There is only one bit of the Companies Act that gets much airtime (unless you happen to be a corporate lawyer).
Section 172 is the “DNA of our corporate law” says Roger Barker, director of policy and corporate governance at the Institute of Directors.
It’s the bit that underpins what directors of a company are meant to do. It’s the bit that nods to a stakeholder model where the company should “have regard to” suppliers, communities and the planet. And it’s the bit that some people are not terribly happy with.
The Better Business Act campaign, supported by hundreds of companies as well as the IoD, wants to change section 172. They argue — correctly — that what is there is woolly and embeds the idea that, when push comes to shove, shareholders come first: what is needed is a legal obligation putting social, environmental and shareholder interests on an equal footing.
This sounds like a technical rewrite but would be a fundamental, and much-needed, overhaul — one that would drag the foundations of corporate obligations more into line with current thinking.
But it could take time to thrash out. There is a simpler change that would bring this legislation up to date with the realities of modern labour markets.
Section 172, like the rest of the Act, refers to the “interests of the company’s employees”. Was that word chosen specifically to include those the company employs directly but exclude others such as contractors, freelancers, seasonal workers or those on other informal contracts?
Almost certainly not. Janet Williamson, senior policy officer at the Trades Union Congress, has been through the reports and recommendations produced in the drafting of the legislation and argues it was clearly “not intended to differentiate between different parts of a company’s workforce”.
The union, as part of its response to the government’s consultation on audit and corporate governance reform, is calling for a change: replace the word employee with “workforce”, or similar, throughout the Companies Act.
The world of work has changed. The number of self-employed has risen by a third since 2006. Zero-hours contracts were not widely used then but have become commonplace in certain sectors. The rise of outsourcing, and use of labour intermediaries, has weakened the linkages between a company and some people who contribute to its bottom line.
To some extent, this change would reflect what has been established elsewhere. The Corporate Governance Code, which applies to companies with a premium listing for their shares, refers to engagement with “workforce” rather than employees; the Wates principles — a set of voluntary standards for large, private companies — use similar language.
The listing of Deliveroo highlighted that large investors will hold companies to account for their workers (or self-employed couriers in that case) in the broadest possible sense. Some are now focused on those working in supply chains too.
This is more than a tidying-up exercise. Other, lesser-known sections of the Companies Act (411 and 414C for the fans) also reference “employee”: they cover reporting around staff numbers and costs, and information needed to understand the performance or position of a company’s business.
Investors should want a more complete picture of who is contributing to a company’s success and how they are treated. One example given by the TUC: a hotel chain that makes more than 80 per cent of its revenues from franchised properties reports only on the terms, compensation and engagement of its direct employees. But how are standards and morale for the people that account for the bulk of its business?
This could result in some simplification that companies, and their advisers, can embrace. The varying definitions between different regulations and branches of law is a source of frustration. It results in oddities: gender pay gap reporting has a broader scope than pay ratio reporting, say. The latter excludes indirectly-employed workers, rather limiting its usefulness.
The labour market, corporate governance thinking and public opinion have moved on and left the law behind. It’s time for an update.