Holmes Report Blog

The Holmes Report blog focuses on news and issues of interest to public relations professionals. Our main site can be found at www.holmesreport.com.

Wednesday, March 08, 2006

The Old Shareholder vs. Stakeholder Debate Resurfaces in the U.K.: The British government is considering (hat tip to my wife) a Company Law Reform Bill that would formalize directors’ responsibilities not only to shareholders but to other stakeholders.

Buried in a 780-page document—buried so deep the U.K.’s Institute of Directors apparently did not spot it when it initially voiced approval for the proposals—is a section that says directors—traditionally answerable only to shareholders—“must (so far as reasonably practicable) have regard to the likely consequences of any decision in the long term, the interests of the company's employees, the need to foster the company's business relationships with suppliers, customers and others, the impact of the company's operations on the community and the environment.”

I have three responses to this.

First, I think any sensible director, and any sensible management, should consider the interests of all stakeholders in the decision-making process. Reason whines that “the bill doesn't even create a hierarchy to direct directors whose interests take precedence.” What? Are directors so lacking in judgment, wisdom and experience—three things you’d like to think they were hired for in the first place—that they can’t make a decision that balances competing interests without being told which one to put first? Then maybe it’s time for some new directors.

Second, I think the law as written invites lawsuits while remaining at the same time completely unenforceable. How do you prove that other interests were really taken into account? Doesn’t “so far as reasonably practicable” give directors so much wriggle-room that it undermines the intent?

Third, I think the law could be improved immeasurably—and would have considerably more impact—if the word “must” was changed to “may,” In other words, giving directors permission to consider the interests of other stakeholders in addition to those of shareholders. Too many directors believe they have to act in the short-term interests of shareholders. Many would continue to act that way anyway, because of the pressure of the financial markets.

But it would be nice if they believed that every now and again they could make a decision that was in the long-term interests of all the company’s stakeholders.

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