The effort to decarbonise and move to a sustainable economy is multifaceted with various actors including businesses, legislators, governments and consumers, amongst other stakeholders, having key roles to play. Carbon emissions of businesses conducting operations pose a challenge in the move to a sustainable economy. Whilst a company must operate within the external confines set by legislators and regulators, there is a growing recent trend amongst businesses to modify their own corporate governance procedures to reduce environmental impact.
As part of our sustainable economy series, in this article we look briefly at competing theories in the purpose of the company, developments in the corporate governance regime in the U.K, and at the recent case study of beauty company ‘Faith In Nature’ which has strengthened its corporate governance provisions using innovative means to prioritise the environment in its business decision taking process.
The purpose of the company has been a long- standing debate and is inextricably linked to a company’s environmental impact. Influential American economist Milton Friedman famously published his 1970 essay in the New York Times entitled: “The Social Responsibility Of Business Is to Increase Its Profits” [1]. In that article, Friedman’s “key point” was that a corporate executive (a Director) has a primary responsibility to take decisions in the interest of the company’s shareholders as follows: “That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”
The so-called “Friedman Doctrine” advocates a shareholder primacy model in which the interests of shareholders, and the objectives of profit maximisation, take precedence over other stakeholders with Directors being accountable for their decisions to shareholders.
The main corporate governance statute in the U.K, the Companies Act 2006 (CA 2006), put into law the duties owed by a Director of a company to that company. The drafting of s172 CA 2006 introduced the concept of ‘enlightened shareholder value’, which is intended to address some of the perceived imbalances of the shareholder primacy model, and advance the interests of key stakeholders such as the environment.
s172 CA 2006 reads as follows (emphasis added):
(a) the likely consequences of any decision in the long term,
(b) the interests of the company’s employees,
(c) the need to foster the company’s business relationships with suppliers, customers and others,
(d) the impact of the company’s operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
The effectiveness of the ‘enlightened shareholder value’ model and whether it goes far enough in the context of the climate crisis has been called into question. The primary duty of U.K directors “to promote the success of the company” has been understood to mean to take decisions prioritising shareholder profit over other stakeholders, such as the environment. As above, the wording of s172 CA 2006 only states that directors should “have regard to” the factors listed at (a) to (f), with “promoting the success of the company for the benefit of its members as a whole” still at the forefront, meaning that shareholder profit still appears to trump regard to the environment and other stakeholders in order of priority.
Noting the potential issues with ‘enlightened shareholder value’ in s172 CA 2006 as it stands, being that arguably the environment is still subjugated to shareholder interests in the U.K, eco beauty company ‘Faith In Nature’ took the step of becoming: “the first company in the world to give Nature a vote and a voice — legally making Nature a director of our [Faith In Nature’s] company” [2]. We examine below the steps taken by Faith In Nature to prioritise the environment in its corporate governance.
In its articles of association, Faith In Nature has defined the objects of the company as being:
“to promote the success of the company:
Further, the company’s articles state that:
“A director must act in a way he or she considers, in good faith, most likely to promote the success of the company in achieving the objects set out and in doing so shall have particular regard (amongst other matters) to:
We anticipate that the effect of the novel drafting by Faith in Nature in its constitutional documents is to place the environment (amongst other stakeholders not considered in this article) at an equivalent level of priority to shareholder interests as far as is possible to do so in U.K company law.
The objects of the company are to use “best endeavours” to have a positive impact on the environment. We note that s172 (2) CA 2006 (cited above) states that: “Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.”
Faith In Nature appear to have expressly amended its company purpose to take into account environmental interests, therefore amending the meaning of “promoting the success of the company” to place the environment at an equivalent level to the interests of shareholders and giving s172(2) CA 2006 more ‘bite’.
As this type of drafting becomes more commonplace, we look forward to seeing how directors, shareholders, investors, interested third parties and courts will interpret the duties of a Director of a U.K company whose constitution includes environmental or societal purposes. This type of ESG aligned drafting is readily available for consideration by all via The Chancery Lane Project (see Ragnar’s and Arlo’s clauses, for example). [3]
The purpose of the company is inextricably linked to its environmental impact. This article has explored the corporate governance regime in the U.K and a case study of the innovative example of Faith In Nature. This article also follows our previous update on corporate governance reforms. For more detailed information, see s172 Director’s Duty – it’s not just about the bottom line | Michelmores.”
For more information about corporate governance at your company, please contact Jonathan Kitchin, Will Rees or Caroline Bamford at Michelmores.
[2] https://www.faithinnature.co.uk/blogs/notes-on-nature/recognising-the-rights-of-nature
[3] https://chancerylaneproject.org
This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relating to your particular circumstances, you should seek independent legal advice.