Purpose-Based Governance and Revitalisation of Company Law to Facilitate Purpose-Based Companies

The permissibility of corporations pursuing purposes other than profit has been the subject of debate for a number of years. This debate has intensified recently with proposals from bodies such as the British Academy and the Business Round Table (as discussed in previous OBLB posts) to allow or mandate the adoption of purposes by corporations. The challenges posed by COVID-19 have also focused attention on corporate purpose. In addition, there is increasing demand for appropriate vehicles for the conduct of social enterprises and other purpose-based ventures. At the same time, purpose is central to governance in the charitable sphere. In two recent articles I critically analyse the role of purpose in Australian company and charity law and demonstrate revitalisation of the law to facilitate adoption of, and governance centred on, purpose.

The first article, ‘Purpose-Based Governance: A New Paradigm’,  proposes a model of ‘purpose-based governance’, which offers significant potential advantages in both the charitable and for-profit spheres, as well as forming the basis of a unifying governance paradigm. The article focuses first on charitable entities. Such entities are required to specify their purpose and also to adhere to that purpose in order to obtain and maintain charitable registration and associated advantages. Governance in the charities sphere is naturally grounded in purpose and a purpose-based governance model has the potential to recentre and refocus governance of charitable entities. 

The clear role of purpose in the charitable sphere serves as a model for the potential operation of purpose in the for-profit sphere. Although purpose does not currently play a central role in the governance and regulation of for-profit companies, there is definite potential for purpose to play a defining role. The first step is the clear articulation of a company’s purpose(s) in the constitution. Giving purpose more of a role in the corporate sphere has transformative potential, particularly in relation to the vexed question of stakeholder interests. Careful critical analysis clarifies that Australian law allows companies to adopt purposes in addition to, or other than, shareholder profit in the constitution, paving the way for governance centred on purpose. Purpose-based governance does not, however, fundamentally alter current accountability structures and does not expose directors to liability if they do not achieve the company’s specified purposes.

Although not necessarily the panacea for all governance conundrums, purpose-based governance has much to offer. At the very least it is a new lens through which to approach persistent and intractable governance issues. More fundamentally, purpose-based-governance has significant potential as an overarching governance model. 

The second article, ‘Use of the Corporate Form for Public Benefit - Revitalisation of Australian Corporations Law’, provides extended detail on relevant aspects of the company law regime and focuses more closely on particular issues that arise in the facilitation of purpose-based companies. These include the application of directors’ duties in the context of such companies, with particular focus on the application of the duty to act in good faith in the interests of the company where companies have multiple purposes. This in turn has relevance for the drafting of appropriate constitutional provisions. Other issues arise in relation to standing and enforcement, departure from purposes and signalling. The focus of analysis is on the for-profit corporate form given that it is uncontroversial that other corporate forms (such as companies limited by guarantee) can be used for charitable and not-for-profit purposes. 

In this respect, experience from the UK and US can provide helpful insights in the revitalisation of Australian law. In particular, scholarly analysis of the issues arising from these overseas legislative regimes, and suggested solutions, are invaluable in determining the application of directors’ duties to purpose-based companies and in framing appropriate constitutional provisions. Although changes to the law are not necessary to enable companies to adopt purposes, these lessons from other jurisdictions that have legislated to allow for special-purpose companies are therefore instructive in revitalising Australian law. 

This analysis demonstrates that revitalisation of Australian law to allow purpose-based companies is feasible. In fact, it is opportune. This in turn allows company law to be attuned to practical and conceptual developments in the corporate sphere and more broadly. Such revitalisation does not require a fundamental shift, particularly given the malleability of directors’ duties. Indeed, given that the origins of the corporate form were connected with public ends, this evolution of the corporate form, and the attendant adaption of directors’ duties, are a natural adaptation rather than a radical reformulation. 

Dr Rosemary Teele Langford is Associate Professor, Melbourne Law School, University of Melbourne.