Theshareholder primacy versus stakeholder theory remains a ongoing debate incompany law. The shareholder primacy promotes the idea that the company shouldbe run in a way that would fulfil the interests of the shareholders. Where asthe stakeholder value includes taking into consideration the interests of otherstakeholders involved in the company such as, employees rather then prioritisingthe shareholders interests alone. Before The Companies Act 20061was enforced there was no company legislation that provided guidance todirectors on how to manage a company.  Aspart of a new statutory framework of the directors duties, s 1722 ofThe Companies Act 20063introduced ‘The Enlightened Shareholder Value'(ESV). This provision seeks topromote the success of all its members as a whole. Therefore this principleaims to find a balance between the traditional approach of shareholder valueand stakeholder value and be the happy medium. S 1724states a  director of a company isrequired to ‘act in a way he considers,in good faith, would be most likely to promote the success of the company forthe benefit of its members as a whole and in doing so have regard (amongstother matter) to the factors listed in s1725(1).

6 Inthis essay I will be examining whether the ESV concept has caused a shift fromthe approach adopted by common law and whether or not English company law hasadopted the stakeholder theory. TestS 1727, adoptsa subjective test which states ‘ directors must act in the way they consider, ingood faith, would be most likely to promote the success of the company.’8 Atcommon law, the case of Re Smith9held that it was essential for the directors to act in a ‘bona fide way thatwould promote the success of the company for the benefit of it’s members as a whole'(Regentcrest).10  Consequentially,their actions must be based on what ‘they think, not what the courtthink, is for the benefit of it’s members as a whole.

’11  S 17212 codifiesthis  common law duty to act in a bonafide manner and now introduces a number of factors that must be taken intoconsideration when directors are performing this duty. 13 Thisnew  approach used in s 17214is subjective as the company’s success is mainly relied upon the directorsactions in ‘good faith’. However, this opens the doors to criticism as itresults in directors escaping liability easily, by arguing that their actionswas performed in ‘good faith’.

This provides the directors a defence when theiractions are questioned and allows them to rely on s 17215as a ‘get out of jail free card’.16Therefore, s17217lacks as it is difficult to prove breach done by the directors. However, there are two conditions that allow thecourts to take a more objective approach.

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This was highlighted in the caseof  charterbridge18,where Pennycuick J said that an objective test was applicable where thedirector failed to think whether his actions was in the best interests of the company.He stated “whether an intelligent andhonest man in the position of a director of the company concerned could..

. havereasonably believed that the transactions were for the benefit of the company”.19 Although it is unclear whether or notthis objective approach lasts with the enforcement of s 17220,since there is no clear reference addressing this matter.21 MENTION CONDITIONS kaey 2007. Mention common law did haveobjective considerations by court to supplement subjective app.- s172 made noref to this.

Traditional approach In English company Law, The traditional approach is theshareholder value, where the company should be operated in a way that ensures profitis maximised for the benefit of it’s shareholders above other members such as customersand suppliers. ” There is one and onlyone social responsibility of business- to use its resources and engage inactivities designed to increase its profits so long as it… engages in openand free competition, without deception or fraud”.22This approach is based on the idea that ‘maximising shareholder value is inprinciple the best means of securing overall prosperity’.23 Althoughthe directors have a duty to act in a manner that is in the company’s bestinterests and take into consideration the interest of existing and futureshareholders, they are not obliged by law to be held accountable for individualshareholders.

24This is illustrated in the case of Percivalv Wright25which  provides that directors are ‘generally responsible to the company and notto individual shareholders or creditors (or the employees)’.26 Thisruling has often been criticized, for instance in the case of Coleman v Myers27,Mahone J had refused to follow this ruling due to the following statement “it seems untenable argument to suggest thatthe shareholders on an offer to buy their shares are not perforce constrainedto repose a special confidence in the directors that they will not be persuadedinto a disadvantageous contract by non-disclosure of material facts”.28Furthermore, even though directors may not normally owe a fiduciary duty toshareholders, it is clear to see that directors are still obliged to owe a dutyto shareholders to some extent. One reason being, that directors have a duty toallow shareholders to be involved in decision making when their approval isrequired, such as ‘approving the durationof a director’s  service contract with aguaranteed term of more then two years, removal of a director or givingauthority to directors to issue shares’.29 Moreover it could beargued that in reality the effect of s17230had already been articulated by Bowen Lj in common law.

In the case of Hutton vWest31,Bowen Lj, famously stated that “charitycannot sit at the boardroom table and there are to be no cakes and ale exceptfor benefit of the company”. 32The significance of this case was that directors were able to look after theiremployees and other stakeholders, if it was a benefit to the company. 33Forthat reason it could be argued that the enactment of s17234is essentially based on a concept that has already been delivered. The more preferableapproach may be the traditional approach that adopts the Shareholder Value asit is viewed as being the most efficient. ‘shareholdershave incentives to maximise profits and so they are likely to foster economicefficiency. It is more efficient if directors operate on the basis ofmaximising shareholder wealth, because the least cost is expended in having thisas the object rather then something else’.35Also without the list of factors that directors must consider in s172(1)36,they can focus on one key objective rather then numerous. As a result, directorswill make better and solid decisions as they don’t need to ‘balance all of thedivergent interests’.

37Stakeholder theoryThe stakeholder theory wasproposed by Freeman (1984). A stakeholder is defined as “an organisation is anygroup or individual who can affect or is affected by the achievement of theorganisation’s objectives”.38This theory provided that the company is responsible to a bigger group ofstakeholders instead of just shareholders. This meant the business mustconsider customers, suppliers, employees, communities and shareholders. Asproposed by Freeman (1984) it is the responsibility of the directors to ensure they’satisfy the needs of the groups that have a stake in the business.’39The corporate goal for stakeholder theory is the ‘maximisation of theshareholder value, however it is acknowledged that all stakeholders have to beconsidered to generate this value.

’40Although, this theory provides some useful factors, it has failed to getimplemented in the Company Act 200641.The key reason for this was due to the fact the theory was unsuccessful inguiding directors on how to get a balance between the diverse interests of anyof the groups that qualify for the term ‘stakeholder’ such as, employees,customers, suppliers,  creditors as wellas the wider community and competitors. Even though this theory may have someissues it can not be denied that it promotes fairness and trust to every bodyinvolved in the company. This encourages the company to gain more loyalty fromits stakeholders which increases efficiency and then enhances the interests ofthe stakeholders.

This is supported by Freeman and Rawls “at the heart of stakeholder theory is to be found a respect for theprinciple of difference. Respect for difference promotes fairness. This meansnot only that the organisation should treat stakeholders fairly,…but thatthis treatment of difference and inequality will help boost profits”.

42 TheEnlightened shareholderThe Enlightened Shareholder view was enacted by TheCompany’s Act 2006.43 Itis a principle that provides guidance on how companies should be managed. ‘The Company Law Review Steering Group (CLRG),the committee appointed in 1998 by the Department of Trade and Industry in theUK to undertake a comprehensive review of UK company law, included much of its discussionsabout ESV under a broad corporate governance heading’.44 Whenconsidering the key objective of the company the CLRSG wished ‘to retain the idea of the shareholdersbeing the ultimate focus of directors, but they wanted to have a greateremphasis placed on the company’s long term future’.45They believed by planting the description of ‘Enlightened Shareholder Value’would certainly differentiate from the traditional shareholder value. The maindifference was that ‘the approach is more enlightened as directors are requiredto take into account interests other than those of the shareholders.’46 Thecurrent ESV approach could be described as a balance between The traditionalapproach and the Stakeholder theory as the approach requires the directors toprioritise their actions to result in the company’s success.

In support of thisKiarie (2006) suggests that s17247is ‘compromise between the shareholderprimacy and the stakeholder theory by maintaining the primacy of shareholders’interests while considering other stakeholder’ interests’.48 S172(a)49provides ‘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 forthe benefit of its members as a whole, and in doing so have regard (amongstother matters)’.50 This statement clearly states thatdirectors are obliged in considering the shareholders and stakeholdersinterests as well as any other bodies involved in the company, when deciding whatis in the company’s best interest. The ESV,is adopted by the Company’s Act 200651 as an alternative approach, since itgenerates better results for wealth maximization. S172 (1)52 sets out a non-exhaustive list thatdirectors must take into account when making a decision, which helps expressthe approach.  Even though, producingmaximum wealth for the shareholders is an essential part in running the companyit is also important that the directors take a balanced approach when reachinga decision. Furthermore, even though the ESV provides guidanceto directors in achieving the success of a company, there still remains areasthat are criticized.

For instance, Prior to the enforcement of The Company’s Act 2006.53It was unclear as to who directors owe a duty to. This issue should have beensolved when s17254 wasenforced as it provides a guidance for directors, by listing factors thatdirectors must have consideration to. However, it has been argued that thesection still lacks in guidance and does not provide detail in how a directorshould actually act in practice.

‘The provision sets out a menu ofnon-shareholder interests to which directors are to have regard, but fails togive any guidance as to the form this ‘regard’ should take and as a consequencegives no indication for directors as to what they must do in order to complywith the provision’.55Alsoanother issue is when referring to the company’s success the act does not provideany clear definition of the word ‘success’.  This means that the act  leaves an open door, allowing  the directors to interpret the term ‘success’with their own understanding. Attenborough (2006) expresses that this is areason to cause uncertainty as directors may have different interpretations to theterm which may result in directors making decisions with different levels ofstandard in regards to the ‘success of the company’.56 During a debate in the House ofLords, Lord Goldsmith commented on the ‘success of the company’ as follows “The starting point is that it is essentiallyfor the members of the company to define the objective they wish to achieve.Success means what the members collectively want the company to achieve. For acommercial company, success will usually mean long-term increase in value”.57 Also, the fact that s172 (1)58 provides a list of factors thatdirectors must have regard to may cause the administrative procedure toincrease since directors will need to make sure they have done all that theycan regarding these factors.

Which may result in the board investing more timein reaching decisions. Even though, the list of factors this section providesis not exhaustive, it has not been made clear whether a director would havebreached their duty when taking into account all the factors except the one inrelation to environment. A problem can also occur when two or more of thefactors clash.59 Another issue with the provision setout in s172 (1)60 is that although shareholders areable to raise an action against directors regarding breach of duty, theprocedure lacks in providing stakeholders with power to also raise an actionfor breach against directors that fail to take into account their interests.61Inconclusion, ‘The Enlightened Shareholder Value’ concept introduced by The Company’sAct 200662is a balanced approach between the shareholder value and stakeholder theory.

Thesection delivers guidance for directors in managing a company and the factorsprovided in s172 (1)63 canbe viewed as an ‘essential element of directors general duty’. S 17264encourages directors to take  intoaccount stakeholder interests in consideration of the ESV. However, it isargued that shareholder interests remain paramount in the directors decisionmaking process, leaving stakeholders interests subordinate. Therefore it isclear, that the English law has failed to adopt a stakeholder theory. 1The Companies Act 20062The Companies Act 2006 s 1723The Companies Act 20064The Companies Act 2006 s 1725The Companies Act 2006 s 1726John Birds, Annotated CompaniesLegislation (Oxford University Press 2012).

1967The Companies Act 2006 s 1728Susan McLaughlin, Unlocking CompanyLaw. 3389Re Smith & Fawcett Ltd 1942 1 ALLER 54210 Regentcrest plc vCohen 2001 2 BCLC 8011Andrew Hicks and S. H Goo, Cases AndMaterials On Company Law (Oxford University Press 2008). 38512The Companies Act 2006 s 17213Andrew Hicks and S. H Goo, Cases AndMaterials On Company Law (Oxford University Press 2008). 38514The Companies Act 2006 s 17215The Companies Act 2006 s 17216Stephen Judge and Imogen Moore, CompanyLaw. 9517The Companies Act 2006 s 17218Charterbridge Corporation v LloydsBank Ltd 1970 Ch 62.19H.

K Saharay, Company Law (UniversalLaw Publishing 2010). 4420The Companies Act 2006 s 17221Susan McLaughlin, Unlocking Company Law 339 22Milton Freidman, “Capitalism and Freedom”(Chicago: University of Chicago Press,1962). 13323Company Law Review, Strategic Framework (1999), para 5.1.11.24J. A Cassidy, Concise CorporationsLaw (Federation Press 2006).21825Percival v Wright 1902 2 Ch 40126Michael Ottley, Q & A Company Law(Routledge 2016).

82 27Coleman v Myers 1977 2 NZLR 225).28 David Sagar, Larry Mead and PhilippaFoster Back, Fundamentals Of Ethics, Corporate Governance And Business Law, CertificateLevel (CIMA Publishing 2006). 28029’Resolutions, Regulations & Rights:Everything You Need To Know About Shareholder Decision-Making | Lexology’ (Lexology.com,2018)

aspx?g=42a0e13e-b35f-4176-bfb6-cb9860057664>accessed 18 January 2018.30The Companies Act 2006 s 17231Hutton v West Cork Railway Co(1883) 23 Ch D 65432Petri Ma?ntysaari, Comparative CorporateGovernance (Springer 2005). 22333’Cork Rail Case ‘Clever And Progressive’ (TheIrish Times, 2018)

com/news/crime-and-law/cork-rail-case-clever-and-progressive-1.527442>accessed 18 January 2018. 34The Companies Act 2006 s 172 35AndrewKeay, ‘Tackling the Issue of the Corporate Objective: An Analysis of the UnitedKingdom’s “Enlightened Shareholder Value Approach” (2007) 29 Sydney Law Review577.36The Companies Act 2006 s 172 (1)37ibid38J Quist, Backcasting For A SustainableFuture (Eburon 2007). 4839Gregor Gossy, A StakeholderRationale For Risk Management (Gabler 2008). 740ibid41The Companies Act 200642Judith-Anne MacKenzie, Textbook On LandLaw. 7243The Companies Act 200644Company Law Review, Modern Company Law for acompetitive Economy:  The Final Report,Volume 1 (2001) at Chapter 3 45Andrew Keay, ‘Tackling the Issue of the Corporate Objective: An Analysis of theUnited Kingdom’s “Enlightened Shareholder Value Approach” (2007) 29 Sydney LawReview 577.

46ibid47The Companies Act 2006 s 172 48Law Express Question And Answer: Company Law(Q&A Revision Guide) (7th edn, PearsonUK, 2014 2018). 17449The Companies Act 2006 s172 (1)(a)50’Companies Act 2006′ (Legislation.gov.uk,2018)

gov.uk/ukpga/2006/46/section/172> accessed22 January 2018.51The Companies Act 200652The Companies Act 2006 s 172 (1)53The Companies Act 200654The Companies Act 2006 s 17255Andrew Keay, ‘Tackling the Issue of the Corporate Objective: An Analysis of theUnited Kingdom’s “Enlightened Shareholder Value Approach” (2007) 29 Sydney LawReview 577.

56Law Express Question And Answer: Company Law(Q&A Revision Guide) (7th edn, PearsonUK, 2014 2018). 17457Saleem Sheikh, A Guide To The CompaniesAct 2006. 43158The Companies Act 2006 s 172 (1)59Law Express Question And Answer: Company Law(Q&A Revision Guide) (7th edn, PearsonUK, 2014 2018). 17460The Companies Act 2006 s 172 (1) 61Andrew Keay, ‘Tackling the Issue of the Corporate Objective: An Analysis of theUnited Kingdom’s “Enlightened Shareholder Value Approach” (2007) 29 Sydney LawReview 577. 62The Companies Act 200663The Companies Act 2006 s 172 (1) 64The Companies Act 2006 s 172