Director's duties

Company law reform deserves to be big news. The architecture that it provides is essential to the efficient operation of the economy, and everyone is affected by the balance it strikes between competing interests. How much power is given to directors (and, ultimately, the shareholders who appoint them) in determining a company's actions, and how much they have to listen to other stakeholders - employees, suppliers, creditors and so on - is a matter for legitimate debate.

Even in Britain, where there is a reasonable degree of political consensus on that question, there are still those who argue that directors should be answerable to a wide range of interested parties, and not just to the company's ultimate owners.

But that ideological debate ought to be no more than an entertaining side show to the current discussions. For the most part, directors are answerable to shareholders for their attempts to lead a business forward, and not to other stakeholders. That has always been the position and, since the government ordered a root and branch review of British company law in 1998, there has been little serious debate about whether it should remain so. Most assume that it should.

The main problem with the British government's proposals is not their ideology. There is, apparently, no real desire to change the law in this area, but to re-state it in clear and accessible terms. Since there is no single statutory statement of how a director ought to behave at the moment, that seems sensible.

And, in formulating such a statement of the current law, it is perfectly reasonable to say that directors - in deciding what their company should do - ought to consider the interests of employees and other key stakeholders. The law would hold them negligent in discharging their duty to shareholders if they did not. It is also reasonable to say, for example, that directors should not act when they have a conflict of interest, and that they should not make undisclosed profits out of their position.

The issue is not what the new law says, but how it says it.

At the moment the proposed statutory statement would change the law, and could lead to lots of unnecessary and costly litigation. It could, for example, give rise to the impression that directors can be sued by employees if they negligently fail to consider employees' interests in determining a company's actions, and not only by the shareholders. It might also lead to the conclusion that a director can never accept an appointment if he might have a conflict on one particular issue in the future, which is not the case now (and would be unworkable in practice).

Such unintended consequences could be very damaging - and would have profound effects for the private equity industry and its portfolio companies, as well as the wider economy. It is crucial that the government addresses these practical concerns (and replacing the statutory code with some non-statutory guidance might be one way to do so).

But in addressing them, it should avoid being drawn into an ideological debate. There is a danger that the front page headlines will give the impression that there is real disagreement about what the law on directors' duties should be.

If there were - and there is a danger that the furore will catalyse one - that would be really concerning.

Simon Witney

SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on our services to the private equity industry please contact Simon Witney in our London office 020 7533 2222 or visit our website at www.sjberwin.com