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Calls for a Better Business Act: company purpose to look beyond shareholder value

  • United Kingdom
  • ESG

09-06-2021

There have been recent calls for the UK Government to introduce a Better Business Act to amend section 172 of the Companies Act 2006 (CA 2006) to give equal weight to the interests of stakeholders alongside creating value for shareholders.

The Better Business Act campaign is backed by a number of leading businesses, such as Iceland Foods and the John Lewis Partnership. The campaign is calling for amendments to section 172 of the CA 2006, so that companies are legally required to operate in a manner that benefits their wider stakeholders, including workers, customers, supplier, communities and the environment, while seeking to deliver profits for shareholders.

What does section 172 of the Companies Act 2006 cover?

Section 172 provides that a director must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole (section 172(1)). In so doing, the director must have regard (among 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 the members of the company.

For a commercial company, ‘success’ is generally understood to mean long term increase in value for the benefit of shareholders.

One of the statutory purposes of the annual strategic report in a company’s report and accounts is to help members assess how the directors have performed their duty under section 172. For financial years beginning on or after 1 January 2019, unless the company is medium-sized or entitled to the small companies exemption in accounting terms, the strategic report must include a section 172(1) statement which describes how the directors have had regard to the matters set out above when performing their duty under section 172. Section 172 is therefore a key component of the environmental, social and governance (ESG) reporting that companies currently undertake.

What should change?

 The campaign for a Better Business Act wants to transform the way companies do business, so that all UK companies, irrespective of size, take ownership of their social and environmental impact. The campaign is backed by a coalition of over 550 businesses. The campaign calls upon business to align the long-term interests of people, planet and profit. To achieve this, they urge Britain’s business leaders to call on the Government to amend section 172 of the CA 2006 to make businesses accountable for benefiting workers, customers, communities and the environment while delivering profit.

The proposed changes would involve:

  • aligning the interests of shareholders with those of wider society and the environment;
  • empowering directors to exercise their judgement in weighing up and advancing the interests of all stakeholders;
  • businesses being required to benefit wider stakeholders beyond shareholders; and
  • businesses would have to report in the strategic report or an impact report on how they balance people, planet and profit.

The campaign have set out a proposed revised section 172 that reflects their aims, and have published a Q&A which sets out further details.

Other calls for change

There has also been a recent research report published by ReGenerate (a think tank backed by the Department for Digital, Culture, Media and Sport and the Joseph Rowntree Foundation) entitled The case for purpose-driven business. The report aims to set out how having a “purpose beyond profit” not only helps companies make a difference, but is also more likely to make them sustainable and successful. The ReGenerate report concludes by reference to a number of case studies that:

  • The public want businesses to take greater responsibility for social and environmental issues;
  • Businesses have the power to positively transform society; and
  • Being purpose-driven is increasingly shown to make businesses become more successful and sustainable.

Like the Better Business Act campaign, ReGenerate also believes that section 172 CA 2006 should be amended, and believes that there is a strong evidence base that having a purpose beyond profit is likely to ensure a more successful and sustainable business.

What does this mean for companies and directors?

 If the proposals to amend section 172 CA 2006 are adopted, this would mean a significant change for companies and their directors in terms of the considerations t they must have regard to when carrying on business. Section 172 currently requires directors to consider the interests of other stakeholders when making decisions, but in the course of pursuing the success of the company for the benefit of its shareholders. The proposed changes would put other stakeholders on an equal footing with value for shareholders.

The precise detail behind these proposals would have to be developed, and there is no current legislative intention on the part of the Government to introduce them. The recent BEIS White Paper, restoring trust in audit and corporate governance makes no mention of amending section 172, for example.  However, the Better Business Campaign believes that the proposals are attracting interest in Westminster, and they have gained considerable traction with a number of businesses. If accepted by the UK Government in principle, changes to the CA 2006 would be required, which we would expect to be subject to a formal consultation, and legislation would only be tabled when Parliamentary time allows. This illustrates that the proposals to amend section 172 are, therefore, likely to be a longer term aim. It will also be interesting to see how investor bodies such as the Investment Association and the Pensions and Lifetime Savings Association react to these proposals and the potential shift away from value for the institutional investors they represent as the primary focus.

Companies are becoming subject to increasing amounts of ESG regulation. In the UK, the Government has recently consulted on extending mandatory TCFD reporting to a wider range of companies, including larger private companies (see our briefing). The EU is taking a different approach in proposing the Corporate Sustainability Reporting Directive as part of its Sustainable Finance Package. Some UK companies and directors may, therefore, be wary of the introduction of further overlapping reporting obligations. It is hoped that if these proposals are to be taken forwards, the Government would consider how they sit alongside other ESG reporting obligations, such as the proposed TCFD reporting, other matters that quoted  companies and certain other entities are required to report on in the strategic report and the Listing Rule requirements that currently apply to premium listed companies.

How Eversheds Sutherland can help

Our ESG Solutions team can help businesses get to grips with ESG reporting and disclosure and preparing for forthcoming obligations and new legislation in this area. See our brochure below for further details.

Useful links

Better Business Act webpage

Regenerate: the case for purpose driven business (full Report)

ESG Corporate Brochure

TCFD Brochure