Calls for companies to be more sustainable currently echo from many quarters. For the most part this is embodied in demands for new kinds of corporate reporting. However, academics looking at the problem believe a change in the law may be in order and propose updating the legislation that sets out directors’ duties in the UK.
Launched this week during an event hosted by the Institute of Directors’ Centre for Corporate Governance, a paper from a trio of researchers at the University of Bristol says that pushing companies to be more sustainable needs stronger law and that means amendments to section 172 of the Companies Act—the clause that spells out directors’ duties—to include a reference to boards having a responsibility for “future generations”.
The paper rests on the assumption that many companies continue to use “short-term strategies” and need encouragement to change their ways. They argue a “system change” in favour of sustainability needs fortified regulation that could be used to hold directors to account in the courts.
Directors’ duties and sustainability
The paper—written by Nina Boeger, Roseanne Russell and Charlotte Villiers—suggest the reforms might also make directors subject to an “obligation” to produce a forward-looking sustainability strategy that would include “verifiable targets”. They add that such action may need a national regulator to take enforcement action.
If implemented the reforms would represent a significant change to the corporate governance landscape in the UK. But this is not the only proposal. The paper also suggests reforms that would make managers face risk liability for breaching regulations aimed at environmental protection; introducing board members with responsibility for “environmental matters; impose closer connections between executive pay and environmental protection; and offer environmental groups some form of “jurisdiction” that would allow them to challenge a director’s breach of duty.
The writers also propose an upgrade to corporate reporting to redefine the “true and fair” principle so accounts must include “social and environmental impact of an enterprise”.
Speaking during a virtual launch of the paper, Nina Boeger said: “The law does have flexibility in terms of pursuit of sustainability and encourages long-term decisions. But it’s not ideally set up to do this. For directors who have strong sustainability ambitions, arguably, there is not enough certainty.
“For those directors who have no ambitions whatsoever, there is arguably not enough encouragement and, potentially, enforcement to create those ambitions.”
The paper comes as a bold first step for the IoD’s new corporate governance project which launched in June to explore the impact of hot button issues such as artificial intelligence, stakeholderism and sustainability on governance. Board members include Colin Mayer, a professor at Oxford University, who has written extensively on purposeful business for the British Academy.
Not everyone is convinced that beefing up section 172 would enable directors to be held to account. Joan Loughrey, a professor of law at the University of Leeds, revealed concerns that courts are shy of ruling based on section 172. Loughrey says decisions made by directors are considered “business judgments”, or commercial decisions, and involve a “high degree of uncertainty” and choosing from “multiple courses of action”. That leaves courts wary.
“Providing that directors do actually take account of all the factors that are listed under section 172, and any other relevant factors, then, even though the ultimate decision they take could be egregiously damaging to the environment, providing they can defend that decision and show how they reached the decision … the courts will be very very reluctant to impose any liability upon directors,” she says.
There were other options for pushing sustainability activity among company managers. Charlotte Villiers suggests corporate reporting could be strengthened and boards might consider the addition of new committees and perhaps become more “imaginative” about who sits on dedicated sustainability committees. The idea of a separate board committee echoes suggestions elsewhere that the UK might follow the South Africa model and introduce committees designed to represent stakeholder interests.
There may also be good reason to improve the education of both directors and shareholders, Villiers adds.
Sustainability and stakeholder interests have become a permanent feature of corporate governance. The debate on how to embed it company thinking is an urgent one. Time is running out for correcting the climate crisis; it’s possible the planet does not have the luxury of waiting for voluntary measures to work. The researchers’ interventionist approach may prove a more effective way forward.