Let us examine the oft-repeated claim that the directors of (especially listed) companies have a legal duty to maximise profit and to minimise tax for the benefit of their shareholders.
Under Section 172 of the UK’s 2006 Companies Act, company directors merely have a legal duty to promote the success of their company.
Specifically, directors are required:
“to have regard to the likely consequences of any decision in the long term;
the interests of the company’s employees;
the need to foster the company’s business relationships with suppliers, customers and others;
the impact of the company’s operations on the community and the environment;
the desirability of the company maintaining a reputation for high standards of business conduct; and
the need to act fairly as between members of the company.”
Nothing here about a legal duty to maximise profit.
So I guess PR people should not allow their directors to say that they have a legal duty to maximise profit?
Correct. For the simple reason that it is not true.
Promoting the success of the company clearly implies a duty to generate profit (or at least a positive cash flow) but it says nothing about ‘maximising it’. Nor by implication, of finding inventive ways to minimise tax.
Moreover, it could be argued that maximising profit and minimising tax may actually be harmful to employees.
It may be harmful to shareholders who are the ones that are effectively penalised if HMRC fines a company for tax avoidance or claws back tax presumed by shareholders not to be owed.
It could harm the long term interests and reputation of a company if there is negative press coverage about a company’s tax affairs, or if HMRC successfully challenges the arrangements.
It could even harm a company’s commercial interests if customers boycott a company as a result.
So let’s put to bed the excuse that companies have a legal duty to maximise profit and find a better way of communicating why companies make profits.
18 Nov 2019