Businesses back legislation to ‘Upgrade Capitalist Operating System’

Bates Wells is today publishing a draft Company Purpose (Amendment) Bill – legislation which, if passed, would displace shareholder primacy as the orthodoxy in British board rooms.

The Bill is being backed by a growing group of influential B Corps, business leaders and academic thinkers. Bates Wells is inviting others to join what we’re describing as #OperationUpgrade – a collective effort to ‘upgrade’ the capitalist ‘operating system’ so that the system is responsive to a world of increasingly limited resources and in turn supports the development of a future fit economy.

The principles behind the Bill, which has been shared over the last few weeks with the major political parties, can be seen in key sections of a number of the different political parties’ manifestos.

The key asks of #OperationUpgrade are:

  1. A change to the default model of company purpose set out in s172 of the Companies Act to require all companies to seek to ensure, at a minimum, that their business activities have a positive impact on society and the environment, alongside benefit to shareholders. This would in turn have the effect of changing the nature and shape of directors’ duties to companies; and
  2. A requirement for all companies to produce an annual impact report which discloses the positive and negative impacts each company has on society and the environment. In the case of companies which are subject to audit, the new impact report would also be subject to audit.

Bates Wells and other members of the coalition behind #OperationUpgrade believe that only a fundamental and clinical change of this kind to the purpose of business, which we would like to see in the UK and replicated in other jurisdictions, will enable humanity to close the emissions gap, bridge the SDG finance deficit and look forward to the future with confidence and a sense of opportunity.

We are planning alongside key partners to build momentum behind #OperationUpgrade over coming weeks and months, as a new Government settles into power in Westminster and as we look forward to the UK’s hosting of COP 26, the UK Presidency of the G7 in 2021 and other key moments.

We are inviting others to join with us in this call for an upgrade to the capitalist operating system.

Upgrade the “Operating System” for Capitalism

This legislation” says James Perry, co-founder of COOK and a key figure in the B Corp movement, “would upgrade the operating system for capitalism, which currently runs on an outdated system that focuses business narrowly on shareholder returns. This upgrade requires all businesses to benefit wider stakeholders”. Perry goes on to say that “It is now clear that the current operating system, which drives relentless profit maximisation, is harming us all in its single minded conversion of social and natural capital into financial capital. It is a failed and broken system in urgent need of an upgrade”.

The Bill is informed by the legal and political experience of the B Corp movement in passing business legislation on a cross-party basis in 40 legal jurisdictions. However, it is the first time legislation mandating a move to the triple bottom line for all companies has come out of the B Corp movement or indeed, as far as we are aware, has been formally proposed in any part of the world.

Bill Clark, the original architect of the “benefit corporation” legislation which has now been successfully introduced in 37 US states, as well as Italy, Colombia, and Canada, explains that “We are at an inflexion point within the movement. The benefit corporation legislation we developed nearly ten years ago is slowly spreading all around the world but we need to move faster. We can’t allow for good business simply to be an option. We need to turn the law on its head and require all companies to minimise their harms and seek to do some wider good for society, and not just for shareholders.

Up until this point, benefit corporation legislation has been optional and it has been up to individual businesses and their shareholders to decide whether or not to become a benefit corporation, a legislative form available in certain jurisdictions. There are over now over 8,000 benefit corporations.

Paul Polman, former CEO of Unilever and one of the architects of the Sustainable Development Goals, explained that “If we want business and society to thrive, we need to set minimum expectations about how businesses will contribute to society and ensure it has a positive environmental and social impact. Otherwise why would we give a business the permission to exist? Climate change, whilst the biggest challenge humanity faces, is also its biggest market opportunity and worth at least $12 trillion. That’s why I back this Bill – the UK has the chance to lead the way and at COP26 to call upon other countries to do the same.”

In recent weeks, The Body Shop and the Guardian Media Group have certified as B Corps and joined the growing business movement. Other prominent B Corps include Patagonia, Ben & Jerry’s, Divine Chocolate, Toast Ale, Ella’s Kitchen, Pukka Tea, as well as many other recognised brands. The movement is growing rapidly and is becoming increasingly influential in discussion about the future of business. It attracted attention in August when B Corp CEOs took out to a full page ad in the New York Times calling upon Business Roundtable signatories to “get to work”, join the B Corp movement and adopt a true legal stakeholder governance model, instead of talking a good game.  

On the topic of the growth in the momentum and profile of the B Corp community in the UK, Chris Turner, the Executive Director of B Lab UK, said that “Over the course of this year, the B Corp community has seen a dramatic increase in size and influence, demonstrating that ‘upgrading’ to a stakeholder governance model results in thriving businesses acting as a force for good. We are riding the wave of an explosion of interest in our stakeholder governance model across all sectors and size of business, and which we see only increasing as this movement gains momentum.”

The Mechanics of the Bill

The Bill replaces s172 of the Companies Act 2006, which sets out the default purpose of companies to benefit their shareholders, with a mandatory triple bottom line purpose for all companies. This is essentially the same model of purpose that companies choosing to certify as B Corps already adopt on a voluntary basis, but the proposed legislation would work by setting a new floor for all businesses.

Bates Wells’ Luke Fletcher, who drafted the Bill in collaboration with Bill Clark, explains that “The Bill shows how a simple and short piece of legislation could change how business works. The key to reforming our whole capitalist system is to reform company purpose, so that at the heart of every company is a fundamental – legal – understanding of its place in the world. This would shift the paradigm for every business, every business strategy and every boardroom discussion”.

Dr Mary Johnstone-Louise, Director of the Ownership Project at Said Business School, a programme which is analysing the impact of different forms of ownership on business and business purpose, adds that “There is a widespread sense that there is a need to look again at s172 of the Companies Act 2006 to see whether it is possible to ask companies to be managed not only for the benefit of shareholders but also for the benefit of wider society and the environment, in a manner commensurate with the nature and size of each company. This Bill is an example of what legislation upgrading s172 in this way might look like”.

Under the Bill, the Government would bring forward secondary legislation setting out more detailed rules about how companies would be expected to account for their wider “impacts” on society and the environment. Clara Barby, the CEO of the Impact Management Project, which is facilitating leading standard-setters to coordinate their impact measurement efforts, clarifies that “The opportunity to reach global consensus is in front of us. If impact reporting was to become a legal requirement, it would create the final push to get to a set of ‘generally accepted’ global impact reporting standards – and we could finally understand the full range of value for people and the planet that is destroyed or created by enterprise”.

Conclusion

Mark Cuddigan, the CEO of Ella’s Kitchen, a B Corp and one of the champions of the movement emphasises that “The B Corp movement has given us ‘proof of concept’. There is independent certification of the impact of the business, which includes legal changes to put the interests of wider society and the environment alongside profit. It makes it possible to tell the difference between a good business and good marketing. And it works! Surely all business should be good business?”

The publication of the legislation by Bates Wells follows hot on the heels of the launch of the British Academy’s Principles for Purposeful Business report, which reflects a profound shift taking place in the intellectual climate on the question of our common understanding of business and its purpose and seems likely to influence thinking on the subject in academic and policy circles for years to come.

On this front, Luke Fletcher says “We wait to see if there will be a cross-party majority in Parliament for a critical change like this to the most fundamental of economic rules – the legal purpose of companies and, in turn, the whole economic system. The pressure can only grow. Surely it is a matter of time before we see this kind of legislation pass, given growing acknowledgement of the climate crisis. With an upgrade like this, we at least give ourselves a shot at closing the emissions gap, financing the Sustainable Development Goals and rising to meet some of our greatest challenges.”

Charmian Love, co-founder of the B Corp movement in the UK also references the climate emergency when she says that “We are facing a climate emergency and a social emergency.  We need to upgrade the system and change the rules of the game to address these market failures – and we desperately need businesses to show us the way. If not now, when? If not us, who? When people decide to do nothing, they decide to do a great deal in a world that is not standing still. If we can upgrade the capitalist operating system in this way, maybe we can feel hopeful and optimistic about our children’s futures. If you feel the system needs an upgrade, join us. #OperationUpgrade”.

The Company Purpose (Amendment) Bill

If you would like to read the Company Purpose (Amendment) Bill in its entirety, we’ve prepared a document which provides further details on what has been proposed.

Further Information

Alternatively, if you would like to arrange an interview with a spokesperson, please contact Sam Hunter, Senior Press Officer, Bates Wells on +44 (0)20 7551 7906 or [email protected].

Further Notes

  1. A B Corp is a business which has been independently certified by B Lab as meeting rigorous standards of social and environmental performance. To achieve certification, a business must also either become a benefit corporation, in jurisdictions where benefit corporation legislation is available, or otherwise amend its governing documents to ensure that the purpose of the firm includes a purpose to have a material positive impact on society and the environment, alongside creating value for shareholders. Most B Corps are not benefit corporations but in some states the only way to become a B Corp is to become a benefit corporation.
  2. A benefit corporation is a corporation formed under benefit corporation legislation with modified obligations committing it and its directors to higher standards of purpose, accountability and transparency. Traditional US corporations are expected to use profit maximization as the primary lens in decision making and in some US states the only way to amend the purpose and directors’ duties to meet the requirements for certification as a B Corp is to become a benefit corporation. Many see traditional corporate law as a hurdle in creating long-term value for all stakeholders, including the shareholders themselves. Benefit corporations reject this myopic model. They are required to consider all stakeholders in their decisions. This gives them the flexibility to create value for all stakeholders over the long term, and even through exit transactions such as IPOs and acquisitions. There is no requirement for benefit corporations to certify as B Corps.
  3. B Lab is a nonprofit that serves a global movement of people using business as a force for good. B Lab is the independent body which certifies businesses meeting rigorous standards of social and environmental performance as B Corps. There are at the time of writing over 3,100 certified B Corps in 150 industries across 70 countries, all of which share a common goal to drive forward the global movement of people using business as a force for good.
  4. Bates Wells is a full-service City law firm which specialises in the impact economy – working for businesses, investors and others seeking to create a positive impact. It is the first law firm in the UK to become a B Corp. It is the firm which originated the concept of the community interest company, which was introduced under the Companies (Audit, Investigations and Community Enterprise) Act 2004, and of which there are now over 14,000 in existence. Louise Harman, a partner at the firm, was seconded to the Mission Led Business Review. The firm recently declared a climate emergency and joined Business Declares.
  5. Bill Clark is currently Of Counsel with the law firm Drinker, Biddle & Reath in Philadelphia in the US, where he practised as a partner for over 25 years, focusing on corporate governance. In 2009, Bill worked with the founders of B Lab, Bart Houlahan, Jay Cohen Gilbert and Andrew Kassoy on the development of the first ever benefit corporation legal statute, which was adopted in 2012, a legal innovation which has rippled across the US and increasingly around the world, with benefit corporation legislative proposals springing up in a range of jurisdictions. The model has won widespread bipartisan support. In 12 US jurisdictions, the model was adopted unanimously, a remarkable outcome in a politically polarised country. Bill is a recipient of the Pennsylvania Bar Association Lifetime Special Achievement Award.
  6. Luke Fletcher is a partner at Bates Wells and co-leads the firm’s Impact Economy practice. He is the co-author of the English law legal requirements for B Corps and is the author of the Purposely model Articles, which were developed in collaboration with the Department for Culture, Media and Sport, the Department for Business, Energy and Industrial Strategy and Companies House. Luke was a member of the British Academy’s recent Future of the Corporation Steering Group and its Deliberation Group, supporting Professor Colin Mayer and the British Academy in the development of Principles for Purposeful Business.
  7. The Sustainable Business Commission, co-chaired by Paul Polman and Lord Mark Malloch-Brown, identified sustainable development as a $12 trillion market opportunity. There is an opportunity for the UK to become the place to start, scale and finance sustainable business.
  8. The Lib Dem manifesto states that “Business can be a force for good in our economy” and sets out a commitment to promote “responsible capitalism that works for everyone”. This includes a commitment to “reform fiduciary duty and company purpose rules” so that companies benefit wider stakeholders “alongside benefit to shareholders”, as well as ensuring that companies “report formally on the wider impact of the business on society and the environment”. This sits alongside a requirement for companies to exercise due diligence to minimise certain forms of harm arising out of their activities and to report on their actions.
  9. The Labour manifesto states that Labour will “rewrite the rules of the economy, so that it works for everyone”, with a strong emphasis on the economic need to respond to the climate emergency. The manifesto says that “Labour will take on short-termism and corporate greed, making sure good businesses are rewarded, not undercut. We will rewrite the rules of the economy and ensure everyone plays by them. We will amend the Companies Act, requiring companies to prioritise long-term growth while strengthening protections for stakeholders”.
  10. The Green Party manifesto states that the party will “transform our economy to make it work for the wellbeing of people and environment – and we want business to play a leading role. We want enterprise in the 21st century to be about more than what pays… …We want to transform the business environment in the UK, so enterprise that benefits us all is rewarded and helped to thrive.” The Green Party have also promised to bring forth a “Sustainable Economy Bill”, the backbone of which could be The Company Purpose (Amendment) Bill, combined with additional binding targets on companies to reduce their negative impacts.
  11. The Scottish National Party manifesto states that “At Westminster, the SNP will further support the growing trend in the private sector towards greater corporate responsibility. By taking a greater stake in the communities within which they operate, firms can become partners for social progress. Whilst it is always better to work collaboratively as partners, the SNP supports direct intervention when firms fail to meet their legal and social obligations.
  12. The Conservative manifesto does not contain any commitment to a wholesale change of company law. However, the Conservative Government commissioned the Mission Led Business Review which recommended that Government should promote the flexibility offered under the law for companies to act with a purpose and align shareholder and stakeholder interests, should encourage businesses to incorporate around a purpose and commit to impact and should explore the introduction of a legislative equivalent to the benefit corporation. The Conservatives could still therefore introduce legislation for a new default company purpose as a legislative option for companies, akin to a benefit corporation statute.
  13. In the event that the next Government formed following the general election does not wish to pursue legislative change, Bates Wells will look to collaborate with an MP or Lord to put forward the Company Purpose (Amendment) Bill as a Private Members’ Bill during the next session of Parliament. Anyone interested in exploring this option should get in touch.

All content on this page is correct as of December 4, 2019.