Big Tobacco’s takeover of Vectura shows the holes on our Companies Act
There’s little dispute that companies ought to aim to return money to shareholders. Dividends sustain our pension pots and are vital to keep our economy growing. But when this pursuit becomes single minded it fails even by its own logic. PMI’s takeover of Vectura will generate the greatest shareholder value in the short term, but it will end up damaging the companies’ long term interests. Asthmatics dependent on inhalers will be in a position where they have to support the maker of Marlboro cigarettes. Already there is speculation that the takeover will leave Vectura excluded from research and clinical networks in future.
The consequence of the existing system is that, in a takeover situation, directors feel duty-bound to sell the company to the highest bidder – even if they believe the transaction will be damaging to customers, employees and the public. At this moment, we are witnessing a buying spree in Britain with Morrisons, LV= and even BT all facing the prospect of private equity takeover. These bids are causing unease in Westminster as well as within trade unions and established institutional investors, raising concerns about potential job losses and rising debt.
Within the existing framework, boards will feel compelled to cede Britain’s best beloved brands to the highest bidder regardless of the wider social implications. Big tobacco’s takeover of Vectura is the most egregious example, but in the next few months more deals will take place.
There is another option, and it’s backed by business. Over 700 businesses, from local businesses to high-street brands, are demanding changes to the Companies Act to require directors to take a more holistic view. These businesses are backing The Better Business Act, which would reform Section 172 of the Companies Act so that directors are required to align shareholder interests with wider society and the environment. This isn’t about being anti mergers and acquisition – it’s about ensuring that the benefits of transactions are shared and potential harms avoided.
This would leave company directors better equipped to make decisions in everyone’s long term interests. According to polling undertaken by the Institute of Directors, another backer of the campaign, more than half of directors believe that the Companies Act focuses too much on shareholders and not enough on other stakeholders.
It’s not only business leaders that are demanding change. Voters and consumers want to see businesses taking a broader view too. 72 per cent of the UK public think businesses should have a legal responsibility to people and the planet alongside shareholders. As more and more consumers make spending decisions based on corporate purpose, businesses that act solely based on profit maximisation could ironically see sales drop.
With strong support from businesses and consumers now is the time for the Government to act and amend existing company law. The Government intends to reform corporate governance in the next Parliamentary session and this issue must be a priority to tackle within those planned reforms.