Should UK law adopt a more "stakeholderist" approach to directors' duties?


Introduction

Should directors owe a duty to act in the interests of all stakeholders – or stay loyal to shareholders alone?  It is a question that has been debated for decades, in just about every jurisdiction. Academics disagree: while some follow Milton Friedman in arguing for a shareholder value model, others claim that "stakeholderism" delivers more value for society at large.  

In all of these debates, one thing at least seems clear: context matters. What works in Japan might not work in the United States. Germany's social norms and political economy might dictate a different formulation to the UK. Although jurisdictions can, and should, learn from each other, one size will not fit all. 

But when it comes to the UK, my view is clear: let companies adopt a stakeholder model if that is best for them – but maintain long-term shareholder value as the default.

The UK Companies Act provides an appropriate process – and a sensible yardstick – for directorial decision-making. In my view, mandating a broader duty would muddle accountability and force directors to take on roles for which they are neither equipped nor elected. 

The current legal position 

Section 172 of the UK Companies Act requires directors to act in the way they honestly consider is most likely to promote their company’s success. 

For commercial companies, “success” means, by default, shareholder benefit.  Directors must “have regard” to other factors – for example, the interests of employees, relationships with suppliers and customers, the community, the environment and the company's reputation – but only so far as these matter for corporate success. 

This "stakeholder review" is a codification of good practice. Well-run companies value their customers, workers and suppliers. If they neglect these relationships, their long-term success will generally suffer. 

Crucially, having taken account of these stakeholder factors, UK directors must measure their decisions according to whether they promote long-term corporate success for shareholders – long term shareholder value. That is their yardstick, their benchmark. Directors enjoy wide discretion as to how they achieve that goal, and they will not be in breach of Section 172 if they honestly try and fail. But they must try.

Re-defining success 

Most UK commercial companies do not vary the statutory default. They could, but they do not.

The Companies Act says that if a company wants to re-define "success" – and move away from long-term shareholder value as the ultimate objective of directors' decisions – it is free to do so. If a company wants to become a B Corp, for example, the shareholders can vary the company's constitution so that social and environmental outcomes are on an equal footing with long-term financial results. For some companies, that is absolutely the right answer and that flexibility is important.

Changing the default

Some argue that the law should do more than provide optionality. They say it should specify a different default – and perhaps even that companies should not be able to opt out of it. Under these proposals, the suggested default usually demands equal attention to all – or at least some – stakeholders. 

My view is that such a position is not optimal for most companies, especially public companies with a diverse shareholder base. Here’s why.

Impossible balancing acts 

Difficult board decisions involve trade-offs. If a decision does not require trade-offs, it isn't really a decision. Who doesn't want to please all the people, all the time? When trade-offs are required, mandating directors to optimise across all or several stakeholders, without providing them with a yardstick against which to measure their decision, creates impossible choices. How do they weigh, for example, jobs in the UK against environmental impacts in China? How do they rank workers’ interests, customer needs, and shareholder returns when they have to choose between them? Any answer is a political judgement, not a business one – and outside the remit of a company board.

Better ways to protect stakeholders 

Of course, stakeholders and the environment need protection. That is why we have employee and consumer rights laws, and environmental protection regulation. It is also why I believe the UK should adopt due diligence laws which require companies to identify and avoid specified adverse impacts, such as modern slavery or deforestation.  It is the job of lawmakers to set clear boundaries for corporate discretion. Lawmakers have legitimacy and democratic accountability. The board does not.

Erosion of accountability 

A wider stakeholder approach blurs the criteria for judging a board’s actions. How do we measure their effectiveness, and hold them accountable, if we have asked them to make what are, in effect, value judgements. Directors would be exposed to second-guessing from all sides, hampering effective governance and making enforcement of duties vague and contentious. It might also open the door to boards acting in their own interests, under the pretext of serving some higher good.

Enforcement questions 

If we did change the default, we would also need to consider who would enforce it. If it remains, in effect, the shareholders, it is likely that little would change. Do we want to open boards to challenge by all affected stakeholders? 

Conclusion: clarity and choice 

Movements to reform UK company law, making stakeholder interests the focus for directors' decisions, have gained traction. While I share many of the goals of those who make that argument, I think campaigners would do better to focus on legally effective protections for vulnerable stakeholders – decided by Parliament and enforced by regulators and the courts. 

The UK’s current approach to directors' duties is not perfect, but the intention is right. Directors are told to promote long-term corporate success. For most companies, long-term shareholder value is the best goal for directors, operating within the limits laid down by law.    

Section 172, by requiring boards to consider all relevant stakeholders, encourages directors to think broadly and adopt a good process – but also tells them what to aim for. If that isn't what shareholders want, they can tell directors to aim for something else.

The current approach might not be right for all time, and in all countries. But I think, at the moment, it is right for the UK.  

About the author

Dr Simon Witney is a practising lawyer who also teaches on the LLM programme at LSE. His doctoral thesis, completed at LSE in 2017, was on corporate governance in private equity-backed companies. Simon continues to research and write on corporate governance, company law and related topics. Simon’s book Corporate Governance and Responsible Investment in Private Equity was published by Cambridge University Press in 2021.

Simon is also a Senior Consultant at the London-based law firm, Travers Smith.

Simon has previously served in senior positions within the British Private Equity and Venture Capital Association (BVCA), including as Chair of its Legal and Accounting Committee and as a member of its Council. He is also a past Chair of Invest Europe’s Tax, Legal and Regulatory Committee.