application is that, ‘could an honest and intelligent man, in the position of
the directors, in all the circumstances, reasonably have believed that the
decision was for the benefit of the company’. In all the case of insolvent
companies the test is to be applied with the benefit of the creditors
substituted for the benefit of the company.
Section 172(3) make express reference to ‘any enactment’. Hence, a
director who is subject to section 214
of the Insolvency Act 1986, is
required to consider the interests of the creditor.
Again the problem of section 172(3) lies on enforcement on
the part of the creditors.
In relation to the question of
standing to sue to enforce this duty (locus
standi), Toulson J in Yukong Line Ltd of Korea v Rendsburg
Investment Corpn of Liberia (No. 2) (1998) held that a director of an
insolvent company, who breached his fiduciary duty to the company by
transferring assets beyond the reach of its creditors owed no corresponding
fiduciary duty to an individual creditor of the company. Creditors have no
standing, individually or collectively, to bring an action in respect of any
such duty. The appropriate cause of action would lie with the liquidator
to bring an action for misfeasance under section
212 of the Insolvency Act 1986.
Hence, it could be seen that the
interests of the shareholders will generally have priority over interests of
creditors, unless the company is insolvent, or is of doubtful solvency. This is
the position even prior to the enactment of CA 2006.
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Environment
In R (on the application of People & Planet) v HM Treasury (2009),
which is a case concerning the application for judicial review advance by
People & Planet, regarding the policy adopted by HM Treasury for RBS. It
was alleged that the HM Treasury has acted unlawfully in adopting the policy as
to how RBS should be managed, namely they sought change to policy that might be
harmful to the environment by reason of their carbon emissions and
insufficiently respectful to human rights. The court rejected the application
and stressed that the factors listed under section 172(1) do not represent an
absolute ground for a director to breach his section 172 duty, but rather, they are merely factors to take into
account, in deciding whether a director has breaches his section 172 duty.
I suppose that a criminal sanction
is necessary in this context, this is a harm done to the society and
environment. While section 172 duty
is owe to the company to the director, which mean that company is the proper
plaintiff if there is a breach of this duty, the protection to environment can
never be carried by this way since the true interested parties to the
environment are not given a corresponding legal right which can be enforced
against the person who are bound to carry out the duty. After all, the company
is a legal artificial person and clearly a criminal sanction is not applicable
to a fictional person.
Apparently a criminal sanction is
not applicable Copp’s response to
the decision in R (on the application of People &
Planet) v HM Treasury,
perhaps company law is not the right mechanism for promoting and protecting
environmental and human rights issues.
By virtue of section 414A, all UK-incorporated companies are required to
prepare a strategic report as part of their annual report unless they have an
exemption. By virtue of section
414C(4)(b) and section 414C(7)(b),
the strategic report must include the information relating to the environmental
matters, the employees matters, as well as social, community and human rights
issues.
The idea of business strategic
report appear to be that, the members of the company are expected to do
something, when they have found out that something have go wrong by reading
through the report. Ironically the strategic report would
eventually become a welcome speech in annual general meeting, or even a
flyer (which no one bother to read), because the truth is that all the
shareholders care about are bloody profit maximization and immediate return of
their investment.
Academics argument
John Kong argues that CA
2006 is simply a codification of existing law. It does not in reality
change directors’ practices substantively, but simply reflects existing law and
practice. Section 172 duties are
discharged as long as the directors have made a good business faith judgment with
reasonable care, skill and diligence.
According to Rachel C. Tate, at the first sight section 172 appears to elevate stakeholders to a higher standing.
However if we look at the details of it, as Andrew Keay mentioned that, any consideration must be such that it
does not impinge on shareholder benefits. The overall purpose of section 172, is still, promote company
success for the benefit of its members. While this remains to be the
determining question on whether section
172 duties have been discharged, it is doubtful whether the interest of
stakeholder could be protected by way section
172. On the other hand, in the absence of any enforcement mechanism, section 172 is fatal to the hope of any
stronger footing for broader stakeholders.
After all, the rights derive from section 172 are not even precise. Lowry & Dignam observed that there
are two significant problems with this duty. First, it could not be enforced in
the same way as other fiduciary duty owed to a company by its director. Second,
it was difficult to identify the precise scope of the duty for the purpose of
determining whether it had been discharged or not.
Perhaps it is too harsh to say
that section 172 is merely a
re-statement of existing law, for it has a non-exhaustive list of factors for
the directors to take into account while performing their duties.
However, as the cases of Stimpson v Southern Landlords Association
and R (on the application of People
& Planet) v HM Treasury, these are nothing more than a list of factors
to be taken into account. This is not in any sense a protection of stakeholders
at all, as MW McDaniel said that, ‘a
right without a remedy is worthless’. Hence, the protection of stakeholders’
interests can never work effectively unless there are a clear and precise
duties and obligation impose on someone who is obliged to carry out, and the
interested party has a corresponding legal right that is directly enforceable
by they themselves in the court.
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