Is an update to corporate governance needed to prevent future scandals?
Campaigners want to place the interests of all stakeholders at the heart of boardroom decision-making via a change to company law
Recent corporate scandals, the ongoing climate emergency and rising inequality all have a common denominator, according to Chris Turner, executive director of B Lab UK and founder of the Better Business Act campaign. He claims that the current focus on profit over purpose is preventing these issues from being properly addressed.
“The consensus is now that this shareholder primacy and the need to maximise short-term returns have greatly contributed to the big challenges we face, from the climate emergency to inequality,” Turner says. “Good business decisions are made by considering all stakeholders and by thinking long term.”
Changing directors’ duty
Although many businesses are now recognising their wider responsibilities to society and the environment, a director’s priority – as outlined in the Companies Act – is to ensure financial success. Currently, Section 172 of the Companies Act states that company directors have a duty to promote the success of the company, while only needing to “have regard” for factors such as the environment, employee interests and customers.
It’s because of this wording that Turner thinks the directors’ job description requires an update. “There’s been a lot of lip service to the emerging focus on stakeholders,” he adds. “We need to change how corporate governance is framed to ensure that shareholder interests are maintained, while also aligning with the interests of society and the environment.”
The recent P&O Ferries sacking scandal, which saw 800 staff fired via video call, only to be replaced by cheaper agency workers, provides a case in point. “The decision P&O Ferries made to lay off their workers would have been totally different if the interests of those workers had to be considered to a greater degree and balanced against the financial interests, which ultimately drove the decision to replace them,” Turner says.
In his opinion, the current “loose language” in the existing act leaves too much open to interpretation. “The phrasing is very vague – you can have regard and then disregard. It doesn’t have to be any more than a very fleeting consideration of other interests,” he says. “We want to replace that with something that clearly says the directors’ responsibility is to align the interests of shareholders, wider society and the environment.”
To bring about this change, Turner started the Better Business Act campaign. It is now backed by more than 1,000 business leaders, who include the bosses of Iceland, The Body Shop, the Institute of Directors and retail expert Mary Portas, who recently became co-chair of the group.
The coalition is pushing for an amendment to the Companies Act to ensure that the purpose of a business includes a commitment to benefit wider society and the environment – as well as its shareholders’ pockets. “There is no shareholder value in the long term unless we can address the climate emergency and strengthen society,” Turner says. “All we’re doing is ensuring that the law and corporate governance reflect the reality of these big challenges.”
Many free-market capitalists would claim that shareholder primacy, which has dictated corporate governance for decades, has helped generate the rapid economic growth and innovation that all of society now benefits from. But Turner believes that profit does not need to come at the expense of environmental degradation and growing inequality.
There is mounting evidence that businesses that have a higher purpose than maximising profit regularly outperform their competitors. A 2016 Harvard Business School report found that organisations with a clear purpose reported annual stock returns that were up to 7.6% higher than those that did not. Organisations with clear commitments to ESG goals also report better retention rates, especially among younger employees.
Turner says: “Businesses that follow the principles of the Better Business Act have greater annual growth in terms of turnover and headcount, retain employees better, have a smaller gender pay gap, and invest more in R&D. The argument that business creates value and benefits society through growth is right, but it will do more of that, as well as having other positive impacts if it has a wider purpose.”
The coalition recently presented these arguments to politicians in Westminster and there are hopes that its recent lobbying efforts will have encouraged parliament to include its suggested reform to company law in the Queen’s Speech on 10 May.
“We’re confident that we’ve made a really strong case in the build-up to the Queen’s Speech,” Turner says. “The challenge now is the pressure on legislative time.”
Even if the Better Business Act does not feature in the list of new laws announced by the Queen at the State Opening of Parliament, the campaign has plans to keep pushing it, regardless. “The issues it seeks to address will only get more urgent and pressing,” Turner argues. “The momentum is irresistible at this point. This change is going to happen; it’s just a matter of time.”