There is a growing consciousness of the need for change in business but how should this change happen?

By 06/09/2018Blog, Uncategorized

Written by Loughlin Hickey

There is a growing consciousness in business of the need for a higher duty of care towards society. The latest examples present common themes but suggest different approaches to making it a reality.

Larry Fink’s much-publicised CEO letter suggests that a company must have a purposeful approach towards society to be successful and indicates that a capital allocation and shareholder challenge will follow for those who don’t heed that advice.

Elizabeth Warren’s Accountable Capitalism Act proposal for large US companies goes further and seeks to regulate how companies should act and so gives legal redress to shareholders when the management does not follow the more stakeholder/worker/societal centric way of operating that her bill sets out.

The UK Government’s recently published Civil Society Strategy, which is joined to the also recent Industrial Strategy, sets out expectations for responsible businesses and offers itself in a convening role. Both are backed up by new recommendations from the Financial Reporting Council (the FRC) on the need for reporting on purpose and reporting how in accordance with company law (section 172 Companies Act 2006) companies are considering multiple stakeholders in their decision making.

So we have three approaches:

  1. A markets led approach
  2. A government led/regulatory approach
  3. A government-sponsored approach that signals the need for a collaborative approach

Each will have their supporters and sceptics. And this may not be about the detail of the approach but the bias of those supporters and sceptics towards what they consider the role of business is and who is best placed to make decisions about how it should operate and be judged. Implicit in this is how a business creates value, who it creates value for and indeed what that value is.

The supporters of a market-led approach would say that the market and the investors should decide and that financial return or shareholder value is the appropriate benchmark. Within that, there is a debate going on about how value should be considered and measured beyond financial return. Also, there is an implicit view of the extent of the role government should play in the private sector and indeed in people’s lives.

The sceptics might say that the market cannot judge itself and certainly can’t be relied upon to care about stakeholders beyond shareholders (including senior management incentivised by shareholder value) and numerous corporate scandals bear that out. Indeed, they might say that the voting records of major shareholders do not signal real concern for purposeful management or the concerns of society.

The supporters of a government led approach may share the view of the market sceptics and take the view that government oversees companies’ licence to operate, and so is the natural shaper and enforcer of corporate and shareholder responsibilities. And within that is a sense that there should be boundaries to market activity where profits as the only measure are inappropriate.

The sceptics of this might point to the success of the markets in improving the prosperity of countries, creating jobs, innovating to create new solutions, increasing prosperity, and creating the tax base that allows the government to build a social safety net. And they might also point to the inefficiencies of either government-owned enterprises or enterprises ensnared in government red tape.

The supporters of the government-sponsored approach could reference the convening power and “democratic authority” of governments to set standards of behaviour for all elements of society (including business) as well as the power of their spending decisions to signal and help change behaviours. Government might have the best perspective on how to benefit the people they serve while recognising the expertise and value created by each element of society (including business) and the interdependence of each.

The sceptics might respond that national governments cannot control businesses that operate globally, that governments operate to party political priorities and not societal interests and do not have strong enough trusted relationships with all of the elements of society (including business) to create the necessary collaborative working. And some would say that business cannot be trusted to collaborate for a common good as they are essentially there to make money for a small group of people.

Despite the different approaches, it is encouraging to see different groups taking the initiative to make things better for society. What also unites them is they each suggest that what is better for society is also better for business. This echoes other initiatives, from the UK government’s Mission Led Business Review, the Purposeful Company task-force, the British Academy Future of the Corporation project and the Sustainable Development Goals. Each seeks to provide evidence that the more successful businesses care about people and benefit society. This might lead you to think that either we don’t need any new initiatives because it is just plain common sense and any more interventions would just confuse things. Or, we should embrace all of the suggestions as they will make things better for business and society. Or, more plainly why don’t those in charge of business get this stuff!? The reason is that, like the rest of us, they are human.

In any change there is a lag of adjustment as we need to unlearn and re-learn and, as we all know, change can be difficult, not least for those who have navigated the current system such that they have isolated themselves from its defects or used the current system for their advantage. And change is made even more difficult when there are strident and powerful voices warning about the dangers of abandoning the “tried and tested” way to embrace a new way that sounds appealing while the weight of evidence is skewed, simply by the scale of “business as usual”, towards the old way of doing things. It is even more complicated when we either do just minor tweaks (so the new thinking is framed within the old way of operating and is consumed within it- which is the risk with a markets only approach) or wholesale change is imposed in “our best interest” and resistance grows (which is the risk with the government imposed/led approach). Finally, there needs to be a positive picture of what we might move to rather than simply a negative view of what we are moving from

With this is in mind the three “alternative approaches” might rather be seen as building blocks as we need them all: the markets signal that change is needed and acts to embrace the change, government signals that society has changed its normative expectations of business and existing laws are interpreted in that light and new policy proposals should follow if there is no change in behaviour, and a forum is created where all of the actors (civil society, markets and government) come together and agree how change can happen, the changes that need to be made by each actor and how all can collaborate and participate in the benefits. And in each of the approaches, the supporters need to help make their case and address the sceptics’ valid views and the sceptics must engage and be open minded.

Some suggestions for the all-important change dynamics (the “to” and “from”) that these building blocks should enable are:

  1. Business is part of society and not apart from society.
  2. Business is a dynamic series of relationships and not just an inanimate set of contracts.
  3. Business should develop people of character ready to play a full role in society and not just produce goods and services for profit.
  4. Profit is one outcome of good business and is not the purpose of business.
  5. The purpose of business is to respect people and benefit society and thereby provide a fair return for responsible investors: it is not to maximise shareholder value.
  6. The investors in business need to have regard to the long-term wishes, needs and desires of their ultimate beneficiaries (including savers and current and future pension beneficiaries) and not the capture of short-term financial gain.
  7. The concept of value should include social value (including resource preservation and renewal) and not just financial returns.
  8. Business should welcome and enable dialogue with all key relationships (including employees, customers, suppliers, communities and investors) rather than assert views from a limited number of people with a narrow experience of the society they are serving.
  9. These key relationships (employees, customers, suppliers, communities and investors) should use their own influence and behaviours to signal the change they want and not leave it to the markets or government to lead, decide upon and monitor the change.
  10. The role of society (of which business and other institutions are part, as are all of us as individuals) is to encourage and enable all human development: a sense of solidarity, a sense of meaning and striving for positive relationships and the opportunity to contribute and participate. Everyone is a someone, and not a something.

With these changes in mind, we can all help shape the overall change that is needed and is coming but needs direction and momentum. And we recognise that business leaders are human and need signalling, encouragement and help to move to be better businesses for all. We can all play our part as all of us are a part of a whole.