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Putting purpose at the heart of corporate governance – the British Academy's recommendations

Posted on 22 November 2021

In 2019 as part of its 'Future of the Corporation' work, the British Academy concluded that "the purpose of business is to solve the problems of people and planet profitably, and not profit from causing problems". In their follow up report this year, "Policy & Practices for Purposeful Business", the Academy proposes a number of ways in which company law can be used to put this purpose at the 'heart of corporate governance'.

Currently, directors are required to "promote the success of the company for the benefit of its members as a whole". This concept of prioritising the shareholders' interests is known as 'shareholder primacy'.  However, the British Academy highlights that in fact company legislation already allows a company to adopt a purpose in its articles that extends beyond benefitting its shareholders and that, where it does so, directors must (under section 172(2) of the Companies Act 2006) promote that wider purpose. In practice, however, commercial companies have rarely expressly adopted a wider purpose.  Shareholder interests have therefore remained paramount for most companies, with the "problems of people and planet" remaining secondary factors to be taken into account.  Nevertheless, and in part due to the work of organisations like the British Academy, the position appears to be changing.

Should better business be mandatory?   

One of the Academy's proposals would involve amending company law to look beyond 'shareholder primacy'. This has already been proposed and campaigned for through the "Better Business Act" proposed by B Lab UK. Were it to be passed, that act would make the purpose of all companies to promote not only shareholder interests, but also benefit wider society and the environment and to reduce (and aim to eliminate) harm. It would require the company's directors to promote that purpose and to report on their success in doing so.

Interim measures

However, the Academy acknowledges that legislative change is a slow and often drawn out process. It suggests interim measures such as the creation of purpose driven model articles that incorporate a statement of purpose as well as a commitment to its fulfilment. We have seen this in practice with a small, but growing movement of commercial companies, who have obtained B Corporation certification, which involves amending their constitutions in much the same way as suggested by the British Academy. We have helped over 70 such companies amend their articles and are also delighted to have become an accredited B Corporation ourselves.

The Academy's other key interim proposal is to publish updated explanatory guidance to the Companies Act 2006 to encourage other companies to embed a wider purpose in their articles. The current guidance to the act suggests that section 172(2), by which directors must promote any other purpose provided by the articles, only applies in exceptional circumstances to 'altruistic' companies such as charities and community interest companies.  The Academy claims that this lack of clarity is stalling progress and in practice exposes those directors and companies seeking to apply more purposeful objectives to action by shareholders seeking to enhance short-term value instead.

Remedies and comment

Some commentators argue that the Academy's proposals do not go far enough, given the lack of remedy for third parties, if directors breach their duty.  Directors owe their duties to the company. Therefore, absent other reform, mainly only the company (controlled by the directors) or, the shareholders through a derivative claim, could bring a claim against them.  They suggest that other stakeholders, in addition to shareholders should be allowed to bring derivative claims against directors.

The Academy report, however, has not proposed to extend the right of action in this way.  Instead, it proposes that regulators be given new powers to hold directors and controlling owners to account for their corporate purposes and there be implementation mechanisms to engage stakeholders in the process.  What is clear, however, and particularly so post COP26, is that the call for business to be a force for good is not abating.  No doubt, the Academy is being pragmatic in recognising that any legislative restatement of the "Purpose of the Corporation" could be slow or even not materialise.  By highlighting what can be done in the meantime, it seeks to advance the purposeful business agenda.  However, this relies on business to make the change itself.  Will this be enough to place purpose at the heart of corporate governance?  As with many areas of corporate governance, the Government's current approach appears to be on legislating for accountability through corporate reporting and, possibly, regulation rather than mandating change through purpose legislation. 

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