From the TUC

Government responds to Banking Commission’s challenge to shareholder primacy

09 Jul 2013, by in Economics

A quick postscript to my recent blog reporting that the Parliamentary Commission on Banking had recommended that directors’ legal duties be changed to require directors to put financial safety and soundness of the company ahead of the interests of its shareholders.

The TUC has long been a critic of shareholder primacy – we believe that directors should be required to promote the long-term success of their company as their primary aim, rather than prioritising shareholder interests as at present.

The government has now responded to the Commission’s recommendations. In short, while sceptical, it has not rejected it out of hand and has said it is going to consult more widely. Or in full:

Changing directors’ duties for directors in banks over the ring-fence threshold has the merit of signalling clearly that shareholders’ interests do not overrule the long term safety and soundness of the firm. But it may also have drawbacks. The enforcement of directors’ duties is entrusted to shareholders or (new) directors. As the Commission notes, prior to the financial crisis many shareholders were not as effective as they could have been in challenging bank practices. It is consequently not clear that such a change to the duties would be effectively enforced.

What the crisis has shown is that the current regime for enforcing existing directors’ duties in the banking sector has had an insufficient deterrent effect on bank directors’ behaviour, and thereby failed to protect the public from harm. The Government will therefore seek views both on the Commission’s specific recommendation as well as alternative options to strengthen the enforcement regime. Any recommendations for changes to the FRC’s Corporate Governance Code would be contingent on the outcome of these deliberations.

As these issues potentially go beyond the financial services sector, the Government will seek views on all of these options in its forthcoming discussion paper on Trust and Transparency, which will be published before summer recess.

So – this should provide an opportunity to put the case for rewriting directors’ duties and removing shareholder primacy in company law. Watch this space!