Directors’ duties and the Better Business Act

Directors’ duties and the Better Business Act

A coalition of over 1,000 UK companies, known as the Better Business Act, is proposing an amendment to section 172 of the Companies Act 2006, which could have a significant impact on directors and their statutory duties. If the amendment is accepted, company directors will have to consider the impact their decisions might have on society and the environment on top of the factors they already have to take into account.

Currently, directors are required (by section 172 of the Companies Act 2006) to act in a way in that they consider, in good faith, would promote the success of the company for the benefit of its members as a whole.  If the Better Business Act campaign is successful, this requirement would be widened to encompass a need to advance the purpose of the company, while acting in a way beneficial to society and the environment. Directors would be expected to make decisions that actively seek to reduce harm or cost to society and the environment. Company purposes would have to align with the revised provisions of a new section 172, and companies are invited by the coalition to add a purpose into their articles of association that goes beyond the expectations set out in the draft Better Business Act.

At the moment, directors need only to “have regard” to wider stakeholder interests, including the interests of employees and the impact of a company’s operations on the community and the environment. Broadly, the proposed changes will give that need more teeth and are intended to give directors more discretion to make choices that benefit society as a whole rather than their principal focus being on shareholder interests and profits – so aligning the three “P”s of People, Planet and Profit.

The coalition anticipates that the new duty would apply to all directors of all companies, and hopes to go further by requiring large companies to produce annual reports describing how the company has advanced the purpose of the company and has had regard to wider stakeholder interests. (Don’t forget that larger companies are already required to report on how they have applied section 172.)

Directors are already subject to extensive statutory and common law duties, in essence bound up by that overall obligation to act in the best interests of the company for the benefit of its members as a whole. In the same way as they can be subject to severe consequences for breach of their existing duties, it’s expected that breach of the new duties proposed by the Better Business Act would give rise to sanctions.

That said, the proposed amendment is expected to require the consideration given to wider environmental and societal impact to be proportionate to the size and nature of the company’s operations, which suggests that directors will still have discretion to do what they see as best for their company at the time, even if it might not immediately advance social or environmental causes.

Whether or not the Better Business Act succeeds in its campaign for the amendment of section 172, it seems as though the public and a great many companies themselves consider that directors should be looking beyond shareholder benefit when making decisions. Our recommendation is that prudent directors should already be giving consideration to wider stakeholder interests when making company decisions, and – critically – to be evidencing their reasons for the decisions they make by keeping good records.

Webinar – Directors’ duties in the spotlight

The suggested changes to section 172 are not the only duties a director has to bear in mind. Rix & Kay’s corporate and dispute resolution teams advise on directors’ duties and breaches and will be pleased to hear from you if you’d like to learn more. Kathryn Paisley (corporate), Richard Ludlow (insolvency) and Dan Sherlock (dispute resolution) are presenting a webinar on directors’ duties with the Institute of Directors on 6 October 2022 – please do sign up via this link if you would like to attend.

We are here to help

If you would like to discuss any of the points mentioned above in more detail or if you would like advice in connection with business affairs, please contact Kathryn Paisley or Barney Bose in our Corporate and Commercial department via email to kathrynpaisley@rixandkay.co.uk  or barneybose@rixandkay.co.uk or tel 01825 744447.