Ethical Performance
inside intelligence for responsible business


directors’ duties and the company law review

September 1999

The best way of ensuring that directors’ decisions take stakeholder interests fully into account is to introduce legal minimum standards for social and environmental reporting, argues Rob Lake

Does business exist purely to serve shareholders, or does it have wider responsibilities to other stakeholders? How much information should it disclose about its relationships with them and its impacts on them? Where does ethical responsibility fit into business for the 21st century?

This debate is hotting up as the Company Law Review progresses. Shareholder interests suggest that any move away from a clear focus on delivering value to them could deprive business of capital and force funds overseas. Stakeholder advocates counter that the most forward-looking companies already see a strong business case for much of the stakeholder approach – and that the growing power of business means it has inescapable moral responsibilities to society.

In reality, companies do not always take the interests of all stakeholders fully into account – as shown by continuing breaches of environmental legislation and poor working conditions in supply chains stretching into the developing world. Disclosure of information on stakeholder relationships and social and environmental impact is growing, but remains patchy.

Business cannot please all of the people all of the time. But directors should have to demonstrate that their decisions are based on a full understanding of stakeholders’ interests. The only way to guarantee this is to change the law on directors’ duties. The existing strong demand for more information on companies’ environmental impact and stakeholder relations will soon quicken with pension trustees’ new duties to disclose their environmental and social policies. Introducing minimum legal standards for these reporting areas will ensure all companies meet these rapidly evolving expectations. Marketplace pressures will continue to create incentives for some companies to operate to even higher standards of transparency and accountability to stakeholders.

What of shareholders in all this? There is little support amongst UK companies for compulsory new corporate governance structures that formally include stakeholder representatives in decision-making. The law could make this an option, although directors’ formal accountability will in most cases remain with shareholders. But shareholders too must play their part in ensuring companies take account of stakeholders’ concerns. Investing billions of pounds without such social responsibility is not acceptable – and unlikely to lead to investment success in the long term.

Rob Lake is Head of Policy at Traidcraft Exchange, the charitable arm of Traidcraft, the UK’s largest independent fair trade organization.

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