Directors' responsibility to take account of legitimate interests*

Directors primary duty is to the shareholders – to maximising shareholder value.

However, companies are social organisations participating in a network of communities, other organisations and society as a whole. These are both affected by the company and can affect it.

These other 'stakeholders' include employees, suppliers, subcontractors, agents, distributors and customers. Depending on the size and significance of the organisation its relationships with government and the local community can also be relevant.

To what extent should directors take account of the interests of stakeholders?

The UK Institute of Directors code of professional conduct requires directors to exercise responsibilities to employees, customers, suppliers and other stakeholders, including the wider community.

The UK Companies Act of 2006 enshrines in law the concept of 'enlightened shareholder value', a form of corporate social responsibility that requires directors to take into account in its decisions specified corporate social responsibility factors.

It broadly replaced the old duty to act in the company's best interests, and requires directors to have regard to the longer term and to various 'corporate social responsibility' factors, including the interests of employees, suppliers, consumers and the environment.

These moves should encourage a culture where the wider consequences of decisions are routinely considered.

As a result, directors should ensure that the board identifies and knows the interests, views and expectations of all individuals and groups which the board judges have a legitimate interest in the achievement of company objectives and the way in which these objectives are achieved. They should ensure that communications with such parties are timely, effective and unbiased, subject to the needs of commercial security and regulatory compliance where appropriate.

Directors should also help the board to promote goodwill with stakeholders and be prepared to be accountable for company actions. This should include encouraging the board to set up procedures for managing relationships with stakeholders, particularly at times of crisis (eg litigation, environmental disasters, takeover bids).

However, it is important to note that consideration of stakeholders interests is part of a single duty to work for the benefit of shareholders, rather than a separate set of duties in relation to the stakeholders represented in the list of factors.

Directors will be liable only to the company (or its shareholders on behalf of the company) for breach of this duty, and only if the company can demonstrate that it has suffered loss as a result of the breach.

Corporate governance check

Does the board take into account the legitimate interests of shareholders and other organisations, groups and individuals who have a direct interest in the achievement of company objectives?

• Regularly identifies and reviews shareholders and all key interested parties?
• Knows the interests and expectations of each of these parties?
• Knows the ways shareholders and stakeholders can have influence over the company's objectives, values, policies and activities?
• Ensures compliance with legal and ethical requirements?
• Anticipates the impact of future possible developments on the positions or behaviour of shareholders and other interested parties?

* Inspired by the Institute of Directors Standards for the Board

What to do next

If you would like to know more about how we can support your personal development as a director, facilitate an away day or corporate retreat, or assist with your board's corporate governance, contact us or call +44 (0) 7970 891 343.