Why we need legal reform to help support purpose-driven companies to thrive
The UK’s framework for business incorporation does not currently do enough to help encourage and protect companies that want to prioritise social and environmental impact.
During the last ten months, in the darkest days of Covid, businesses that went the extra mile to support their employees and local communities gave rise to a feeling of togetherness and positivity. They demonstrated that not all businesses are there just to line their owner’s pockets. Calls to “#BuildBackBetter” chimed throughout social media and the news as a slogan to prompt action towards a positive, trustworthy corporate model.
In our recent research into What is holding purpose-driven business back?, we asked our Working Group of experts and other leaders how well they were supported by incorporation law to be purpose-driven, and focus on the way they affected society and the planet, as well as the bottom line.
Our work was informed by a poll conducted by The British Academy. It showed that business leaders were just as likely to think that the role of business is to find profitable solutions to the problems of people and the planet, as they were to think that it is to maximise returns to shareholders.
This is a fascinating result!
The same proportion of business decision makers think the role of business is to be purpose-driven as think it is to maximise return to shareholders
Which ONE, if either, of the following statements do you think BEST reflects the role businesses have in society? SOURCE: British Academy Purposeful Business poll, conducted by YouGov Plc: Total sample size was 660 senior decision makers. Fieldwork was undertaken between 14th - 16th September 2020. The survey was carried out online. The figures have been weighted and are representative of British business size.
Secondly, despite this, over half of business leaders believe that the legal and regulatory environment is more focused on shareholders interests, compared with just fifteen percent who thought it was focused on society’s interests.
Senior decision makers in business think the legal and regulatory environment is shareholder focused
For the following question, we want you to think about the current legal and regulatory environment for business in the UK... Whose interests, if anyone, do you think the legal and regulatory environment for business in the UK are more focused on? SOURCE: British Academy Purposeful Business poll, conducted by YouGov Plc: Total sample size was 660 senior decision makers. Fieldwork was undertaken between 14th - 16th September 2020. The survey was carried out online. The figures have been weighted and are representative of British business size.
In order to get a better understanding of why purpose-driven business leaders feel that they have to swim against the current, we took a closer look at the underlying legal framework, and discovered that this perception is underpinned by reality.
One key takeaway was that it is not clear how a company can be legally set up in a manner consistent with being purpose-driven.
The current legal framework within which UK businesses sit is broadly PERMISSIVE of operating in a purpose-driven way. However, it is not obvious nor easy for companies to incorporate in a way that will reliably PROTECT their purpose. Nor does the incorporation process provide clarity for Directors on their fiduciary responsibility to both shareholders and wider stakeholders.
This is quite nuanced, so please bear with us.
Regarding incorporation, there are three main ways in which purpose-driven companies are incorporated:
A regular limited company: Most companies are set up in this way, including 71% of new UK companies in 2019. They are subject to Section 172(1) of the Companies Act 2006. Many, although not everyone, argues that S172(1) is too focused on maximising shareholder return, above their impact on other stakeholders.
A regular limited company, with their purpose written into their articles: Although the option to legally protect a company’s purpose exists, writing purpose into articles is not an overtly obvious option for purpose-driven entrepreneurs. Why? None of the model articles available at Companies House include any purpose statements and the available guidance does not prompt Directors to think about it. It is an easily missed option during the registration process. Once incorporated, it can be difficult for an established company to write their purpose into their articles, since it requires at least 75 percent of shareholders to agree.
Using an alternative incorporation type: While incorporation types such as Community Interest Companies and Cooperatives are very useful and offer a blend of profit and purpose, they also tend to be fairly restrictive due to arduous setup processes, and ownership models that are off-putting to mainstream investors.
The suitability of incorporation type matters for purpose-driven businesses. The legal set up of a company not only signals intent to everyone from investors to employees, but is also a crucial means of using the law to protect a company’s purpose.
Our research revealed that there is, at the very least, a lack of clarity and understanding over what protection of purpose is provided by the law, particularly for the vast majority of companies which incorporate as a standard limited company.
Why is protection needed? We have heard from a number of larger businesses that pressure from the investment system can pull them in the direction of focusing on short-term profitability, rather than staying true to their purpose and seeking profit through the delivery of that purpose. This can become particularly prescient during potential take-over situations.
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So how do we move forward?
As we begin to #BuildBackBetter, we need to think about how to encourage and protect purpose-driven businesses through the UK’s legal framework. We want purpose-driven businesses to succeed thanks to the system being there to support them, not in spite of it.
We are currently researching the different options, and are due to come out with some concrete reform proposals in early 2021. We are asking ourselves the following questions:
What can make the UK a more supportive environment for purpose-driven businesses?
If the current incorporation options are not sufficient to support purpose-driven companies to thrive in the UK, what alternative incorporation type would be most appropriate?
Is it desirable for established purpose-driven companies operating under Section 172(1) of the Companies Act 2006 to pivot across to a different incorporation type? If so, how would they best be supported to do so?
What would be useful to ensure there is clarity for businesses over the best incorporation type for them?
If you have any thoughts on any of this, then we would love to hear from you!
If you have an interest in our work, please sign up to our newsletter on our website or get in touch at info@re-generate.org. We would be so pleased to hear from you.
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Are you running or thinking about how to start a purpose-driven business? Purpos.ly could be a helpful starting point when thinking about your company’s articles.
