Company directors should seek to help wider society and the environment, rather than just shareholders. Unfortunately, the Companies Act 2006 is written in a way which communicates that directors should seek to maximise profits for shareholders at all costs. Those behind the Better Business Act campaign recognise this is wrong, especially at this point in history, when human civilisation is threatened by rising temperatures. Companies and their directors should be guided to help wider society and the environment by default – through legislative change – so they can play their part in steering us towards a better future.
Companies are an inseparable part of the UK now, so much so that, some people even refer to the UK as UK plc. The articles of association of a company are the contract between the company and its directors (those who run the company) and shareholders (those who own units of the company). The default articles of association that a company uses are prescribed in the Companies Act 2006. These standard articles are known as the ‘Model Articles’. They apply when a company is incorporated unless they are altered or a new version of the articles is created. Within the articles of association, the duties of company directors are set out.
Section 172 of the Companies Act 2006 is part of the default duties of directors laid out by the act. Unfortunately, this section focuses on the primacy of shareholders. It states that directors have a fiduciary duty to ‘promote the success of the company for the benefit of its members (shareholders) as a whole’. Within section 172, directors are informed that they have a duty to have ‘regard’ for other stakeholder interests, but this can only be done in the context of advancing the success of the company for the benefit of its shareholders. In other words, directors are supposed to discount wider stakeholder interests if they interfere with advancing the interests of shareholders. Directors who prioritise societal and environmental considerations are technically breaching one of their fiduciary duties towards the company, so the company can see it as appropriate to unseat them or even take legal action against them. Furthermore, directors often use section 172 of the Companies Act to justify bad behaviour. Clearly, the way section 172 is written is problematic.
Virtually all companies operate using the default version of section 172, or a slightly adapted version of the section, as the foundation of their activities. UK companies can amend, adapt, or even adopt bespoke articles of association, as long as they follow the requirements set out in the Companies Act. However, to change them requires the approval of at least 75 per cent of shareholders, so companies can easily get locked into using the standard version of section 172, or a slightly tweaked version. Ultimately, section 172, in its default form, gets companies off on the wrong footing and changing it, when a company is up and running, is far from straightforward.
The Better Business Act is a campaign supported by over 2000 UK businesses, which aims to encourage the government to change section 172 so that companies operate in a more ethical manner, by default. Passing the Better Business Act into law would radically change corporate governance so that wider society and the environment benefit. The Act doesn’t detail exact legislative change but details four aims which those who amend section 172 should have so that businesses are put on a better path. According to the Act, section 172 should change so:
- The interests of shareholders are advanced alongside the interests of wider society and the environment;
- Directors are empowered to use their judgement to advance the interests of shareholders, wider society and the environment;
- The Default change applies to all companies so shareholders, wider society and the environment benefit;
- Companies report on how they balance people, planet and profit in any required strategic or impact reports.
In summary, changing section 172 by following these guidelines will lead to company directors taking on more ethical responsibility, by default. It is a campaign well-worth support.
Unscrupulous business practices are adopted across many sectors of the economy, making it so they don’t serve wider society. For example, gambling companies often don’t adequately address gambling-related suicide of their own accord. Companies often deplete natural resources and fail to take responsibility for harmful waste. These truths often make good people turn away from considering a career in business. By changing section 172 of the Companies Act we can adjust societal norms so that it is seen as universally appropriate for those working in business to factor in wider societal and environmental factors. Directors who do a good job of factoring in wider considerations could be voted out by profit-obsessed shareholders, so changing section 172 isn’t a panacea, but it would be a positive change. Undoubtedly, some well-enforced top-down environmental and animal welfare laws will always need to be part of the regulatory mix because these issues are easily and routinely deprioritised.
Addressing the climate and nature emergencies involves collective action, so those businesses that make a concerted effort to avoid passing on their costs to future generations and the unprivileged people around today need to be supported by customers and investors in order for better business to materialise.
The UK government has set a target to make the UK economy net zero by 2050. This is unrealistic if companies continue putting short term profits above wider social and environmental factors, in line with the default text of section 172. In this way, we are currently within a culture where companies tend to be pushing against government requirements rather than endorsing them harmoniously. This shouldn’t be happening, as we should all we working towards the target of net zero together. Changing section 172 would stamp out the current lack of clarity.
It’s high time for company directors to show genuine moral leadership. The media could lead on this because we now have celebrity businesspeople. TV programs could show those in business thinking in detail about wider societal and environmental issues before deciding to invest, so that societal norms change. Changing section 172 by default may make directors of some companies, such as those that are hard to divorce from climate wrecking activities, look or feel awkward, but this mustn’t stop us insisting section 172 should be changed.
For too long ruthless company behaviour which doesn’t take account of wider society and the environment has been tolerated, and even expected. A simple law change would radically improve decision making processes and change expectations. Some may think that the Better Business Act is unambitious because they are keen on more comprehensive reforms to business and trade, but only by taking the public with us in measured and coherent ways can better legal structures materialise through policy change.