The Companies Act 2006 was passed by the Government of the United Kingdom on the 8th of November, 2006. With a particular focus on small businesses, it consolidated the majority of existing legislation relating to companies in the UK and also included a number of reforms, the most notable being s.127, which introduced the requirement that company directors consider the impact on the environment when exercising their duties.
👉 What exactly is the Companies Act 2006? Who does it affect? What are its main features? And how does the Companies Act 2006 impact the environmental duties of companies?
What is the Companies Act 2006?
The Companies Act 2006, introduced by the UK Government, is legislation that serves as the primary source of company law governing the UK. As the longest act in the UK’s history, covering over 700 pages and 1300 sections, the legislation provides a comprehensive code for companies operating in the United Kingdom and made changes to many of the laws contained within the Companies Act 1985, which it largely superseded.
The main focus of the Companies Act 2006 was to:
To codify existing common law principles (ie. laws created by the courts)
To update and consolidate UK corporate law
To amalgamate the company law of Great Britain and Northern Ireland under one legal regime
To simplify administrative demands placed on companies, including through the support of electronic based communication over traditional paper communication
To strengthen the rights of shareholders, including affording new rights to indirect shareholders
To implement a simplified incorporation process for new businesses
The duties of company directors contained within the Companies Act 2006
Of all the sections in the Companies Act 2006, the biggest changes can be found within the sections concerning the duties of company directors.
Up until the Companies Act 2006, the duties of company directors could only be found in case law (ie. the legal decisions of judges resulting from court proceedings). The Companies Act 2006 solidified the duties of company directors for the first time by writing these into statute law.
However, it should be noted that the duties contained within the act are not exhaustive and that duties found in case law may also still be applicable.
The most notable duties placed on directors by the Companies Act 2006 are:
To act within powers - this means that directors must abide by the terms of the company’s memorandum and articles of association, and also any decisions made by the shareholders.
To exercise reasonable care, skill and diligence while carrying out their duties as director.
To promote the success of the company whilst also having regard for the long-term consequences of decisions, business relationships with suppliers and customers, the interests of their employees and the impact of the company on the community and the environment. Note: we talk about this in more detail in the next section.
Directors may be found to be liable for breach of their duties where the company can demonstrate that it has suffered a loss as a result of this breach.
The importance of s.172 of the Companies Act 2006
Section 172 of the Companies Act 2006 states that directors must “promote the success of the company” and continue to act in a way that benefits the company as a whole - something that was already part of company law in the UK. However, the act also introduces an additional list of non-exhaustive factors that directors must also consider, this is termed the principle of the ‘enlightened shareholder’. It requires directors to have regard for the following considerations when exercising their duties as director of the company:
The long term consequences of decisions
Interests of employees
The requirement to nurture business relationships with suppliers, customers and others
The impact on the community and the environment
To maintain a reputation for high standards of business conduct
The need to act fairly with regards to all company members
S.417 of the Companies Act 2006 outlines the requirement for companies to make a statement as part of their strategic report, on how directors have complied with the requirements of s.172 while performing their duties as directors. When submitting the report, companies must include information about environmental matters, the company’s employees, and social and community issues.
Criticism of s.172 of the Companies Act
Even though s.172 of the Companies Act 2006 states that while performing duties, directors must have “regard to” the interests of employees, the community and the environment, the primary focus is still on the shareholders, creating the impression that shareholder benefits should be maximised over the interests of other groups.
Some argue that this mindset is out of step with the realities of today’s world and that it should no longer be the case that companies put shareholder interests above the needs of other stakeholders such as people and the planet.
Issues such as the global financial crisis, Covid-19, climate change and the loss of biodiversity, amongst many other environmental and social challenges demand a rethink about the prioritisation of shareholder wealth over the wider community.
In fact, in recent years we’ve seen a notable shift in mindset within the business community in the UK, with many demanding a direct change to s.172 of the Companies Act 2006. Proposals include an amendment to the section that requires company directors to ensure that the interests of the shareholders, as well as the wider society and environment are considered. They argue that it should no longer be the case that shareholders are prioritised by default.
Breach of directors’ duties with regards to the environment
As the climate crisis continues to grow, the regulatory and business environment has also begun to evolve. It’s common practice for financial incentives, and conversely for penalties, to enforce ethical business practices. As a result of this general shift, what constitutes ‘reasonable care, skill and diligence’ when acting in their role as company director, as required by the Companies Act 2006, will also begin to change.
It’s not unreasonable to assume that compliance with any environmental related statutory and regulatory requirements will fall under the remit of director’s duties, for example emissions reporting obligations and environmental-related financial disclosures. But the question remains whether or not directors could be held personally liable for failure to meet these obligations. For example, could a company director be held personally liable for failing to sufficiently curb emissions from the activities of the business?
Whether or not a director can be said to have performed his or her duty is determined by considering whether the director’s conduct may be deemed ‘so unreasonable, that it extinguishes any realistic claim that the director had an honest belief that the act in question would promote the success of the company’. As company responsibility and accountability with regards to climate change grows, the success of a company will increasingly encompass environmental considerations and obligations. It is likely that the potential for both corporate and personal liability in this matter may also become more of a risk for company directors.
How can businesses future proof their activities?
The term 'triple bottom line’ perhaps best captures the changing attitudes within the corporate world with regards to the environment. It encapsulates the idea that profit (ie. the standard bottom line) should no longer be the only concern for companies. In addition to shareholder profit, directors must also consider people and the planet.
A distinction can be made between a company’s shareholders and stakeholders. As discussed in the sections above, traditionally, companies have been primarily concerned with shareholder value as an indicator of success. But as companies increasingly embrace sustainability there has been a shift towards considering stakeholders impacted by company activities, for example: customers, employees and the wider community.
Since the Industrial Revolution, companies have been responsible for a significant proportion of pollution to the environment; a key cause of climate change. Because of this, companies also hold the potential to have one of the biggest positive effects on the environment. We’ve seen a notable shift within the business world in this regard, and companies are slowly starting to take responsibility - either voluntarily or through requirements put in place by governments and regulatory bodies.
Arguably, the Companies Act 2006, through the introduction of what it terms the ‘enlightened shareholder value’ principle, has already tried to incorporate the concept of the ‘triple bottom line’ to some degree, or at least to promote its adoption by businesses operating in the UK. It’s likely that, while for the time being, shareholder value still takes precedence over other considerations, as we see a wider cultural shift towards sustainability practices and environmental obligations, companies will increasingly have to balance shareholder value with environmental and wider community impacts.
Companies that seriously engage with these considerations place themselves in a stronger position for success. Not only by protecting themselves from the risk of litigation for breach of duty, but also because consumers and investors are increasingly favouring companies with a greater degree of corporate social responsibility which will ultimately impact shareholder value.
Greenly can help you cut down on your emissions!
If you’ve been inspired by what you’ve read here, why not get in touch with Greenly. At Greenly we can help you to assess your company’s carbon footprint, and then give you the tools you need to cut down on emissions.
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