Company Law - Management & Corporate Governance (Part 2)

Corporate Social Responsibility in UK

The development of corporate social responsibility in the UK has been slow. This is in large part due to the case of:

Hutton v West Cork Railway Company

Facts: A company was in the process of winding up. At a general meeting of shareholders, a resolution was passed to compensate the corporate officers for their loss of employment, and to pay £1,500 in remuneration for past services of the directors, who had never been paid. This payment was not based on any legal claim that the directors had to payment; rather, it was simply a gratuity.

Held: Profit maximisation was the only permissible goal of a company. To make such payments would be ultra vires.

The result of this case was that it was not permissible to give workers anything unless it was good for the shareholders through an increase in efficiency and therefore profit. For a long period, many developments in English company law were involved with finding an alternative mechanism of achieving corporate social responsibility.

Over time, the ultra vires doctrine was eroded by both case law and statute, and during the 1980’s the UK saw a significant increase in corporate giving to the wider community.

In particular, the Companies Acts of 1980 and 1985 required the directors to have regard to the interests of their employees as well as their members. However, although a step in the right direction, employees faced considerable technical difficulties in achieving any legal remedy.


Influence also came from the EU. The 1992 Maastricht Treaty on European Union and its annexed Protocol and Agreement on Social Policy resulted in Directives for the information and consultation of employees. Companies of more than 1,000 workers with more than 150 in at least two member states had to establish company-wide information and consultation committees for their employees.

The Cadbury Committee report

This committee was set up by the Financial Reporting Council, the London Stock Exchange and the accounting professions to consider financial aspects of corporate governance. It recommended a code of pest practice, which boards of listed companies would have to abide by as a condition of listing. Coming into force in 1993, it considered the following practices important:

- The appointment of independent non-executive directors to the boards of listed companies;

- Appointments to the post of executive director were to be vetted by a nomination committee, the appointees of which were to be taken mainly from the non-executive directors;

- The role of Chief Executive and Chairman should not be held by the same person to maintain independence;

- Service contracts of more than three years should not be made to executive directors unless approved by the general meeting;

- Salaries of executive directors should be determined by a remuneration committee comprising mostly non-executive directors;

- An audit committee should oversee the company’s financial matters, comprising mostly of non-executive directors.

Each listed company had to include a statement in its annual report acknowledging compliance, or justifying any non-compliance with the code. 

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