Employee

Promoting Employees’ Interests through Corporate Law in the New KnowledgeBased Economy Jingchen Zhao♣

The New Economy is also known as “the Information Economy”, “the Second Industrial Revolution” or “the Post-industrial Society”. It finally arrived in the twenty-first century after being heralded for a long time. The New Economy is focused on talent, knowledge and information and is based on mobile devices such as email, the internet and intranets, making new dot com companies competitive in the global market. This economy is global, and it will steadily increase the globalisation of business. The basic issue concerning corporate governance in the New Economy concerns whether corporate directors should view themselves solely as the stewards of their investors’ capital, and so aim to maximise shareholder value, or whether they should they view themselves instead as the custodians of their companies’ “human capital” and thus concentrate more on protecting the interests and developing the knowledge and skills of their employees. In the New Economy, people play an increasingly significant role in corporate governance since we are in the midst of a transformation from an industrialised to an information-oriented society. Therefore, in this article, the role of employees will be discussed in terms of their role as one of the primary stakeholders in a company, in order to consider why human capital has become centralised in the New Economy in the twenty-first century, and what kind of legal rules should be adopted to protect this development and promote the success of the company.

Key Words: new economy, stakeholder theory, human capital, duties of directors

It is not the strongest of the species that survive, nor the most intelligent, but the ones most responsive to change. – Charles Darwin

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Lecturer in Law, Kingston Law School, Kingston University ([email protected])

Chapter 1: Introduction

Despite conflicting views about their impacts, increasing globalisation and the development of information technology over the last two decades are changing every single aspect of the way we work, and particularly the way economy develops.1 Compared to conventional methods of production, production in the modern economy is more likely to be in an intangible form, based on the exploitation of ideas rather than material things. This is the so-called weightless economy, which is seen as a novel change in light of technology and the knowledge explosion since the 1990s. In addition, technological development has brought about a higher sustained level of productivity growth, allowing faster economic growth with less inflation.2 Therefore, many academics and practitioners use term “New Economy” to describe the economy of the world from the 1990s onwards, especially with reference to developed countries.

With society progressively becoming knowledge- and information-based, employees are increasingly being considered as assets of the company and one of the company’s biggest overheads in terms of cost;3 the success of a business cannot be achieved if excellent, highly educated people are not attracted to work there. In the knowledgebased industries, employees as human capital have become the key to business success since such companies are heavily dependent on their employees’ knowledge, expertise and active involvement in order to outperform other companies.

From a European perspective, the importance of placing human capital investment at the forefront of policies to promote economic growth and social cohesion was explicitly outlined in the Lisbon Summit of the European Council in March 2000, and has been repeatedly emphasised ever since as a key strategy to turn the EU into the most competitive and dynamic knowledge-based economy in the world.4 For instance, in
CL Fisk, ‘Knowledge Work: New Metaphors for the New Economy’ (2005) 80 Chicago-Kent Law Review 839 at 839– 840; G Brown, A Strong and Strengthening Economy: Investing in Britain’s Future: Economic and Fiscal Strategy Report and Financial Statement and Budget Report (London, The Stationery Office, 2006), para. 1.3. 2 R Formaini & TF Siems, ‘New Economy: Myths and Reality’ (2003) 3 Southwest Economy 1 at 1. 3 G Proctor & L Miles, Corporate Governance (London, Cavendish, 2002), 56; T Clarke, International Corporate Governance (2007), 117. 4 A da la Fuente & A Ciccone, Human Capital in a Global and Knowledge-based Economy: Final Report, Employment Social Affairs, European Commission Directorate-General for Employment and Social Affairs Unit A.1. (2002). 2
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recent EU communications about lifelong learning, quality of work and mobility, it is stated that “measures aimed at increasing the quantity and quality of the stock of human capital should be an important part of any growth-promoting policy package”. 5 With their new status as resources of company investment, the protection of employees’ interests is increasingly important.

In terms of corporate governance, this indicates that company directors should pay additional attention to current and prospective employees’ interests. Inevitably, this will shed significant light on the transportability of the “best practices” of corporate governance, particularly in Anglo-American shareholder-oriented countries where employees’ interests have not traditionally been at the centre of managerial concern. Therefore, changes to the world economy have created a need to address the new demands of companies, employees and society, and for a fundamental rethinking of corporate law and policy. A number of questions therefore arise: if human capital is so important in the New Economy, what are the necessary measures for protecting the interests of employees with their new status as human capital, in order to promote the competence of the company? Is the adoption of the stakeholder approach the right way to make company directors more responsible in the New Economic era?

The article will start with an introduction to the concept of the New Economy, with an analysis of the interrelationships between the New Economy, corporate governance. and human capital. Secondly, the interests of employees in the New Economy will be discussed, especially with regard to their position upgrade from servants to stakeholders, who have a crucial and indispensable responsibility in promoting the success of the company. Thirdly, arguments will be presented regarding the protection of employees’ interests through UK company law, especially via the Enlightened Shareholder Value model and with particular regard to relevant legal provisions, s 172 (1) and s 417 of the Companies Act 2006.

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Ibid., see page 11. 3

Chapter 2: The New Economy, Stakeholders’ Interests and Human Capital

2.1: What is the New Economy, and how does it differ from the old economy? Initially appearing in Business Week in 1994,6 the term “New Economy” has been widely employed in a large amount of literature, regardless of the lack of a common definition.7 However, a common feature shared by all academics in their use of the concept is a highlight on the significance of information.

Generally speaking, the New Economy has been defined by economists in both broad and narrow perspectives. In the broad perspective, the Bureau of Economic Analysis described the New Economy as economy of “strong growth in real GDP and per capital GDP, higher rates of investment as well as low inflation and unemployment” 8. Davis redefined the New Economy as a “new paradigm” with driving forces including technical progress, globalisation, product market structure modifications and labour market structure modifications.9 Three basic characteristics of the New Economy can be derived from those two definitions: first, there is always greater stability of GDP and prices in the New Economy; second, there is a potential drop in unemployment and inflation; and third, and most importantly, there is a trend towards long-term wealth creation, which mainly results from the tremendous technological innovations from the mid-1990s onwards.10

As for the narrow perspective, the term New Economy incorporates the development of information technology and the internet, together with their impact on the economy. Gordon understood the New Economy as equivalent to an acceleration in the rate of technical advance in IT, although he did not take into account its contribution prior to 1995 when he defined the New Economy as encompassing the “mid-1990s acceleration
See JW Verity, ‘The Information Revolution’ (1994) 3372 Business Week 10; MJ Mandel, ‘The Digital Juggernaut’ (1994) 3372 Business Week 22. 7 J Triplett, ‘Economic Statistics, the New Economy, and The Productivity Slowdown’ (1999) 34 (2) Business Economics 13 at 13–14. 8 B Fraumeni & S Landefeld, ‘Measuring the New Economy’ Bureau of Economic Analysis Advisory Committee Meeting available on http://www.bea.gov/bea/about/newec.pdf . 9 G Davies, M Brookes & N Williams, ‘Technology, the Internet and the New Global Economy’ Goldman Sachs Global Economic Paper, (2002) March. 10 N Jentzsch, ‘The New Economy Debate in the US’ John F Kennedy Institute for North American Studies, Section of Economics, Working Paper 125/2001. 4
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in the rate of price decline in computer hardware, software and telephone services, the corollary of an acceleration of exponential growth rate of computer power and telecommunications capability and the wildfire speed of development of the Internet” 11. Similarly, Bosworth and Triplett focused on the role of IT as an accelerator of the economy’s rate of output and productivity growth when they claimed that the New Economy embraces IT developments, namely “computers, peripherals, computer software, communications and related equipment.12”

The next question is what makes the New Economy new? Compared to the traditional economy, several characteristics of the New Economy were presented by Atkinson and Court13. It is argued that, in the New Economy, the market is more dynamic, unclear and unpredictable. Along with notable improvements in technology, production and trading patterns across the world, companies are increasingly facing competition on an international level. The rule of the game in competition is the fast eats the slow. Dot com companies and networked companies are new organisational forms of corporation, with flexible and devolved interconnected subsystems. The key drivers in supporting enterprise are people, knowledge and capabilities. The success of the company is measured by the market price of the entire company, which is influenced by elements like share price, reputation of the company, value of the trade mark and so on. Leadership is always based on a shared power structure, with employee empowerment and self eldership. Employees are regarded as an investment of the company.

In contrast, the old economy is based on the notion of stable, linear and quite predicable markets, in which companies compete on a domestic basis with a hierarchical bureaucratic structure.14 In this system, the key driver to the growth of an enterprise is capital. The rule of the game for competition is the big eats the small. The success of the company is measured by profit, and the leadership of the company is purely vertical.
RJ Gordon, ‘Does the New Economy Measure up to the Great Inventions of the Past?’ NBER Working Paper, Aug 2000, http://paper.nber.org/papers/W7833 . 12 B Bosworth & J Triplett, ‘What’s New About the New Economy? IT, Economic Growth and Productivity’ Brookings Economic Papers, October 20, 2000, available via website (visited on 2nd March 2009) http://www.brookings.edu/views/papers/bosworth/20001020.pdf . 13 R Atkinson & R Court, The New Economy Index Report: Understanding America’s Economic Transformation, Progressive Policy Institute, Technology, Innovation and New Economy Project, Nov.(1998); for more detailed content see via website: http://www.neweconomyindex.org/index_nei.html#Table_of_Contents . 14 Ibid., see page 7. 5
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The employees are always seen as expenses of the company.

2.2: The New Economy and Corporate Governance 2.2.1: Interests of Employees in the Company – from Servants to Stakeholders Continuing changes in the business world, including the widespread employment of new technologies, the globalisation of the economy and society, and increasing competition in both the public and private business sectors, have all had a great impact on the transformation of organisations’ internal structures, strategies, and management approaches.15 Of all these changing strategies and approaches, the enhancement of employee interests to make full use of their knowledge and experience is commonly recognised as a significant way to achieve organisational objectives.16 Before discussing the interests of employees as a primary stakeholder group in a company, it is worthwhile to briefly discuss the notion of a “stakeholder”. The actual term “stakeholder” first appeared in management literature in an internal memorandum at the Stanford Research Institute in 1963, and was described as the only group to whom company management needs be responsive.17 The use of “stakeholder” to refer to a variety of constituencies who participate in a business has been commonly accepted since the 1980s, after the publication of Freeman’s Strategic Management, a landmark book in the business literature.18 The concept of stakeholders was defined as “those groups without whose support the organisation would cease to exist”, originally including shareowners, employees, customers, lenders and society.19 The most famous and frequently cited definition was given in an essay by Evan and Freeman, where stakeholders were described as “those groups who have a stake in or claim on the firm.”20 According to the relationship between their interests and the company, stakeholders can be divided into primary stakeholders and secondary stakeholders. They can be also divided into internal and external stakeholders, depending on whether

G Shapiro, “Employee Involvement: Opening the Diversity Pandora’s Box?” (2000) 29 Personnel Review 304. P Crosby, Quality is Free (New York, McGraw-Hill, 1979); D Steininger, “What Quality Initiatives are Failing: the Need to Address the Foundation of Human Motivation” (1994) 33 Human Resource Management 601; J Pfeffer, Competitive Advantage through People (Cambridge, MA, Harvard Business School Press, 1994). 17 E Sternberg, ‘The Defects of Stakeholder Theory’ (1997) 5 Scholarly Research And Theory Papers 3. 18 RE Freeman, Strategic Management: A Stakeholder Approach Boston and London: Pitman (1984). 19 ibid, see page 31-32 20 WM Evan & RE Freeman, ‘A Stakeholder Theory of the Modern Corporation’ in Snoeyenbos, Almeder & Humber (eds.), Business Ethics 3rd edn. New York: Prometheus Books (2001) see page 101–114, 102. 6
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they are members of the company.

As a key stakeholder group, employees have an interest in the company since it currently provides their livelihood, and at some future point employees may often also benefit financially from the company’s pension scheme.21 In return, employees can enhance the innovation and sustainable development of their company by providing their own expertise and experiences. They are the ones who create, invent and produce products, deliver their professional services to the company, create its profits, and represent it to the external world.22

Employees tend to have a strong and interdependent relationship with the company they work for. On the one hand, employees are concerned with the company’s important strategies, such as working conditions, pension schemes and so on. By virtue of their length of service and the relative inflexibility of their bond with the company, i.e. their livelihood which is dependent on their employment, employees strive to secure their interests within the company.23 On the other hand, however, the company’s development, especially the implementation of long-term strategies, largely depends on its employees’ recognition and performance of corporate strategic plans.

Traditionally, under the shareholder value principle which dominates in the UK, the role played by UK employees in corporate governance has not been as active as that of their counterparts in Continental countries. It has been found that the main method of communication between UK management teams and their employees was one-way – for instance, staff news-letters, notice boards and emails24 – in which employees functioned as inactive receivers rather than dynamic involvers. The unions who

CA Mallin, Corporate Governance Oxford: Oxford University Press (2004); see page 45. J Williamson, ‘A Trade Union Congress Perspective on the Company Law Review and Corporate Governance Reform since 1997’ (2003) 41 (3) British Journal of Industrial Relations 511 at 514. 23 Company law requires directors to take account of employees’ interests in matters affecting the company. However, there is no enforcement mechanism for employees to use where directors fail to take account of their employees’ interests. See s 309, s 719 of the Companies Act 1985, and s 187 of the Insolvency Act 1986. Also see S Sheikh & W Rees, Corporate Governance and Corporate Control (London, Cavendish, 1995), 147. 24 G Proctor & L Miles, Corporate Governance (2002, London: Cavendish Publishing Limited), 56. 7
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represent the employees have suffered an overall decline in membership,25 and their influence on the management and governance of companies has been seriously undermined.26

Since the 1990s, however, with society becoming progressively more knowledge- and information-based, employees are increasingly considered as assets of the company, and as one of the company’s biggest overheads in terms of cost, 27 the success of the business cannot be achieved if excellent, highly educated people are not attracted to work there. In knowledge-based industries – for instance, the software and pharmaceutical industries – employees have become the key to the business triumph because companies are heavily dependent on their employees’ knowledge, expertise, and active involvement in order to outperform other companies. Employees in these industries are generally regarded as non-substitutable, since they are often specialists in certain areas. Due to the company’s reliance on their expertise, they are very difficult to replace. When the company tries to create long-term well-organised relationships with its employees, these specialists are especially important since their existence is crucial to the running and development of the entire company.

Even in the case of substitutable employees, their interests cannot be ignored. Some powers of employee organisations, such as strikes, can easily put companies into difficulties. Given the employees’ increasing significance to company development, it has even been suggested by stakeholder proponents that employees and shareholders should both be recognised as residual claimants of the company.28 If the preferential consideration of shareholders’ interests can be justified by the claim that they bear the greatest risk relative to a company, the duties of directors towards their employees can also be justified by their direct relationship with the company. Employees always find it
Based on the figures to date, membership fell from 8,939,000 in 1989 to 7,321,000 in 1999–2000. Figures based on data collected by Employment Market Analysis and Research (EMAR) for the Office of National Statistics, available at http://www.berr.gov.uk/employment/research-evaluation/index.html. 26 G Proctor & L Miles, Corporate Governance (2002, London: Cavendish Publishing Limited), 58. 27 G Proctor & L Miles, Corporate Governance (London, Cavendish, 2002), 56; T Clarke, International Corporate Governance (2007), 117. 28 MM Blair, “Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century”, in T Clarke (ed.), Theories of Corporate Governance: The Philosophical Foundations of Corporate Governance (Oxon, Routledge, 2004), 183. 8
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difficult to obtain a similar job after losing their employment when a company becomes insolvent. Employees also bear the risks of loss of income, skills, confidence and health, perhaps on a permanent basis.29 Compared to the risks borne by shareholders, who can and do diversify their risks through portfolios, the risks borne by employees seem disproportionate. Therefore, under the traditional shareholder-oriented scheme the protection of employee interests becomes an essential issue.

2.2.2: Employee Considerations under the New Economy Alternatively defined as “the Information Economy”, “the Second Industrial Revolution” or “the Post-industrial Society”, the New Economy is characterised by rapid technology innovation, which is brought about by progressive and respectable performance from company employees. Employees have not only accelerated the pace of innovation by virtue of their expertise, but also affect the pace at which new products gain widespread use and produce significant sales.30 As argued by Grant, “if knowledge is the preeminent productive resource and most knowledge is created by and stored within individuals, then employees are the primary stakeholders. The principal management challenge … is establishing mechanisms by which cooperating individuals can coordinate their activities in order to integrate their knowledge into productive activities.” 31

In the New Economy, more extensive education and training are expected from potential employees, to allow the new technologies of the company to be developed and adapted. It is also expected that directors should accumulate adequate human capital for research and development, in order to enhance the long-term interests of the company, even if such input in terms of employees might be at the expense of the shareholders in the short term. Therefore the dominant role of employees in the new knowledge-based economy promotes a pragmatic consideration of stakeholder interests in shareholderoriented jurisdictions, in order to realise the long-term interests of the company. A basic

J Williamson, ‘A Trade Union Congress Perspective on the Company Law Review and Corporate Governance Reform since 1997’ (2003) 41 (3) British Journal of Industrial Relations 511 at 513. 30 R Formaini & TF Siems, ‘New Economy: Myths and Reality’ (2003) 3 Southwest Economy 1 at 2. 31 See RM Grant, “The Knowledge-Based View of the Firm: Implications for Management Practice” (1997) 30 Long Range Planning 450, 452. 9
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question arises for corporate governance: should corporate directors view themselves solely as stewards of their investors’ capital and aim to maximise value for shareholders, or should they view themselves instead as custodians of their company’s “human capital” and thus concentrate on protecting the interests and developing the knowledge and skills of their employees?32

2.3: The New Economy, Human Capital and Employees Information networks are extensively established, and offer people everywhere the opportunity of inexpensive access to a huge amount of information classified into various databases. Investment in human capital contributes significantly to productivity growth, especially for high technology science-based companies. It is argued that one of the huge successes of the modern corporation is to attract talented workers, who otherwise might have become independent entrepreneurs, without offering them ownership, control, or even the obligation of directors’ considerations towards their interests. 33 It is estimated that human capital accounted for 22% of the observed productivity growth in the period from 1969 to 1990, and 45% of the productivity differential with the sample average in 1990.34 Employees, as providers of human capital, play a key role in fostering innovation and change within their company.

The value of intellectual property is becoming increasingly crucial in the knowledge economy. As early as 1999, copyright had become the United State’s number one earner of foreign currency, outstripping clothes, chemicals, cars, computers and planes. The knowledge, talent and technology of employees are, like electricity, in a form that can only be perceived when they are being used. 35 The information obtained by today’s consumers demands customised products, which will inevitably result in a more demanding role for employees interms of their initiative and creativity. Knowledge or intellectual capital and talent will greatly promote innovation and modifications to
J Aoi, ‘To Whom Does the Company Belong? A New Management Mission for the Information Age’ in DH Chew (ed.), Studies in International Corporate Finance and Governance Systems: A Comparison of the U.S., Japan, & Europe, Oxford: Oxford University Press (1997) see page 244 at 246. 33 CL Fisk, ‘Knowledge Work: New Metaphors for the New Economy’ (2005) 80 Chicago-Kent Law Review 839 at 843. 34 A da la Fuente & A Ciccone, Human Capital in a Global and Knowledge-based Economy: Final Report, Employment Social Affairs, European Commission Directorate-General for Employment and Social Affairs Unit A.1. (2002); see page 4. 35 P Druker, Chapter 15: ‘Leadership – More Doing than Dash’ in Managing for the Future, London: ButterworthHeinemann, (1992); see pages 119–125. 10
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company products as well as the company itself. Company directors should identify and encourage the development of their “human assets” in individual ways, in order to contribute to the company’s success by utilising their employees’ highly subjective tastes and idiosyncratic ways of thinking.36

The massive shift in manufacturing capacity, from Western economies to those countries that offer access to cheaper labour, will continue be a significant trend in the New Economy. This will not only create jobs for local communities in developing countries, but will also create severe pressure for unskilled workers in more advanced economies.37 This transition will also cause social problems concerning employment environments in developing countries, where the interests of employees cannot be effectively and soundly protected by employment law. Disasters might happen and unethical working conditions might prevail in developing countries due to the negligence of the company directors. Meanwhile, the employees do not have access to relevant information in order to protect themselves, because of their poorly-developed information systems compared with those countries which are already in the New Economic era.

For example, in the Bhopal incident in 1984, 20,000 people, including company employees, were killed or harmed by a chemical leak from the American-owned Union Carbide chemical works in the city. The leak could have been prevented if procedures, management and maintenance at the plant had been more rigorous. As a second example, the use of child labour in factories in the third world, whereby multinational companies produce cheap products to sell in Western markets, became an international issue in the 1990s and the first decade of the new millennium.38 In the light of these examples, directors should pay special attention to employees as key stakeholders if their company is based in the third world, in order to secure the health and safety of their

J Aoi, ‘To Whom Does the Company Belong? A New Management Mission for the Information Age’ in DH Chew (ed.), Studies in International Corporate Finance and Governance Systems: A Comparison of the U.S., Japan, & Europe, Oxford: Oxford University Press (1997) see page 244 at 247. 37 P Sadler, Building Tomorrow’s Company: A Guide to Sustainable Business Success London: Kogan Page (2002), see page 19. 38 C Fisher & A Lovell, Business Ethics and Value: Individual, Corporate and International Perspective Harlow: FT Prentice Hall, (2006) see page 53. 11
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employees and customers. The employees should be offered more information about the company by the directors, including operational information and safety knowledge. Also, they should be aware of both the domestic and international legal requirements, and should give local managers sufficient training about legal and local ethical policy issues.

“Participation and intervention at local, national and global level” are advocated today in order to “unleash extraordinary development benefits and real social and environmental gains”.39 The New Economy will be able to deliver a positive balance of benefits and costs only if we ensure that “societies are fully able to take advantages of the arising opportunities by encouraging socially and environmentally responsible business conduct.”40 This should ideally be realised through partnership with various external stakeholders, and the creation of synergies with various stakeholders such as local communities, local organisations and societies, labour organisations and certain international bodies.

Chapter 3: Protection of the Interests of Employees under English Company Law

The UK has been regarded as a leader in the Anglo-American cluster in terms of its transition towards the Continental model. This comes as a result of integrating stakeholder considerations into its own narrowly-defined objective of shareholder value,41 achieved by the recent introduction of the ESV principle which requires directors to take stakeholders’ interests into consideration, and the rapid growth of CSR activities.42 Its “Enlightened Shareholder Value” principle explicitly advocates a shift in

JD Wolfensohn, Foreword in S Zadek (ed.) The New Economy of Corporate Citizenship, Copenhagen The Copenhagen Centre (2001). 40 Ibid. 41 CA Williams & JM Conley, “An Emerging Third Way? The Erosion of the Anglo-American Shareholder Value Construct” (2005) 38 Cornell International Law Journal 493; T Clarke, “Introduction”, in T Clarke (ed.) Theories of Corporate Governance (Routledge, 2004), 13; S Deakin, “The Coming Transformation of Shareholder Value” (2005) 13 Corporate Governance: An International Review 11. 42 CA Williams & JM Conley, “An Emerging Third Way? The Erosion of the Anglo-American Shareholder Value Construct”, (2005) 38 Cornell International Law Journal 493; S Deakin, “The Coming Transformation of Shareholder Value” (2005) 13 Corporate Governance: An International Review 11. 12
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focus towards the “long term interests of the company”, which requires the directors of the company to recognise and report the effects of their business performance on various non-shareholder constituencies, such as employees, communities and the environment. The UK’s goal under the Companies Act 2006 appears to be the maintenance of its corporations’ financial accountability to a constituency of dispersed, independent shareholders, while simultaneously using market forces to nudge companies in the direction of greater social responsibility by taking stakeholders’ interests into account.43

It is apparent that employees, as the internal stakeholders of the corporations, are more vulnerable to management adoptions in the company than any other constituency. Whether it is a question of fair wages and conditions, sexual harassment in the work place, or maybe just the employees taking advantage of company resources, such as the phone or internet, for personal use, employee-related ethical problems are unavoidable for most contemporary company directors.44 However, this article will focus on the consideration of employees by directors under corporate law, rather than employment law and pension law in general, although directors’ duties under those legislations are also significant components in their duty scheme.

3.1: Historical Review

Based on the idea that corporate law and labour law were in essence separate fields of regulatory policy45, English company law statutes before the 1970s paid little attention to the consideration of employees’ interests. The interests of employees and their relationships with employers and others were mainly defined and protected within the realm of labour and employment legislations, including the Employment Rights Act 1996 (ERA 1996) and the Employment Regulations Act 1999 (ERA 1999). 46 Other than this,
CA Williams & JM Conley, ‘An Emerging Third Way? The Erosion of the Anglo-American Shareholder Value Construct’ (2005) 38 Cornell International Law Journal 493 at 500. 44 A Crane & D Matten, Business Ethics: A European Perspective Managing Corporate Citizenship and Sustainability in the Age of Globalization Oxford: Oxford University Press (2004) see page 223. 45 H Hansmann, “Worker Participation and Corporate Governance” (1993) 43 University of Toronto Law Journal 589; S Anderman, “Termination of Employment: Whose Property Rights?” in C Barnard, S Deakin & GS Morris (eds.), The Future of Labour Law (Oxford, Hart Publishing, 2004), 126. 46 G Proctor & L Miles, Corporate Governance, London: Cavendish Publishing Limited (2002), 54. 13
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employees were perceived as having no legitimate interests within the business of the company or its assets, and directors owed no duties towards their companies’ employees. However, employees only benefit from the directors’ decisions when the consideration of the interests of the employees is consistent with shareholder benefits.47 Judicially, in the case Hampton v Price’s Patent Candle Co.48, it was held that keeping the workforce happy and satisfied was a prudent capitalist policy. but it was not a legal requirement. The refusal of the Court to consider the interests of employees was once again reflected in practice by the operation of the ultra vires rule in Hutton v. West Cork Rwy. Co. Ltd.,49 in which the Court of Appeal confirmed that it was beyond the capacity of a company to make gratuitous payment to past or present employees. In sum, in the early years of company law employees’ interests were not formally considered by directors under English law.

As a consequence of increasing positive interactions between businesses and employees in practice,50 employees’ interests were first recognised in UK company law in a Government Company Law White Paper in 197751. In 1977 the Bullock Report52 on Industrial Democracy was set up by the Labour government in order to advocate a radial extension of industrial democracy, through a requirement that unions be given the right in law to protect employees’ interests. There were three proposals considered by the Bullock Committee. First, the committee considered the establishment of a Trade Union Council, which would have given trades unions the right to demand that employees elect half of the directors in large companies.53 Secondly, there was also a proposal for the establishment of an EEC Commission, which would require large companies to have a

Hutton v. West Cork Rwy. Co. Ltd. [1883] 23 Ch. D. 654; also see D Milman, ‘From Servant to Stakeholder: Protecting the Employee Interests in Company Law’ in Feldman & Meisel (eds), Corporate and Commercial Law: Modern Developments London: LLP (1996) 147 at 149. 48 Hampton v Price’s Patent Candle Co. [1876] 44 LJ Ch 437. 49 Hutton v. West Cork Rwy. Co. Ltd. [1883] 23 Ch. D. 654. 50 “Frequently in large commercial law firms company lawyers will attempt to draft directors’ service agreements which, strictly, are employment law documents. Additionally, business decisions impact upon the employment relationship and social action impacts upon business decisions, at the very least in terms of costs to business.” See C Villiers, UK Report on the Employer and the Relationship between Labour Law and Company Law (2000), available at http://www.dirittodellavoro.it/public/current/miscellanea/atti/pontignano2000/Villiers.html, accessed on 29/05/09. 51 HMSO, The Conduct of Company Directors, (Cmnd 7037, London, HMSO, 1977). 52 Report of the Committee of Inquiry on Industrial Democracy 1977 Cmnd 6706 at 84 (Lord Bullock, Chairman). The committee also commissioned and published two comparative research reports: E Batstone and PL Davies, Industrial Democracy – European Experience (1976). 53 Report of the Committee of Inquiry on Industrial Democracy 1997 Cmnd 6706 at 84 (Lord Bullock, Chairman) see page 26–28. 14
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supervisory council in addition to an executive board, in which one third of the members would be elected by the company employees.54 Thirdly, it was proposed by the Confederation of British Industry that companies should be required to negotiate employee representation schemes with their own employees, without any legislation to prescribe format or proportions.55

The Bullock Committee concluded by recommending the creation of a Commission to observe, encourage and recommend specific steps for employee representation.56 In detail, it was required that there should be the facility to elect representatives to the board of directors of private companies employing more than two thousand employees. The key features of these recommendations were that union representatives should be equal in number to those of the shareholders, with a smaller group of agreed “independent outsiders”, and that, unlike in some Continental European countries, the representatives should be elected by trade union members, rather than by all the employees. However, the response of British employers was universally hostile, and the reaction of the unions was ambivalent since many of them were worried that the proposals might undermine the established shareholder-oriented systems.

A report to Parliament was suggested by the Labour government, recommending the adoption of a law that would require companies to discuss employee representation with their labour unions, and either to reach a solution within a reasonable time or to submit to a plan that could be imposed by another committee created for their purpose. 57 As far as directors’ duties were concerned, the Bullock Report called for a reform of the basic directors’ duty to act in the best interests of the company. It also proposed that directors should be entitled to take account of the interests of shareholders and works in subsidiary companies.58 However, the Labour government fell from power before any of these proposals were actually adopted by Parliament. After the return of a Conservative

Ibid, see page 28–30. Ibid, see page 30–32. 56 Ibid, see page 160–166. 57 See Industrial Democracy 1978 Cmnd 7231. 58 See Charterbridge Corporation v Lloyds Bank [1970] Ch 62. 15
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government in 1979, the issue of employee involvement was removed from the political agenda.

Apart from the unsuccessful attempt by the Bullock Review to enforce protection of employees’ interests, directors’ duties to consider the interests of their employees were also recognised in 1977, when a Government White Paper, the Conduct of Company Directors, acknowledged that directors ought to consider their employees’ interests:
“The Government believes that employees should be given legal recognition by company law. The statutory definition of the duty of directors will require directors to take into account the interests of employees as well as of shareholders. They will also be required to send the annual report to all employees as well as to shareholders.”

A Companies Bill in 1978 also proposed the statutory codification of directors’ duties towards employees. It was provided in Clause 46 of the Bill that: “(1) The matters to which the directors of the company are to have regard in the performance of their functions shall include the interests of the company’s employees generally, as well as the interests of its members.” However, the Bill was never enacted since it had lapsed by the 1979 General Election.59 In White Papers in 2002 and 2005, the importance of a long-term view rather than just an immediate return was specially emphasised in situations where directors make decisions, with the purpose of establishing an effective framework of company law to support the performance of Britain’s companies. Moreover, besides shareholders, wider factors such as employees, effects on the environment, suppliers and customers were explicitly noted in the Bill in order to implement the enlightened shareholder approach.

3.1.1: Assessment of Article 309 The first company statute to acknowledge employees’ interests was the Companies Act 198560, in which it was stated that “the matters to which the directors of a company are to have regard in the performance of their functions include the interests of the
S Sheikh, A Practical Approach to Corporate Governance, London: LexisNexis UK (2003) see page 332–333. S 719 of the Companies Act 1985 and s 187 of the Insolvency Act 1986 are also concerned with the interests of employees, granting the power to a company to make gratuitous provision for employees on the cessation of a company’s business, even though this provision “is not in the best interests of the company”. 16
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company’s employees in general, as well as the interests of its members”61. Under company law legislation, Section 309 of the Companies Act 1985 imposes a statutory duty upon the directors to consider the interests of employees when carrying out their duties, and disclose information in the annual accounts about employees and employment practices. Section 309 specifically states that the duty it imposes on directors is owed exclusively to the company. This should mean that the duty to consider the interests of employees is not owed to, and therefore is not enforceable by, the employees themselves.62 Hence, the duty is no great burden on the directors since the law simply requires the directors to consider the employees, rather than acting in their best interests. The directors will not give priorities to employees over shareholders when they are making decisions.63

In other words, Section 309 does not impose on the directors a positive duty which is owed directly to the employees. According to the statute as written, it is enough merely for directors “to have regard” to their employees’ interests, a provision by which it is acknowledged that their corporate decisions may have harmful effects on their employees. An aggrieved employee is effectively denied any remedy as he or she effectively has no locus standi to complain, unless he or she is a director or a shareholder in the company at the same time.64 Therefore, Section 309 was perceived as “mere window dressing”,65 effectively a “statutory provision without teeth”66.

From a practical point of view, Parkinson also argued against certain deficiencies of Section 309 when he pointed out that the section would not have much effect on the way companies operate in practice.67 It is clear that the current duty imposed by Section 309 is a subjective duty. Directors have to act in accordance with what they believe to be an appropriate balancing of sometimes conflicting interests,68 while the Court is unable to
See s 309 of the Companies Act 1985. SW Mayson, D French & CL Ryan, Mayson, French & Ryan on Company Law, 21st Edn., Oxford: Oxford University Press (2004); see page 522. 63 G Proctor & L Miles, Corporate Governance London: Cavendish Publishing (2003); see page 43. 64 S Sheikh, A Practical Approach to Corporate Governance London: Lexis Nexis UK (2003); see page 333. 65 Ibid. 66 B Hannigan, Company Law London: Lexis Nexis (2003); see page 206. 67 JE Parkinson, Corporate Power and Responsibility: Issue in the Theory of Company Law Oxford: Clarendon Press (1993) see page 83–84. 68 Ibid., see page 83. 17
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intervene merely because it disagrees with the way in which the directors have weighted those interests.69 Further, there is no guidance in the section for how directors should interpret their responsibility under the provision. There is also no guidance about direction, or about a practical method for how directors should balance the interests of shareholders and employees.70 Managerial strategies will mostly be based on the discretion of the directors.

Therefore, if an action is going to be brought against the directors, it will be necessary to prove that the management policy is injurious to the employees’ interests, or to prove that the directors have disregarded or not honestly considered whether their policy will constitute a suitable balance between the interests of shareholders and those of the employees. This means that those directorial decisions which are injurious to employee interests may be only attacked on the grounds that the directors lacked good faith, which is extremely difficult to prove.

Furthermore, this specific duty appears to be unenforceable because there is no direct means of enforcing it, either individually or collectively. According to Section 309 (2), the duty is owed to the company (and the company alone) and is enforceable in the same way as any other fiduciary duty owed to a company by its directors. Therefore, if the employees of the company and other parties challenge the directors’ decisions and conduct, actions will be brought by the company. If the people in control of the company at the relevant time do not authorise the company in bringing an action against the directors if they are thought to have failed to have regard for the interests of the employees, the employees have no remedy under Section 309, even when their interests are adversely affected by those actions.71

Moreover, proceedings for breach of fiduciary duties may, under certain circumstances, be commenced in derivative form by a member on the company’s behalf.. “This raises

Ibid., see page 84. S Goulding & L Miles, ‘Regulating the Approaches of Companies towards Employees: the New Statutory Duties and Reporting Obligations of Directors within the United Kingdom’ in S Tully (ed.) Research Handbook on Corporate Legal Responsibility, Cheltenham: Edward Elgar (2005); see page 90. 71 Ibid., see page 90. 18
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the possibility of an employee with a shareholding being allowed to enforce the section 309 duty derivatively.”72 However, recent rulings effectively “bar any derivative action that does not have the approval of a majority of shareholders other than those who are defendant”.73 Therefore, the only way that section 309 might be enforced would be if employees are also shareholders who own a majority of shares in the company, and they subsequently bring an action against the directors. Therefore, a claim regarding the requirements for a derivative action would demand greater judicial creativity than can perhaps be realistically expected in the circumstances.74 It is also significant to stress that section 309 is permissive rather than mandatory, and that it clearly states that the employees cannot sue for any claimed breach of duty to them. These characteristics – the non-mandatory nature and the absence of enforcement through litigation – are typical of ongoing constituency statutes based on similar legislations in the US.

In spite of all those deficiencies, section 309 is still a positive and significant provision, which represents a tentative step towards recognising the employees’ role in an enterprise.75 Nevertheless, the Company Law Review Steering Group stipulated that section 309 should be repealed. In their view, there was a danger that the section might be interpreted as enabling directors to prefer employees’ interests to those of shareholders, which would threaten the principle of shareholder supremacy. Directors, therefore, should consider employees’ interests only in the process of promoting shareholders’ interests.76 This argument is not convincing, since it fails to consider the importance of sustaining the relationship between shareholders and other stakeholders, including employees, in the process of pursuing the objective of long-term shareholder value.

3.1.2: The Operating and Financial Review The CLR proposed that companies of economic significance should prepare an
JE Parkinson, Corporate Power and Responsibility: Issues in the theory of Company Law Oxford: Clarendon Press (1993); see page 83. 73 LS Sealy, ‘Director’s Wider Responsibilities – Problems Conceptual, Practical and Procedural’ (1987) 13 Mon U L R 164. 74 JE Parkinson, Corporate Power and Responsibility: Issues in the theory of Company Law Oxford: Clarendon Press (1993); see page 83. 75 See JH Farrar & BM Hanningan, Farrar’s Company Law 4th Edn., London: Butterworth; see page 386. 76 Company Law Review Steering Group, Modern Company Law for a Competitive Economy: Strategic Framework (DTI), 1999; available on DTI website: http://www.dti.gov.uk/ see paras 5.1.20 to 5.1.23. 19
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Operating and Financial Review, which is intended to be qualitative in character, containing all the information pertinent to assessing the performance and future prospects of the company, including its relationships with its employees and its impact on the community and environment.77 It was acknowledged by the CLR that stakeholders, such as employees, customers and the community, had legitimate interests in the activities of the company, especially those companies wielding significant economic power.78

The new OFR was introduced by the British government as draft regulations requiring 1290 British-based companies listed on the London Stock Exchange, the New York Stock Exchange or NASDAQ to publish an annual report on May 5th, 2004 after an extensive public consultation process. The new OFR requires companies to identify material, social and environmental risks, and to disclose information about those risks. 79 The regulation has operated to give much greater prominence to issues related to corporate social and environmental responsibilities.

Specifically, the OFR is based on an existing, non-statutory model for company reporting, which is recommended by UK Accounting Standards Boards and is already widespread and adopted by many listed companies. The intention of the OFR is to give directors a chance to explain to shareholders and other stakeholders about issues such as how they have looked after their social responsibilities, their employees, the environment, consumers and the community. The Review is regarded as a safeguard against the negative implications and effects of an excessive focus on short-term shareholder returns. The ultimate aim of this inclusive approach would be achieved by establishing successful relationships with members of the supply chain, the community and the environment.80

It is also proposed by the White Paper that rather than comprising duties on the

R Goddard, ‘Modernising Company Law: The Government’s White Paper’ (2003) Modern Law Review 402 at 405. Company Law Review, Modern Company Law: Final Report, (2001) 3.28–30. 79 CA Williams & JM Conley, ‘An Emerging Third Way? The Erosion of the Anglo-American Shareholder Value Construct’ (2005) 38 Cornell International Law Journal 493 at 500. 80 L Roach, ‘The Legal Model of the Company and the Company Law Review’ (2005) 26 Company Lawyer 98 at 102. 20
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directors, the “wider interests” will be taken care of by providing “a narrative report covering the main factors underlying the company’s performance and financial provisions”81 – namely the OFR82. The report is intended to be qualitative (e.g. including the balance sheet) and historical (e.g. reporting financial results for past years), and it is also intended to cover internal company matters (e.g. the size of the workforce). 83 It is intended to contain all the information that is material to an assessment of the company’s performance and future prospects, including its relationship with its employees, customers and suppliers84 and its impact on the community and environment.85 The Government also makes suggestions on proposed legislation for the OFR, to shed light on its important role in company reporting. “Annex D provides a commentary on a preliminary draft of the relevant clauses and invites comment on a range of issues on how the OFR should be implemented.”

The legal requirement for quoted companies to provide an OFT was once again stipulated in the Company Law Bill 2005, in which the directors are required to prepare an OFR for each financial year.86 Directors who failed to comply with the requirements will be committing an offence, and will be liable to a fine not exceeding a statutory maximum.87 The Secretary of State may also make provision by regulation as to the objective and contents of the OFR.88

However, the legislation and enforcement of the OFR as a reporting policy for directors are still open for debate, and further modification are necessary to perfect them. In practice, if enlightened shareholder primacy means balancing the interests of shareholders and stakeholders for the benefit of the long-term interests of the company, the reporting and disclosure of relevant issues in the OFR cannot by itself generate meaningful change in corporate practice. The mechanisms governing directors’
White Paper 2002 “Modernising Company Law” available via <http://www.dti.gov.uk/companiesbill/part2.pdf> para 4.28. 82 The Review was first published by the ASB in 1993. 83 White Paper 2002 “Modernising Company Law” available via <http://www.dti.gov.uk/companiesbill/part2.pdf> para 4.30 84 Ibid., see para 31. 85 Ibid. 86 See Company Bill 2005, Section 393. 87 Ibid., Section 395. 88 Ibid., Section 394. 21
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behaviour and company policy have to be modified so that the directors can fully realise the importance of the relationships between the company and its stakeholders from a fresh perspective, so as to establish information disclosure provisions.89

3.2: Changes Brought by the Companies Act 2006

3.2.1: The Enlightened Shareholder Value Principle and Employees’ Interests

Before the Companies Act 2006, the maximisation of shareholder wealth was not only a theory, but also a basic feature of corporate ideology and public belief in the UK. 90 This long-term and deeply-rooted shareholder-centred culture pushed many directors towards the narrow belief that under the current legal framework they were obliged to take a short-termist and shareholder-centric view at the expense of other corporate groups.91 As a consequence, this legal framework was criticised on the grounds of “limiting any accountability to stakeholders within a framework of, and to the overall purpose of, profit-maximization for shareholders”.92 The ESVP emphasises the significance of coordinating stakeholder relationships for the corporations’ long-term development, and it also aims to make directors aware of the gradual transformation occurring in legal and social frameworks in which corporations exist and operate, and to subsequently adjust their managerial routines. For those directors who are enthusiastic in balancing the shareholder and stakeholder concerns, this provision offers them legitimacy in doing so and some surety against being sued, provided that their action does benefit shareholders too.93 Over the past few decades, the UK and the US have both striven to overcome this short-sighted weakness, and have increased stakeholder consideration in corporate governance. The ESVP in new UK company law is a significant attempt to introduce such stakeholder considerations into the previous shareholder-centred scheme; it is hoped that the growing consideration of stakeholders’
J Williamson, ‘A Trade Union Congress Perspective on the Company Law Review and Corporate Governance Reform since 1997’ (2003) 41 (3) British Journal of Industrial Relations 511 at 514. 90 J Armour, S Deakin & SJ Konzelmann, ‘Shareholder Primacy and the Trajectory of UK Corporate Governance’ (2003) 41 British Journal of Industrial Relations 531 at 535; SM Bainbridge, ‘Director Primacy, the Means and Ends of Corporate Governance’ (2003) 97 Northwestern University Law Review 547 at 576. 91 RSA Inquiry, Tomorrow’s Company: The Role of Business in A Changing World, Aldershot: Gower (1995). 92 J Dean, ‘Stakeholding and Company Law’ (2001) 22 Company Lawyer 66 at 70. 93 A Keay, ‘Tackling the Issues of the Corporate Objective: An Analysis of the United Kingdom’s ‘Enlightened Shareholder Value Approach’’ (2007) 29 Sydney Law Review 599. 22
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interests in codified directors’ duties will be an efficient means of establishing a longterm corporate culture, and the necessity of corporate disclosure will further enhance directors’ regard for stakeholder interests.

There were no separate sections regarding the directors’ duties towards employees in the Companies Act 2006. Instead, employees’ interests were considered in Section 172 in the context of directors’ duties to promote the success of the company. Section 172 of the Companies Act 2006 emphasised the likely consequences of directors’ duties in the long term. Recognising the long-term interests of companies is one of the major advantages in adopting the stakeholder model in corporate law, and this requirement fits the ideal hybrid corporate governance model principle. The interests of employees, as the primary stakeholders who play a significant role in innovation and reformation within corporations, are certainly crucial in shaping an efficient corporate structure for the benefit of the long-term interests of the company.

Compared to Section 309 in the 1985 Act, legitimacy was given to directors in Section 172 (2) when considering the interests of employees. This means that where (or to the extent that) the purposes of the company consist of or include the purpose of the benefit of its employees, it can be asserted that directors’ decisions are made with the goal of promoting the success of the company for the benefit of its members. Since the success of the company was defined clearly in Section 172 (1) as long-term success, corporate decisions in favour of employees’ interests will be justified as long as they are directed at the long-term interests of the corporation. This strategy is obviously effective for companies in the new knowledge-based economic age, where specific employees are hired with unique professional knowledge that is crucial to product improvement and professional techniques. Indeed, the same holds true for companies that employ irreplaceable employees.

3.2.3 ; Business Review Corporate disclosure has long been regarded as an important way of enhancing corporate accountability and improving the transparency of corporate activities. In light of
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the growing awareness of long-term development and stakeholder considerations, there has been an increasing demand for corporations to produce reports detailing their commitment to social and environmental issues. An eye-catching modification in the Companies Act 2006 is the abolition of the OFR94 for quoted companies95 beginning on or after 1 April 2005. On 28th November 2005, on the opening day of the annual conference of Britain’s biggest business lobby group, Gordon Brown, the Chancellor of the Exchequer and until May 2009 the Prime Minister of the UK, announced the Government’s intention to abolish the requirement for the OFR.96 Indeed, the statutory requirement to produce an OFR, which had been the subject of much consultation and discussion, was abolished in the Chancellor’s speech.

The replacement for the statutory OFR is the Business Review, in line with the minimum requirements of the EU Accounts Modernisation Directive (2003), which called for companies’ annual reports to include “both financial and, where appropriate, nonfinancial key performance indicators relevant to the particular business, including information relating to environmental and employee matters (when necessary)”.97 The government’s intention is to use an enhanced Directors’ Report, specifically the Business Review, in order to satisfy EU and investor requirements. The general idea will be that the Business Review’s requirement for directors “will be less onerous on companies but still useful for investors and other stakeholders”.98

Based on a “table comparing the requirements of the Business Review and the Operating and Financial Review”, differences between the OFR with the Business Review mainly centre around the following aspects. Firstly, while the OFR was applicable to all UK quoted companies, the Business Review applies to all UK and EU companies except “small” companies. Secondly, while both reports require a balanced and comprehensive review, the Business Review covers only performance and
The OFR requirement was amended on 21st March 2005 in Schedule 7ZA of the Companies Act 1985; see also Company Reform Bill Section 393 – Section 395. 95 Companies with economic power are referred to as major companies. 96 Regulations to repeal the requirement for the OFR were published on 21 December 2005 and came into force on 12 January 2006.The Business Review requirement stayed in place. 97 Article 14 amending Article 46 of the Accounts Directive. 98 A Reese, ‘Operating and Financial Review and the Business Review’ London: WSP Environmental (December 2005). 24
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development through the year, rather than the analysis of the wider trends affecting the business which was part of the OFR. Thirdly, the only essential element of the Business Review is a summary of principal risks and uncertainties, without the commentary on business objectives, capital structure and resources required by the OFR. Fourthly, in terms of measures, the Business Review does ask companies to “include to the extent necessary” financial and non-financial Key Performance Indicators (including, where appropriate, environmental and employee matters), but there is no request for social and community issues, receipts or returns to shareholders and persons with whom the company has key relationships.

Legislatively, under Section 417 of the Companies Act 2006, directors are obliged to include in the Business Review “a fair review of the company’s business and a description of the principal risks and uncertainties facing the company”.99 The purpose of the Business Review is “to inform members of the company and help them assess how the directors have performed their duty under Section 172”.100 The obligations imposed on quoted companies are more onerous in comparison. Their Business Review must “to the extent necessary for an understanding of the development, performance or position of the company’s business”, include “the main trends and factors likely to affect the future development, performance and position of the company’s business and information about environmental matters, the company’s employees, social and community issues.”101 In other words, information concerning environmental,

employment and community issues does not have to be included in the Review if it does not contribute to an understanding of the development, performance or position of the company, and there is no indication or explanation as to what weight directors should give to any material relating to these matters. Therefore, it is debatable whether the Review will constitute a genuine account of the stewardship of all the relationships in which the company is involved.102

Section 417 (3) Companies Act 2006. Section 417 (2) Companies Act 2006. 101 Section 417 (5) Companies Act 2006. 102 A Keay, ‘Tackling the Issue of the Corporate Objective: An Analysis of the United Kingdom’s ‘Enlightened Shareholder Value Approach’’ (2007) 29 Sydney Law Review 577 at 604. 25
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The reason for the OFR’s abolition cited by Brown was that it was an example of goldplated European regulations which caused an unnecessary burden on business. It was also claimed by the DTI (now known as DBERR) that the transition from the OFR to a more narrative report is an improvement which gives corporations more flexibility, because the newly-developed reporting standard would be built on by a process of voluntary guidance. It was stated by the DTI that the removal of the requirement to produce an OFR would save businesses up to £33 million per year.103

In the opinion of the author, although the requirement for a Directors’ Report and Business Review is apparently similar to the requirement for an OFR, the abolition of the OFR brings negative consequences in terms of the transparency and accountability of business decision-making. The information requirements for stakeholders in the OFR, including environmental,104 employment,105 and social and community issues,106 are absent from the Business Review. It is clear that the controllers of companies see value in producing this information, because so many companies (about 60% of all listed companies) currently produce some form of OFR.107 The legal requirements for the OFR above and beyond the EU Accounts Modernisation Directive will enable stakeholders to get more information on corporate strategies, and this non-financial information can give them added value and insight into a company’s health and the worthiness of its investors. A Business Review cannot replace the OFR in terms of its implicit role as a form of embryonic social and environmental report. These requirements are expected to work as complements to Section 172 in disclosing information and giving stakeholders legitimacy. However, these requirements are hard to enforce if the disclosure is not mandatory.108 There is the potential risk that directors will simply select the information they are willing to disclose to limited parties in the company. Voluntary disclosure by companies can serve as a sufficient basis for ESVP, which is a legislative corporate
See Directors’ Reporting – Removing the Statutory Requirement to Produce an Operating and Financial Review, Note to Chancellor, 23 November 2005. 104 Schedule 7ZA 4 (1) (a) Companies Act 1985. 105 Ibid., 7ZA 4 (1) (b). 106 Ibid., 7ZA 4 (1) (c). 107 A Johnson, ‘After the OFR: Can UK Shareholder Value Still Be Enlightened?’ (2006) 7 European Business Organization Law Review 817 at 840. 108 See Section 417 (5) Companies Act 2006; if directors decide not to disclose stakeholder-related information which is necessary for an understanding of the development, performance or position of the company’s business, they only have to state in the review which kind of interests are not being disclosed and no other explanation is required. 26
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governance principle in UK company law.109

Chapter 4: Conclusion

From the discussions above, it can be concluded that the New Economy finally arrived in the twenty-first century after being heralded for a long time.110 The New Economy focuses on talent, knowledge and information, and is based on mobile devices such as email, the internet and intranets, which make the dot com companies able to trade simultaneously in the global market. It is a kind of economy with greater stability of GDP and prices, together with a potential drop in unemployment and inflation. In the New Economic era, the company will always benefit from the impact of technological innovation in creating potential long-term wealth. Compared to the old economy, information technology plays a massive role, and successful companies are always those who obtain sensitive information in the first place. The scope of competition now extends internationally.

In the New Economy, successful companies always engage with various stakeholders not only inside the company, but also outside – for goods and services, finance, labour and political patronage. A good relationship with employees, consumers, local communities, and the media are significant in promoting the competence of a company. The performance of its employees in technological innovation has and will continue to accelerate the entire development of the company, especially in high technology companies. Therefore, it can be deduced that human capital plays a crucial role, and contributes significantly to productivity growth in the New Economy. Therefore, rather than being regarded as expenses of companies, employees should more naturally be regarded as an investment of the company.

In terms of the classic corporate governance shareholder vs. stakeholder debate, the
A. Johnson, ‘After the OFR: Can UK Shareholder Value Still Be Enlightened?’ (2006) 7 European Business Organization Law Review 817 at 840. 110 P Sadler, Building Tomorrow’s Company: A Guide to Sustainable Business Success, London: Kogan Page (2002); see page 17. 27
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employees are classed as primary and internal stakeholders. In jurisdictions following a stakeholder approach, the interests of employees should be considered and further protected by company directors acting as the deciding mind of the company. It is argued that the stakeholder approach, if practically implemented, is an efficient way of protecting the interests of employees in the New Economy era. The interests of employees are always in conflict with those of shareholders and other stakeholders, and how to protect their interests under corporate law becomes another question. After a discussion of directors’ duties towards their employees, we found, under the enlightened shareholder value model, that the enforcement of the duties is still problematic. Although directors have been offered legitimacy to consider employees’ interests, the employees do not possess practical abilities to claim for remedies if the directors’ decisions are injurious to their interests. Even though there are exceptions, the chances of success in a challenge of this kind are extremely slim.

Further research on the enforcement of directors’ duties towards employees under corporate law – not only under English law, but also regarding the law under other jurisdictions – will be beneficial, both academically and practically. Law economic studies of the relationship between the advantages of the stakeholder approach and the New Economy in the narrow and broad perspective will be also crucial.

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