Will company directors be more accountable to their shareholders and the wider community now that the landmark Companies Act 2006 is now fully in force?

Businesses, lawyers and legislators are already taking stock of the commercial landscape to detect whether the new law has met its creators’ lofty aims.

The Government’s rationale for replacing the Companies Act 1985 was to create a modern and simple legal framework that neither acts as an obstacle to the way companies operate nor stifles entrepreneurship. In particular, the focus was on a “think small first” approach, deregulation and promoting a long-term investment culture.

The shift in emphasis towards think small first was certainly welcomed by most companies, 95 per cent of which are regarded as small. Company law has traditionally been written with larger companies in mind, with exemptions for smaller companies tacked on as an afterthought. The 2006 Act sought to correct this, by setting out minimum requirements for all companies and layering additional requirements on top for public and listed companies. This has made the law more accessible.

The Act has also simplified procedures. Changes, such as removing the requirement for private companies to hold annual general meetings and relaxing the rules on written resolutions, should reduce administrative costs. This is particularly helpful at a time when confidence in starting new businesses has been so adversely affected by the economic climate.

But as the longest statute in English law, comprising 1,300 sections and more than 40 sets of accompanying regulations, the Act is a vast and complex piece of legislation. That it has also been introduced piecemeal over three years, many have found the task of interpreting and implementing its provisions a daunting and expensive proposition.

The law will continue to change, as we have already seen in amendments to the Act’s provisions on shareholder meetings. In many cases, changes can be made by secondary legislation. While this makes it more flexible, it is also harder for companies to keep up to date.

Further complexity has been created by transitional provisions for companies incorporated before full implementation of the Act. Policymakers argue that these were designed to preserve existing bargains between companies and shareholders and to ensure that existing companies were not required to do anything when the new law came into force. But, if deregulation is the objective, requiring companies to take action to obtain the benefit will leave many of those that would benefit most still burdened by the old regime.

Another aim of the Act is to enhance shareholder engagement and promote a long-term investment culture. Corporate scandals and tougher economic conditions have led to greater concern among many shareholders about the management of their investment.

The Act has sought to address this, for example by setting out directors’ duties to clarify their responsibilities. Shareholder interests are now balanced by the concept of “enlightened shareholder value”. Directors must act to promote the success of the company, for the benefit of its shareholders. But they must do so “having regard to” long-term consequences and wider factors, such as the impact of the company’s operations on the community and environment.

Although these provisions were brought into force in 2007, it is too early to tell whether the Act will make directors more accountable. There remains a question mark over the zeal with which directors will focus on matters that they may consider ancillary to the underlying needs of the company. Fears of environmental and other activists seeking to hold directors accountable to the wider community have not so far materialised, but it is early days. This is an area where case law will undoubtedly develop, so the Act is unlikely to succeed in its aim of providing clarity.

The Act also sought to enhance shareholder engagement by enfranchising the many investors in listed companies who hold their shares through intermediaries. Provisions relating to proxies and representatives of corporate shareholders at company meetings were designed to enable nominee shareholders to give voting rights to the underlying owners of the shares they hold.

After something of a false start, with conflicting provisions causing confusion, particularly in relation to corporate representatives, it looks as though we now have workable provisions that will achieve this objective. But there has not been much take-up of other provisions allowing indirect investors to receive copies of accounts and other documents direct from the company.

The principles behind the legislative changes are generally sound and smaller companies incorporated under the new Act are likely to benefit from a more coherent and less bureaucratic system of corporate governance. For existing small companies, lack of appropriate advice and resources may mean that the deregulatory benefits are denied to them. So far, the statutory statement of directors’ duties and the concept of enlightened shareholder value have not had much perceptible impact in practice. In an increasingly globalised economy, the continuing impact of the Companies Act 2006 must be closely monitored to ensure that the UK remains an attractive location for businesses to reside and shareholders to invest.

Danielle Harris is a professional support lawyer in the corporate team at Maclay Murray & Spens LLP

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