UK: All for one, one for all.

UK: All for one, one for all. - Do companies owe a legal duty to all of their stakeholders?

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Last Updated: 31 Aug 2010

Do companies owe a legal duty to all of their stakeholders?

The debate over the way in which one should run a company tends to be split, perhaps simplistically, between on the one hand the corporate citizen, who furthers the interests of all stakeholders, and, on the other hand, those companies which exist solely to maximise short-term returns for its shareholders. Company executives who follow the latter model often cite company law as their rationale. But is this interpretation of statutory duty valid?

Not according to the Centre for Tomorrow's Company think-tank, dedicated to corporate reform set up by the Royal Society for the Encouragement of Arts, Manufactures & Commerce (RSA). In a recent submission to the Hampel committee on corporate governance, it argued that although many directors believe it is their duty in law to concentrate their attention on pleasing current shareholders, their duties are in fact owed to their company as a whole, and not to any specific third-party group. The paper goes so far as to argue that: 'For directors not to give due weight to all the company's key relationships (the RSA steers clear of the phrase 'stakeholders') may well be a breach of fiduciary duty'.

Unsurprisingly, company bosses are less keen on this interpretation of the law. Charles Latham, head of commercial law at the Confederation of British Industry believes that it would be wrong for anyone, other than a company's shareholders, to be able to mount a legal challenge to the directors on this issue. In any case, he asks: 'How would the court be able to balance the conflicting interests if a duty is owed equally to everyone?' Richard Bagley, company affairs executive at the Institute of Directors, agrees: 'Most well-run boards take into account the views of their "constituent interests" but they are not accountable to them.

If a company is accountable to everyone it is accountable to no-one.'

Even among would-be reformers, not all believe the spirit of the law is on their side. Janet Williamson, policy officer with the Trades Union Congress, says: 'We think this (the RSA argument) would be unlikely to stand up in court.' She agrees that directors should have a duty to consider the interests of stakeholders - 'We want to encourage this - it's not just altruism, it's good economic sense' - but believes that it would require a change in the law. 'The duties of directors should be widened to reflect their obligations to other stakeholders.' But perhaps in this case, practical considerations are more important.

Philip Goldenberg of City solicitors S J Berwin was the legal adviser to the RSA's original Tomorrow's Company report, published in 1995. While claiming that his interpretation of the law is correct, he suggests that the main benefit of the report has been the process of cultural change in attaining 'better communication between investors and companies'. Christopher Pearce, group finance director at Rentokil Initial, agrees with the sentiment if not the legal interpretation: 'Legally, the directors' duty is to the company as a whole, in effect the shareholders. In practice, if you don't treat employees, suppliers and so on properly, you won't have a company.'.

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