Response to the Government’s consultation on corporate governance reform Contents

2Directors’ duties and pensioners

15.The green paper asks:

(7) How can the way in which the interests of employees, customers and wider stakeholders are taken into account at board level in large UK companies be strengthened?

We have not considered broader issues of corporate governance beyond our remit and have restricted our response to a narrow issue which emerged during out BHS inquiry.

16.Section 172(1) of the Companies Act 2006 sets out matters a director of a company must have regard to in the conduct of his or her duties:

(1)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—

(a) the likely consequences of any decision in the long term,

(b) the interests of the company’s employees,

(c) the need to foster the company’s business relationships with suppliers, customers and others,

(d) the impact of the company’s operations on the community and the environment,

(e) the desirability of the company maintaining a reputation for high standards of business conduct, and

(f) the need to act fairly as between members of the company.31

Under section 414C of the Companies Act directors of larger companies must publish an annual Strategic Report setting out how they have performed their duties under section 172.32

17.Pension scheme members, or the trustees who act in their interests, are not explicitly included as stakeholders to whom directors must have regard in the conduct of their duties. To some extent their inclusion may be implicit in, for example, considering the long term interests of employees. The interests of former employees may, however, differ from those of current employees. This is increasingly the case as the proportion of active members of DB schemes falls.33 Deloitte noted that section 172 “imposes some balance of the interests of shareholders and current employees, albeit with the balance in favour of shareholders, but there is no reference point for former employees”.34

18.The Association of Chartered Accountants said that pensioners may be at particular risk of being neglected when directors carry out their section 172 duties:

This can be a challenging task in any time as the resources are always finite. Under financially stressed situations, this can be particularly difficult. The on-going debate on the pension deficit at failed businesses has highlighted that this flexibility can subject relatively vulnerable stakeholders, namely former employees, to disadvantage.35

Former employees, whether they have retired or work elsewhere, tend to be dispersed and less equipped to speak with an informed collective voice than other stakeholders such as shareholders and current employees. The notorious complexity of pensions make it more difficult for scheme members to intervene. In the case of BHS, the PPF, in acting to recover maximum funds for the pension schemes from their insolvent sponsor, can expect to recover between 2p and 8p in the pound of the pension deficit.36 The pensioners did not choose to, in effect, lend their retirement savings to BHS but the PPF is an unsecured creditor. By contrast, Sir Philip Green has an outstanding claim for 100 per cent of a £35 million floating charge he previously pledged to the pension fund.37

19.ICSA: The Governance Institute suggested that company directors should have “an explicit duty to have regard to the interests of members of defined benefit pension schemes”.38 Pension scheme trustees must always act in the best interests of scheme beneficiaries. Beneficiaries include pensioner members, active members (employees who are building up benefits), deferred members (non-active members who are not yet drawing benefits), prospective members and the widows, widowers and dependants of members.39

20.The Legal and General Group, an insurance company, did not favour “comprehensive overhaul” of section 172 but said:

recent corporate events may provide grounds for more express recognition of certain stakeholders in board decision making such as past (e.g. pensioned) and current employees.40

Legal and General cautioned, however, that the failure of BHS was “perhaps more to do with the application of directors’ duties by those directors in question” than deficiencies in legislation. They suggested that there was “scope for the application and enforceability of directors’ duties to be scrutinised through the courts” rather than through further prescription at this stage.41

21.The list of stakeholders to whom company directors must have regard under section 172(1) of the Companies Act 2006, duties they must report on annually under section 414C of that Act, does not include defined benefit pension scheme beneficiaries or the trustees who must act in their interests. Incomes of pensioners in retirement are reliant on the sustained success of the sponsoring company but they are at particular risk of being neglected in corporate decision making. The inclusion of pension scheme trustees in section 172 may increase the chances both that directors would take into account the interests of current and future pensioners in carrying out their duties and that those who have failed to do so will be held accountable in the courts. We recommend that pension scheme trustees be added to section 172(1) of the Companies Act 2006.


32 Companies Act 2006 s414C; The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations (SI 2013/1970)

33 Pension Protection Fund, The Purple Book 2016, figure 3.9

34 Deloitte (CGV0145)

35 Association of Chartered Certified Accountants (CGV0100)

38 ICSA: The Governance Institute (CGV0111)

39 The Pensions Regulator, Trustee guidance, issued December 2007

40 Legal & General Group (CGV0098)

41 Legal & General Group (CGV0098)




9 February 2017