Introduction
The question of for whom a company should be run lies at the heart of corporate governance debates. The statement suggests that UK company law adopts a purely shareholder-centric model and that this is a "great strength". This essay will argue that this statement is an inaccurate simplification of the current legal position in the UK. The Companies Act 2006 (CA 2006) codifies a model of ‘enlightened shareholder value’ (ESV), which, while ultimately prioritising shareholder interests, legally requires directors to consider a range of other stakeholder interests. This essay will first outline the legal duty as set out in section 172 of the CA 2006, contrasting it with the pure shareholder primacy suggested in the question. It will then evaluate whether this ESV approach can be considered a "great strength", by examining the arguments for its clarity and accountability against criticisms of its limited practical effect for non-shareholder stakeholders. It will be concluded that while the ESV model is a pragmatic compromise, labelling it a "great strength" is an overstatement, as it contains significant limitations.
The Director's Duty to Promote the Success of the Company
Historically, the common law position was that directors owed their duties to the company itself. This abstract concept was interpreted by the courts to mean the interests of the shareholders as a collective body, both present and future. In the classic case of Greenhalgh v Arderne Cinemas Ltd (1951), Lord Evershed MR stated that the phrase ‘the company as a whole’ meant the ‘corporators as a general body’. This established a principle often referred to as shareholder primacy, where the ultimate goal of the directors was to maximise value for the shareholders. Other interests, such as those of employees or creditors, were only to be considered insofar as doing so would benefit the shareholders.
This common law duty was codified and, importantly, developed by section 172 of the Companies Act 2006. Section 172(1) states:
> "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…"
This opening part of the section confirms that the ultimate duty is owed for the benefit of the members (the shareholders). However, the statement in the question that directors must act for shareholders only is directly contradicted by the rest of the subsection. Section 172(1) proceeds to list a series of non-exhaustive factors to which a director must "have regard":
(a) the likely consequences of any decision in the long term, (b) the interests of the company's employees, (c) the need to foster the company's business relationships with suppliers, customers and others, (d) the impact of the company's operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company.
This statutory framework does not create a pluralist model, where directors have a duty to balance the competing interests of all stakeholders. Instead, it establishes what is known as enlightened shareholder value. The primary goal remains the success of the company for the shareholders' benefit, but the legislation mandates that in pursuing this goal, directors must take into account a broader range of considerations. The logic is that a company which ignores its employees, customers, or its environmental impact is unlikely to be successful in the long run for its shareholders. Therefore, the statement in the question is legally incorrect; UK law does not require directors to act for shareholders only. It requires them to act for shareholders having regard to other stakeholders.
An Evaluation: The Strengths of Enlightened Shareholder Value
The ESV model codified in section 172 can be seen as a strength for several reasons, primarily related to clarity and accountability. A key argument in favour of shareholder primacy is that it provides a single, clear metric for director performance: shareholder wealth. As argued by commentators like Friedman (1970), giving directors multiple objectives to serve different stakeholder groups would leave them with no clear objective at all. They could justify almost any decision by claiming it benefits one stakeholder group, even at the great expense of another. This makes it very difficult to hold them accountable for poor performance. Section 172 attempts to solve this by retaining a single ultimate objective – the benefit of the members – while encouraging a broader, more long-term perspective. This provides a clear line of accountability that would be lost under a true stakeholder model where a director serves many masters.
Furthermore, the duty is a subjective one. Directors must act in the way they consider, in good faith, will promote the company's success. This gives directors a significant degree of discretion in balancing the various factors listed in s.172. The courts are generally reluctant to question the commercial judgement of directors (Re Smith & Fawcett Ltd, 1942). This business judgement rule allows directors to make difficult decisions, confident that as long as they have acted in good faith, their decisions will not be unpicked by a court with the benefit of hindsight. This provides the certainty and freedom necessary to run a business effectively in a complex commercial world. The ESV approach, therefore, can be presented as a pragmatic and workable compromise that promotes responsible business practice without making directors' jobs impossible.
A Weaker Position: Critiques of the ESV Model
Despite these perceived strengths, the ESV approach has been heavily criticised, suggesting that calling it a "great strength" is questionable. The primary criticism is that the duty to "have regard to" stakeholder interests is too weak to be meaningful. Because the duty is subjective and the ultimate aim is shareholder benefit, it is extremely difficult for stakeholders to ensure their interests are properly considered. A director can simply state that they did consider, for example, employee interests, but decided that a course of action that was detrimental to them (such as redundancies) was nevertheless necessary to promote the long-term success of the company for its members.
This is compounded by a crucial issue of enforcement. The duties under section 172, like other general duties, are owed to the company, not to third parties. This means that stakeholders such as employees, suppliers, or environmental groups have no direct legal standing to sue a director for an alleged breach of section 172 (Department for Business, Enterprise and Regulatory Reform, 2007). A claim can only be brought by the company itself, or by a shareholder through a derivative action under Part 11 of the CA 2006. A shareholder is unlikely to bring a claim arguing that directors failed to have sufficient regard for employees or the environment, as their main concern is usually financial return. This lack of a direct enforcement mechanism for stakeholders leads to the argument that the list of factors in section 172(1) is more of an aspirational statement than a hard-edged legal duty, offering little real protection.
Moreover, the continued focus on shareholder value, even in its 'enlightened' form, is argued by some to encourage a culture of short-termism. In practice, the pressure from financial markets and the structure of executive pay often incentivise decisions that boost the share price in the short term, even if this is at the expense of long-term investment or the interests of other stakeholders (Keay, 2007). While section 172(1)(a) explicitly mentions "the long term", the overarching duty to members can still pull in the opposite direction, making the ESV model an imperfect tool for fostering genuine corporate sustainability.
Conclusion
In conclusion, the assertion that UK company law requires directors to act for the benefit of shareholders only is a misrepresentation of the legal position. The Companies Act 2006 establishes a model of enlightened shareholder value, where the primary duty to promote the company's success for its members is qualified by a mandatory requirement for directors to have regard to a wider range of stakeholder interests.
However, whether this model constitutes a "great strength" is highly debatable. Its main strength lies in providing a single, ultimate objective for directors, which creates a clear framework for accountability that would be absent in a pluralist stakeholder system. It gives directors the flexibility to exercise their commercial judgement while encouraging them to adopt a longer-term and more socially aware perspective. On the other hand, the model is criticised for being toothless in practice. The duty to "have regard to" stakeholder interests is subjective and, crucially, is not directly enforceable by those stakeholders themselves. This leads to the view that section 172 is more of a political compromise than a radical shift in corporate governance, doing little to alter the fundamental power dynamic within a company. Therefore, while the ESV approach is a more nuanced and modern position than pure shareholder primacy, its significant practical limitations mean that describing it as one of the "great strengths" of UK company law is an overstatement.
References
Cases
- Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286
- Re Smith & Fawcett Ltd [1942] Ch 304
Legislation
- Companies Act 2006
Secondary Sources
- Department for Business, Enterprise and Regulatory Reform (2007) Duties of company directors: Ministerial statements.
- Friedman, M. (1970) 'The Social Responsibility of Business is to Increase its Profits', The New York Times Magazine, 13 September.
- Keay, A. (2007) 'Tackling the Issue of the Corporate Objective: An Analysis of the United Kingdom's Enlightened Shareholder Value Approach', Sydney Law Review, 29(4), pp. 577-612.
