Is the true goal of corporate governance to serve shareholders or all of society?
In short: The UK is a global leader in corporate governance, yet frequent failures continue to erode public trust. While much debate focuses on executive pay and audit reform, a deeper question remains: should a director's primary duty be to protect shareholders, or to consider the wider impact on employees, customers, and the environment?
Corporate governance is the system used to direct and control companies, primarily through their boards of directors. In the UK, the Corporate Governance Code provides a framework for public listed companies to be effective and transparent. Rather than a rigid set of rules, the Code operates on a 'comlamply or explain' principle. This allows businesses the flexibility to deviate from official guidance, provided they justify their approach in their annual reports. This flexibility is particularly relevant for the Code's application to public listed companies, as it does not extend to private firms. The Code's broader objectives include ensuring boards remain accountable and focused on achieving sustainable, long-term success.
The legal landscape is defined by the Companies Act 2006, which outlines seven general duties for directors. A pivotal component is section 172, which mandates that directors promote the success of the company for the benefit of its members. Nevertheless, this obligation is not merely limited; directors must consider various stakeholders, such as staff, vendors, clients, society, and nature. Beyond the core mandate of shareholder benefit, the legal framework also requires directors to act within their specific powers and avoid any conflicts of interest. They must also exercise a level of reasonable care, skill, and diligence in their decision-making processes.
Recent years have seen significant pressure for reform. Following the January 2018 collapse of Carillion, the UK government commissioned three independent reviews, leading to a 2021 white paper titled ‘Restoring Trust in Audit and Corporate Governance’. While much of the recent legislative focus has been on auditing frameworks and reporting requirements, scholars like Alex Edmans suggest that the most vital reforms may lie in areas often overlooked, such as boardroom diversity, director independence, and the fundamental scope of fiduciary duty. The government's recent legislative efforts have also included the 2020 Corporate Insolvency and Governance Bill, which temporarily permitted remote annual general meetings. However, some recent attempts at regulation, such as the draft requirements laid in Parliament in July 2023, were eventually withdrawn by the government in October 2023.
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Sources
- Summary by Intellect · source: Reforming Corporate Governance
- Also: Audit and corporate governance reform
- Also: Corporate Governance Reform
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