ESG is fashionable
Many fashion businesses are trending ESG chief among them Patagonia whose owner last year sold the company to an environmental non-profit organisation.
But equally there are fashion brands making headlines for missing the mark:
Boohoo has been faced with claims of poor working conditions and treatment of staff in its Burnley warehouse, leading to Boohoo staff being targeted by protesters in February 2023 at Source Fashion.
H&M, Next, and Inditex have been accused of failing to pay the minimum production value of their goods to workers in their suppliers’ Bangladesh factories. Not only is this “bad for business”, but also for the companies’ directors they could be personably liable for such ESG failings.
We look at directors’ duties and how they apply in relation to corporate sustainability and ESG requirements.
Who is a director?
There are three different ways that somebody can be considered a director:
- De jure (or legal) directors are those who are formally appointed, with no ambiguity as to their role or authority in relation to the company.
- De facto directors are never formally appointed but exercise a degree of control or influence over the company. They are part of the company’s governing/decision making process, they appear as a director and carry out the functions that directors typically do.
- Shadow directors are neither formally appointed nor carry out the typical director functions, but are there in the background exercising influence over the company’s affairs and telling the board how to act on certain issues.
Directors’ duties
A director owes statutory duties to the company that they serve. Known as the “general duties”, broadly these relate to acting with integrity, care, and skill, and avoiding conflicts of interest, to ensure that the company is as successful as possible.
Who owes the duties and who enforces them?
The “general duties” apply not only to legal directors, but also “de facto” and “shadow” directors. This was highlighted recently by The Sunday Times when commenting on Mike Ashley’s new advisory role with Frasers Group. However, it has been reported that Frasers has taken specialist legal advice to ensure that Ashley’s role will not fall into the shadow director trap.
Under company law, directors’ duties are owed to the company itself, and enforcing these duties is a matter for the company. Failing to discharge their duties is one of the few exceptions to the liability protection that a company affords its directors and shareholders. Broadly, if a director is found to have breached their duties, which results in the company suffering a loss, then a director can be held personally liable for this and may be ordered to ‘make good’ the loss suffered by the company. If the breach is severe, it may result in the director being disqualified on the grounds of being unfit to hold office.
The subsidiary six
In respect of a director’s duty to promote the success of the company, there are many factors which a director must take into consideration if they are to act in the company’s best interests, including:
- The likely long-term consequences of any decision;
- The interests of the company’s employees;
- Fostering the company’s business relationships with suppliers, customers and others;
- The impact of the company’s operations on the community and the environment;
- Maintaining a reputation for high standards of business conduct; and
- Acting fairly between members of the company.
These considerations are known as the “subsidiary six”.
In the context of H&M, Next, and others paying their Bangladesh factory workers less than the production cost of their products, the directors of these companies may have already fallen foul of (3) and (4) above.
Underpaying suppliers (or failing to raise payments in line with production costs and minimum wage levels) does not foster strong, positive relationships with suppliers (3), nor have a good impact on the community where the factory is based (4), and is not conducive to building a reputation for high standards of business conduct (5).
All of which could deter their target market – who are turning increasingly to sustainable and ethical fashion – from purchasing from their brands. Fewer customers equals fewer sales and revenue, and over a sustained period, this leads to fewer profits for a company’s shareholders!
A widening of directors’ duties on the horizon?
On 1 June 2023, the European Parliament voted in favour of a proposal to adopt the proposed Corporate Sustainability Due Diligence Directive (“CSDDD”). It is currently expected that the CSDDD will come into force by 2025.
The goal of the CSDDD, is to require businesses to undertake corporate sustainability due diligence in order demonstrate what action they are taking to protect the environment and human rights. It will require businesses to put in place processes and procedures to prevent, mitigate and account for the detrimental impacts which their business, and other businesses within the value chain in which they operate, may have on human rights and the environment. For example, large companies (with a turnover of more than EUR 150 million) will be required to ensure that their business practices are compatible with meeting the Paris Agreement target of limiting the increase of global warming to 1.5°C.
In addition to requiring businesses to implement new, and enhance existing, policies and procedures relating to sustainability, the CSDDD will also introduce duties and requirements for directors of businesses which fall within the categories identified above, including:
- setting up and overseeing the implementation of the CSDD at their business;
- being obliged to consider the consequences of their decisions on human rights, climate change and the environment, when acting in the best interests of the company; and
- where a director’s remuneration is linked to company performance, his/her overall contribution to sustainability will be considered when deciding his/her overall remuneration package.
The European Commission has proposed that directors’ duties will be enforced through existing Member State laws.
Final points
Time will tell if the CSDDD will result in the fashion world seeing fewer accusations of modern slavery, poor working conditions and unethical relationships with suppliers. But with good corporate governance, sustainability, and environmentally-friendly products at the forefront of many minds, fashion businesses (and their officers) would do well to ensure their directors are complying with their statutory duties and the subsidiary six.
Authors
Follow us online
