My previous blog post talked about the mania for kowtowing to ESG issues that seem to be creeping into public companies. What exactly is the purpose of a company? Is it to generate financial returns for shareholders or does it have wider responsibilities?
Section 172 of the Companies Act spells it out. Its primary duty is “to promote the success of the company” but the Act does recognise other responsibilities by saying also that:
A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—
(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.
This clearly gives company directors wide discretion to support environmental or other ESG issues that may be influenced by the company’s operations. And it makes clear that employees and the wider community are stakeholders in a company.
There was no great opposition to this wording when the last Companies Act was passed in 2006 and I personally believe it is quite reasonable. But the balance between the financial interests of shareholders (members) and the wish by companies and their boards to dabble in politics has swung too far away from sound ethical principles. For example, some companies are intervening in the contentious issue of abortion in the USA. Is that in the interest of their employees? That’s basically a political or religious question that cannot easily be answered.
Clearly companies have to obey the law so if the Government mandates specific legislation on environmental or social issues then companies have to comply. But do they need to, or should they, promote policies that attempt to influence behaviour in the wider community?
For example, should Ben & Jerrys have stopped selling ice cream in Israel because they disagreed with the policies of the Israeli Government?
Companies always have conflicts of interests in their operations which they have to reconcile with the prime objective of promoting the success of the business. For example paying their employees more might be in the interest of the employees but might undermine the financial position of the company. The directors need to balance their responsibilities to the different stakeholders.
What they should not be doing is trying to win a popularity contest in the social media.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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