Directors’ duties: what does the duty “to promote the success of the company” actually mean?

The Companies Act 2006 (CA 2006) creates a series of general duties which company directors must comply with when fulfilling their role. Importantly, the duties are owed to the company, not to the shareholders or any other stakeholders, and it is the company that would have a right of action against a director in the event a duty is breached. 

The duty to promote the success of the company (s.172 CA 2006)

One of the most important and frequently discussed duties is the duty to promote the success of the company pursuant to s. 172 CA 2006. This section provides that each time a director makes a decision, both individually and as part of the board, they must act in a way that they consider, in good faith, would be most likely to promote the success of the company for the benefit of its shareholders as a whole. In doing so, they must have regard to six key factors, including the likely long-term consequences of the decision, the effect the decision may have on the company’s employees and business relationships, and its broader impacts on the community, environment and reputation. They must also consider the need to act fairly between the shareholders. 

It is the director’s responsibility to balance the significance of these factors, and the list is not exhaustive – directors should also consider any other relevant matters when determining whether the decision will promote the success of the company for the benefit of its members. The duty is subjective, which means it is for the director to decide, acting in good faith, what is likely to promote the success of the company for the benefit of its shareholders. 

The precise requirements of the duty have been the subject of much discussion and debate. Whilst the six factors (and any other relevant matters) must be considered as part of the decision-making process, these factors are subordinate to the overarching duty to promote the success for the benefit of its shareholders. The meaning of “success” refers to the long-term increase in value of the company. 

This principle of shareholders taking primacy over the other factors referred to in s.172 has been criticised in recent years, particularly as investors become more concerned with environmental, social and corporate governance issues, such as the company’s impact on climate change. Requiring directors to consider the factors listed in s.172 when making a decision arguably creates a compromise position, as it does require wider stakeholders to be considered by company directors, as opposed to just requiring directors to focus on value for shareholders, but for some this is insufficient.

New legislation is currently being proposed in the form of the Company Directors (Duties) Bill. This Private Members’ Bill proposes to amend s.172 to require company directors to balance their duty to the promote the success the of the company with duties in respect of the environment and the company’s employees. Whilst this proposal is a long way from becoming law (it is shortly due to have its second reading in the House of Commons), it demonstrates an increasing concern with company decision-making, and the need for directors to give weight to other factors, such as environmental impacts and employees, beyond just doing what is likely to create profit for the shareholders. 

Nonetheless, as the law currently stands, company directors should firstly give careful consideration to the obligation to promote the success of the company for the benefit of its shareholders, and then consider the factors referred to above, whenever they make a decision. It is advisable to document the decision-making process, and keep records of the factors considered and why. This can be done as part of the company’s board minutes.  

Hayleigh Southgate is an associate in the corporate and commercial team, advising on company law and business acquisitions & disposals.