When the US Business Roundtable recast its statement on the “purpose of a corporation” in August, the Financial Times cautiously endorsed the shift from shareholder primacy to a broader commitment to all stakeholders. We also urged businesses to practise what they preached. Our series on companies that are forging purpose-led strategies that will sustain them into the future shows how difficult that can be.
Many signatories to the BRT statement still seem to believe it was merely catching up with progress they had already made at their own companies. They are in for a rude shock. There are clear reasons why further action is necessary. They include the rising tide of protest about failure to tackle climate change, the commitment of younger workers and customers to purpose-led businesses (and their disquiet about companies that fall short), and tensions over the fact that wages continue to lag overall economic growth.
As Paul Polman, former chief executive of Unilever, put it at a recent forum on progress towards the UN’s sustainable development goals, the cost of inaction is rapidly becoming significantly higher than the cost of action.
At the least, enlightened self-interest ought to prompt companies — and shareholders — to keep employees happy, communities healthy and governments funded. Otherwise, they will succumb to a tragedy of the corporate commons, in which each company’s pursuit of its narrow short-term interests will undermine the long-term survival of the whole group.
The question is how to encourage chief executives and business owners to do the right thing. The evidence of the FT series suggests three important areas of action to encourage long-term sustainable growth.
One is to align asset managers’ and owners’ goals more closely with those of the purpose-led companies in which they invest. Danone’s chief executive told the FT individual fund managers’ short-term horizons were often at odds with the long-termism their bosses have begun to advocate.
A second, linked imperative is to accelerate improvements in non-financial measures that assess the impact companies have on society and the environment. Consensus on such measures would provide solid new benchmarks for progress and allow regulators, investors and staff to hold executives to account — and reward them accordingly.
Finally, there is a need for structural and regulatory solutions. These should include a more relaxed attitude to two-tier shareholder structures, such as time-limited supervoting shares for anchor shareholders that protect long-term strategy-making. Regulators need, too, to explore ways to discourage companies and investors’ nearsighted focus on quarterly earnings.
Governments must co-operate to ensure multinational companies pay their fair share of tax. Policymakers should promote a diversity of corporate models, from the foundation and trust control common in some northern European countries, to employee-owned companies and co-operatives, through to private equity ownership and public listing.
It was clear already after the financial crisis that crude maximisation of the share price was a management goal that jeopardised sustained corporate growth. The BRT’s recognition of this fact is welcome, if overdue. No company will achieve its long-term goals, however worthy, without achieving short-term success. But to prosper well into the future, managers, and those who oversee them, need to take account of the wider health of the societies in which they operate.
Letters in response to this editorial comment:
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