Ethical Responsibilities of a Director under the Companies Act 2006 - Essay Example

?Listed Companies Are Under Increasing Pressure From The Media And Politicians To Behave “Ethically”.  In Recent Months, Certain Multinationals Have Been Criticized For Arranging Their UK Tax Affairs In Such A Way That They Are Legally Required To Pay Very Little Tax In This Country. Large Companies’ “Green” Credentials Have Increasingly Come Under Intense Scrutiny.” Table of Contents Introduction 3 Ethical responsibilities of A Director Under Section 172 Of The Companies Act 2006 3 Opinion As To Whether Section 172 of the Companies Act 2006 Is In Need Of Reform. 7 Conclusion 10 References 11 Introduction In the modern day perspective, a director’s role is considered to be quite significant when concentrating upon the success factors or driving forces which can derive sustainable growth for a company. In the recent past, many occurrences have revealed the lack of ethical concerns, and the discrepancies persisting in the directors’ performances of listed companies owing to which the companies have been witnessing increasing pressure from the community including the media and even the politicians with relation to their ethical commitment and ‘green’ initiatives. It is in this context that Section 172 of the Companies Act 2006 tends to play a major role in directing the roles and the responsibilities of the directors to preserve the success and the interests of the corporate being treated as two separate entities. However, in light of the prevailing occurrences of unethical conducts by directors as against the interests of the company, it can be argued that certain amendments are required in the provisions mentioned under Section 172 of the Companies Act 2006. This paper aims at arguing on the basis of this particular aspect with reference to few case laws. Ethical responsibilities of A Director Under Section 172 Of The Companies Act 2006 The Companies Act 2006 is one of the major legislations, which governs the companies’ activities within the business periphery of the UK. It is one of the longest legislations, which has been passed in the UK with a large number of sections by its name. The main aim of the law is to modernise along with simplify the prevailing Companies Act in the UK. Moreover, it has been observed that this law is also meant to codify the duties of the directors in the companies. Furthermore, this Act would also grant much improved rights to shareholders of companies and it would also be effective in limiting the managerial burdens carried by the companies operating in the UK1. One of the crucial impacts of the Companies Act 2006 is on the managers of the UK companies. The duties of the directors of the companies are codified with the emergence of this Act. It has been observed from the Section 172 of the Companies Act that the directors of the companies need to appreciate their duties towards organisations. The directors should work for the best interest of the companies. The directors should have to perform keeping in mind the ethical considerations. In this regard, the director should not accept any kind of benefits from any of the third parties. It would be unethical to the company if they perform activities in that manner. It has been evidently mentioned in the Companies Act that the directors would not be allowed to take any type of benefits from any of the third parties as it may harm organisations. Moreover, it has been viewed from Section 172 of the Act that the directors of organisations must act in a way that would said to be done in a good faith and to support the success relating to the company by considering the success of the interests of the members associated with it [Aberdeen Railway Co v Blaikie Brothers]2. Additionally, it is the duty of the directors of organisations to think about the long-term consequences of his/her decisions which are also ethically important. Furthermore, it has also been assumed from Section 172 of the Act that the directors would also have to keep in mind the welfare or interests of the employees of organisations and do the best for the success of the organisation [Scottish Co-operative Wholesale Society Ltd v Meyer]3. This would also be included as part of the ethical behaviour of the director. He/she would need to take decisions with regard to the interests of the workforce of the organisations as they are the ultimate asset of companies. Moreover, one of the most vital duties of the Act imposed on the directors is that they would need to check the impact of their operations on the communities as well as the environment. This is among the significant ethical responsibilities of the directors. The directors of the companies would have to be fair in whatever decisions they take. The decisions made by directors would have to made by the considering the overall welfare of the associated members of the company4. It has been observed that it is the duty of the directors of companies to operate in a tax efficient manner. It would be immoral and unethical on the part of directors if they intend to minimise the tax liability of the company. It has been clearly mentioned in Section 172 of the Companies Act 2006 that “a director 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”4. It has been witnessed that if the directors fail to do so, he would be held responsible for the outcome [Foster Bryant Surveying Limited v. (1) Bryant and (2) Savernake Property Consultants Limited]5. Moreover, it needs to be mentioned that the director of a business entity also has the duty towards the shareholders of the company. The directors of companies must make certain about a proper tax planning. It has been witnessed that the directors would be held directly responsible if their decisions fail to deliver any fruitful result for the company. Moreover, it has also been noticed that if the company has to suffer a loss due to an increased tax bill, as an outcome of the decisions of the director then he/she would be liable to compensate the company for the breach of duty. This does not mean that the director should have an aggressive intent towards tax planning or he/she would go for tax avoidance. This would be unethical on part of the directors. The only path that the director can tread is to efficiently pursue lawful tax planning strategies which would enable the company to get the maximum benefits without hurting the interests of the people associated with the company. This would also help director of companies to avoid any breach of duty ethically. Overall, it can be concluded that the director of the listed company would have to be ethical in every action of his/her. He/she would be held accountable for any kind of losses to the company as well as for damaging the interests of the people associated with the company. Consequently, he/she would ultimately be held liable for breach of duty6,7,8. Opinion As To Whether Section 172 of the Companies Act 2006 Is In Need Of Reform. It has been learnt that companies now-a-days play a major role in creating the economic growth worldwide. In this regard, the companies operating in the UK have gone a step further. It has been noted that the economy of the UK in the preceding few years has shown a rapid development. Economic development of the country largely depends on the industries and companies that operate within the periphery of the nation. Owing to the large numbers of companies operating in the UK, the employment rate of the place has rapidly augmented and ultimately it impacts the economy of the country. As there is a rapid increase of firms in the place, it certainly results in the growth of the economy of the country. It has also been assumed that the companies that are operating in the country have made it competitive in the global business environment9. It has been further observed that with the emergence of the Companies Act 2006, the directors of the different organisations have been at times in a state of confusion about the fact that, whose interests would they consider while taking decisions regarding the management of the company. In the previous law designed by the government of the UK, it has been noted that the directors of the companies were required to take decisions on good faith by considering the interests of only the company [Regentcrest v. Cohen]10. It was an indefinable concept where the directors of the companies were not certain about what the actual significance of the company is. In the year 2006, the law was reformed with the inclusion of a new approach “enlightened shareholder value” (ESV) that would force directors of companies to think about the interests of the shareholders along with the welfare of the companies. The interests of the customers, suppliers as well as the employees were also included in the revised law11. It has been criticised by maximum number of people that Section 172 of the Companies Act contains nothing new to be mentioned. The main intention of revising the law is to firstly ensure that directors are acting in the way that would benefit the company and to secondly provide certain points on the aspects which directors have to take into account12. However, it has to be mentioned that the directors of the organisations are concerned about the fact that the law would affect the operations of the companies. The directors presume that in the process of maintaining the interests of the third parties i.e. shareholders and employees, the interests of the company would need to face certain inconsistency. It has been argued by most of the critics that the legislation should not force the companies to maintain the laws on the expense of the commercial expenses of the company. It has further been argued that Section 172 is not necessarily need a positive improvement as it would be complicated to make certain that the provision has certain adverse impacts given the limited accountability available. Furthermore, it has been viewed that according to the law the interests of the shareholders are kept alongside the interests of the company which weakens the ‘separate legal entity’ principle and resonates throughout the Section 172 of the Companies Act [Foss v Harbottle]138. Although it has to be mentioned that the interests of the shareholders are quite crucial as unsatisfied shareholders would not invest in the company. Moreover, it has also been observed that shareholders or stockholders are not the sole factor that was concentrated upon in Section 172 of the Act. The interests of the employees were also been specified in the law. Without possessing an effective workforce, it would not be possible to run or operate a company. The law would encourage the directors to consider the welfare of the employees while making decisions. Furthermore, it has also been noted that the law also persuades the companies to consider the welfare of other stakeholders which was missing in the previous law. It can also be measured as another positive perspective of the Section 172 of Companies Act. The companies would need to balance the interests of the different stakeholders associated with of them. It would be worth mentioning in this regard that without the healthy involvement or assistance of the different shareholders, effective operations of any company would not be possible14. Conclusion From the overall discussion on the Section 172 of the Companies Act 2006, it can be summarised that the law has both positive as well as negative attributes that affect the companies. On the basis of the analysed aspects of the law, it can be recommended to the government minister that there is not much need for reformation in the Section 172 of the Companies Act 2006. It has been observed from the overall analysis of the entire discussion that the positive impacts of Section 172 of the Act on the companies outdo the negative impacts. It has been assumed that the companies would have to be more responsible towards the different members associated with. This would increase the faith of the members towards the company and would ultimately strengthen the bond between them. Moreover, the law would also encourage the companies to consider the welfare of the shareholders, which inadvertently benefits the company in the long run. Overall, it has to be admitted that Section 172 of the Companies Act 2006 would benefit the companies as well as the associated members in the long-term period. Although there are certain aspects which might cause problems on the part of the companies but these aspects can be rectified in the course of time. References ASIC, ‘Insolvency: a guide for directors’, Information sheet 42, , n.d. (accessed 19 March 2013). BAILI, 2007. ‘Foster Bryant Surveying Limited v. (1) Bryant and (2) Savernake Property Consultants Limited. Neutral Citation Number: [2007] EWCA Civ 200’, Case No: A3/2006/1346, , 2013, (accessed 23 March 2013). Company Bug, ‘What is the Companies Act 2006?’, Home, http://www.companybug.co.uk/what-is-the-companies-act-2006/, 2012, (accessed 19 March 2013). Crown, ‘Companies Act 2006’, Explanatory notes, , 2006, (accessed 19 March 2013). Committee on Japan, ‘Global Economy, Global Technology, Global Corporations’, National Academies Press, Washington D.C., 1998. Excel Community, ‘Financial and accounting duties and responsibilities of directors’, Home, , 2013, (accessed 19 March 2013). Gopal, P. ‘A critical examination of the impact of section 172 of the Companies Act 2006’, The student journal of law, , 2006, (accessed 19 March 2013). Horrigan, B. ‘Directors duties and liabilities- where are we now and where are we going in the UK, broader commonwealth, and internationally’, International journal of business and social science, Vol. 3, issue 2, 2012, pp. 21-45. Michael R. ‘Company Law Essay Question on Section 172 of the Companies Act 2006’, Home, , 2012, (accessed 19 March 2013). Old Bailey Chambers, ‘Director’s Duties’, Home, , 2012, (accessed 19 March 2013). Solicitors Journal, ‘Beyond the blunt power of tax legislation’, Home, , 2013, (accessed 19 March 2013). Tate, R. C. ‘Section 172 CA 2006: the ticket to stakeholder value or simply tokenism?’. University of Aberdeen, (accessed 23 March 2013). Bibliography Crown, ‘Companies Act 2006’, Legislation, , 2006, (accessed 19 March 2013). Chohan, A. ‘Is section 172 of the companies Act 2006 capable of delivering for all stake holders?’, University of Warwick, 2012, p. 1-15. Mckenna, C, ‘Directors duties’, Law-now, , 2007, (accessed 19 March 2013). 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