In-house solicitors will be familiar with the obligations of directors as set out in section 172 of the Companies Act 2006 (especially now there is a statutory requirement to report on it). Many of those same solicitors will be equally familiar with directors (newly appointed or otherwise) who believe that they have a legal obligation to maximise profit for the shareholders, and that this constitutes an ‘overriding duty’ or a director’s main ‘fiduciary duty’.
This fallacy persists for a number of reasons, including:
• Pressure from heavyweight shareholders who benefit most from short-termist decision making.
• Bonus and other reward packages.
• An easy metric that everyone understands.
• Fear of competitors.
However, the legal obligation in section 172 of the Companies Act 2006 is far more nuanced and provides a clear set of criteria which many directors may be surprised by. Now is an excellent time to revisit the fallacy of a legal obligation to maximise profit. We are in an age where environmental and social governance issues are rocketing up the corporate agenda and climate crisis is threatening both short and long-term stability. Section 172 speaks directly to those concerns.