What are companies for?

Last month The Economist newspaper published a special Briefing on corporate purpose – What Are Companies For? This explained the increased interest among business corporations in pursuing a social purpose, in addition to increasing shareholder returns and providing value to customers. This trend, according to The Economist, is a reaction to the global financial crash, and represents companies either seeing the light or caving in to external pressure, ‘depending on who you ask’.

The article gave several examples, such as BlackRock, a giant investment fund, which expects all major companies to articulate their social purpose. It notes that at a recent Business Roundtable, major CEOs agreed that their firms should serve stakeholders as well as shareholders; offer good value to customers and training to staff; promote inclusivity; treat suppliers fairly and ethically; support the communities in which they work; and protect the environment. This list doesn’t, in truth, seem particularly radical, but the article also presented the other side of the argument, citing activists who have used the courts to force the giant CalPERS pension fund to revert to picking investments for their financial performance alone, rather than their ‘social performance’; and a major hedge fund which claims that generating competitive shareholder returns is social value enough. Overall, while presenting a more or less balanced account of the debate, The Economist seemed to come down more or less on the latter point of view.

As a long-term reader of the newspaper, I found this surprising: I read the article fully expecting it to end with an endorsement of the need for businesses to contribute purposefully to three kinds of value: to their customers, to their investors, and to society more broadly. This is not a new or radical idea, and especially in an age when we are learning to expect less and less of our communities and governments, and therefore need to be able to rely on businesses acting responsibly of their own accord, against a background of social inequality, institutional decay, environmental degradation and political instability.

Among many things the article did not clearly say, I’d make three points.

1. Corporate citizenship and the social contract

Citizenship is one of the great public goods, where it exists. A healthy polity is one whose people are citizens, rather than subjects. They have a voice in the directions in which they are led, and in who does the leading; they hold their leaders accountable; and they accept a duty towards their fellow citizens, and to the nation state, which guides and sets limits on how they behave, including how they contribute to society. Good citizens behave accordingly not only because they are held accountable for doing so, but because they feel a sense of responsibility to do so. They not only pay their taxes as required, they also engage in community activities which enhance the common good. This is part of the social contract.

Businesses are in many ways corporate citizens. Not just because so many of them use the language of ‘good corporate citizenship’ in their public relations, but because, like individual citizens, they have a voice in the politics which determine where they are led, and who does the leading – and in holding leaders accountable (even if some may disingenuously deny having this influence). Therefore, in addition to paying taxes and otherwise complying with the law, they should also display a sense of responsibility towards others, and aim to behave in ways that enhance the common good.

Thus, as good corporate citizens, it’s essential corporations act in a socially responsible way, and recognise how they are contributing, and will in future contribute, to society: through their goods and services, their returns to investors, and in how they comport themselves and treat the environment and those around them. They should aim to enhance society and its prospects for the future, rather than simply avoid undermining them.

2. Stakeholders in a common future

Companies increasingly talk about ‘their stakeholders’, and The Economist article adopts the same language. It’s true, of course, that corporations have their stakeholders – i.e. others with a stake in their success and how they achieve it: the communities in which they operate, local and national governments, employees, their suppliers and customers, and so on.

But the concept of a ‘stake’ is far more powerful than that. The truth is, companies and others have a shared stake in a sustainable future, characterised by an open, well-regulated economy, greater equality of opportunity, a restored and sustained natural environment, democratic governance, and some version of ‘the pursuit of happiness’. My family and friends, the farmer in Harissa and the farmer just down the road here in Kent, BP, Huawei, Microsoft and the local corner ship: we are all stakeholders in that future. None of us can meet our goals in the medium term, unless we recognise our common stake.

Therefore companies which seek to define their social purpose are not stepping outside the appropriate parameters of business decision making. They are simply recognising the truth that it is in their interests – in common with others in society with whom they share a stake – to contribute social value.

3. Long-term interests

Of course, there will always be businesses willing to take a short-term view, seeking to maximise financial profits above all. And some business sectors are controversial simply because of the products and services they produce, even before considering a wider social purpose (arms, tobacco, etc.). But this should not alter the recognition that businesses should aim do ‘do well by doing good’. Indeed, there are many sectors for whom taking a ‘common weal’ approach is particularly well aligned with their evident economic interests. These include companies operating in sectors which perforce take a long term view because of the nature of their business: pension funds, miners, forestry, water supply, insurance companies, and the like. They all need to generate income in the short term, but they do so on the basis of long-term assets, much of whose value and benefits will ultimately accrue to people in future generations. Therefore they have no choice but to consider how they can help ensure those future customers will be in a position to purchase and benefit from their products, and thus how they might contribute to societal well-being.

For these three reasons, among others, The Economist got the balance of its briefing wrong. As good corporate citizens, with a stake in a sustainable future, and a future in which customers will be in a position to purchase their wares, corporations have an interest in behaving responsibly, and understanding and aiming to increase their net benefit to society. In any case, since it would be weird to suggest that businesses should not contribute to the good of society, it seems intuitively right that they should.