THE UNTAPPED POTENTIAL OF THE INCLUSIVE ECONOMY B Lab UK Response to the Industrial Strategy Green Paper TABLE OF CONTENTS Executive Summary
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The Untapped Power of Business in the UK
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How Best to Achieve an Inclusive Economy?
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Why the UK?
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Creating a Platform for Inclusive Business
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The “Inclusive Company”
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APPENDIX A - UK INCLUSIVE BUSINESS CLUSTER ANALYSIS
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APPENDIX B - POLICY OPTIONS FOR IMPLEMENTATION
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APPENDIX C - INCLUSIVE COMPANY MODEL
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Executive Summary We believe that the true power of the private sector to tackle society’s most pressing problems is currently untapped in the UK. We are asking for Government to explore the creation of a platform for mainstream, for-profit companies to pursue inclusive business practices in the UK. We believe that the UK can become the best place in the world to start, grow and finance an inclusive business. The power of the private sector is not restricted to its ability to generate profit but comes from its incredible capacity to leverage the ingenuity and creativity of millions of entrepreneurs to meet our human needs effectively. In the UK, we have yet to explicitly enable business to direct its resources and innovative force towards solving the complex problems that we face. This is a huge missed opportunity given the scale of those problems, from deprivation and inequality to environmental degradation. We must deal with these issues at a regional, national and global level, and quickly. It is an enormous task but also an unprecedented opportunity for those governments and economies with the vision to step up to the challenge. The model for business described in this paper is inherently inclusive as it empowers every business owner, investor and employee to address the problems faced by their local communities at source, co-creating better ideas for resource management, regional employment opportunities, and goods and services that truly serve the needs of the relevant stakeholders. A driver for our industrial strategy could thus become how best to enable every person to participate and contribute to the fullest form of prosperity for the nation as a whole. The UK is uniquely positioned to take up the mantle as the global leader for inclusive business, drawing upon its acknowledged leadership in financial markets and corporate governance, and its rich history of industrial, financial and corporate innovation. The Fourth Industrial Revolution is well underway and the UK’s role within it has yet to be secured. The UK has the commercial, financial, and cultural assets needed to lead this corporate evolution. To do so could shape British industrial strategy to the immediate benefit of the UK and with a global, lasting impact into the next century. What is missing from our corporate infrastructure is a platform and identity for inclusive businesses in the UK. We do not currently have a robust way to identify which companies in the UK are operating on an inclusive basis. Companies must be able to internalise and “own” the positive benefit that they produce if they are to be encouraged to pursue this model of business. Such company models have been successfully adopted in multiple jurisdictions and thus substantially derisked. They involve making it easier for companies to self-identify as inclusive businesses to stakeholders; to make clear to large investors that this model of business is consistent with their fiduciary 1
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responsibilities; to proliferate best practices in corporate citizenship; and to gather together as a community, constituency and force for good in society. The Government has the power to electrify this movement in the UK by exploring the creation of a voluntary “Inclusive Company” identity for those companies wishing to take on this challenge. The government’s Industrial Strategy review is an excellent opportunity to set out this vision for the future role of business in the UK.
The Untapped Power of Business in the UK Using Business as a Tool to Tackle Society’s Problems Business is a force for good, or can be if we let it. This is not obvious from the polarised debates dominating our political discourse that tend towards either the further freeing of markets or the dismantling of the capitalist system. In dividing the debate in this way, both camps miss the true power of the private sector. The immense value of business to society lies not just in making a profit but also in its ability to meet our needs, from the life-threatening to the mundane, with creative and spontaneous solutions.1 This is achieved cumulatively by leveraging the efforts of millions of entrepreneurial individuals, all working towards the common purpose of solving the problems faced by us all. This, as opposed to our GDP or stock market capitalisation, is the true generation of wealth that forms the foundation of our shared prosperity. It is not the in-built efficiency of the “invisible hand” that makes the private sector a prime candidate for addressing social problems. Rather it is the distributed nature of the participants in the system, the sheer volume of different and disparate ideas and perspectives that are brought to the table, coupled with the agility to iterate through failed attempts and non-starters, that gives the private sector its power. However, the current infrastructure surrounding the operation of corporate entities in the UK is geared towards viewing company success through a pure profit lens rather than looking at the full range of outcomes. This leads to perverse incentives around corporate behaviour including the growth in share buybacks linked to executive pay packages, short-termism and unprecedented levels of saving by our biggest corporates, at a time when UK investment and productivity lags behind our European competitors. This extraction of value by profit-driven firms has in turn resulted in rising inequality and the polarisation of society. The “licence to operate” of UK business has thus been steadily eroded, driven by a perception that business works only for itself. Entrusting our future prosperity, in its broadest sense, to “business as usual” would be foolhardy, not least given recent trends of automation, outsourcing and cost-cutting. We may get more profit, but for whom, by what means, for how long and at what cost? The stakes are simply too high.
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For further discussion of this reframing of market capitalism within economic thinking see, for example, Eric Beinhocker, Institute for New Economic Thinking, Oxford Martin School.
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The Scale of the Problem and the Size of the Opportunity The tragedy of this misalignment lies in the scale of the problems arising out of a global economic system geared primarily towards profit. At a global level, the Sustainable Development Goals (SDGs), adopted by each of the 193 UN Member States, represents a global effort to address these problems. The ambition of the 17 SDGs, to be achieved by 2030, is daunting, but in reality we have no choice but to recalibrate the global economic machine, and quickly. The urgency of this agenda cannot be overstated, and NGOs and governments alone simply do not have the resources to continue to repair the damage being done by a system of capital deployment that, albeit inadvertently, actively encourages irresponsible and unsustainable business practices. British Industrial Strategy will be particularly relevant to, for example, Goal 8 on guaranteeing decent work and economic growth. We can expect that it will be businesses focussing on social and environmental impact that will initially lead this charge and enable broader participation by the market. Addressing these problems is an enormous task but also an unprecedented market and leadership opportunity for countries such as the UK with the expertise, assets and vision to step up to this challenge. What is needed is clarity and guidance, across all government departments, about how business can engage directly with the SDGs.
A True Collaboration with Business Instead of government working for business, or government working against business, we see the value in government working with business as a true collaborator, fostering localised as well as systemic approaches to the critical social problems facing our society, including inequality, productivity and regional deprivation. The corporation has always been embedded within the broader system of social welfare, including through the employment and training of much of our workforce and through the provision of essential goods and services to us all. This serves as a modernised model for the role of business in the UK. The double-benefit of this approach lies in the corresponding relief to the strained resources of local and national government. Businesses that are encouraged to reach out to underserved markets and marginalised communities are freeing up State resources to focus on providing services that only the State can effectively finance, such as upgrading the UK’s infrastructure or providing care for the most vulnerable in our society.
How Best to Achieve an Inclusive Economy? This question gets to the heart of the government’s Industrial Strategy review and tackles what is possibly the key political and social issue of our time. It has become clear that an inclusive economy does not spontaneously arise by leaving markets to tend to themselves and relying on the hope that we will all benefit from a strong and profitable private sector--the “trickle down” approach. Nor does redistribution solve the 3
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problem because money is only one of the benefits of economic participation, others being dignity, self-possession, agency, freedom and a sense of societal self-worth. Equally, alternative narratives focusing on nationalisation and decapitalisation ignore the successful wealth-generation and increase in standards of living achieved by private enterprise in the last 200 years.
What is Inclusive Business? A more promising path to achieving an inclusive economy lies in addressing economic exclusion head-on by empowering every citizen, business owner, investor and employee, in every region, to intentionally address the problems faced by their communities, industries and customers. This can be done by encouraging the private sector to pro-actively seek positive social impact and consider the points at which their business operations interface with social need. In fact, several research papers show that companies that take this approach outperform financially those businesses that are focused purely on profit by as much as 4% growth year-on-year (Harvard Business School, 2012). This is because adopting an inclusive, responsible approach boosts employees’ motivation and productivity, and this runs through to the bottom line. This approach results in local solutions to local problems, solved at source, with communities and businesses coming together, in genuine collaboration, to co-create better ideas for resource management, regional employment opportunities, and goods and services that truly serve the needs of the relevant stakeholders. The outcomes are inherently more inclusive, but so too is the methodology. Inclusive businesses have the transformational capacity to raise up local economies and restore economic and social cohesion to areas that have undergone significant change. Whether it be generating social housing in Edinburgh, creating skills training in Glasgow, or restoring shipbuilding and related industries to Liverpool and the Welsh ports, inclusive business can be the route to future full prosperity for citizens up and down the country. The power of this movement comes from leveraging what the private sector does best: searching for individual, tailored solutions as opposed to complying with a planned, government-mandated view of what good corporate citizenship looks like. Companies are free to pursue the generation of shared value however they are best placed to do so. The best examples of inclusive businesses can be found as part of the global B Corporation movement. This a community of over 2,000 businesses in 50 countries with combined revenues of over $30bn. They have all explicitly set out to identify as businesses operating on an inclusive basis. This is sometimes referred to as “stakeholder capitalism” but it would be a mistake to think that companies pursuing this path leave themselves subservient to the myriad of possible stakeholders, robotically taking into account conflicting interests without regard to the core corporate purpose. Rather these companies look outwards to their stakeholders to see how they can absorb energy, ideas, knowledge and resources, and work together to create shared value. This naturally lends itself to a more long-term view towards investment as these carefully curated relationships become some of the company’s most valuable assets. 4
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Economic inclusion is thus integral to this view of capitalism and growth, not because it serves social justice to redistribute wealth after the fact, but because only by allowing and actively facilitating the participation of every member of society in the economic process can we gain access to the diversity of ideas needed to deliver solutions to the global and social problems facing our generation. The focus of Industrial Strategy can thus shift to asking how we can best support the capabilities of all our citizens to contribute to the economy.
Why the UK? The global movement around responsible business is gaining momentum but, beyond passing legislation, no country has yet positioned itself as its leader. The UK has the commercial, financial, and cultural assets needed to lead this corporate revolution. We believe that the UK could become the best place in the world to start, grow and finance an inclusive business.
History of corporate and financial innovation The architecture of the modern corporation was, to a very large extent, developed in the UK. Free incorporation plus limited liability brought with it an explosion of capital but without consideration of the direction that it would be socially desirable for such capital to flow. The transition to companies operating on an inclusive basis represents a natural evolution from the corporate forms first developed hundreds of years ago, and responds to the needs of the modern age. The UK is the natural home for such an evolution to be shaped and developed, given its historical role in developing the original standards of corporate behaviour and corporate governance.
Political Moment Brexit represents an unprecedented opportunity for the UK to set out its stall as the best place in the world for forward-thinking, innovative, and inclusive businesses to start, grow, invest and raise finance. The most important companies in the world today did not exist 25 years ago. Now is the time to create the conditions for the next generation of global corporate leaders to establish themselves in the UK. As we carve out a place for ourselves within the new world order, this is the moment to set into motion the mechanisms that will ensure the level of, and kinds of, investment that the UK is hoping to achieve over the coming decades.
Knowledge industry exports The City and the UK’s sophisticated “knowledge industries”--including legal, financial, marketing, consulting, PR, media, and design--are amongst our b iggest exports and therefore the potential to draw this expertise into the pursuit of inclusive business is enormous. This has two potential effects. Firstly, if the UK were to take leadership of this movement 5
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then the UK’s knowledge industries would be able to tap into global demand for their services. Inclusive business services would stand to become the next major export for the UK economy, at a time when Brexit has potentially limited some market opportunities, particularly in the financial sector. Second, the UK’s global reach and pre-eminence within these sectors means that our “knowledge industry” service providers would serve as the ideal vehicle for the dissemination and propagation of the idea that business can be a force for good in the world.
Inclusive Business Cluster Michael Porter, professor at Harvard Business School, developed what is known as the cluster model of competitive advantage. This is an analytical tool that allows countries to assess their strengths when they are developing hubs or “clusters” around specific economic activity. It can be used to explain the development of any major economic cluster, from the tech hub of Silicon Valley to the tourist industry around the Great Barrier Reef (see here for an example based on Toronto's strong health informatics cluster). Applying this analysis, the UK has the educational, transportational, financial and legal infrastructure required to flourish as a global cluster for inclusive business (see Appendix A for more detail). Therefore whilst the UK may struggle to replicate the success of Silicon Valley in the broader tech sector, we have the ideal environment for supporting inclusive business. This is the path through which the UK can establish itself as a leader in the Fourth Industrial Revolution, just as it was in the First.
Creating a Platform for Inclusive Business What is Missing? The UK has considerable assets giving rise to a distinct competitive advantage in establishing a global hub for inclusive business. However, what is noticeably missing is a clear platform for inclusive businesses operating in the UK. Many British businesses already operate on an inclusive basis but it is difficult to identify which ones and how many. We believe that the best way to catalyse explosive growth in companies using business as a force for good is to create a corporate identity around inclusive business.
The Power of Internalising Positive Social Benefits To enable companies to gain credit for the positive social impact of their business and operations they must be able to internalise those benefits in some way. Typically economic theory has recommended taxation as a way to force companies to internalise negative externalities, and subsidies or tax breaks to encourage positive externalities. But there is a different tool available in this case. Internalisation for inclusive businesses can be achieved by simply allowing companies to “own” their positive impact by creating a clear identity around 6
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businesses that choose to operate on an inclusive basis. This would enable those companies to commercialise their social impact by allowing them to self-identify as inclusive companies. Self-identification and reporting solve the otherwise persistent informational market failure that raises the costs of due diligence for government procurement agencies and investors seeking companies that create shared value as part of their business model. Creating a corporate identity for inclusive businesses in the UK thus acts as a beacon for a portion of the $21 trillion in funds deployed globally to Sustainable Investment, as well as enabling the managers of the £2 trillion in pension fund assets in the UK to easily leverage the synergies between their fiduciary duties and the shared benefits of inclusive business. It also enables easy identification by all Government departments of willing partners geared towards helping the UK contribute to addressing the Sustainable Development Goals by 2030. A further benefit is that we can begin to develop a language and methodology to distinguish between the long-term impacts of value-creating, sustainable, job-supporting companies like Unilever, that we might want to attract to the UK, versus the value-extracting, cost-cutting, job-cutting Kraft’s of the corporate world. It also allows for the emergence of benchmarks and standards, and the proliferation of corporate best practice based on publicly reported information on the true impact of business in the UK. Annual reports of inclusive businesses could become a way of communicating what works and what doesn’t work in the pursuit of shared value.
s.172 and the Market Resistance Preventing Adoption by Inclusive Companies The UK is already ahead of many jurisdictions with the notion of “enlightened shareholder value” embedded within s.172 of the Companies Act 2006, requiring all companies to “have regard to” a broad range of stakeholders and allowing flexibility for companies wishing to pursue alternative definitions of “success”. However, the de facto position of a profit-focused single bottom line, and the associated market friction for any company attempting to deviate from this norm, has chilled the rate of transformation for UK companies to an almost negligible level. The market resistance is created by an entrenched culture based on an understanding that the role of business is to maximise profits. The pull of the default structure of incorporation, and the friction presented by directors, shareholders, investors, lawyers, and auditors -none of whom are comfortable with innovating against that established structure, even for a subset of inclusive businesses -- results in a systemic inertia that guides companies away from a more inclusive model of corporate governance. This resistance is based on twin misperceptions that lie at the heart of the concept of profit maximisation--firstly, that it is the directors’ fiduciary duty to maximise profit for shareholders, and second that it is the fund managers’ fiduciary duty to maximise profit for investor beneficiaries. Profit maximisation is certainly a popular business strategy for some companies and investors alike, but it does not form the entirety of those fiduciary duties. These misperceptions have given rise to a narrative that business and society work fundamentally at cross-purposes to each other. From the perspective of business and 7
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investors, it gives rise to a belief that managers and employees, if given a chance to pursue ends other than profit maximisation, would undermine the value of the businesses they run. From the perspective of society, a legitimate concern arises that when businesses are contracted to create social value their orientation is to extract as much financial value as possible from the opportunity and return it to their shareholders. These combine to make society uncomfortable with trusting business with social goals, and to make business uncomfortable with embracing social goals. In fact both positions fail to recognise that by aligning the interests of shareholders and society in the conception of “business”, both of these concerns are addressed. Increasingly, companies are choosing to differentiate themselves along these lines and those that have done so are finding themselves creating enormous positive social impact and reaping the rewards of improved “licence to operate”, higher productivity, better employee engagement and better financial returns over the long term. The challenge for society is to ensure that this alignment of interests is authentic, and that society can make it clear that businesses and investors have the powers and accountabilities in place to do so. Thus far much of the focus in reforming s.172 has been on raising the minimum standards for all companies in order to avoid further scandals such as BHS and Sports Direct. Whilst there are valid reasons to reconsider the balance between shareholders and other stakeholders in UK company law it is not clear that this alone would in fact avoid future scandals, and attempts to mandate better corporate decision making in UK companies are bound to run into difficulties. Ultimately s.172 is already permissive--it allows “good” behaviour but does not actively encourage it. We believe that, in parallel, a powerful policy measure would be to create a pathway for companies that want to push for even higher standards. As well as focusing on raising the lowest common denominator for UK companies, Government has the opportunity to create a ‘race to the top’. This approach encourages the proliferation of best practices and removes barriers currently preventing the companies from embracing an authentically inclusive approach to business by intentionally creating value for all stakeholders. It is not a government mandate but a market solution as it allows employees, suppliers, investors, and customers--i.e. the company's actual stakeholders--to “enforce” the best corporate governance by voting with their feet and wallets.
The “Inclusive Company” There is still no clear and legally accepted way for UK companies to self-identify as inclusive in order to access the benefits of “owning” the positive social impact that they create. Thus whilst s.172 is considered to be permissive by those who take the time to analyse the directors’ duties carefully, in that directors can take into account a broad range of stakeholder interests, s.172 alone does not encourage the market to adopt practices that place those stakeholder interests in parity with shareholder interests. Neither does s.172 create an identity for inclusive business. Indeed it cannot--being as it is applicable to all companies, and not just those that choose to adopt an inclusive approach. There is therefore no mechanism by which companies can internalise their positive social 8
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impact.
How to Create the “Inclusive Company” Model The most robust way to create a clear legal pathway and identity for inclusive business is for Government to establish the “Inclusive Company” as a voluntary company model that would be available to “Limited” and “Plc” companies. This may be possible in secondary legislation (see Appendix B for a summary of the range of policy options available). By allowing companies to self-identify as inclusive businesses on a v oluntary basis the UK can take an incremental approach that preserves the stability of the existing economy, avoids placing further burdens on companies that are ill-prepared to deal with them, and continues to encourage investment. Until best practices around corporate behaviour and reporting are established it is also better for the charge to be led by companies with a clear intention to pursue an inclusive model, rather than forcing minimum compliance by unwilling companies. In order to enable capital flows and reduce market resistance, this “Inclusive Company” should be consistent with forms that have been successfully implemented in other jurisdictions, notably the “Benefit Corporation” form which has been adopted in 32 US jurisdictions and Italy. This will also be in harmony with parallel work underway across the world, from Australia to Latin America, and enable the UK to take leadership of this fast evolving field. The fundamental ingredient of an “Inclusive Company” designation is a “triple bottom line” purpose, which places having a material positive impact on society and the environment at the heart of the purpose of the company, alongside profit. The responsibilities of directors and rights of shareholders should also be laid out clearly and unambiguously, without creating uncertainty or the risk of vexatious litigation. It is not enough for companies to say that they will follow a stakeholder approach, they must also be held to account. This means that they must be transparent, and provide annual reporting, including against environmental, social and corporate governance (“ESG”) metrics, established by third party standards. This is a corporate innovation for mainstream businesses and goes beyond the market served by asset-locked Community Interest Companies and social enterprises. The policy is designed to attract for-profit companies pursuing mainstream commercial goals that are also mindful of the impact of their operations.
Global Momentum A global movement is emerging that reframes the corporation not as vehicle for profit but as a driver of shared value. In most jurisdictions this has taken the form of a “Benefit Company” legal form of incorporation, which allows companies to use the “Benefit Company” designation to identify themselves as having committed to pursuing a material positive social impact. This movement has been bolstered by support for socially responsible business at an international level, including through the work of the G8 Social Impact Investment Taskforce (now called the “Global Social Impact Investment Steering Group”), the OECD’s initiative on 9
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New Approaches to Economic Challenges, and the UN Global Compact, amongst others. Whilst the standards around “Benefit Companies” are still being established, the status has been substantially de-risked in light of the successful adoption in other jurisdictions-- more than 4,200 US companies have now incorporated as “benefit corporations”. This would become, should the U.K. adopt it, the global standard. Indeed many countries are looking to the UK to lead in this area, given our acknowledged global leadership in corporate governance. This may be especially true of the Commonwealth countries where the corporate statutes are largely based on English law.
The UK Movement In the UK, support has come from the Cabinet Office’s Mission Led Business Review, Recommendation 9 of which encouraged government to explore the introduction of a “benefit company” status in English law, the Big Innovation Centre’s Purposeful Company Report, and the work of the British Academy’s Future of the Corporation initiative. There are also broader trends pointing to the rising public and market interest in inclusive business, including from the leaders of the future, such as tech entrepreneurs and “millenials”. Our most innovative industries--forming the future of our industrial footprint--are already asking for Government to take the lead in shaping responsible business and technology in the UK. The UK is not alone in experiencing this shift but we are uniquely positioned to capitalise upon it. This is fundamentally a modern innovation of the old ways of doing business that were built for the 19th Century and the Industrial Revolution, and it serves as a natural extension of the twin forces of technological change and globalisation that we cannot avoid. By seizing the moment to electrify this movement in the UK by creating an “Inclusive Company” model, the Government can forge a new path for UK industrial strategy into the next century.
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APPENDIX A - UK INCLUSIVE BUSINESS CLUSTER ANALYSIS A basic outline of Professor Michael Porter’s cluster model can be found here. Applying this analysis to the UK’s potential as a hub for inclusive business we can see that many of the key features are already in place. ● World-leading business schools pushing forward in the field of responsible business and providing a pipeline of future talent, including London Business School, Oxford’s Said Business School (incorporating the Skoll Centre for Social Entrepreneurship), Cambridge’s Judge Business School, and many others across the UK. ● Highly developed transportation infrastructure, including connections to all major cities and economic hubs in the world. ● Large pools of highly skilled legal, accountancy, financial and management professionals. ● Established and credible history of rule of law and fair treatment within the legal and judicial system. ● Robust financial system and related infrastructure (e.g. the London Stock Exchange). ● Growing demand in the form of “conscious consumerism” and corporate procurement policies (e.g. Deloitte, Unilever, Fujitsu) that require suppliers to meet shared value standards. ● Potential demand for inclusive business from government using its commissioning power to drive change. ● World-leading governance organisations such as the Institute of Directors. ● Active media engagement on topics of responsible business, including by The Economist, The Guardian, BBC and Channel 4. ● Support from NGOs and other business-friendly partners such as Business in the Community, Social Enterprise UK and B Lab UK. ● Established channels for venture capital investment. ● Support from policymakers (Cabinet Office, BEIS, Innovate UK, UKTI, British Council).
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APPENDIX B - POLICY OPTIONS FOR IMPLEMENTATION The Green Paper considers whether there may be missing institutions that could be created to support the government’s Industrial Strategy. The recommendations below address this question in light of the potential growth that can be unlocked by creating an identity and platform for inclusive business in the UK. The table below contains a series of policy options that can be deployed sequentially or as discrete policy packages. We consider that those policies that are designed to concretely establish an identity for inclusive business, namely the creation of an “Inclusive Company” model (shown as shaded in the table), should form the government’s priority. Policy Measure
Potential Impact
Utilising existing flexibility in CA 2006 Guidance on s.172(2): BEIS to issue guidance on existing flexibility within s.172(2) for companies to adopt own purpose
Reduces friction. Does not create clear identity.
Reporting on s.172(2): FRC to consider a reporting requirement for all companies to consider whether it is in the interests of the company to adopt a triple bottom line purpose and to give reasons if the company does not choose to do so
Shifts default towards consideration of s.172(2) and alternative purposes for companies.
Example Articles: government to issue example or template articles for use in conjunction with s.172(2)
Creates template for inclusive business identity but no mechanism to ensure wholesale adoption of Articles.
Pathway for incorporation for impactful companies: development of online tool to help companies incorporate around purpose
This initiative arose out of the Cabinet Office’s Mission Led Business Review. Again, reduces friction but does not create identity for inclusive business.
Integration with Companies House: provide links to example or template articles alongside formal model articles here and here, provide Word document versions of template articles, allow online company registration if use unamended template
Currently companies can only register online at Companies House if they use the Model Articles issued by the Secretary of State. Companies House is currently exploring the relaxation of this requirement. This would reduce friction but again does not create a separate identity.
Establishing standalone identity for inclusive business Model Articles for impactful
This could potentially create an identity for
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companies: SoS to issue model articles via secondary legislation associated with inclusive company designation and impact reporting requirements (see Appendix C)
inclusive business if companies are required to adopt the Model Articles in their entirety. Without further legislation, the company reporting requirements would have their basis in the company’s Articles only and not in Statute.
s.172A Inclusive Company Model: Primary legislation to establish impact company model with equal legal status to limited companies, public companies and CICs (see Appendix C).
This measure would create a clear and unambiguous identity which would serve to inspire leaders and catalyse explosive growth of inclusive companies. This should be in line with the global standard so as to benefit from the growing momentum.
Clarify and enforce existing directors’ and fiduciary duties Guidance on s.172 reporting: FRC to issue guidance on duty to report in relation to s.172 - all companies to report on extent to which they have “had regard to” stakeholders under s.172(1)
This proposal was supported by the BEIS Committee report on Corporate Governance, and originally put forward by the FRC in its evidence to the BEIS Select Committee (see here and h ere). Would serve to clarify existing duties under s.172.
Guidance on investor fiduciary duty: going beyond the Law Commission's report on Fiduciary Duties of Investment Intermediaries, government to clarify synergies between fiduciary duty of investors and pension fund trustees and inclusive business, where inclusive business operates for profit and purpose
Potential to unlock investment into inclusive businesses and remove barriers to institutional investors investing in inclusive economy.
Guidance on fiduciary duties for Inclusive Companies: FRC to issue guidance about the impact on directors duties and investors fiduciary duties where a company is an inclusive company with a triple bottom line purpose
Reduces market resistance to adoption of Inclusive Company model.
S.172 enforcement: establish office to enforce duties under s.172 or expand powers of FRC to hold directors to account under s.172
Provides recourse for stakeholders and enables them to hold companies to account. BEIS Committee report on Corporate Governance supports expansion of FRC powers.
Strengthening reporting requirements Reporting requirements for s.172(2) companies: SoS to issue secondary legislation requiring all companies adopting tailored definition of “success” under s.172(2) to meet additional
Starts to build store of publicly reported data on companies pursuing alternatives to default mode of incorporation.
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reporting requirements (e.g. reporting on ESG metrics against a third party standard if relevant) All companies to report on s.172 duties: SoS to issue secondary legislation explicitly requiring all companies to include in their strategic report a statement on the extent to which directors have fulfilled their duties to “have regard to” different stakeholders under s.172 CA 2006
Creates clarity over which companies are already meeting stakeholders’ needs and has the potential to raise minimum standards for all companies.
Government funding and procurement Public procurement: government to use its commissioning power to encourage companies to adopt inclusive business practices
Currently tender processes do not give credit for business models or practices with positive social impact. Government can catalyse change in those markets in which it has significant or even monopsonistic market power.
Government Shareholdings: government to use its power as a shareholder or custodian through the UK Shareholder Executive to convert its investee businesses to inclusive businesses
Examples include RBS, Channel 4 Television, the Green Investment Bank, BBC Worldwide, Crown Estates, Network Rail, Transport for London, National Air Traffic Control Service.
Government Licensing: government to use its power as a regulator to convert regulated businesses to be inclusive
Examples include making licences conditional on adopting inclusive governance with a holistic approach to value in sectors such as banking, telecoms, broadcasting and public utilities.
Linked government funding: Government to require that all innovation partners / government-backed startup funds provide information to participants on alternative models of incorporation
Raises awareness of alternative forms of incorporation.
Gathering data on inclusive business activities Impact company registry: formation of voluntary company registry for companies seeking positive impact
Allows for analysis of impact business statistics and trends. Builds evidence base for incidence of inclusive business in the UK.
Research funding: funding for universities researching impact of inclusive business
Builds case for widespread adoption of inclusive business models.
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Honours system: “Net social impact” filter to be applied to business leaders who benefit from the honours system
Establishes standards for UK business leaders.
Inclusive Business Champions: Government to support appointment of regional inclusive business champions.
Allows regions to take ownership of the movement in relevant sectors.
Exports: work with FCO / DTI / British Stimulates demand for export of inclusive Council to promote UK’s leadership role in business service providers and promotes UK inclusive business as best place for investment and incorporation for inclusive businesses. Strategic partnerships Public company and Multi-national partnerships: partner with key public companies and multi-nationals operating in the UK to explore transition to inclusive business model
Work towards removing barriers for multinational and public companies interested in adopting the inclusive business identity.
Third Party Standards: partnerships with standards bodies and accountancy firms to explore establishment of recognised impact performance standards
Establishes robust and recognised standards for corporate reporting on culture and impact.
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APPENDIX C - INCLUSIVE COMPANY MODEL The “Inclusive Company” model can be established in UK law via two pathways. The first is secondary legislation. The Secretary of State can issue model articles of association under s.19 of the Companies Act 2006. Under this route the reporting and other obligations would not have statutory weight and failure to comply would constitute a breach of articles only. The second route is primary legislation: the adoption of a s.172A for Inclusive Companies. This would put the inclusive company model, and its associated reporting and stakeholder consideration requirements, on a solid statutory footing. S.172A Inclusive companies / Inclusive Company Model Articles (1) The objects of the company are to promote the success of the company for the benefit of its members as a whole and, through its business and operations, to have a material positive impact on society and the environment, taken as a whole. (2) A director shall 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: (together, the matters referred to above shall be defined as the "Stakeholder Interests"). (3) For the purposes of a director’s duty to act in the way he or she considers, in good faith, most likely to promote the success of the company, a director shall not be required to regard the benefit of any Stakeholder Interest or group of Stakeholder Interests as more important than any other. (4) Nothing in this Article express or implied, is intended to or shall create or grant any right or any cause of action to, by or for any person (other than the company). (5) The directors of the company shall for each financial year of the company prepare a strategic report which sets out how the directors have sought to promote the success of the company.
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