Company Law Allows A Purpose Beyond Profit

Legal requirements offer opportunities for business to be driven by more than shareholder value

From academia to boardrooms, the notion of purposeful business is attracting increasing attention.

Larry Fink, founder and CEO of BlackRock, recently made headlines by making 'a sense of purpose' the theme of his 2018 letter to CEOs, writing: 'Without a sense of purpose, no company, either public or private, can achieve its full potential.'

When the world's largest asset manager tells companies that society demands that they serve a social purpose, they sit up and take notice.

The same message has been coming from academics and practitioners for some years. Reviewing existing evidence on the subject, the Big Innovation Centre's 'Purposeful Company' report found that a strong sense of collective purpose can enhance a firm's commercial performance, driving employee satisfaction, customer loyalty and long-term shareholder value.

Alongside this, for large companies a key driver is attracting and retaining talent. Harvard Business School Professor Michael Beer is among academics reporting 'an increasing awareness that the purpose of a company has to be beyond shareholder value', noting that this 'will enhance your business'.

"When the world's largest asset manager tells companies that society demands that they serve a social purpose they notice" At the same time, an increasing number of start-ups are being set up with a purpose beyond profit at their core. Many of the business leaders of tomorrow instinctively want to combine doing well with doing good.

They have customers on their side: almost three-quarters of the public say that they are more likely to buy from or engage with businesses that have an objective beyond merely generating profit.

Opportunity in law

It appears that we are now reaching a tipping point, when this burgeoning interest in purposeful business is translating into practical questions about company law and governance. How does a company's purpose affect the duties of directors? What does it mean for the relative priority given to the interests of shareholders versus other stakeholders?

Section 172(1) of the Companies Act 2006 is relatively well known, defining a director's duty 'to promote the success of the company for the benefit of its members as a whole', while having 'regard to' various other stakeholder interests. Section 172(2) is less well known, but is of profound importance: it allows a company to identify another...