As “social good” objectives (like the protection of the environment, the improvement of public health and the alleviation of poverty) rise up the corporate agenda in the UK, we examine how UK companies are reconciling the pursuit of these objectives with their directors’ duties, which normally require the prioritisation of the creation of shareholder value above other objectives. We also briefly explore the current trend of UK companies seeking to embed social and environmental purposes in their constitutions.

The core duty of a director of a UK company

This is set out in section 172 of the Companies Act 2006 and requires a director to act in the way that he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its shareholders as a whole. The following observations can be made about the nature of the section 172 duty:

• The duty is primarily subjective: it requires the director to do what he or she believes, in good faith, will promote the success of the company. A UK court is unlikely to interfere with a director’s business decision unless the director has failed to consider, at all or in good faith, whether the decision would promote the success of the company.
• What “success” means will vary depending on the circumstances of each company but for a commercial company will typically mean a long-term increase in its financial value. We explore how companies can modify this default purpose below.
• The duty is owed to the company and not directly to the shareholders. It can be enforced by the company acting by its board (by bringing a claim for breach of duty) or, although this is rarer, by the shareholders (by bringing a derivative action on behalf of the company).

In seeking to promote the success of the company for the benefit of its shareholders as a whole, a director is to have regard to a non-exhaustive list of wider social factors, including the interests of the company’s employees and the impact of the company’s operations on the community and the environment. This is referred to as the “enlightened shareholder value” principle. However, in the event of a conflict between what would benefit the company’s shareholders and what would benefit one or more of the wider social factors, the predominant view is that the interests of shareholders prevail.

The traditional approach: corporate social responsibility

It has long been the practice of many commercial companies to justify the (usually limited) pursuit of social and environmental objectives as being consistent with the long-term success of the company from which the shareholders will ultimately benefit, even if these involve expenditure in the short-term that is not necessarily critical to the company’s business operations.

This has typically taken the form of traditional corporate social responsibility initiatives, which are often regarded as being critical to the maintenance of a company’s reputation and, in some cases, to its ability to obtain business. Notably, the UK government recently announced that certain companies bidding for public sector contracts will in the future be rated, in part, on social value factors. The directors of companies that fall into this category would be expected to conclude that pursuing a certain amount of social good will therefore be critical to the company’s ability to win contracts and generate profits for the ultimate benefit of its shareholders.

But what about when a company wants to give shareholder value and the pursuit of social good equal weighting, or to give social objectives priority over shareholder value?

The new approach: modifying the default corporate purpose

Section 172 expressly recognises that a company can have purposes that consist of or include purposes other than the benefit of its shareholders. Where this is the case, the duty is modified so that a director is required to act in the way that he or she considers, in good faith, would be most likely to promote the success of the company by achieving those purposes.

Embedding a social purpose in a company’s constitution has long been common among companies operating in the “third sector”. Charitable companies are required by law to have exclusively charitable purposes and community interest companies often voluntarily embed a social purpose in their constitutions.

More interestingly, according to a recent UK Government report ^[1], increasing numbers of commercial companies are seeking to embed social purposes alongside their traditional shareholder value motives, blurring the lines between private and third sectors.

The UK Government is encouraging entrepreneurs forming companies to embed social purposes within their constitutions and has backed the development of a new online tool which seeks to help them do this. Purposely uses the answers to an online questionnaire to generate template constitutional documents and offers four main models depending on the desired prioritisation of shareholder value relative to the social purpose. These include shareholder value and the social purpose having equal standing and the social purpose taking precedence over shareholder value (and vice versa).

Another increasingly popular option is to seek to become a “B Corp”, a global certification of a commercial company’s social and environmental performance, which has been achieved by over 2,500 companies worldwide and 145 companies in the UK. In addition to passing a rigorous social and environmental impact assessment, prospective B Corps in the UK are required to embed the following “triple bottom line” approach in their constitutions:

• Companies are required to replace the default corporate purpose with prescribed language that effectively puts shareholder value and positive social and environmental impact on an equal footing.
• The intention is to require directors of B Corps to pursue strategies that seek to achieve all three purposes (and not to pursue strategies that would benefit one purpose at the expense of another).
• However, the practical consequences of the directors failing to pursue the social and environmental aspects of the triple bottom line are less clear. The B Corp prescribed language expressly states that external stakeholders do not have rights of enforcement against the directors. This preserves the default position that directors’ duties can only be enforced by the company itself (acting by its board) or, in limited circumstances, by the shareholders, neither of whom would typically be incentivised to bring a claim against the directors for failing to pursue the social and environmental (as opposed to the shareholder value) aspects of the triple bottom line.

While these trends have to date been most prevalent among start-ups and other small and mid-sized companies, there is growing interest among larger UK companies. Examples of larger UK companies that have already obtained B Corp certification include Danone’s UK subsidiary and Pukka Herbs, an organic tea company that was recently acquired by Unilever (and that Unilever plans to maintain as a certified B Corp post-acquisition). Looking to the future, the B Corp movement has established a Multinationals & Public Markets Advisory Council tasked with recommending a manageable path to B Corp certification for multinationals and publicly traded companies. Natura, a Brazilian cosmetics company, was the first publicly traded company globally to obtain B Corp certification and Danone, having already obtained B Corp certification for a number of its subsidiaries, has announced that it is working towards group-wide B Corp certification.

Although no publicly traded UK companies have yet obtained B Corp certification, it will be interesting to see whether the UK corporate governance regime’s current focus on corporate purpose and culture ^[2] will encourage any publicly traded UK companies to pursue this option. And, of course, it will be interesting to see whether public shareholders will be supportive of such a move, which would necessarily involve a degree of de-prioritisation of their interests.

[1] Government Response to Advisory Group Report on ‘Growing a Culture of Social Impact Investing in the UK’, June 2018, available here.

[2] As we reported here, the Financial Reporting Council is currently consulting on revisions to the UK Corporate Governance Code (with which UK premium listed companies must “comply or explain”). The proposed revisions include a new Principle promoting the importance of company purpose and culture, with the Board being required to establish the company’s purpose, strategy and values, and ensure that these and its culture are aligned.