Section 172, the law that spells out a company director’s responsibilities, is back in the sights of reformists: they want to see it change to extend the duties to a broader collection of stakeholders.
Even since the emergence of environmental, social and governance issues as central elements in corporate governance, there has been talk of overhauling section 172 of the Companies Act 2006, as the law is widely seen as giving priority to shareholders.
The latest proposal envisages a redrafting of a core paragraph in the law, so that it speaks of a director’s duty to “members and beneficiaries as a whole”, rather than just “members”.
The outline proposal also asks directors to avoid “harm or damage” which, if adopted, would be another addition to the duties.
Drafted by John Gaffney, a professor at University College Cork, the new duty would read: “A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members and the beneficiaries as a whole and abstain from causing harm or damage (including the negative externalization of costs) to the beneficiaries…”
In Gaffney’s case, the word beneficiaries would include the “community of natural persons resident in a jurisdiction… in which the company operates or conducts business,” or where its assets are located.
It also includes, “the natural environment, including all living species, climate and natural resources…”
This is the latest in a number of efforts to raise the issue of reforming section 172 to ensure directors’ duties include a wider set of stakeholders. Gaffney says the draft is intended to highlight the “radical revisions to company law,” needed to deliver stakeholder capitalism.
Intents and purposes
Others have taken up the call for reform. Earlier this year, the TUC, the UK body representing trades unions, called for a rewriting of section 172. “We can restore fairness,” said Frances O’Grady, general secretary of the TUC, “by reforming company law so that directors have duties beyond short-term profits for shareholders.”
The TUC was backed in its call by think tanks the High Pay Centre and Common Wealth.
Elsewhere, a separate campaign was launched last year called the Better Business Act—also looking for a rewrite of section 172—with the backing of the Green Party and the UK’s Institute of Directors (IoD).
The campaign calls for the duties in section 172 to shift emphasis from directors promoting the “success” of their companies to pushing the “purpose” of their organisations.
Jon Geldart, the IoD’s director general, said at the time that reform would “empower directors to advance the purpose of their businesses in a way that benefits all stakeholders.”
In June, the IoD even called for government to develop a “voluntary” code of conduct for directors that would embed the “expectations of society” in the business community.
In May, when the government published its intentions for the reform of audit, audit committees and audit firms, there was disappointment that the proposals did not include measures for section 172. Gaffney’s latest paper demonstrates that the appetite has not gone away. Campaigners show every sign of continuing to push for reform.