Unfinished Work in UK Company Law Reforms - A Normative and European Perspective to Addressing the Gaping Holes in Directors’ Duties

In the face of scandals in the corporate sector, such as the collapse of BHS in 2016 and Carillion in 2018, UK policy-makers are responsive to introducing reforms in company law. Indeed, the Business, Energy and Industrial Strategy Department (BEIS) consulted on whether core aspects of company law such as directors’ duties ought to be reformed. The responsiveness of policy-makers and adjustments made to company law, however, obscure a deeper underlying issue, which is the resistance to reform of more fundamental issues, i.e. the private and shareholder-centred paradigms of company law which arguably underlie the problems and malaises that reform is attempting to address. In our paper, we critically examine the limitations of recent reforms, viz the introduction of the directors’ section 172 statement and the expectations articulated of directors’ behaviour in relation to subsidiaries in distress. We suggest that recent corporate problems reflect more fundamental gaping holes in UK company law, which can beneficially be addressed by reaching into normative thinking, some of which resonates with European developments, in bringing about an economically successful but ‘fair’ corporate economy.

We first discuss the context and pattern of company law reform in the UK over the last 20 years. Policy-makers from different political parties have consistently been responsive to revelations of corporate malaises and introduced company law reforms to address problems. Reforms included codified directors’ duties and clearer shareholder rights and enforcement, as well as a corporate governance code and shareholder stewardship code that have been the subject of emulation. However, adjustments in company law are firmly founded upon the private and shareholder-centred paradigms of company law and corporate governance. These foundations are starting to show cracks under new pressures revealed in more recent corporate malaises. Recent events such as the collapse of BHS, Carillion, the Inquiry into poor employment practices in SportsDirect, and revelations of corruption at Rolls Royce, aggressive tax avoidance at Google, Starbucks and Amazon, reflect problems that stem from the private and shareholder-centred foundations in company law and corporate governance. Policy-makers have chosen to deal with specific problems via regulation, such as in anti-abuse tax legislation and the prohibition of modern slavery in work and supply chains, but the achievements in regulatory reform are yet early and mixed. Recent company law reforms have also been proposed, dealing with the sales of subsidiaries in distress, as well as companies’ stakeholder relations and responsibility profiles. Although it remains a positive trend that UK policy-makers are responsive and willing to reach into the heart of company law, the reforms are limited in nature for remaining within the same foundational paradigms. 

We argue that there is a need for normative rethinking of the limitations of the private and shareholder-centred paradigms underlying UK company law and corporate governance, taking into account relevant insights from Europe. 

As norms are emerging in law and soft law with respect to the conduct of corporations as economic citizens, the recent round of reforms reflect this awareness though not the robustness needed to drive corporate behavioural change. We propose transforming directors’ duties so that the leadership of companies are compelled to internalise normative aspects of good corporate behaviour. We sketch the contours of an alternative proposal in directors’ duties that will position companies for the modern complexities and challenges they face. We argue that directors should owe normative duties that reflect and that are commensurate with the citizenship profiles of their companies. In particular, hard and soft law have been developed in relation to companies’ responsibilities in supply chains, sustainability and in the conduct of their group structures. We argue that following the contours of the existing hard and soft obligations in relation to these three areas, new normative directors’ duties can be designed for companies in a proportionate manner. We also envisage that enforcement of these duties should be supported by the introduction of a public enforced rather than shareholder-enforced model.

Roger M Barker is the managing director of Barker & Associates Consulting Ltd.

Iris H-Y Chiu is the Professor of Corporate Law and Financial Regulation at University College London.