Is it time to enforce section 172 of the 2006 Companies Act?

philip greenLabour MP Frank Field, co-author of the 60-page report into the BHS collapse by the parliamentary business, innovation and skills select committee, has  raised concerns with Greg Clark, the Business Secretary, about possible gaps in Britain’s corporate governance regime.

After alleging that Sir Philip Green had “plundered” BHS’s pension schemes, he said that the committee’s report highlighted the need for tougher rules to apply to privately owned companies, and for watchdogs to be handed additional powers to enforce them.

Sir Philip Green, who was knighted in 2007 for services to the retail industry, was a director of BHS for fifteen years before selling the company to a three-times bankrupt for £1 less than a year before the company collapsed with 11,000 job losses and a pensions deficit affecting 20,000 former employees.

As a director of a UK limited company, Sir Philip was subject to the 2006 Companies Act, in particular, section 172, which states:

  1. Duty to promote the success of the company
    • A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—
      1. the likely consequences of any decision in the long term,
      2. the interests of the company’s employees,
      3. the need to foster the company’s business relationships with suppliers, customers and others,
      4. the impact of the company’s operations on the community and the environment,
      5. the desirability of the company maintaining a reputation for high standards of business conduct, and
      6. the need to act fairly as between members of the company.

Clearly, Sir Philip and the other BHS directors can be challenged for not complying with (a) the consequences of any decision in the long term – when taking over £400 million out of the company over a 15 year period, leaving it with a pensions deficit of over £500 million and selling the company on to people who were not capable of running the business were not actions that would promote the long-term sustainability of the business.

Or (b) the interests of the company’s employees, 11,000 of whom have lost their jobs and 20,000 former employees have reduced pensions

Or (c), (d), (e) and (f)

The Cabinet Office are reviewing Sir Philip’s knighthood but they will not consider reviewing his honour until any formal reviews or investigations which establish the facts of a case have been completed – these include investigations by the Serious Fraud Office, the Insolvency Service and the Financial Reporting Council who are examining PwC’s audit of the BHS.

So we may never see a prosecution for non-compliance with section 172 of the 2006 Companies Act as Sir Philip Green may well have been stripped of his knighthood and barred from being a company director by these other, more pressing investigations but it would have been a timely reminder to all company directors of their fiduciary duties, even if they are majority shareholders of the companies they direct.

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