Corporate model deeply flawed, say major business leaders
The entire concept of what a corporation is for and how it functions is flawed, according to an ambitious piece of research backed by some major figures in business.
Launched on 1 November, Reforming Business for the 21st Century: A framework for the Future of the Corporation calls for a radical rethink of corporate purpose, arguing that the prevailing view of a company’s role – to maximise shareholder profit – is both problematic and a relatively recent phenomenon.
Corporations were originally established, nearly two millennia ago, with “clear public purposes”, according to the report’s authors. Only since the thinking of economist Milton Friedman took root in the early 1960s has corporate purpose come to be equated “solely with profit”.
Corporations were originally established, nearly two millennia ago, with 'clear public purposes'
The Reforming Business report – published by the British Academy, the UK's national body for humanities and social sciences – is part of a multi-disciplinary research programme that’s examining how companies should adapt to address economic, environmental and social challenges and to take advantage of technological opportunities. In the first phase, thirteen research groups investigated ten themes, guided by an advisory group of business leaders.
Speaking at the report’s launch in London the academic lead on the project, Professor Colin Mayer, said: “The purpose of business is not simply to produce profits, it’s to produce profitable solutions to the problems of people and planet.”
While this may sound self-evident to social entrepreneurs, James Perry, director of the B-Corp Cook and a member of the Future of the Corporation’s business advisory group, told Pioneers Post the research project was the “most substantial enquiry” he’d seen yet into the philosophical question of what makes a corporation.
Importantly, the report is backed by leading figures in business and academia, who call for a “new contract with society” and acknowledge that business “must recognise the role it needs to play in pursuing purposes beyond profits”.
Alongside Perry, other signatories include the chair of healthcare firm Novo Nordisk – which employs 42,000 people in 79 countries – and of one of the UK’s major energy suppliers, SSE.
The researchers propose a new framework for the corporation based on three things: well-defined and aligned purposes (which may or may not relate to a wider contribution to public interest or social goals, but in any case are not just driven by shareholder interests); a commitment to trustworthiness (which is good for relationships with clients, suppliers, employers and others, thus benefiting the firm itself and everyone else); and embedding an enabling culture (which is key to implementing change and to promoting ethical standards).
The next stage of the research, from 2019, will explore how business practice and relevant policies could be shifted to make this work. So far, five levers have been identified: ownership (looking beyond shareholder ownership); corporate governance, regulation, taxation and investment.
Some policies are moving in these directions. A new corporate governance code puts the UK “at the forefront” of this field, said Mayer; US Senator Elizabeth Warren has proposed an Accountable Capitalism Act; new measures in France promise to formalise companies’ social and environmental role.
But, continued Mayer, such actions don’t get to the heart of the issue: “[We need] a comprehensive reformulation, not piecemeal reforms, across companies and across public policy.”
Colm Kelly – who has a dual role at PwC as global leader on tax and legal services, and global leader on purpose – echoed this, saying that corporate “wiring” had been designed to support the Friedman doctrine. “Once you reframe it you see all sorts of elements of the wiring which need to be taken apart and redesigned” – this, he said, is “no small task”.
Corporate 'wiring' [has] been designed to support the Friedman doctrine
Speaking at the launch, Secretary of State for Business, Energy and Industrial Strategy Greg Clark MP welcomed the research and the focus on “value in its deepest, not just in its accounting sense.” But he also underlined the positive role played by corporations in tackling society's biggest challenges. “The only way [to] seize these opportunities for progress is by harnessing the agency of business, he said, highlighting some of the ways companies already think “beyond profit”.
Some felt this was missing the point.
Tweeting during the event, Social Enterprise UK chief executive Peter Holbrook wrote that Clark’s speech was “underwhelming” and “sound[ed] very much like business as usual”, with a message reminiscent of “corporate responsibility from the early 1980’s[sic].” (Holbrook later tweeted his support for the proposals in the report itself.)
While the view of social enterprise was represented in the research process through the British Council, audience members noted the lack of social or environmental businesses represented among speakers at the launch. Henry Richards, project manager at the British Academy, said that the initial phase of the programme necessarily started "from a narrower perspective" – but that the researchers are "really keen" to involve a broader range of stakeholders in the next phase.
Perry, the only one among 18 speakers from a social enterprise, however, said that the sector should not necessarily expect to be part of such a process. “This is all about business as a concept which is rooted in the capital markets… Social enterprises don’t, by and large, relate to the mainstream capital markets, they have their own,” he said. “This is about saying: how can the goals of the social enterprise community be embraced in the capital markets.”
He agreed that the social enterprise sector has much to teach mainstream business leaders – who nowadays are “hungry to learn” from the B-Corp experience – as well as a role to play in calling out ‘greenwashing’.
But they should not feel threatened by the imminent arrival of huge firms onto their patch, Perry said.
“Any enterprise seeking to do a better job for society should be welcomed… there’s a real danger in the social enterprise space that it identifies as ‘a sector’ and has to defend the interest of ‘the sector’.” Not least because a world of reborn corporations would also benefit social enterprises themselves: more purposeful business goals will mean more room for ethical providers in their supply chains,” Perry said.
The Business, Energy and Industrial Strategy Department was unable to comment as Pioneers Post went to press.