Company Law: How to embed equality of opportunity into your company’s articles of association

The Equality Act 2010

The introduction of the Equality Act 2010 (EA) initiated a decisive change in how companies, charities, and public bodies implement their equality polices. A raft of equality legislation was introduced by the Labour government in 2001, including the Employment Act 2003 and the Equality Act 2006. European directives introduced during the same period, strengthened, and enhanced the implemented UK legislation. The main purpose of the EA was to harmonise the previous discrimination law and reinforce the legislation to support progress on equality.

Protected Characteristics

The EA introduced the important concept of protected characteristics:

  • age
  • disability
  • gender reassignment
  • marriage and civil partnership
  • pregnancy and maternity
  • race
  • religion or belief
  • sex and sexual orientation

In addition, the EA specifically provides a duty to public bodies, which covers government departments, local authorities and HNS bodies. To consider how their strategic decision making will impact to reduce inequality associated with socio-economic factors: a key element is to identify which factors they can influence.

The Equality Act 2010 and companies

The legislation did not impose a similar duty on companies and charities. However, company accountability, sustainability and equality are factors consumers consider when making buying decisions, therefore companies are developing written polices to address consumers concerns. For example, Cancer Research UK has developed a corporate responsibility strategy that incorporates published polices on sustainability, modern slavery and supplier conduct.

To address the male bias in corporate boardrooms, the global insurer Legal & General has recently announced they will not invest in companies whose boards are not diverse. Boohoo, the online fashion retailer, suffered a public relations disaster in 2020, resulting in its shares price plummeting on the revelation their UK based suppliers failed to provide safe work environments and paid less than the minimum wage.

Controlling the decision-making process

There are two main factors that require controls to embed any core belief into a company. The first is to tightly define the company’s purpose (often called the vision). The second is to control the decision-making process so that is does not negatively impact upon the company’s purpose. It follows that decisions made by the board of directors that conflicts with the defined purpose, ought not to be made.

Before making any decisions, directors should be aware of the contents of their articles of association. The advantage of well drafted articles is they act as an aide-mémoire, detailing the key Companies Act provisions that must be a factor in any decision: for example, powers and responsibilities of directors, how they make decisions, how meetings are held and the rights of shareholders (for companies incorporated by shares).

Articles of Association v Policy Documents

Often, smaller private companies and charities do not have the time or resources to research and draft corporate responsibility policies. Consequently, a relatively uncomplicated and cost-effective solution is to amend the articles of association. Unlike corporate responsibility polices, the articles are legally binding for the company and its members. For the members themselves, it is arguably a more advantageous solution to controlling the board of directors.

Why use the articles of association?

The term DNA is often articulated by companies when discussing core values. Anne Larilahti, Finnair’s Vice President recently commented ‘DNA is the code that defines what you are. And if you take that into the corporate environment then that is the articles of association.’ Finnair, included the following provision into article (2) of their articles of association.

‘The company may also engage in, or support, activities that are aimed at ensuring the acceptability, and thereby the long-term profitability, of its business by increasing the positive effects and reducing the negative effects of its business on the environment and society.’

In the UK, Anglian Water in 2019 became the first water company to embed public interest polices, by amending its articles. Chief Executive Peter Simpson said, ‘in conjunction with our shareholders, we have approved a fundamental change to our company Articles of Association, legally enshrining public interest within the constitutional make up of our business’.

The corporate world is recognising the need to use the articles of association to embed policy: the articles are the only legally binding company document that defines the company’s decision-making process and purpose. Conversely, policy documents are not legally binding on the company, its members, or its stakeholders.

How to make the change?

Companies incorporated after 2009 use the new model articles (unless they draft bespoke articles), introduced by the Companies Act 2006. Article (3) of the new model articles confers, (subject to the articles), a general authority to the directors to exercise all power of the company. As article (3) is subject to the articles, this provides the opportunity to include provisions for equality of opportunity and sustainability.

The following precedent can be inserted, which replaces article (3) of the new model articles. The precedent includes provisions for equality and accessibility and embeds the commitment to eradicate discrimination against the company’s stakeholders.

Part 2 Directors

Directors’ powers and responsibilities

3.0 Directors’ general authority

3.1 Subject to article (3.5) the directors [trustees] are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company.

3.2 Equality of Opportunity.

3.3 The following provisions are subject to the Company Act 2006 and the Equality Act 2010.

3.4 Commitment to Protected Characteristics. The company is committed to the principles of equality of opportunity and must ensure, where feasible that:

    1. shareholders;
    2. trustees;
    3. external trustees;
    4. members;
    5. employees;
    6. job applicants;
    7. volunteers;
    8. consultants; 

(together the ‘stakeholders’) are discriminated against on the basis of: 

    1. age;
    2. disability;
    3. gender reassignment;
    4. marriage and civil partnership;
    5. pregnancy and maternity;
    6. race (including ethnic origin, nationality and colour);
    7. religion or belief;
    8. sex and sexual orientation 

(together the ‘Protected Characteristics’)

 

3.5 When exercising their powers concerning the [companies/charities] objectives, priorities, and vision, the [board/trustees] must consider, if practical, how their resolutions will strengthen equality of opportunity.

 

3.6 Where a disabled person is placed at a substantial disadvantage in comparison with non-disabled people, the company will, where feasible, assess and change practice, modify the built environment, and provide supporting aids and services. 

Implications and conclusion

To change the articles of association requires 75% of the voting members to approve the new provisions (special resolution). Once implemented, the directors would be required, where practical, to consider equality of opportunity, discrimination, and access rights in relation to the stakeholders of the company. If the company holds shareholder agreements, the documents may require re-drafting if they conflict with the new provisions in the articles.

Who is legally bound by the articles?

The precedent above clearly states the directors must consider non-member stakeholders, for example, non-voting volunteers. These groups do not retain any legal rights under the articles. It is the members alone who legally may resort to the courts, if decisions are made by the directors that contravene the articles of association. The caselaw is unambiguous, if resolutions are passed in contravention of the articles, they would be deemed void.

Conclusion

Companies whose aim is to project their equality credentials can show their commitment by embedding provisions into their articles of association, binding the directors and the members to ensure when making strategic decisions, they will always consider equality of opportunity.

From a public relations standpoint, the ability for a company to declare that its decision making must include provisions for equality of opportunity, is a positive message.

Richard C. Bishop is the author of Articles of Association: Guidance and Precedents and Articles of Association for Charities and Not for Profit Organisations: Guidance and Precedents.

Richard C. Bishop

Written by Richard C. Bishop

Richard is lecturer in finance at Leeds Beckett University teaching in the Centre for Tourism and Hospitality Management. Prior to working at Leeds Beckett, Richard taught marketing and business strategy at Wolverhampton University, specializing in delivering CIM modules and lead the financial service degree program at Coventry University College.

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