Last week I was invited by the UK’s Institute of Directors (IoD) to hear a discussion about the proposal for a Better Business Act (BBA)
This comes from the UK branch of the admirable B Corp movement, which has attracted 3720 companies in 74 countries who are committed ‘to meeting the highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose’. B Corps see themselves as a community of leaders driving a global movement of people using business as a force for good.
I was intrigued to see that the B Corp movement had the support of the IoD in putting its case for a Better Business Act In 1995 the then Director-General of the IOD, Peter Morgan , expressed his outrage to me that the 1995 RSA Tomorrow’s Company report, which placed purpose, values and relationships at the heart business success, was suggesting that business needed to earn its ‘licence to operate’ from society. (He saw this as a rejection of free enterprise.)
Instinctively I want to support B Lab and the IOD in their efforts to improve the law in ways that strengthen business as a force for good. Yet I am unconvinced.
Purpose starts with the entrepreneur
Businesses are started by entrepreneurs. It is part of the richness of the market economy that entrepreneurs combine all kinds of motivations. Earn a good living; be liberated from hierarchy; commercialise a brilliant idea; have fun; make a difference; build an empire; prove doubters wrong.
The original purpose of a business flows from these motivations. Not every founder’s purpose fits the same template and life would be dull it they did.
Most businesses bring in outside finance as they mature. Directors are elected by the shareholders who have put their capital at risk. It is the company, not shareholders to whom directors owe their duty. Directors are not slaves, nor even agents, of the shareholders. They are elected to serve the company and be faithful to its purpose and values.
Admittedly many directors have buckled under pressure from capital markets and failed to fulfil this duty. For example, as corporate lawyer Philip Goldenberg and I argued at the time of the takeover bid, the directors of Cadbury were not required to accept the bid from Kraft. Others, like Unilever, have resisted takeovers which they believe will damage the company.
What does the Better Business Act Change?
Current company law in the UK thereby treats directors are stewards, put in place to ensure that the company thrives and fulfils its purpose, and lives its values in all its relationships. In Section 172 it tells directors that their duty is to promote the success of the company, for the benefit of the members, having regard to the long term and the interests of the environment and all the stakeholders.
The suggested change would
‘Amend the Companies Act 2006 to provide that the duty of a director of a company is to promote the purpose of the company, and operate the company in a manner that benefits the members, wider society, and the environment’.
Would this make any difference in the Cadbury case? No. Under both current and proposed legislation, the job of the directors is to use their judgement to steer the company to fulfil its purpose while balancing the short-term and the long term, and balancing the respective claims of shareholders, customers, employees, suppliers and the community. The directors must decide.
The pressure for short-termism comes primarily from our capital markets and the short-term incentives too often linked to share price. That points to an agenda for concerted action in the operation of the stewardship value chain, not directors’ duties. .
Perhaps the key difference is the change from requiring directors to ‘promote the success of the company’, and instead to advance its purpose. But does this change anything beyond the symbolic? The definition of purpose, like the definition of success, is still with the directors.
The best expression of what is mean by Purpose with a capital P comes from Alex Edmans’ excellent book Grow the Pie.
‘When an enterprise is run for the primary purpose of creating value for society it isn’t sacrificing profit and redistributing a fixed pie. Instead, it expands the total value it creates…..To reach the land of profit, follow the road of purpose’.
This is, in slightly different terminology, and supported by far more academic evidence, what Tomorrow’s Company, Blueprint for Better Business, and The Purposeful Company has been arguing. It emphasises the interdependence between creating value for shareholders and serving human purposes.
Contrast this with a statement by a B Lab Ambassador promoting a Better Business Act:
It (Section 172 of the Companies Act) means that the Directors’ priority is in the interest of the shareholders of the company which is making money for them.
B Lab UK wants them to replace this and instead say that the directors’ priority is making decisions in the interest of the stakeholders. A stakeholder is anyone or thing that has an interest in a company and can either affect or be affected by the business, like all people and the planet!
Advocates of the BBA need to decide where they stand. Are they pie-growers or pie splitters? This sounds like the language of pie-splitting.
Three views of the company
There are, crudely, three ways of thinking about the company. There are those who believe in shareholder primacy. Then there are those who, reacting against the damage that this dogma has done to planet and people, go to the other extreme and use the language of stakeholder primacy.
Both these views focus on what different groups extract from the pie. The success of a company depends upon what gets added to the pie. That is why I have always argued for the third, stewardship view of the company. Directors are stewards of the company, not agents of the shareholders or stakeholders. Their success is to be judged by the value that they create in both the short and the long term. If they turn their backs on the needs of shareholders, or those of society and future generations, they will unable to sustain their success and lose their licence to operate.
As I have argued , with Ong Boon Hwee in Chapter Seven of Entrusted, there are many changes that government can make in order to make it more likely that directors will live up to their stewardship obligations to the company, to society and to future generations.
For now I have a simple challenge to IoD and B-Lab. Please give some examples. Show how the BBA will pave the way to better stewardship by directors. Until you do so I will continue to argue that there is nothing in the current framing of the UK’s Companies Act which stops companies pursuing ‘Purpose’.
Mark Goyder is Senior Advisor to the Board Intelligence Think Tank and Founder of Tomorrow’s Company