Out-Law Analysis | 20 Apr 2021 | 2:31 pm | 2 min. read
A relatively small change to section 172 of the UK's Companies Act 2006 could have a transformative impact on company law, directors’ duties, corporate governance, businesses and, ultimately, the economy, society, and the environment.
The draft Better Business Act (BBA) (3 page / 167KB PDF) proposed by the BBA coalition changes the focus of the director's duty set out in s172 from being a duty "to promote the success of the company" to being a duty "to advance the purpose of the company".
S172 says that 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 doing so have regard” to specified other interests, impacts and consequences. These words have led to shareholder primacy and a mindset in some boardrooms that shareholder profits are to be maximised at all costs, or at least at the cost of other interests, which directors may have regard to but decide to discount.
This mindset is no longer viable in the world we live in today. The wording in s172 has become an anachronism and no longer reflects the realities companies now face. The global financial crisis; Covid-19 pandemic; existential threats of climate change and biodiversity loss, and multiple other urgent environmental and social challenges are forcing a rethink about the role and purpose of companies, and a focus on the 'triple bottom line' of planet, people and profit.
What ‘success’ means for business is being re-imagined. In fact, the proposed revision to s172 does not talk about “promoting the success” at all, but instead about “advancing the purpose” of the company “to benefit its members as a whole, whilst operating in a manner that also (a) benefits wider society and the environment in a manner commensurate with the size of the company and the nature of its operations; and (b) reduces harms the company creates or costs it imposes on wider society or the environment, with the goal of eliminating any such harm or costs”.
The BBA campaign wants four principles to be reflected in an amended s172:
According to the BBA coalition, the legislation would change the default position for all companies so that directors would be empowered to advance the interests of shareholders alongside those of wider society and the environment. The BBA campaign's FAQs say: “In situations where a director has to choose between the company’s intention to create positive social or environmental impacts and the interests of shareholders, the directors would no longer be compelled to default to prioritising shareholders.”
For companies with a holistic approach, which already recognise the benefits to all stakeholders of long-term responsible and sustainable business over maximising short-term shareholder profits, the change to s172 will formalise their current behaviour. However, the urgency of environmental and social challenges is driving the conversation that ‘purpose-led’ and ‘sustainable’ business must be not only values-based, but become rules-based to oblige all companies to operate in a manner which benefits all stakeholders and ensures a fair and level playing field.
The change to s172 will help bring company law into alignment with broadly recognised imperatives for businesses to work towards the UN Sustainable Development Goals and Agenda 2030, and facilitate the economy decarbonising to meet Paris Agreement goals on climate change.
The BBA has cross party parliamentary support and is championed by large and small businesses. The campaign to reform s172 is building momentum and the voices for reform are increasing and getting louder.
13 Apr 2021