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Companies with a conscience?

07 August 2008

Companies with a conscience?

New obligations on directors are changing the way that thousands operate and directors are having to make harder decisions.

Section 172 of the Companies Act 2006 has imposed a duty on a director 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.”  A director must now “have regard to”  a non exhaustive list of factors including;

1. the likely consequence of any decision in the long term;
2. the interests of the company’s employees;
3. the need to foster the company’s business relationship with the suppliers, customers and others;
4. the impact of the company’s operations on the community and the environment;
5. the desirability of the company maintaining a reputation for high standards of business conduct; and
6. the need act fairly between members of the company. 

The shareholders’ interests still take priority, but directors are now being forced to have a social conscience.  Whereas, at one time, a director could safely source the cheapest labour and materials in order to keep profits up, social responsibility is now a legal obligation. 

When, on 23rd June 2008, Panorama reported that Primark’s Indian suppliers had been subcontracting work to firms who use child labour, Primark acted quickly.  Where subcontracting had apparently occurred without its knowledge and was forbidden by its code of practice, it terminated contracts with previously trusted suppliers, announced plans to appoint an organisation to improve the monitoring system that it had already in place and set up a charity to help young people in the areas in which it operates.

Today’s demand for fast fashion means that clothes have to be produced as soon as they are seen on the catwalks and the fact that they may only be worn a few times by their owners until next month’s pay cheque comes through means that they need to be manufactured cheaply.  It is hardly surprising that firms turn to the Third World sweatshops and child labour to provide this.  However, whereas at one time, from a legal point of view at any rate, that would have been fine and a director would have been praised by his shareholders for maximising profits, that is no longer the case and the concept of “enlightened shareholder value” has been introduced. 

Since the enactment of these new directors’ duties, there is now no such thing as a profit without a conscience. 

Jill Thomas, Solicitor, Brachers

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