UK Companies Act Reform Urgently Needed

It will surprise some that a think-tank with close historic links to the Tory Party - The Social Market Foundation - has proposed a revision of Section 172 of the Companies Act to impose a duty on directors to see that employees, at all levels of a company, share in the proceeds of growth - and to extend reporting requirements to cover the basis for pay decisions.  This is, however, one of many reflections of the current disintegration of neo-liberal ideology in business, and the recognition that the neo-liberal model of capitalism, based on greed and exploitation, simply has to change if any kind of capitalism is to survive.

Actually the last major revision of the UK Companies Act in 2006 started this process, by requiring directors to 'have regard' for the interests of employees and other stakeholders, as well as shareholders (the owners of capital) - there was a huge opportunity in the early 'noughties' for a more radical change, but unfortunately 'New Labour' failed to grasp it, and talk of 'stakeholder participation' remained little more than talk.  A bolder move then could have mitigated some of the effects of the 2008 crash, and moreover began to address the emerging issue of business' environmental responsibility.

One crucial factor here is that the neo-liberal 'shareholder value' model that held sway particularly in the USA and UK (slightly less so in the rest of the EU, with it's 'European Social Model') places the ownership and governance of big business in the hands of people that really only have short-term interests - because active shareholders and fund managers buy and sell all the time - and are often geographically remote - wheras stakeholders like employees and their local communities have a real interest in the long term, and in curtailing the kind of environmental irresponsibility that will blight their children's lives.

I still believe, however, that relatively modest changes to company law can go a long way to restructuring economies to begin to address the two great problems of our time: escalating social inequality and impending climate/ecological breakdown.

181 of America’s biggest companies have recently proposed changing the official definition of 'the purpose of a corporation' from 'maximising shareholder returns' to 'improving society', including benefiting staff and the environment.  In the EU, too, there are proposals to

  • strengthen the presence of employees on the boards of large companies
  • increase transparency on pay, and make excessively high wages non-deductible against corporation tax
  • introduce a government-backed label that will enable consumers to choose between products and services on social and environmental grounds.

(Trois idées neuves pour l’entreprise européenne du 21è siècle)

In what many regard as Europe's most successful economies, such as Germany and Sweden, of course, big companies are already obliged to have staff representatives in governance, and France already has obligatory profit sharing - even for quite small businesses.

Despite this general movement, the UK Labour Party's recent modest proposal to gradually transfer 10% of share ownership in the largest companies to staff - which would only apply in fact to about one tenth of one percent of all UK businesses - was greeted with horror by the 'disaster capitalists' currently running the UK Government.  This is so painfully short-sighted: the reality is that the next, urgent, reform of the UK Companies Act needs to go much further, especially with regard to the environment.  It must attempt no less than encoding both social and environmental responsibility into the DNA of big business, by

  • changing the purpose of all companies to include social and environmental responsibility,
  • enabling the participation in ownership and governance by stakeholder groups other than shareholders - not only employees, but also local communities or the wider public, whose interests are broader and longer-term than remote shareholders, and
  • introducing new reporting requirements on these issues and environmental impacts - including employment and environmental standards in supply chains - so that people can make genuine ethical judgements about what they buy.