ESG investing and section 172 of the Companies Act 2006: Desperate times call for soft law measures

By Dr Georgina Tsagas, Lecturer in Corporate Law (University of Bristol Law School).

In this blog entry, Dr Tsagas provides an overview of her proposal for the reform of the UK’s Corporate Governance Code. Her full arguments will soon be published in G Tsagas, “Section 172 of the Companies Act 2006: Desperate times call for soft law measures”, in N Boeger and C Villiers (eds.), Shaping the Corporate Landscape: towards corporate reform and enterprise diversity, Oxford: Hart Publishing, forthcoming.

Section 172 CA 2006: Not worth the paper it is written on?

Section 172 of the Companies Act 2006 has been afforded much attention during Parliamentary discussions on the codification of directors’ duties and has since the enactment of the Companies Act 2006 occupied much space in discussions among scholars who share an academic interest in the shareholder/stakeholder debate, in policy documents on law reforms following a series of corporate failures, as well as in company law lecture notes provided by Law Schools across the UK.

The previous duty to act bona fide in the interests of the company has been substituted by section 172 CA 2006, which imposes on a director the duty to ‘act in a way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole’ and in doing so must have regard to a series of factors listed in the section. The factors are: (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.

With the UK leaving the EU, it is a critical time to discuss enlightened decision-making on boards, considering that, arguably, one of the key benefits of joining the EU with regard to UK company law, was that the UK was prompted to consider incorporating provisions affording a certain level of protection to the interests of other constituencies across a wide range of company and securities law Acts and regulations. What often escapes the attention of participants in discussions surrounding s. 172 CA 2006, is the section’s limitations not so much in terms of it prioritising the interests of shareholders over the interests of other constituencies, but with regard to its enforcement and utility overall.

In considering the challenges, shortcomings and dilemmas surrounding the function of this section, we must consider ways forward and more specifically, the option of endorsing a change in the mode of regulating this aspect of managerial conduct. Ample evidence suggests that section 172 CA 2006 in its hard law form will not facilitate the goal of promoting the ‘good governance’ of companies that have a high impact on society in terms of enlightened decision-making. The use of alternative means available in the soft law sphere can arguably better support a more pluralistic and democratic formation of corporate decision-making. At the same time, Environmental, Social and Governance (ESG), the three central factors in measuring the sustainability and ethical impact of an investment in a company or business are coming to the forefront. Investors are getting more and more acquainted with ESG regarding their investment options.

Enlightened shareholders and other bodies in action?

In the oil and gas sector, there exist examples whereby shareholders, as well as other bodies, lobby for compliance with the Corporate Governance Code and environmental standards. In May 2017, Shell shareholders, including the Church of England, European pension funds and Dutch activists, tabled a resolution for Shell’s annual general meeting, asking the company to establish carbon emission reduction targets, sending a signal to the board of the Anglo-Dutch company to set new climate change goals.[1] ClientEarth, a London based law firm, in August 2016 alerted the UK financial regulator to reporting breaches by two oil and gas companies, SOCO International Plc and Cairn Energy PLC, which failed to adequately disclose climate change risks to their businesses in their 2015 strategic reports.[2] The companies updated their disclosure practices as a direct result of ClientEarth’s complaint to the FRC, but the regulator has not made the results of its investigation public.[3] TESCO Supermarkets shareholders protested against Tesco’s failure to pay the living wage to its employees resulting in the taxpayer having to make up the shortfall through tax credit payments at TESCO’s AGM.[4] Sports Direct shareholders similarly protested at its meeting, regarding the firm’s pledge to improve working conditions, following the sportswear chain’s lawyers’ critical report of the company’s working conditions, advocating in favour of a new, fully independent review of company practices.[5]

The proposal and justifications

The Code does not explicitly refer to stakeholders or other aims and objectives in the manner in which the wording of section 172 CA 2006 does, however. The text that could be introduced in the Corporate Governance Code would necessarily require the creation of a new section, namely ‘Section F: Relations with Stakeholders.’ The section would adequately endorse the OECD Principle IV. regarding the role of stakeholders in corporate governance which provides that: “The corporate governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.”[6] In this respect the Corporate Governance Code Section F should stipulate that:

“Main Principle: There should be a dialogue with stakeholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with stakeholders takes place and that during the board’s decision-making process the board has 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.”

Adopting such a provision in the UK Corporate Governance Code however does not merit value merely because of the need to follow current trends and global or other domestic standards. There are sound reasons for introducing such a proposal in the Corporate Governance Code in this form. Such a proposal is not only in line with the market-based tradition of UK corporate governance, i.e. comply or explain, but also constitutes a proactive form of regulation at a stage in time when the events that are likely to follow the political effects of Brexit demand it. The UK’s withdrawal from the EU will result in non-direct effect and non-applicability of EU company legislation, so the political need to ‘sell’ the UK as a ‘business friendly’ environment will emerge; this includes the need to show case that the UK encourages corporations to incorporate relevant sustainability, ESG (environmental, social and governance) and CSR (corporate social responsibility) considerations in developing their long-term strategies and operations planning.

The UK’s withdrawal from the EU is also likely to result in a lower probability for stakeholders to be given a central place in the government’s agenda and not feature in hard law legislation, as more progressive scholars may have hoped for.[7] At the same time, recent corporate scandals (British Home Stores) have put pressure on the government to do something, so the proposal put forward here may in fact be a compromise that may in fact produce some of the desired effects of better governance.


Continuing with the inclusion of section 172 in the Companies Act 2006 as a safeguard for stakeholders’ interests is futile. Not so much because the section prioritises shareholders’ interests over stakeholders’ interests, but because the mode of regulation that the Companies Act employs does not provide the substantive content of this section with the visibility that is necessary for it to be functionally a viable way of stakeholders’ featuring in corporate decision-making as a matter of best practice. Section 172 CA 2006 gives the illusion to the business community, regulators, certain scholars, and market players alike, that something is being done in the sphere of company law in relation to acknowledging stakeholders’ interests in corporate decision-making. As we have here advocated, this is far from being the case.

The proposal put forward is not a ground-breaking one; yet it is one which in the author’s view adequately reflects the reality of how the UK regulatory market is accustomed to operating and should only be seen as one of a range of tools the government should put in place to strengthen stakeholders interests in companies. Making alternations for example on the issue on which parties are allowed to monitor whether the Code has been complied with and on what basis could also complement this proposal. Other initiatives, as are the introduction of new corporate formats for cooperatives and social enterprises, all fall within the agenda of changing the current status quo followed in UK corporate governance to a more progressive one.


[1] A. Vaughan, ‘Shell shareholders to vote for new climate change goals’ The Guardian (2017) available at

[2] See news item, ‘ClientEarth triggers review of companies’ climate disclosures, 22 August 2016 , available at

[3] See news item, ‘ClienEarth complaint prompts transformed climate reporting from oil and gas firms’ 28 April 2017 available at

[4] S. Poulter and R. Steiner ‘Tesco shareholders attack bosses over staff’s ‘slave wages’ after it emerges taxpayer is topping up employees’ incomes’  Mail Online 27 June 2015

[5] BBC News ‘Sports Direct hears shareholder anger at annual meeting’ 7 September 2016

[6] OECD Principles 2015, page 34.

[7] See example of backtracking on employee participation on boards as advocated by PM Theresa May in her governmental speech in July 2016 compared to the Green Paper November 2016 proposal introducing optional committees comprised of employees.

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