A narrow focus on profit isn't fit for the 21st century.
The Companies Act is woefully out of the date and based on Victorian principles. The key idea is that business should be run in a way that maximises profits for its owners and shareholders. This structure frames everything that businesses do.
A narrow focus on profit may have been fine for the 19th Century, but isn’t fit for the 21st Century where we face a climate emergency and social division. Even on its own terms, the economy isn’t growing anyway near the levels it used to in the past.
You cannot tackle the climate crisis, heal our divided country and revitalise our economy unless you reshape the institutions that comprise it. This means changing business.
Labour has been particularly ahead of the political curve in grasping that fact and have said they will rewrite the Companies Act if they get into business in order that “directors have a duty to promote the long-term interests of employees, customers, the environment and the wider public”.
The Liberal Democrats have also committed to changing the judiciary duties of directors. There is an emerging progressive policy consensus that the time has come to change company law.
Ultimately all questions of business performance go lead back to governance and management.
Boards set the tone for the business and this then percolates through the rest of the company. The strategies and decisions that these boards make are what drive the country’s economic performance.
Where the sole focus on profit may have driven long-term decision making, it now drives short-termism.
A new report by the TUC & High Pay Centre has found that between 2014-2018, £442bn has been returned to shareholders as profit.
Profit isn’t a bad thing, but at a time when UK businesses have low levels of productivity, pay still below the levels reached before the financial crisis and a climate emergency, is this level of pay-out an example of long-term thinking?
When it comes to the Companies Act, there are two key areas: Sections 172 and 396 of the Companies Act.
Section 172 says that Companies have to put shareholder profits ahead of all interests. We need to change this, to put society, environment and workers on equal footing with profitability.
Section 396 covers reporting. At the moment it says that companies have to give a “true and fair view of the state of affairs” of the company. Usually this just means the financial state of affairs, profit and loss.
But we need more than that. We need to know what environmental impact businesses are having. What social impact they are having. This will help citizens, civil society, investors and other stakeholders to hold businesses to account for their responsibility. Changing one without changing the other is not an option.
Progressives should ignore those businesses which say that this is anti-business. It isn’t about destroying business, it is about saving it.
Edelman’s Trust Barometer 2019 found that 52% of the public believe that business isn’t working. More of the same will lead to further falls in public trust in business.
We also have the example of over 100,000 social enterprises who living this in practice. They are booming, contributing £60bn to the UK economy and employing 2m people. Social and environmental responsibility isn’t bad for business, if anything, it makes businesses better.
Rewriting company law is an exercise that will cost very little but could unlock billions for workers, communities and the planet. So much focus will be given to the “big” numbers around public spending during this election, but it is policies like this which will really determine the future of the country.
Andrew O’Brien is Director of External Affairs at Social Enterprise UK.
If you want to show your support for reform, you can sign an open letter www.howdocompaniesact.org
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