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Pressure builds to make section 172 reflect society’s values

They may be little more than two years old, but the most recent revisions to section 172 of the UK’s Companies Act 2006 are looking increasingly out of time. And a comparatively small amendment to its wording could have a profound impact on how the purpose and objectives of business are evaluated and measured, with a fresh emphasis on corporate governance.

There is a growing sense that section 172 currently reflects how success used to be measured, which often amounts to little more than pounds, shillings and pence and keeping expectant shareholders from revolting. But as we emerge – hopefully and cautiously – from a pandemic-changed world, company priorities are expanding to judge success through the wider lens of the community and environment.

The focal point for this is the Better Business Act (BBA), put forward by the BBA coalition – a broad church of companies of all shapes and sizes – which is seeking to have the director’s duties set out in section 172 of the UK’s Companies Act reconsidered, from an onus to “promote the success of the company” to a duty “to advance the purpose of the company”.

It’s a small change that makes a big difference.

So who is pushing for reform of section 172 of the UK’s Companies Act 2006? The BBA coalition currently consists of over 550 businesses and the campaign concept and strategy were initiated by B Lab UK, which acts as Secretariat to the coalition. The BBA held a Parliamentary reception last month and is confident that it has wide backing, with the BBA’s research suggesting that three quarters (76%) of the UK public believe that businesses have a responsibility to protect the natural environment, while 72% said that business should have a legal responsibility to people and the planet, alongside profit.

At heart, The Better Business Act is aiming to transform the way business is done, so that every company in the UK, regardless of size, takes ownership of their social and environmental impact, with the BBA urging business leaders to call for the amendment to section 172 of the Companies Act to ensure businesses are legally responsible for benefiting employees, customers, communities and the environment, alongside delivering profits.

Currently, section 172 states 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.

However, this phrasing has unintentionally served to encourage businesses to focus solely on benefits to their shareholders and some boardrooms to conclude that these are to be maximised at all costs, or at the very least at the expense of other interests where they conflict. Directors may “have regard” to such issues, but can opt to ignore them.

This outlook appears increasingly out of place with contemporary values and no longer reflects the world companies now operate within, or the values of many of the consumers and clients they serve. Over the last decade or so, the global economy has been hit by financial crises, increasingly urgent climate threats, social and wealth disparity and, of course, the effects of the Covid-19 pandemic.

Not surprisingly, these issues are making companies rethink their role and purpose and what that means is a reappraisal of how success is measured and what it looks like for business.

In fact, the BBA’s proposed revision to section 172 steers away from promoting “success” and replaces this ethos with “advancing the purpose” of the company and to achieve this, the BBA campaign is calling for four principles to be reflected in the amended section 172:

Aligned Interests

The interests of shareholders are now advanced alongside those of wider society and the environment. This establishes a new principle of fiduciary duty within section 172 of the Companies Act.

Empowering Directors

This change must empower directors to exercise their judgement in weighing up and advancing the interests of all stakeholders.

Default Change

This change must apply to all businesses by default. It must no longer be optional to benefit wider stakeholders beyond shareholders.

Reflected in reporting 

Following this change, businesses must report on how they balance people, planet and profit in a strategic report or impact report, where one is currently required.

The BBA said in a statement: “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 already operating a more joined-up, long-term approach that balances shareholder returns with responsible and sustainable business practices, the amendment to section 172 will do little more than rubber-stamp their current corporate behaviour. For others, this proposed change to section 172 should help align company law with social and environmental imperatives beyond the profit motive.

If the BBA can build consensus for reform, being good might just be good for business.

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