Retrenchments in order to increase profits: The legal and ethical duties of directors

Authors Tobie Wiese

ISSN: 2413-9874
Affiliations: Former senior lecturer, Department of Commercial Law, University of Cape Town
Source: Industrial Law Journal, Volume 36 Issue 3, 2015, p. 1748 – 1765


The Labour Relations Act and the decisions of the labour courts interpreting the provisions of the Act limit the managerial prerogatives of directors to retrench workers in order to increase profits by requiring that employers must consider alternatives to dismissals. In addition, the Companies Act requires that directors must act in good faith, for a proper purpose and in the best interests of the company. The best interests of the company include those of all its stakeholders, including the workers. It therefore requires of directors to balance the interests of all stakeholders when making the decision to retrench. The ethical duties of directors include compulsory compliance with legislation but taking into account the corporate social responsibility of the company. The corporate social responsibility of the company is towards all of its stakeholders, not only the shareholders. It is contended that both the legal and ethical duties of directors require that retrenchments in order to increase profits should be allowed only when the long-term sustainability of the company in the interest of all its stakeholders requires it, as opposed to the short-term interests of only the directors or shareholders.