Overview Of The Duty Of The

Director To Promote The Success

Of The Company
(CA 2006 –Section 172(1))
CONTENTS
What is Corporate Governance?
A system which is defined with practices, rules and
processes in controlling and directing an organization.
Company Law and Corporate Governance
• Company law is formulated with the company activities and establishment of
company policies and procedures.
• Company law has two diversions of Corporate Governance and Corporate Finance.
• Corporate Governance maintains the balance between the operations and practices
of business with the interests of stakeholders.
• Both corporate governance and company law work for the protection of human
rights and it is considered to address any gaps in processes and remediation of any
damage.
• Enlightened Shareholder Value(ESV) under Corporate Governance work towards
optimizing the shareholder value at the same time considering stakeholder interests
for the long term run of the company in a sustainable manner.
• Sustainable Development Goals are used to induce the responsibility of corporate
governance any company law by addressing corrupted environments, transparent
processes, reduced bribery and building successful partnerships.
What Is Companies Act 2006 ?
• Considered to be the longest act in the British history and being the primary
source of UK Company Law.

• The replacement act of Companies Act 1985.

• The act aims to simplify company law by improving shareholder rights as

well as relating to the duties of the directors.

• The act ensures the insignificance of a company secretary and AGM by

improving the administration and reducing the difficulties faced by small
companies bringing out ‘Think Small First’ approach.

• The company act stands out for the justice of the shareholders by maximizing
of the fulfillment of shareholder interest at an unfavorable process of the
company.

• The act boasts about the duties of the directors to make decisions in the good
faith.
Remedies for Breach of Duty
A breach of duties of the director can
lead to:
• The director to pay damages for the liability.
• Indicating the threat of breach with a
warning letter.
• Fine imposed or imprisonment for critical
breaches.
• Termination of employment
• Return of any company properties obtained
in the breach.
The Duties of the Director amid Covid-19 Pandemic
• Ensuring customer and employee health and safety concerns and adhere to the
government regulations to be followed to stop spreading the pandemic within the
premises.
• Review the cash flows of the company in short term and long term run.
• Analyze the funds and facilities allocated as measures to prevent spread of Covid-19.
• Oversee the economical impact due to Covid-19 and take measures in benefit of the
company.
• Plan the business continuity and work from home rosters.
• Adopt technologies to virtually connect with shareholders, partners, employees and
customers.
Shareholder Primacy
• The theory focuses in increasing the wealth of the shareholders while directors being bound to fulfill the interests of
shareholders.
• This focuses to maximize the profits generation to shareholders.

• There is no particular law for this theory, but modern era believes in shareholder’s wealth to be the primary factor.
Real Life Scenarios Featuring the Imperfections of
Shareholder Primacy
• Jack Welch, CEO of General Electric decided to reduce the wages and terminate the workers creating a fear among other employees as
well showcasing an inhuman behavior where workers were ignored of their service creating unemployment in the industry which
eventually affects in economy.
• High turnover Amazon discriminating the rights of workers and disrespecting the service of workers by ignoring their interests to
maximize profits finally damaging the reputation once the inside work culture was revealed.
• Reduced quality and downturn for the company at Boeing in treating the employees in cost cutting and increasing profits by losing
professional employees.
• Mismanagement of Intel Corporation causing the struggle with TSMC due to the silicon chip shortage which was uttered with lack of
research and development whereas major focus was on stock buybacks.
• Collapse of Enron Corporation,UK due to short term benefits causing senior managers to be imprisoned and most employees being
deprived of retirement savings.
• A comment posted by one of the most influential persons using the Snapchat stating that she refrained from using the particular
created a loss of $1.5billion to the company. Major issue with this was the new redesign of Snapchat which was formulated to
overcome the completion and maximize profits which became an utter disappointment among consumers.
Real Life Scenarios Featuring the Imperfections of
Shareholder Primacy
• A comment posted by one of the most influential persons using the Snapchat stating that she refrained from using the
particular created a loss of $1.5billion to the company. Major issue with this was the new redesign of Snapchat which
was formulated to overcome the completion and maximize profits which became an utter disappointment among
consumers.
• The earnings of shareholders have been more than the profit earned by Unilever, Coca-Cola, Diageo and Associated
British Foods whereas the suppliers remain as the poorest people in the world and none of the companies have taken
any action to upgrade the life of their suppliers.
• The collapse of Northern Rock Bank has been caused due to the reliance on short term funding, which finally
encountered severe liquidity issues.
• Chiquita Brands Inc.,USA was collapsed due to the company mismanagement whereas poor working and environmental
conditions were maintained in profit maximization.
• Bad management at Lehman Brothers,USA led to the collapse of the organization after its’ heavy investment of
Mortgage Debts.
Covid-19 Pandemic and Shareholder Primacy
• Covid-19 has created the logic of interdependency whereas most companies were
struggling due to customer loss and reduced workforce. Therefor most of the shareholders
and investors had to concern the wellbeing of employees by upgrading health and safety
measures of employees. External Pressure and legal constraints also supported on behalf
of stakeholder consideration.
• More societal aspects have been raised with the spread of the disease where shareholders
had a responsibility to aid the society to combat Covid-19 as a nation, although they were
financially at a crisis amid the pandemic.
Covid-19 Pandemic and Shareholder Primacy
• It was proven that the impact to the company at a crisis would have been
reduced if the company has forecasted in long term. Therefore failure of
shareholder primacy was highlighted where the major concern could have
been to take proper judgement of stakeholders.
• Innovation, research and development have been vital to combat Covid-19
where companies who followed Shareholder Primacy had the least attention
in investing on improving and appreciating stakeholder skills.
• The ethnic collaboration was highlighted where the whole world faced the
pandemic and helped each ethnic group and it was highlighted to add a
multinational director board to overcome racial inequalities.
Shareholder Primacy leading to Economic Crisis
From Shareholder Value to Enlightened Shareholder
Value
• The theory is more or less similar to Shareholder Value (SV),but it implies a more dominant effect in the introduction of corporate leaders who
would rely on protecting stakeholders.
• The theory is more focused on improving capitalism that would be beneficial for stakeholders.
• The approach was initiated to achieve the fundamental rights of directors and correct the narrow, short term interest shown as per section 172(1).
Stakeholder Theory
• The theory focuses not only in the fulfilment of shareholder interest, but as well as the wellbeing of
stakeholders and the corporation. Stakeholders can be identified as employees, suppliers, investors,
customers, community and government bodies.

• This theory ensures the social responsibility of a company rather than chasing after profit maximization.
Stakeholder Theory Application in Giant Industries
Transition from Shareholder Theory to Stakeholder Theory for
Business Development
• Examining business practices and defining the values of each employee of how they can
involve in business development.
• Conduct stakeholder analysis.
• Group the stakeholders as per their capabilities and define company strategies.
• Arrange discussion sessions with stakeholders and gather opinions and information.
• Make necessary adaptations with different groups with the growth of the company.
• Focus on adopting sustainability practices into the organization.
Better Business Act (BBA)
• The act resembles as a better legislation with amendments to empower the stakeholders.
• The main purpose of the act has been diverted from “the duty to promote the success” to “the duty to advance the
company”.
• This ensures the company intentions having positive attributes towards the social and environmental impacts without
prioritizing only the interests of shareholder interests.
• It is considered that the little changes made in the act would be quite beneficial to combat climate change & resource
depletion and to make necessary sustainable changes.
Four New Principles reflected in amended Company Act
 Ensure the interests of shareholders.
 Empower Directors.
 Default change applied to companies.
 Report sustainable practices followed by the company
Adaptation of ESG Principles to the companies
WHAT IS MEANT BY ESG PRINCIPLES?
 ESG is referred to as “Environmental”, “Social”
and “Governance”.
 ESG standards are used to measure the risks of
the company by the investors.
BENEFITS OF FOLLOWING ESG
PRINCIPLES
 Improved sustainability contribute to protect the
planet and resources.
 Social responsibility is enhanced and stakeholder
intervention is maximized.
 Identification of risks.
ASSESSED GOVERNANCE FACTORS
 Company attributes towards the environment.
 Attitudes of company towards stakeholders.
 Health & Safety measures taken.
 How the company is driven.
COMPANY VALUE CREATION
 Attraction of customers.
 Lower energy consumption, reduce costs.
 Strategic freedom and government support.
 Increased employee satisfaction boost production.
 Long term capital investments.
Need for a change in Company Law
• Minimize the barriers for small organizations.
• Mitigate the impacts from abuse and corruption .
• Improve innovation and creativity in productions/services.
• Rehabilitation of the bankrupted companies.
• Provoke short term decisions which lead for bankruptcy.
• Ensure the sustainability within organizations for a greener environment.
• Adherence to government regulations.
• Improvement in healthy and safe working environment
• Acquire more consumers and fulfillment of customer satisfaction.
Recommendations for Improvement of Company Act
2006, Section 172(1)

• Formulate strategies and policies in compliance with government regulations.

• The job role of the board should be clearly defined in the strategy.
• Maintain the balance between delegations through the judgement of directors
• Adherence of business principles of BBA
• Adaptation of BSG concepts to promote sustainability within the premises and more
focus on achieving Sustainable Development Goals.
• Monitor organizational performance with KPIs prior to extending into new investments
Recommendations for Improvement of Company Act
2006, Section 172(1)

• Appoint directors with proper assessments.

• Provide information to directors of the board decisions.
• Arrange training and development to employees.
• Build behavioral competencies to improve skills of the board of directors.
• Conduct SWOT analysis to evaluate board and director performance.
• Be innovative in the products/services offered.
CONCLUSION…………..
• Company Act 2006, section 172(1) primarily stands in favor of shareholder theory where directors are
bound by legal obligations at a loss or financial damage to the company, which they are held liable with
an utter responsibility to drive the business towards success.
• Shareholder theory is adversely impacted to stakeholders since the main focus has been for the profit
maximization whereas environmental and social responsibility is forgotten, creating an unhealthy
working environment at some companies leading to customer and consumer dissatisfaction.
• Adaptation of Better Business Act(BBA), Stakeholder Theory and ESG principles will not only maximize
the profits with increased productivity as well as the accomplishment of SDGs generate stakeholder Value
addition.
• Therefore referring to previous economic crisis and company collapses, it is evident that the main focus
of the company should not be considered in short term to maximize profits, but needs to be planned in
long term adhering to government compliances and strategizing the company in a sustainable manner.