The economic success of the shareholder primacy model has dominated UK company law and imposed a strong allegiance to the shareholder value principle as a primary measure of utility. In contrast, concerns about human, environmental and labour rights violations from corporate activities have given rise to a large body of evidence of corporate irresponsibility, which is detrimental to a wide range of stakeholders. These concerns are also central to the legal regulation of corporations in ways which the traditional paradigm, which externalises stakeholder responsibility, has been unable to address adequately.
The battle for the adequate regulatory response is evident in a long line of progressive regulatory changes since the post-1985 Company Law Review. The review debated between the shareholder value approach and the pluralist stakeholder positions. Its compromise position was codified in s 172 of the UK Companies Act 2006. Initially, the Operating and Financial Review (OFR) was announced via legislation in 2005 to facilitate non-financial disclosure but was later controversially withdrawn. The repealed s 417 business review approach replaced the OFR in the original version of the UK Companies Act 2006. This business review also implemented the EU Accounting Directive 2003.
This was replaced with the strategic report, through the enactment of the Companies Act 2006 (Strategic Reports and Directors’ Report) Regulations 2013, which amended the UK Companies Act 2006 by adding ss 414A to 414D.
Recently, The Companies (Miscellaneous Reporting) Regulations 2018 inserted s 414CZA in the UK Companies Act 2006 and added a further requirement for a s 172(1) statement, within the strategic report for large companies. The statement is for companies to explain how the directors have had regard to matters listed in s 172(1) - (a-f). This includes:
(a) the likely consequences of any decision in the long term,
(b) the interests of the company's employees,
(c) the need to foster the company's business relationships with suppliers, customers and others,
(d) the impact of the company's operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
An added requirement is that the s 172(1)-statement should be disclosed on the company’s website. The publication requirement was extended to unquoted companies, as quoted companies were already required by s 430 to publish annual accounts and reports on their websites. The approach is similar to the disclosure of modern slavery statements on websites. This is required by the Modern Slavery Act 2015, s 54. The s 172(1) statement requirement became effective from the financial year beginning on 1 January 2019.
My paper explores whether the evolving company narrative reporting based on s 172 of the Companies Act 2006 can be characterised as reflexive law, which preserves the balance between the utilitarian company law shareholder value approach and the demands of corporate social responsibility (CSR) by stakeholders. It explores whether there is the potential of successfully mediating between two semi-autonomous subsystems of company law and social responsibility.
Reflexive law can be seen as state-based procedural regulation of private self-regulation to encourage directed semi-autonomous action. The choice of reflexive law and governance methods may be triggered by legal self-restraint. Legal self-restraint identified by Teubner as necessary where there is a desire to preserve a valued pattern of social life whilst identifying or creating structures that allow regulation to cope with social problems.
Although reflexive law is apparently procedural, it has substantive implications and this ties in with Teubner’s observation about the interactions between information and interference. The following three key points are made in this direction. Firstly, there is usually a substantive premise within procedural regulation. In the case of s 172, the substantive premise is the directors’ duty as the basis for making the s 172(1)-statement in the strategic report.
Secondly, there is the potential for reflexive law to either safeguard autonomy (in this case, directors’ discretion) or to impose discipline (in this case, to ensure that the basis of the exercise of such discretion is opened up to public scrutiny in the statements).
Thirdly, there needs to be an adequate reflexion in law for the necessary corrective action that requires the balancing of many interests that may not easily be captured in a legal formula. Thus, the reflexive approach allows the law to protect privatised decision-making, while at the same time conveying directions and guidance. This approach would allow interactions between two semi-autonomous systems of government: regulated company law and ‘privately-governed’ social responsiveness and responsibility.
As suggested by Feindt & Weiland, the reflexive governance process should allow interaction and arrangements of different actors across varying levels of governance within and outside the company. It should also include the consideration, adoption and changing of normative principles reflected in various corporate sustainability codes, policies and principles, as well as collaborative actions which take stakeholders’ viewpoints and impact into account. Finally, governance approaches should also include an integrative approach to solutions.
However, there are caveats. Firstly, a shift to reflexivity in regulation can mask asymmetric power relations. A paradox exists when ‘flexibility’, which privileges private decision-making and discretion, is applied to the handling of ‘social responsibilities’ for modern slavery in supply chains or directors’ environmental responsibilities. A relevant comparison are the more rigid legal approaches for investor protections in international investment agreements.
Secondly, the semi-autonomous nature of CSR and handling of stakeholder responsibilities, in a manner external to the company, is a self-imposed choice. Ireland recognises that company regulation is a result of choices in a historical context. Hurst suggests that a ‘weakness’ in the demand for responsibility may derive from the undesirable by-products of an emphasis on utility.
Nevertheless, the success of reflexive regulation lies in evolutionary progress made through changes in processes for information disclosure and the resulting creation of disruptive shared spaces of co-governance. Parker similarly recognises the potential for transforming the directors’ duties to disclosure, audit and justification obligations. Reflexive regulation also provides an impetus for the necessary next step that would involve consultation of stakeholders and re-organisation of internal control and decision-making processes.
The consultation of stakeholders and the re-organisation of internal control and decision-making processes are not yet evident from current regulatory changes. It is important to note that reflexive governance is not a radical tool which confronts and overcomes self-imposed company law limitations. It rather operates within the status quo, seeking interactions between existing systems. Therefore, in this sense the resulting process directs interactions between the company law’s director duties and CSR.
Adaeze Okoye is a Senior Lecturer at the University of Brighton.