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The Better Business Act – a business lobby for change

Posted on 03 June 2021

A coalition of over 500 companies, supported by B Lab UK, have signed a proposal which asks the Government to deliver a new contract between business and society through a proposed 'Better Business Act'. The mission is to change UK law to "make sure every single company in the UK, whether big or small, aligns the interests of their shareholders with those of wider society and the environment". We explain these proposals, which would apply to all UK incorporated companies and not just those, such as certified B corporations, which have already committed, through their articles, to use business as a force for good.

It is a fundamental principle of English company law that directors have a duty to act in a way that promotes "the success of the company for the benefit of its members as a whole" (section 172 Companies Act 2006). In complying with this duty, directors are required to have regard to a list of matters, including the interests of the company's employees and the impact of the company's operations on the community and the environment.

As part of the noticeable drive for companies, both large and small, to become more purposeful,, some are asking whether the current drafting of section 172 is discouraging directors from making decisions for the benefit of wider stakeholders. Yes, directors are required to "have regard" to the interests of employees, the community and the environment, but in measuring success these interests are subordinated to the interests of shareholders (the 'members'). Indeed, Government guidance has stated that "success" will usually mean "long-term increase in value". So the question is: is it possible for directors to make decisions to benefit the environment and society when they arguably have a statutory duty to consider financial returns above all else?

The proposals in the Better Business Act, which had a parliamentary reception on 14 April 2021, seek to make this question redundant. They would replace the duty to "promote the success of the company for the benefit of the members" with a new duty to "advance the purpose of the company". The new "purpose" would be to benefit not only the members, but also operate in a manner that benefits wider society and the environment and reduces harms on society and the environment "with the goal of eliminating any such harm". The aim is to change the default position so that directors would be empowered to advance the interests of their shareholders alongside those of wider society and the environment – an approach that has been described as the 'triple bottom line'. 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. Note that in making this change, the Better Business Act is not looking to remove a company's commercial objectives, (indeed the Q&A on the coalition website explains that a board failing to maintain its commercial rigour could cause the company to "flounder and potentially fail") but to require the board to enrich strategy through "a more holistic consideration of stakeholder issues alongside their focus on commercial success".

The draft act also allows a company to go further, if it should choose to do so, by specifying in its articles of association a purpose that is of greater benefit to wider society and the environment than the purpose prescribed by the act.

If brought into law, the act would also impact on the contents of a company's strategic report, as companies which are required to produce a strategic report would need to include a statement in their report describing how they have advanced the purpose of the company and had regard to the interests of all stakeholders, not just members.

Although the proposed amendments to section 172 are significant, they do not create new rights for stakeholders (other than the members) to hold the directors to account. The current position under company law would be maintained so that the directors would continue to owe their duties only to the company. Actions against the directors for breach of duty by persons other than the company are possible, but only in very limited circumstances (for example, where a shareholder brings a 'derivative' claim on behalf the company or on insolvency). Some may wonder, therefore, whether this proposed amendment goes far enough if other stakeholders are reliant on the company itself or shareholders to hold the directors to account. However, the flip side is that ending up with boards that are paralysed, or struggling to find willing directors, because of the risk of an inordinate number of claims by stakeholders who feel that their interests are not being considered.

As yet, despite receiving some backing from MPs of both parties, it is unclear how the Government will respond. Despite pledges to 'build back better', the Act has not made it into the latest Queen's speech, the Government's legislative agenda for the year ahead. It remains to be seen whether the Better Business coalition can keep up the pressure and affect change requiring directors to not only take decisions that go beyond the bottom line to consider the "triple bottom line".

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