Faculty of law blogs / UNIVERSITY OF OXFORD

Section 172 of the UK Companies Act 2006: Desperate Times Call for Soft Law Measures


Georgina Tsagas
Senior Lecturer in Private and Commercial Law at Brunel University Law School


Time to read

4 Minutes

With the UK leaving the EU, it is a crucial time to discuss enlightened decision-making on boards, considering that, arguably, one of the key benefits of joining the EU with regard to UK company law, was that the UK was prompted to consider incorporating provisions affording a certain level of protection to the interests of various constituencies across a wide range of Company and Securities Law acts and regulations.

Section 172 of the UK’s Companies Act 2006, imposes on a director the duty to ‘act in a 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 so doing, to have regard to a series of factors listed in the section which refer to the promotion of social, environmental and governance objectives. The section has been afforded much attention during parliamentary discussions on the ‘codification of directors’ duties’ and has, since the enactment of the Companies Act 2006, occupied much space in discussions among scholars who share an academic interest in the shareholder/stakeholder debate, in policy documents on law reforms following a series of corporate failures, as well as in company law lecture notes provided by Law Schools across the UK.


Recourse to section 172 CA 2006 in the aftermath of corporate failures has become a norm in a wide range of policy documents from banking law reform regarding the duties of bank directors, to takeover law reform regarding the duties of the target board within a takeover context. A series of recent events have made evident how imperative it is to deal with good governance across a range of companies, whether private or public, and ex ante, rather than ex post. More recently, following the employee pension scheme British Home Stores scandal, the 2016 Green Paper on Corporate Governance Reform sought views on, among other issues, whether there are measures that could increase connection between boards of directors and other groups with an interest in corporate performance, such as employees and small suppliers, and whether some of the features of corporate governance that served companies and society well in relation to listed companies should be extended to the largest privately-held companies at a time in which different types of ownership are common.

What often escapes the attention of participants in discussions surrounding section 172 of the Companies Act 2006, is the limitations of the section, not so much in terms of it prioritising the interests of shareholders over the interests of other constituencies, but regarding its enforcement and overall utility. There are arguably three spheres in which section 172 CA 2006 operates, namely (i) breach of duty per se (ii) the ‘hypothetical director’ test used in the derivative claim permission stage court hearing and (iii) reporting requirements, more specifically the Strategic Report and the Non-Financial Statement. Regarding breach of the duty, the only decision which in fact provides an analysis of the operation of section 172 CA 2006, namely R (on the application of People & Planet) v HM Treasury [2009] EWHC 3020 Admin, in fact acknowledges that recourse to the section by shareholders is advised within the context of shareholders seeking to influence the board in its decision-making process, but not within the context of forcing directors to take the factors outlined into account.


In a recent article (the draft of which is available here), I put forward a proposal to advance an important aspect of UK corporate law in the making, namely by suggesting the use of alternative means available in the soft law sphere that could support a more pluralistic and democratic formation of corporate decision-making. The Corporate Governance Code (the ‘Code’) should make provision for the inclusion of an additional section, Section F, which should stipulate that:

‘Main Principle: There should be a dialogue with stakeholders based on the mutual understanding of objectives. The board as a whole, has responsibility for ensuring that a satisfactory dialogue with stakeholders takes place and that during the board’s decision-making process the board has regard (amongst other matters) to—

(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 impact of the company’s operations on social and human rights issues,

(f) the desirability of the company maintaining a reputation for high standards of business conduct.’

The proposal put forward aligns with the concept of ‘Environmental, Social and Governance’, which appears in the UN Principles for Responsible Investment and refers to extra-financial material information about the challenges and performance of a company regarding these aspects, enabling shareholders to better assess risks and opportunities. The proposal also aligns with the objective that the private sector is expected to play a large role in the implementation of the UN’s sustainable development goals (SDGs), notwithstanding that currently it is reported that fewer than half of global companies plan to engage with the SDGs. There are valid reasons for suggesting the addition of such a provision to the Code, which relate to: (i) the need to enhance the section’s visibility and overall utility, (ii) the need to acknowledge the limitations of hard law, and (ii) the need to, by some means, promote enlightened board decision-making in the current socio-political environment in the UK.


Section 172 CA 2006 gives the illusion to the business community, regulators, certain scholars, and market players alike, that something is being done in the sphere of company law in relation to acknowledging stakeholders’ interests in corporate decision-making. As the paper suggests, this is far from being the case. The proposal put forward aligns with the Department of Business, Energy and Industrial Strategy Committee’s proposal following the response to the Corporate Governance Green Paper, which recommends that the Financial Conduct Authority amend the Code to require information narrative reporting in fulfillment of section 172 CA 2006.  The proposal put forward is one which, in the author’s view, adequately reflects the reality of how the UK regulatory market is accustomed to operating and should only be seen as one of a range of tools the Government should put in place to strengthen the protection of stakeholders’ interests in companies.

Georgina Tsagas is Assistant Professor in Corporate Law at the University of Bristol Law School, United Kingdom.


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