The changing face of the utility company

Even before coronavirus companies were increasingly moving towards a “triple bottom line”, where social and environmental impact are used as measures of success, alongside profit. Richard Wrigley of law firm Shakespeare Martineau looks at the legal issues for a company that is interested in expanding its corporate purpose from that of creating value for shareholders

The role of utilities companies in the economy is well understood, however, the place they have in society is shifting. The pace of transformation is increasing rapidly with the UK’s existing legally binding net-zero target for UK greenhouse gas emissions by 2050, which utilities are already factoring into their business planning. Furthermore, the announcement that, despite Covid-19, the department for business, energy and industrial strategy (BEIS) is aiming to publish the energy white paper in spring emphasises its standing on the UK’s agenda, and will further encourage companies to expand their corporate drive to include public purpose.

While, historically, the sole aim of a corporation was to increase profits whilst complying with laws and social norms, this minimalist view of corporate purpose is not the whole story. In the 19th century, companies were set up to improve public health by providing clean water to the poor, where the founder shareholders acted for altruistic reasons and not with the intention of creating value. This landscape is becoming more familiar.

More broadly, some companies and their stakeholders have taken an interest in the “triple bottom line” where profit is not the only measure of success; in this case, the other two measures are social and environmental impact. As long ago as 1997, Shell produced its first sustainability report that was entitled ‘People, Planet and Profit’ which explicitly recognised the “triple bottom line” concept. Twenty years on from this, The British Academy launched their ongoing programme to redefine the future of corporations. Their radical conclusions include expanding the corporate purpose of companies to include public purposes: a commitment to trustworthiness and embedding an enabling culture. The levers to achieve these goals include changing the nature of ownership to look beyond the traditional view of shareholders, as well as more and better targeted regulation, which itself should include a forward-looking dynamic.

In the water industry, companies have been subject to clashing priorities from Ofwat: being expected to provide greater public value by slashing bills by 12 percent, before inflation, whilst protecting themselves from the financial effects of Covid-19. This, of course, is on top of the water industry’s own initiative to be net-zero carbon by 2030, as part of the industry’s broader Public Interest Commitment. The regulator is already alive to the dilemma of the shift to purpose-driven water providers leading to higher bills for customers, as well as companies paying lip service to the new strategy – also known as “purpose washing”. However, this debate extends far beyond providing financial value to shareholders.

So, what are the legal issues for a company that is interested in expanding its corporate purpose from that of creating value for shareholders? At its most basic level, there are very limited restrictions on the corporate purposes. However, the bigger question is: can directors, as agents of the company, be required to implement a corporate purpose that has some societal value that goes beyond the economic interests of shareholders?

The Companies Act 2006 codified the duties of a director and specifically requires them “to act in the 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…” This duty is qualified to the extent that the directors must “in doing so, have regard (amongst other matters) to–” several factors, including employees and the impact on communities and the environment. However, these factors do not override the principal purpose which is the benefit of members.

A company that wishes to adopt a broad corporate purpose could achieve this by amending its articles of association. The new corporate purposes would then be the purposes for which the directors are required to operate, instead of shareholder value. For most companies, amending its articles of association only requires a 75 percent majority on the votes cast on the resolution.  Companies with different classes of shares will need to analyse voting and veto rights. Of course, wider considerations must be taken into account, for example, the impact on banks and other facility providers, employees and regulation.

It is clear that public purpose has moved onto the corporate agenda and whilst, to an extent, this is happening organically, the direction of travel may well be to impose a wider societal purpose on companies, particularly in the wake of Covid-19. For utilities, the pace of transformation is increasing and recognising the route that government and regulators are taking and grasping the law as it currently stands is essential to staying ahead of the game.