The Nature of Stakeholder Capitalism and the Role of Corporate Law: Proposed Amendments to Chapter 2 of the Companies Act 2006
In a recent contribution to the European Corporate Governance Institute Blog (the ‘ECGI Blog’), ‘The Nature of Stakeholder Capitalism and the Role of Corporate Law: A Brief Response to Colin Mayer’s Blog’, I suggested that if stakeholder capitalism were to be reconceptualized to reflect a form of beneficial social ownership of capital by stakeholders to whom the private owners of capital owed a fiduciary duty, radical revisions, rather than modest reforms, of company law would likely be required. This post is intended to describe—by reference to English company law—the legislative revisions, which I suggest would be required in this respect.
In this section, I set out some proposed amendments to the Companies Act 2006, in particular section 172 of the Act, and related provisions. For ease of reference, I have bolded the proposed amendments.
Companies (Stakeholder Capitalism) Bill
A BILL TO amend various provisions of the Companies Act 2006, and for connected purposes.
Be it enacted [etc.] as follows:
1. Amendments to sections 170 to 178 of the Companies Act 2006
The Companies Act 2006 shall be amended, as follows: –
(a) Section 170 (Scope and nature of general duties) shall be amended to read, as follows -
170 Scope and nature of general duties
(1)The general duties specified in sections 171 to 177 are owed by a director of a company to the company and in the case of sections 172 and 175 also to the beneficiaries.
(b) Section 171 (Duty to act within powers) shall amended to read, as follows -
171 Duty to act within powers
A director of a company must—
(a) act in accordance with the company's constitution, and
(b) subject to section 170, only exercise powers for the purposes for which they are conferred.
(c) Section 172 (Duty to promote the success of the company) shall be amended to read, as follows -
172 Duty to promote the success of the company
(1)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 and the beneficiaries as a whole and abstain from causing harm or damage (including the negative externalization of costs) to the beneficiaries, 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.
(2) Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.
(3) The duty imposed by this section as it relates to the members of the company has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.
(d) Section 175 (Duty to avoid conflicts of interest) shall amended to read, as follows-
175 Duty to avoid conflicts of interest
(1) A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company and with the duties owed to the beneficiaries under section 172.
(2) This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity).
(3) This duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company.
(4) This duty is not infringed—
(a) if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest; or
(b) in the case of a conflict with the interest of the company, if the matter has been authorised by the directors.
(e) Section 178 (Civil consequences of breach of general duties) shall amended to read, as follows -
178 Civil consequences of breach of general duties
(1) The consequences of breach (or threatened breach) of sections 171 to 177 are the same as would apply if the corresponding common law rule or equitable principle applied.
(2) The duties in those sections (with the exception of the duties owed to the beneficiaries in section 172 and section 174 (duty to exercise reasonable care, skill and diligence)) are, accordingly, enforceable in the same way as any other fiduciary duty owed to a company by its directors
(3) The duties owed to the beneficiaries in section 172 is enforceable in the same way as any other fiduciary duty under common law or equity, subject to such rules as may be prescribed from time to time in this regard.
(f) Chapter 2 shall be amended by the addition of the following definitions –
Definitions for this Chapter
(1) In this Chapter—
‘beneficiaries’, to whom the fiduciary duties specified in section 172 are owed —
- the community of natural persons ordinarily resident in a jurisdiction (excluding competitors of the company) in which the company operates or conducts business and/or the company’s assets are situated or used, and
- the natural environment, including all living species, climate, and natural resources, that is impacted by the company’s operations, the conduct of the company’s business, and/or use of the company’s assets.
The proposed amendments to section 172 are intended to implement the model of stakeholder capitalism I propose in my ECGI Blog article. They are inspired by the principle primum non nocere. One could say that in the context of the revised section 172,the principle becomes secundum non nocere. Some clarifications are in order. First of all, unlike the Better Business Act draft revisions to section 172, the proposed revisions to section 172 are not ‘purpose’ driven.
Second, the definition of beneficiaries is evidently wide, encompassing society and the natural environment. It refers to a community of natural persons rather than individuals in line with the notion of beneficial ownership posited in my ECGI Blog article.
Third, the duties in section 172 are intended to be complemented by a duty to avoid conflicts as provided in section 175, which, as far as the beneficiaries are concerned, cannot be authorised under section 4(b).
Fourth, section 178 confirms that the revised duties under section 172 may be enforced by, or on behalf of, those to whom they are owed, ie it does not limit such claims to derivative ones but foresees the likely necessity to enact court rules to govern such actions.
Fifth, while these proposed revisions relate solely to English company law, they would work if adopted across multiple jurisdictions as part of a globally agreed approach.
This exercise is intended to (a) describe the radical revisions to company law that I suggest would be required to give legal effect to the model of stakeholder capitalism I propose in my ECGI Blog article and (b) thereby explain how I view the fiduciary duty mentioned therein would be expressed in a legislative setting, taking English law as an example.
John Gaffney is an Adjunct Professor at University College Cork.
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