A four-year research project looking at the state of corporate governance has concluded that government must reform company law to place “purpose” at the centre of company activities and the fiduciary duties of board directors.
The British Academy makes the recommendation in a report that brings to end a project that saw Oxford professor Colin Mayer defining corporate purpose as finding “profitable solutions to the problems of people and planet, not profiting from creating problems for either”.
The new report says the key to shifting companies to a purpose-led outlook is ensuring boards are held accountable for “determining and implementing the purposes of their companies”.
The report delivers stinging criticism of the UK system of governance despite noting it has all the features needed to deliver purpose-driven companies. In the UK, it says, “there is insufficient accountability for, and implementation of, purpose business. Few companies take up the option that exists within law to adopt purposes beyond promoting shareholder interests, and there is insufficient appreciation and enforcement of directors’ duties under the law.”
In addition to reform of directors’ duties the British Academy calls for new regulatory powers that would enable watchdogs to hold directors to account and for companies to place purpose at the heart of their corporate reporting.
Mayer says: “Twenty-first century business should be about solving problems of people and planet through innovation, imagination and creativity. Profits should flow from doing that. But too often companies also profit from producing problems.”
Purpose and directors’ duties
The British Academy has received support from business interests. According to Jonathan Geldart, director general of the Institute of Directors (IoD), the body’s own research reveals that close to half of company directors “feel that companies should have a stated purpose to help solve problems in society”.
“Businesses are increasingly taking a broader view of their purpose,” says Geldart, “so that they serve the interests of all their stakeholders, rather than sole focus on maximising shareholder value.”
The British Academy’s call echoes the Better Business Act campaign, which proposes reform of section 172 of the Companies Act—the key clauses outlining director’s duties—to reflect company purpose. Currently, section 172 gives directors a first duty to promote the “success” of companies; draft legislation from the Better Business Act campaign changes that to promoting the “purpose of the company”. That campaign already has the support of the IoD as well as companies such as John Lewis and Innocent Drinks.
At the time of the campaign launch Innocent’s chief executive, Douglas Lamont, said a rewritten section 172 would help “accelerate” change towards a more sustainable economy.
There remains some scepticism among expert observers about the campaign for purpose. Andrew Kakbadse, a professor of governance at Henley Business School believes the report fails to answer how “purpose” will work in an “ever more dynamic business and social context.” Kakabadse questions whether chairs and boards will be sacked if they fall short on purpose during straitened times, such as a downturn. He also asks why the report remains silent on why business should be “covering for a government which continues to retreat from their societal responsibilities.
“Despite having an admirable intent, with ‘company purpose’ central to the exitence of the firm, this is all aspirational at best.
“We have witness similar overtures from CSR (corporate social responsibility). The real question is: Is the proposition designed to take a parallel path and generate attention? Then, like CSR, will it suffer a quiet and ignoble death?”
Shareholders vs stakeholders
Purpose has become a focus of debate around the world but while there may be growing support in the UK, the idea has prompted argument in the US following a declaration in 2019 of the Business Roundtable (BRT), a club for CEOs of the country’s biggest companies, suggesting they would in future prioritise stakeholders over shareholders.
Since then researchers from Harvard have written that the statement seems to have been “for show”. They draw that conclusion after examining written statements, guidelines and constitutions of Roundtable member companies to find that few made mention of stakeholders while retaining their previous focus on serving shareholders.
Lucian Bebchuk and Roberto Tallarita, the academics behind the research, indicate that voluntary corporate action is inadequate as a means of persuading companies to adopt stakeholder-driven governance. “Reliance on the discretion of corporate leaders to serve stakeholders, as supporters of stakeholder governance advocate, would be an ineffective and counterproductive approach to the protection of stakeholders,” they write.
If directors’ duties are to include purpose, politicians will need to be persuaded to address the reforms needed. That effort is under way in the UK with some sources indicating that the argument is gaining traction. But we may be some way from boards seeing their legal duties redrawn. The British Academy’s report helps bring that argument out into the open. Directors should take note.