Baking ESG into business: golden shares explained

Tony Chocolonely, the ethical chocolate brand, recently hit the headlines for introducing a ‘golden share’ mechanism to their business to protect the company’s ethical strategy.

Golden shares are not something defined in company law and are instead a concept which has evolved over time. In its simplest form, a golden share is one share in a company held by a certain person, which gives them special rights – for example, consent rights over certain decisions which allows a ‘golden shareholder’ to effectively veto certain actions. Golden shareholders are typically concerned more with a given ethical or social strategy than with profit (although relatedly enhanced voting rights to protect founders are a feature of many US companies like Facebook and Newscorp).

Historically, you may have heard of golden shares being used in the context of government-linked companies. For example, when the British government sold Rolls-Royce in a public offering in the 1980’s, it retained (via BIS (the Secretary of State for Business, Innovation and Skills)) a golden share in Rolls Royce Holdings, which means that the prior written consent of BIS is needed for certain actions the company can take.

However, golden shares are increasingly being used by companies to enshrine and protect their environmental, social and corporate government (ESG) goals.

How do ESG-conscious companies use golden share mechanisms?

Golden shares can be used by companies with an ESG focus to ‘mission lock’ their ethical strategy. In much the same way as government-linked companies, this is done by issuing a single golden share (in the same way that a company would issue other shares such as ordinary shares or preference shares) to a specific shareholder. The articles of association of the relevant company will then set out what rights and resections attach to that specific share, in exactly the same way as it does for other share classes. In addition, it will set out various reserved matters which require the consent of the ‘golden shareholder’. This might include: amending the articles of association, altering the objects of the company, or deciding what is done with the company’s profits. If the articles of association are also amended to say that, for example, the company’s objects must deliver certain ESG benefits and a certain proportion of profits must go to charity, then typically the golden shareholder’s consent will be needed to change these and the company’s ESG mission is effectively ‘locked’.

You may have heard of B Corps, which are businesses with an external accreditation by B Lab – a US-based non-profit organised – for ‘high standards of social and environment performance, transparency and accountability’. One of the requirements to becoming a B Corp is that the relevant company’s objects must include having a material positive impact on society and the environment, as well as promoting the success of the company for the benefit of its members as a whole. It’s no surprise that a number of the companies putting in place golden share mechanisms to add an additional layer of protection to their objects are also B Corps, for example Tony Chocolonely and Toast Ale.

How can I set up a golden share mechanism for my business?

In order to set up a golden share mechanism, you will need to amend your company’s articles of association to provide for a new share class and issue the golden share to your golden shareholder. This process will require various board and shareholder approvals, followed by Companies House filings, updates to your company registers and issuing a share certificate to the new golden shareholder.

Should we put in place a golden share mechanism?

Whilst creating a golden share mechanism is clearly a good way to mission-lock a company’s ESG objectives, that doesn’t mean that it’s right for everyone. Businesses should give careful consideration to such a mechanism and consider what would happen in future if a golden shareholder prevented a path that the board and a majority of other shareholders wanted to follow. Putting such a mechanism in place could hamper the company by restricting a proposed change in direction or putting-off certain investors. It may be that a business with a locked ethical or social strategy might face a valuation penalty – and while that penalty might be considered a price worth paying it should be factored into the decision. If a golden share mechanism isn’t right for your company there are other ways to enshrine and exhibit ESG values, such as becoming a B Corp, or agreeing to give a proportion of profits to charities.

In a world in which customers, investors and potential talent are increasingly factoring ESG into their decisions around purchasing, investing and job moves, enshrining ESG goals using a golden share mechanism can be seen as a valuable step to demonstrating that your company is serious when it comes to ethics, and dispel any accusations of green-washing.