Adrian Wooldridge argues that Britain is at the forefront of a discussion about the future of the corporation and spotlights the Better Business Act as evidence. Although he offered a compelling reminder of the central role that the UK has played in the development of company law, his reading of history has its limits. The debate about the role of business in society can often degenerate into a caricature that pits naive “corporate activists,” as Wooldridge calls them, against defenders of the status quo. The real challenge we face is to recognize the enormous power of entrepreneurs, innovation and enterprise while acknowledging that business does not operate in a vacuum.
As Wooldridge notes, in the past Britain has led the way in company law from the creation of limited liability in the Victorian era to the establishment of the Cadbury Code in the 1990s. It now has the opportunity to construct the legal foundations for a more stakeholder-oriented form of capitalism fit for the challenges of the decades ahead. A coalition of almost 1,000 British businesses is calling for a change to the law which would allow directors to advance the interests of society and the environment alongside those of shareholders. Notably, these are not corporate activists, but rather the owners and directors of local firms and beloved high-street brands from across the country.
As it stands, the UK’s Companies Act of 2006 requires directors to prioritize shareholders’ interests. This requirement is typically interpreted conservatively and narrowly in practice to mean shareholders’ relatively near-term financial interests, and the market has developed norms that reinforce this interpretation.
Under UK law, directors can choose to uphold the interests of workers, the environment and the local community if they believe doing so would be to the benefit of shareholders. However, the rights of these other stakeholders are derivative and not fundamental. Directors do not have a duty to uphold other parties’ interests, except insofar as they enhance the interests of shareholders. These principles are seemingly well entrenched, but a relatively small change in the law, amending section 172 of the Companies Act, could make a big change.
The UK is not unusual. In the United States, directors are fiduciaries and owe duties of care and loyalty to the corporation and its shareholders. In practice this means that directors are permitted to consider the corporation’s impact on other parties, but again only insofar as these serve the interests of shareholders.
In fact, on both sides of the Atlantic, companies can choose to undermine wider interests, if they see doing so as in shareholders’ interest and within the law. Some, including Wooldridge, argue that it is properly within their rights to do so: It is for politicians to determine the rules of the game with legislation. However, this argument fails to account for the huge amounts of influence that businesses exert in the political process, rightly or wrongly.
As Martin Wolf highlights in the Financial Times, business has used this influence “to set the rules of the game under which it then can play.” And indeed, lobbying undertaken by companies who see their role as simply enriching shareholders has led to poor outcomes for citizens, employees, consumers and the environment. In part, this is because companies’ legal mandates have not kept pace with their public pronouncements about the importance of stakeholder capitalism. The Better Business Act targets precisely this disjuncture. If business leaders are required to align the interests of a wider set of stakeholders, far better rules of the game on competition, labor and taxation will follow.
Given the scale of the challenges that threaten peoples’ health, wealth and the natural world, we need to harness the enormous potential of business. Society’s most urgent global problems cannot be solved by government and non-profits alone. The role of innovators and entrepreneurs is crucial. Yet even as Wooldridge acknowledges the huge challenges the world faces, he argues we should simply “let business be business.”
Fortunately, company directors, consumers and voters have made up their minds. Almost three quarters of the UK public think businesses should have a legal responsibility to the planet and people alongside maximizing their profits, and the majority favor brands that do good in the world. Meanwhile, 62% of directors recently surveyed by the Institute of Directors, Britain’s oldest business lobby group, stated that they believed that businesses should not exist solely to make money and generate shareholder profits.
Wooldridge and others argue that current corporate law does not prevent companies from adopting a model that allows them to pursue objectives not grounded in shareholder primacy. True, but surely it should no longer be an option to pursue profit at the expense of people and the planet.
The existing Companies Act is at best vague and at worst a hiding place for those that want to justify profit-maximizing at the expense of wider society or the planet. Wooldridge points to the 2008 financial crisis, where failures at banks and financial institutions necessitated costly taxpayer funded bailouts. He argues that predatory lenders were not to blame but rather mission-led state-backed institutions.
The historical evidence points in another direction: As academics at the University of Pennsylvania have shown, shareholders encouraged risk-taking at banks for competitive reasons — protected as they were by limited liability. We can ill afford another financial crisis. Remedying our current narrow approach to corporate responsibility could help forestall one by forcing directors to confront the larger risks their competitive strategies pose.
Wooldridge was right that Britain is at the forefront of this debate. The British government now has an opportunity in the Queen’s Speech this summer to introduce new world-leading legislation. The Better Business Act will make the UK the first country to require companies to put considerations about profit on an equal footing with the environment and society. That achievement would be something not to resist, but to celebrate.
Bloomberg
