Going beyond shareholder wealth

Businesses must be accountable to society and not just their shareholders | Photo Credit: cnythzl

Capitalism must be reformed, its critics say, to enable more equitable, socially responsible, and environmentally sustainable economic growth. The engines of free market capitalist growth are investor owned, limited liability enterprises. For capitalism’s reform, reform of the legal structures of these enterprises is essential. To understand why, let’s reflect on three questions.

1. Why is that even good human beings, with good values, when they are CEOs or on boards of companies become tacitly complicit in the bad actions of companies?

2. Why do even good companies that we admire for their high standards sometimes do bad things?

3. Why cannot companies who are admired for their business ethics create wider movements of change in the ethics of the corporate sector?

The reason is, “best managed” companies are gauged from the perspectives of investors and stock markets only. Every month, it seems, a fresh scandal breaks out in companies with respected people on their boards. Until fundamental concepts of good management are changed capitalism will not change.

The five rungs

Most companies, even those well managed by stock market measures, are at low levels on the ladder of business responsibility. There are five rungs in the ladder. The first rung is accountability to investors and lenders — the domain of finance, corporate accounting, auditing, corporate law, and stock market regulators. This has been the principal focus of good corporate governance so far.

The second rung is accountability to the direct participants in the business’s processes for financial value creation —customers, employees and vendors; and domains of consumer protection, labour laws and commercial contracts. Along with the first, matters on the second rung are the principal focus of “good business management”.

The third rung is accountability for the effect of business operations on the physical environment; the domain of environmental regulations.

The fourth rung is accountability for the effect of the business’s products and processes on the lives of people — their health, their education, their values.

The fifth is accountability for the political health of the societies in which businesses operate — human rights, fair democratic practices, etc. This leads to the question of the responsibility of corporations as citizens in societies. Are they merely takers of permissions from society or also creators of fair conditions? All companies flounder at this level. Their view is that so long as they comply with the laws of the country in which they do business, their conscience is clear. The only influence they want to have on laws is a selfish concern to make laws easier for them to do business and make profits.

The most simplistic interpretation of the nostrum that the business of business must be only business is: the role of business in society is to run profitable operations and create value for shareholders. Associated with the ideas of free markets, freedom for businesses, and minimum government, this became the dominant paradigm since the 1990s. At the same time another set of ideas acquired great force in global governance.

They are ideas about the governance of the entire global system of which everyone — individuals, businesses, and nations — is only a small part. These ideas were translated into the Sustainable Development Goals in 2015.

Realisation is dawning that everyone, including businesses, must act to improve the ‘commons’ they all share — the natural environment, as well as the quality of society including human rights and justice.

Corporate power

Corporations, which are legal fictions, have acquired the rights of citizens in society: rights to property, rights to protection under law, rights to sue the government and others. However, they have much larger resources to hire lawyers and lobby governments to promote their interests. Some corporations are financially larger than many countries. All citizens are supposed to be equal in the eyes of the law; but, like the pigs in Orwell’s dystopian novel Animal Farm , corporations have become more equal in reality than ordinary humans.

With rights, should corporations not have responsibilities, like every citizen, for building a good society?

Leaders of successful businesses sometimes wax eloquent about how they motivate their employees, even enabling employees to fulfil their life purposes. Lofty statements indeed; and hypocritical because corporate incentive systems are designed to reward contributions to a company’s efficiency, economic growth, and profits.

What about the leaders of corporations? What is their life’s purpose? To make more money for themselves and their investors? Or to make the world better for everyone? Societies need new scorecards to measure the worthiness of businesses. And business leaders need new yardsticks to measure societal values, which they do not think about, and often destroy, in their drive to create more shareholder value.

The idea of a socially responsible business has degenerated into CSR and philanthropy attached to the side of a machine that generates profits, regardless of the impacts of the company’s products and operations on the health of humans and the natural environment. It is much easier to sign a cheque than to look into one’s conscience and change one’s behavior. The business of business remains the making of money. No wonder, most reports of companies’ CSR activities are considered a shallow “green wash”.

If CEOs want to change their company’s DNA, to conform with the ideals of “conscious” capitalism or “green” capitalism, they cannot go too far because their boards and they are legally enjoined to account to their shareholders only. Thus, the responsibility of business to society stays on the lowest rung of the ladder. Even leaders of great companies like Tatas and Unilever operate within societal structures. Until those structures change, they are constrained from doing what their hearts and their personal ethics truly demand.

Therefore, the legally mandated structures of corporations must change to enable companies to release the compassions of their leaders and their employees. Corporations’ licenses to operate must be tied to their performance on all levels of the ladder of business responsibility. All companies must be mandated to report to society as rigorously as they account to their shareholders. This is essential for a transformed, compassionate capitalism, and for humanity to achieve the SDGs faster.

The writer is a former member of the Planning Commission and the author of Transforming Capitalism: Business Leadership to Improve the World for Everyone. (Through The Billion Press)

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