2.6.3 Enlightened shareholder value

Section 172 of the Companies Act 2006, which describes the duty of a director, has as centrepiece the words "to promote the success of the company for the benefit of its members as a whole" and then goes on to say "and in doing so have regard (amongst other matters) to" and lists six elements affecting all so-called stakeholders. It caused great debate and required a lot of explanation by the Attorney General Lord Peter Goldsmith.1 The question was whether the government had opted for "enlightened shareholder value" or for "pluralism", i.e. the stakeholder model.2 The Attorney General's explanation stressed that the government had chosen for the "enlightened shareholder value" and therefore not for "pluralism".

This is clear from the first words of section 172, "although in the interests of the company and its long-term members the board should consider all elements".3 It also means that there is emphasis on the involvement of the board as a whole, because the duty to consider — "have regard to" — all factors results in a greater mutual reliance by one director on another4 and at the same time that, if all elements have been considered, the board is free to choose. The judge should not second guess the board in a business decision.5 In the UK it is clear that the judge will not sit on the chair of the directors who have a good faith business judgment. The Attorney General said as much in Parliament: "Under the duty to promote the success of the company, the weight to be given to any factor is a matter for the good faith judgment of the director. Importantly, his decision is not subject to a reasonableness test and, as now, the courts will not be able to apply a reasonableness test to directors' business decisions".6 The Company Law Review worded it as follows: "The law recognizes that it is essential for directors to have discretion in the way they manage, and legal actions will not interfere with proper exercise of such business judgment."7 Lord Wilberforce, giving the judgment of the privy council said in 1974: "Their lordships accept it would be wrong for the court to substitute its opinion for that of management or, indeed, question management decision, if bona fide arrived at."8

There is a focus on boards and on the long-term ("inclusive") view of the director's role in the interest of the long-term shareholders. The directors may regard a particular investment as serving the long-term interests of the company.9

It is clear that in the end, after the board consideration, long-term shareholder interests prevail.10