Travers Smith's Sustainability Insights: Focusing on stakeholders

A regular briefing for the alternative asset management industry.

Last week, Travers Smith lawyers joined business leaders and academics at Harvard Business School to debate the purpose of companies. The conference, Reimagining the Role of Business in the Public Square, discussed what we should expect from large corporations on issues such as climate change and human rights.

A few participants (most strikingly the law professor, Lucian Bebchuk), were sceptical that business could be relied upon to make the significant changes that are needed to address global challenges, especially if that involves forgoing profit – but most were convinced that a more responsible form of capitalism offers a win-win opportunity for those that grasp it. In any event, regulators from the SEC and the London Stock Exchange made clear that further mandatory disclosures of the external impacts of business were on the way – although there is significantly more opposition to that objective in the US than there is in Europe.

No doubt there will be more direct regulation requiring business to act – especially in the EU, where, for example, an initiative to require companies to identify and mitigate negative environmental and social impacts has significant momentum. But should businesses have a more general responsibility to prioritise societal concerns, even when they are operating within the law, and even if doing so conflicts with their financial objectives?

The (widely discussed and often misinterpreted) 1970 essay by Milton Friedman – The Social Responsibility Of Business Is to Increase Its Profits – is frequently said to have articulated the free marketeer's answer to that question, but business leaders now typically argue that they do not focus on profit at all costs. The US Business Roundtable recently restated its position on the purpose of the corporation, asserting that: "we share a fundamental commitment to all of our stakeholders". In the UK, the Corporate Governance Code says that the role of the board "is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society", and large companies (public or private) are required to explain each year how they have taken account of stakeholder interests in their decision-making.

...some businesses are taking matters into their own hands and using the flexibility that UK law currently affords companies to define their purpose more broadly than shareholder value alone.

Some argue that the law should go further and explicitly require UK companies – and, in particular, their directors – to equally weight shareholder and wider stakeholder interests when making decisions. For example, the British Academy's Future of the Corporation project recommended that UK company law should be changed to "emphasise duties of directors to determine and implement corporate purpose". In its report, the British Academy specifically highlights one important initiative, the campaign for a "Better Business Act" (BBA), which seeks a change to the Companies Act to make clear that – as well as making profit for shareholders – companies must also operate in a manner that "benefits wider society and the environment" and "reduces harms" that the company creates.

The BBA, which would also require large companies to report on their impact, is endorsed by over 1,000 companies and led by B Lab UK. Support for such changes to company law by opinion-formers like Labour's Ed Miliband (currently the shadow minister for Climate and Net Zero) and the Institute of Directors means they should be taken seriously.

Law reform proposals have their critics, including the aforementioned Professor Bebchuk, while eminent UK legal academics have argued that they are not necessary and would probably have limited effect. But, in the meantime, some businesses are taking matters into their own hands and using the flexibility that UK law currently affords companies to define their purpose more broadly than shareholder value alone.

The growing B-Corp movement, which includes a number of private equity- and venture capital-backed companies and an increasing number of alternative asset managers, allows companies to signal their stakeholder commitments – often an important selling point for consumer-facing businesses.

Companies like Gousto, BrewDog and Innocent Drinks, and alternative asset managers including Bridges Fund Management, Towerbrook Capital Partners and InvestIndustrial, have committed to give stakeholders equal billing with shareholders in their company's corporate purpose, while also getting a certification from B-Lab to confirm that they deliver on that promise.

B-Lab is currently revising its certification requirements for financial services companies, partly as a reaction to the "urgent and widespread need for improved action on social and environmental issues" in the sector. Interested firms might want to engage with B-Lab while they work through these changes – especially because there are concerns in the market that the intention is to restrict the B-Corp certification to a very narrow subset of financial services businesses. If true, that would seem to be a missed opportunity to engage the mainstream investment community.

The market's response to growing demands for more responsible approaches by businesses and their investors is building momentum and, as is often the case, policymakers are struggling to identify appropriate regulatory action to underpin it. Whether it is right, or helpful, to change the default legal position in the UK remains a matter of debate, but the message from the business leaders at Harvard last week was that companies – whether public or private – that take their social and environmental responsibilities seriously are more likely to prosper in the long term. UK company law offers no impediment to that, especially for companies that are privately owned.

In our latest Spotlight on ESG, Knowledge Counsel Beliz McKenzie takes a closer look at Section 172 of the UK Companies Act, corporate purpose and the Better Business Act.

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