This morning when listening to Breakfast on BBC1, they discussed the tax affairs of 'Starbuck' and their 'business expert' said something you hear quite often in such debates - to paraphrase.."that Directors are required by law to maximise profits" - which got me thinking and ironically turning to Google.
It's based on a concept from the USA that the main priority of Directors of a company should be to maximise the shareholders value, it's the 'yeah but' answer when challenged.
But what basis is there that Directors are legally required by statute to maximise shareholder value?
In the UK there is no legal requirement by statute that would require Directors to maximise shareholder value. The relevant law is Section 172, The Companies Act 2006, and the blog by Richard Murphy - Tax Research gives a good explanation.
But you might say companies such as Starbuck and Google etc are companies from the States and as such UK law does not apply.
However, similarly in the USA there is "no law stating that the purpose of a corporation must be to maximize shareholder return."
Put simply, in the USA corporation law is determined by the 'States' and most state's statute say that the directors have a "fiduciary" obligation to the shareholders. This fiduciary obligation requires the directors to manage the business with the best interests of the shareholders in mind.
Again simply put it says that the Directors of the Company are answerable to the shareholders, and must act in the best interest of the shareholders. Which depending on the views of the shareholders may not necessarily mean maximizing profits.
For a good debate on this see the Linked in discussion board - What is the law that stipulates that the purpose of the firm is to maximize shareholder return?
The management guru Peter Drucker most famous saying is 'The Purpose of a Business is to Create a Customer'.
And of course for you to have a profit to avoid paying tax on, you first of all need the profit.
For the likes of 'Starbucks' they stand or fall on the number of customers that go in and out of the shop front door. And in that sense the customer is all powerful, if they do not buy into the image that 'Starbucks' is painting for itself, do not cross the threshold and move on by to a competitor.
So next time you hear someone trying to defend something a company has done, which although legally permissible is morally dubious, say 'yeah but - Directors are legally required to maximise profits' remind yourself it has no basis in law.
It's based on a concept from the USA that the main priority of Directors of a company should be to maximise the shareholders value, it's the 'yeah but' answer when challenged.
But what basis is there that Directors are legally required by statute to maximise shareholder value?
In the UK there is no legal requirement by statute that would require Directors to maximise shareholder value. The relevant law is Section 172, The Companies Act 2006, and the blog by Richard Murphy - Tax Research gives a good explanation.
But you might say companies such as Starbuck and Google etc are companies from the States and as such UK law does not apply.
However, similarly in the USA there is "no law stating that the purpose of a corporation must be to maximize shareholder return."
Put simply, in the USA corporation law is determined by the 'States' and most state's statute say that the directors have a "fiduciary" obligation to the shareholders. This fiduciary obligation requires the directors to manage the business with the best interests of the shareholders in mind.
Again simply put it says that the Directors of the Company are answerable to the shareholders, and must act in the best interest of the shareholders. Which depending on the views of the shareholders may not necessarily mean maximizing profits.
For a good debate on this see the Linked in discussion board - What is the law that stipulates that the purpose of the firm is to maximize shareholder return?
The management guru Peter Drucker most famous saying is 'The Purpose of a Business is to Create a Customer'.
And of course for you to have a profit to avoid paying tax on, you first of all need the profit.
For the likes of 'Starbucks' they stand or fall on the number of customers that go in and out of the shop front door. And in that sense the customer is all powerful, if they do not buy into the image that 'Starbucks' is painting for itself, do not cross the threshold and move on by to a competitor.
So next time you hear someone trying to defend something a company has done, which although legally permissible is morally dubious, say 'yeah but - Directors are legally required to maximise profits' remind yourself it has no basis in law.
No comments:
Post a Comment