Corporate governance in the UK is evolving at pace. In April, a parliamentary reception was held for the Better Business Act campaign, which aims to amend section 172 of the Companies Act so that ‘balancing people, planet and profit’ becomes central to the responsibilities of company directors.
The campaign is gathering momentum. If successful, it will underpin two broader aspects of governance change – the environmental, social and governance (ESG) agenda and stakeholder capitalism.
Stakeholder capitalism
Milton Friedman’s doctrine of maximising shareholder value is ill suited to today’s conditions, where society expects ESG priorities to be central to business purpose. The climate emergency and the coronavirus crisis have combined, highlighting the need for corporate sustainability and fairness.
In contrast, solely focusing on shareholder value often results in short-term profit-taking. Hence the recent surge in support for stakeholder capitalism, whereby business leaders aim to create long-term value not only for shareholders but for all stakeholders – employees, customers, suppliers, local communities etc (see AB’s ‘Leading the Change’ special edition on this subject).
The UK’s legal framework does not compel directors to consider the full impact of their decisions
Business is responding. For example, the Davos Manifesto 2020 states: ‘The purpose of a company is to engage all its stakeholders in shared and sustained value creation.’
Companies in the UK are increasingly taking a broader view of their purpose, as demonstrated by the findings of a recent survey by the Institute of Directors (IoD) of more than 700 of its members – see graphics below.
There are now more than 500 certified B Corporations in the UK. B Corp is a sustainability credential assessed by the global not-for-profit B Lab. B Corp businesses meet the highest standards of verified social and environmental performance and public transparency to balance profit and purpose.
Companies Act 2006
However, not all companies operate responsibly. The Better Business Act campaign argues that there is currently no level playing field because the UK’s legal framework does not compel directors to consider the full impact of their decisions. Historically, company law emerged to facilitate the relationship between a company and its shareholders, not its relationship to society. The Companies Act 2006 is inconsistent with a stakeholder-oriented approach.
Section 172 of the act is key – see the panel below. While it allows directors discretion to consider a range of stakeholders when decision-making, this can only be done in the context of promoting the success of the company for the benefit of shareholders.
In other words, shareholder primacy is currently hard-wired into company law.
The campaign
The Better Business Act is the product of a campaign led by B Lab UK to amend section 172 to give shareholders and stakeholders equal weight in directors’ duties. It is backed by more than 600 businesses and has cross-party parliamentary support.
B Lab UK is seeking to impose a duty on directors to ‘advance the purpose of the company’. If successful, all companies in the UK, big and small, will be legally obliged to operate in a manner that benefits their stakeholders while seeking to deliver profits for shareholders. This will align the interests of shareholders with those of wider society and the environment. There will no longer be a choice for directors around aligning the long-term interests of people, planet and profit.
B Lab UK’s objective is to see four principles reflected in an amended section 172:
- Aligned interests. The interests of shareholders will be advanced alongside those of wider society and the environment. A new principle of fiduciary duty will be established within section 172.
- Empowering directors. This change must allow directors to exercise their judgment in weighing up and advancing the interests of all stakeholders.
- Default change. The change must apply to all companies by default. It must no longer be optional to benefit the wider stakeholder group beyond shareholders.
- Reflected in reporting. Companies must report on how they balance people, planet and profit in a strategic report or impact report.
Many businesses are supportive of the campaign, as is the IoD. Roger Barker, the IoD’s director of policy and corporate governance, says the proposals ‘reflect a broader stakeholder orientation that align with the policy objectives of the government on many fronts, including the transition to net zero and the adoption of a climate change reporting standard’.
The practical implications could be significant for many companies and their directors. Those implications include:
- articulating the purpose of their business and developing a strategy to achieve it
- focusing on environmental initiatives and treatment of employees, including reporting requirements
- performing greater due diligence with the supply chain
Progressive companies are already doing this. As Barker says, the proposals would ‘more accurately reflect the real-world behaviour of successful companies, who recognise that the incorporation of stakeholder perspectives in board decision-making is a crucial prerequisite for long-term business success’.
Section 172
Section 172 of the Companies Act makes directors duty-bound to promote the success of the company. Its first provision goes as follows:
A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in so doing have regard (amongst other matters) to:
- the likely consequences of any decision in the long term
- the interests of the company’s employees
- the need to foster the company’s business relationships with suppliers, customers and others
- the impact of the company’s operations on the community and the environment
- the desirability of the company maintaining a reputation for high standards of business conduct
- the need to act fairly as between members of the company.
