What does Unilever’s relocation to the Netherlands tell us about the state of the UK corporate governance regime?

Is the UK’s corporate governance regime to blame?

Many are concluding that the rationale for the decision is materially driven by the UK’s current corporate governance regime. In 2017, Kraft Heinz failed with a $143bn takeover bid for Unilever, the bid being aggressively defeated within 48 hours of it going public with Unilver’s board making a series of terse statements against the bid.

In the aftermath of the takeover attempt, Unilever’s Paul Polman complained that UK takeover rules, and by implication the wider corporate governance regime, focused too heavily on the interests of shareholders, to the exclusion of the interests of employees, customers and other stakeholders. Polman, a long standing challenger of global corporate culture, who has waged public campaigns for corporates and CEOs to aspire to improve people’s lives by providing employment and sustainable manufacturing, going so far as to declare “[t]he reason I believe business should be around is to serve society”, appeared unimpressed by the heavy focus on shareholders.

Whose interests are really at the heart of the UK’s corporate governance regime?

The perception of a shareholder focus stems from the interpretation of a particular section of the Companies Act 2006 (“Act”), specifically the duties of directors set out therein. Section 172 states:

“A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of a company for the benefit of its members as a whole”.
This is one of various directors’ duties codified in the Act. What amounts to “success” in this context has been the subject of debate since the wording was originally included. The government’s offered interpretation for commercial companies is that “success” in this context will usually mean “long-term increase in value”. Notwithstanding the provisions of the Act referencing the directors “having regard to” the interests of employees and others, the implication is that the generation of value for shareholders, is of primary concern. Polman’s criticism, made in a takeover situation, likely relates to this provision. For directors faced with a takeover offer, with an offer price per share higher than current market price, it can be argued that the best interest of the shareholders are represented by accepting the offer.

How was the takeover bid defeated?

Unilever were ultimately able to defeat Kraft-Heinz’s offer within the scope of the UK corporate governance regime, citing that the offer did not fairly reflect the value of Unilever. Notwithstanding this, the corporate governance regime in the UK can be contrasted with that in the Netherlands, which places greater emphasis on the wider interests of stakeholders, rather than just shareholders. Unilever’s prospects of successfully fighting takeover bids from a position of having a sole, Netherlands based headquarters appear to be materially increased by the decision, something its board are likely to have recognised.

What’s the wider context of the corporate governance debate?

The wider picture in relation to UK corporate governance, in the aftermath of the collapse of Carillion and BHS, continues to be the source of much debate. In March, the Department for Business, Energy & Industrial Strategy launched a consultation on proposals to improve the governance of companies when they are in or approaching insolvency. This includes consideration of ways to protect payments to SMEs in a supply chain in the event of the insolvency of a large customer. The evidence suggests that it would be appropriate for a wider revisiting of the UK directors’ duties to take place, particularly to whom the directors owe them. The current focus on the increase of value for shareholders should be revised to reflect the directors’ responsibilities to a company’s wider stakeholders, be they employees, retirees, customers  or suppliers.

What should directors be focusing on in the current climate?

A re-write of the duties of directors seems some way off, for now companies should ensure that their directors are aware of their duties under the Act as it stands. Corporate governance failings remain particularly newsworthy and having a considered corporate governance regime is of ever increasing importance in the current economic and social climate. Suggested steps include:

1. on appointment, ensure that all new directors are briefed on their duties and understand their obligations;
2. ensure that the company’s policies in areas such as human resources, ethics and corporate responsibility are prepared against the backdrop of the directors’ duties; and
3. make reference to the directors’ duties in the terms of reference of any board or committee.