One of the most frequent questions we are asked at the moment about supply chain compliance is about the conflict between a company’s obligation to make money for its shareholders and its wish to do the right thing.
Are directors allowed under UK law to look beyond the numbers?
Under UK law, companies have a number of specific obligations in exchange for the privilege of limited liability. Some of these obligations are set out by law and a company can also set out additional rules in its Memorandum of Association. A company can also set out its objects in the company’s Articles – if it does not do that, then under s.31 of the Companies Act 2006 its objects are unrestricted.
One of the general obligations on the directors of a company is to look after the interests of its shareholders (or members). Whilst it is sometimes said that there is an obligation to “maximise shareholder value” these words don’t actually appear in Companies Act 2006 which governs how limited companies run.
What about other responsibilities?
Under s.172 of the Companies Act 2006, directors can look beyond pure profit to promote the success of the company. S.172 says:
“Duty to promote the success of the company:
(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—
- the likely consequences of any decision in the long term,
- the interests of the company’s employees,
- the need to foster the company’s business relationships with suppliers, customers and others,
- the impact of the company’s operations on the community and the environment,
- the desirability of the company maintaining a reputation for high standards of business conduct, and
- the need to act fairly as between members of the company.”
As a general rule then, the directors of a company should look beyond pure profit and they can look at supply chain compliance issues and the impact of the company’s operations on the community and the environment.
For most organisations investigating its supply chain is then permitted, and even required since the company will want to maintain a reputation for high standards of business conduct and it will want to look at the impact of its operations on the community and the environment. The consequences of focusing just on the bottom line are apparent from recent events such as the concerns about supply chains and China (see https://bit.ly/parlchina) as well as the reputational issues companies have suffered over environmental concerns, working practices and corporate social responsibility. Whilst these issues can hit profits and share price too recent incidents have shown a need for those running companies to carefully think through the impact their organisation has on the world around it.
There is more information about this and other supply chain related topics on our website at https://www.corderycompliance.com/news/. You can find out more about the work we do here https://www.corderycompliance.com/how-we-help/. You can find out more about our board training here https://www.corderycompliance.com/solutions/board-onboard/.
For more information please contact André Bywater or Jonathan Armstrong who are commercial lawyers with Cordery in London where their focus is on compliance issues.
|Jonathan Armstrong, Cordery, Lexis House, 30 Farringdon Street, London, EC4A 4HH||André Bywater, Cordery, Lexis House, 30 Farringdon Street, London, EC4A 4HH|
|Office: +44 (0)207 075 1784||Office: +44 (0)207 075 1785|