From crisis to community

14th July 2021


The Better Business Act would put responsibility to society and the environment on the same footing as responsibility to shareholders, explains Chris Turne

COVID-19 has forced us all to rethink. We have adapted the ways we live and work while reflecting on the world we want to create for future generations. We must ensure that every person and every business becomes part of the solution to our global challenges.

Issues such as the climate emergency, inequality and discrimination remind us of our interconnectedness while highlighting the role of business, as global brands and local enterprises bring us together in the marketplace and workplace. What’s clear is that while business is a significant contributor to these crises, it is also a potent force when it comes to delivering solutions.

The role of business

We know the power of business: the vast wealth it generates and its capacity to create and innovate. However, during the past 50 years, business has become separated from the communities it serves, threatening health, wealth and the natural world. A 2020 B Lab UK poll revealed that 72% of the UK population think businesses should have a legal responsibility to the planet and people, while 76% think it has a responsibility to protect the environment. A survey by the Institute of Directors in May 2021 found that 62% of directors believe businesses should not exist solely to make money and generate shareholder profits; almost half felt companies should have a stated social purpose.

Financial markets are chiming in, too: according to The Investment Association, investors poured £7.1bn into responsible environmental, social and governance (ESG) funds in the UK during the first three quarters of 2020, up from £1.9bn for the same period in 2019. A March 2021 study by PlanetOne Capital predicts that the ESG market is set to double in 2021 as investors plan to support companies that have a positive ESG rating or impact.

Outdated company law

Company law has not kept pace with this shift, with the Companies Act still rooted in the principle of shareholder primacy. Section 172 of the Act defines the duties of directors, and was much debated when last updated in 2006. This led to the ‘enlightened shareholder primacy’ principle, which requires directors to have ‘regard’ for other stakeholders. However, this created ambiguity and uncertainty, and failed to remove the overriding principle of shareholder primacy. It is still possible for CEOs to invoke shareholder primacy in defence of harmful actions, and they can remain handcuffed to prioritising short-term shareholder returns at the expense of people and planet.

We must create a new level playing field, where every business puts the interests of people, profit and planet at the heart of their purpose, and directors take responsibility for this. It’s time for the law to catch up.

The Better Business Act

The Better Business Act is an amendment to Section 172 of The Companies Act that will ensure directors are responsible for aligning shareholders’ interests with those of wider society and the environment. It includes four principles:

  • The interests of shareholders should be advanced alongside those of wider society and the environment. This establishes a new principle of fiduciary duty within Section 172 of the Companies Act.
  • Directors should be empowered to exercise their judgment in weighing up and advancing the interests of all stakeholders.
  • This must apply to all businesses by default. It must no longer be optional to benefit wider stakeholders beyond shareholders.
  • Businesses must report on how they align the long-term interests of people, planet and profit in a strategic report or impact report, where one is currently required.

Businesses around the world have shown that this can be a model for sustainable growth that drives innovation and entrepreneurship. The 4,000-strong B Corp community has led the way, while tens of thousands of businesses have chosen to be incorporated in equivalent ‘stakeholder governance’ forms.

Calling for leadership

The pandemic produced inspiring stories of businesses stepping up and innovating – from Scottish food manufacturer Macphie, which started producing hand sanitiser for the government and the NHS, to global giants such as Danone, which set US$250m aside to support small supply chain businesses. This is what ‘good’ looks like. These businesses are building resilience and growing for the long term; they recognise the importance of community and place, and act for their benefit.

Since it launched in April 2021, more than 600 businesses have joined the Better Business Act coalition – including brands such as John Lewis, Innocent Drinks, Iceland, Danone, The Body Shop and Bulb.

The Act is an opportunity for the UK to demonstrate leadership – creating a competitive advantage, driving innovation, accelerating progress to net zero, and aligning with the government's ambition to ‘build back better’. The eyes of the world are on the UK in its role as president of the G7 group of nations and host of COP26. The time to act is now.

Visit betterbusinessact.org to find out more.

Chris Turner is campaign director for The Better Business Act and executive director at B Lab UK.

Image credit: iStock

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