A pressure group known as the ‘Better Business Act’ (BBA) Coalition has proposed an amendment of a section of Section 172 of the Companies Act 2006. Section 172 is one of the key provisions on corporate governance and concerns a director’s duty to promote the success of a company. Consequences of the proposed amendment, if accepted, would be felt by a company’s board of directors and every stakeholder.
The duty to consider a company’s stakeholders other than the shareholders in decisions is found in Section 172 (S172) of the Companies Act 2006.
There are voices to suggest that it does not serve the agenda of stakeholders as a whole. However, reform for a minority does not always benefit the majority.
S172 has faced previous criticisms. Arguments for reform include the subjective standard that s172 holds directors to. It is difficult to find directors guilty of a breach of s172 as it must be proved that a director’s decision was one that no reasonable director would have made. This gives directors a wide margin of error as it would be difficult to prove no director would not make a similar decision. However the suggested amendment does not seek to rectify this issue, throwing into question whether the amendment is the right answer to historic problems with s172.
What does the reform mean for shareholders, directors and stakeholders?
The BBA is intended to level the playing field between shareholders and all other stakeholders, for example, customers; employees; suppliers; the wider public; or anyone affected by the environmental influence of a company’s actions. The current wording of the Act focuses on the primacy of the shareholder whilst still requiring them to consider the influence of their actions on various other groups, and even extends to ‘others’, implying an inexhaustive list.
Is the current wording of S172 fit for purpose?
The suggested amendment replaces the requirement to “promote the success of the company for the benefit of its members as a whole” with the requirement to take decisions which “would be most likely to advance the purpose of the company”. In doing so, directors “must have regard” to a list of matters and stakeholders widely extended from the current list in s172. The inclusion of the word ‘must’ before the need to consider all other factors strengthens the voice of the non-shareholder stakeholders in companies’ decision making.
For Small and Medium Enterprises (SME), making decisions in favour of the wider public may be an unaffordable luxury. Choosing a fleet of vans on their environmental impact alone may stretch the budget too far. Opportunity cost is one of the most important guiding factors for corporate decisions.
An SME might opt for foreign suppliers over local producers on price, despite air miles and supporting domestic alternatives. For larger corporations like McDonalds, switching to sustainable products like paper straws is easier to accommodate than for local businesses. These decisions may seem self-preferential but there is a more global benefit. Reduced costs increases profit, and this drives up competitiveness. Competitiveness drives up investment. This in turn, increases tax revenues.
However, green strategies such as tree planting according to sales also make a useful marketing tool as well as having a positive environmental impact.
Companies of any size would do well to adapt to the social influences on its market. However the suggested amendment would only require a company to act “in a manner
commensurate with the size of the company and the nature of its operations”, with regard to its obligations to wider society and the environment. Therefore pragmatism could still prevail. Directors of companies with limited resources could still give preference to the economic health of a company where necessary.
Change of a longstanding Companies Act 2006 provision may not be certain. But decisions on profitability alone are definitely noticed outside the discussions of board and general meetings.
If you have concerns over the corporate governance of your company, either as a director who is concerned about the implications of their decision, or as a shareholder who feels prejudiced by a decision of the board of directors, we welcome you to contact Gaby Hardwicke for advice. We can also assist with ensuring the corporate governance structures in place for your company suit the needs of its shareholders and other stakeholders.