Not long ago, being offered a directorship was a rhetorical question. Becoming a director brought with it an improved salary, a better car and just that word ‘Director’ on your business card – what’s not to like about that? But as corporate culture has developed over recent years the expectations of the role of director have changed. Mark Smith, Senior Manager in Scrutton Bland's Corporate Finance department looks more closely at what is and is not expected of a director.
What is a director?
In the eyes of the law, a company is a separate legal entity which has no physical existence and therefore cannot act as itself as if it were its own person. So a company acts through two bodies of people – its shareholders and its directors. The management of a company’s business is the responsibility of the company’s directors. Those responsibilities have historically been thought of as being only monetary, but that is not the case, and this is reflected in the Companies Act.
Doing the right thing
The Companies Act is an important piece of legislation which governs company law in the UK. It also sets out Director’s duties, one of which is set out in Section 172, namely a ‘duty to promote the success of the company’.
On the face of it this looks quite straightforward: success = profits = dividends. I get that.
However Section 172 of the Companies Act then goes on to refer to having regard to ‘the impact of the company’s operations on the community and the environment’ and ‘the desirability of the company maintaining a reputation for high standards of business conduct’.
So is it really as simple as a financial equation which measures success in terms of profits and dividends?
The listed companies
Whilst not the purpose of this piece, referring to listed companies is a good way of understanding the Section 172 requirements – which apply to all companies.
Be it listed companies like supermarkets talking about plastic or food waste, clothing retailers discussing labour costs and sustainable cottons, or gambling firms and their mantra ‘when the fun stops stop’ they are all now looking to do the right thing. The right thing that maybe only ten years ago wasn’t even considered a thing.
So are the supermarkets for example are talking about these things because the Companies Act requires them to? It’s one argument, but it’s probably not realistic, given how societal attitudes to environmental concerns, exploitative labour conditions and addictions have become more prevalent in the past few years.
A good example is Primark. I walked past my local branch the other day and realised that the window display had no sale notices, no promises of a new wardrobe for a knock down price. Instead, they were enticing me in with the promise that the t-shirt I might buy was made with sustainable cotton.
Which brings me to the point – these household names (and many others) can now see that ‘doing the right thing’ is successful for them – so is it therefore another part of the equation?
What about the majority of unlisted companies?
I understand what doing the right thing can do for the listed companies, but what about the rest of us who may be working for unlisted companies? Why do we have to do the right thing – what in it for us?
Firstly you’ll feel better. Stick a tenner in a charity box and you’ll get a warm glow. As a company you can use corporate refillable bottles as opposed to plastic bottles of water in your meeting rooms and you’ll know that you’re helping the environment – and your customers may even notice too.
Secondly your staff will feel better. If customers expect ethical standards from their supermarkets then why would they not want it from their employers. After all, just like a supermarket, you can always change your employer. If your staff are happy they will probably be more productive and you will certainly save on recruitment fees.
Finally – it’s the law. It might be unlikely, but failing to following the requirements of Section 172 could lead you to being barred from being a director. You are unlikely to be penalised for simply using single-use plastic water bottles, but what about entering into contracts with countries that make use of child labour, asking drivers to break the speed limit in order to meet a delivery deadline, or dismissing a long standing employee who takes a month off at short notice due to a sudden family bereavement.
For the majority of companies there is no requirement to report that you have ‘done the right thing’, but for companies that regularly tender for work this might be worth considering as something to include on reports, tenders and other company literature.
Even with no reporting requirement, for all the reasons I have set above, ‘doing the right thing’ is undoubtedly the right thing to do. So perhaps the equation needs updating. Success = doing the right thing + profit + dividends.