What effect does the enlightened shareholder value principle in the Companies Act 2006 have on the corporate objective of UK companies?

Abstract

The Organisation for Economic Co-operation and Development defines corporate governance as the system by which companies are directed and controlled, and through which a company’s objectives are set. Corporate governance theories are closely linked to those of corporate objectives, as the interests that directors have a duty to promote must be determined in order for one to consider issues of corporate governance. This relationship is demonstrated in the UK Corporate Governance Code’s postulation that a company should be managed efficiently to return long-term profits to the shareholders. Corporate objective debates are commonly divided between the shareholder value (‘SV’) theory and the stakeholder theory. This dichotomy remains evident in section 172(1) of the Companies Act (‘CA’) 2006’s stipulation that directors have a duty to act in a way which they consider, in good faith, to promote the success of the company for the benefit of its members, or its shareholders, as a whole. This is similar to the fiduciary duty, such as the duty to act bona fide in the best interests of the company, owed at common law antecedent to the CA 2006. It continues to require directors, when fulfilling the aforementioned duty, to have regards to the non-exhaustive list of long-term consequences alongside employee interests, fostering business relationships, impact on the community and environment, maintaining an upright reputation, and acting fairly between the company’s members. This paper begins by outlining modern discussions on the shareholder-stakeholder paradigm leading up to the codification of directors’ duties in the CA 2006, and the underlying political and legal pressures that led to the Company Law Review Steering Group (‘CLRSG’) recommendation to develop the longstanding principle of SV into enlightened shareholder value (‘ESV’) in section 172(1) of the CA 2006. To assess whether section 172(1) of the CA 2006 has modernised the SV model established in the pre-2006 case law, this paper explores the impact of the legislation on subsequent corporate governance practices in the country, specifically in regard to the reporting requirements found in later statutory instruments. Finally, it is concluded that despite legislators omitting to profoundly expand on the case law preceding the ESV provisions, rebranding SV with an ‘enlightened’ streak creates a margin for more fundamental changes, both legal and normative in nature, in the future of the doctrine, should this be required.