The business of business is... doing good?
In politics you know you have won when you don’t just beat your opponents, you convert them to your cause. Mrs Thatcher apparently used to say that her biggest political achievement was the creation of New Labour – such was the scale of her dominance that even one-time opponents came to embrace not just capitalism over socialism, but also privatised utilities, flexible labour markets, permanently lower tax rates, the right to buy, competition in public services and so on.
The living wage is fast becoming one of those policies, gathering support not just from its natural home on the political left but also from figures on the centre right. Boris Johnson, of course, was ahead of the game in signing up the London Living wage as Mayor several years ago. Conservative websites have now begun to carry calls for the living wage to be spread more widely. And yesterday, Ferdinand Mount, Head of Mrs Thatcher’s policy unit, wrote in the Evening Standard that he is ‘greatly attracted by the idea’.
Perhaps the most telling line in Mount’s piece is that ‘companies have to work out the solution between their accountants and their consciences’. It is here where I think something important is happening – not just on wages but in the whole way we understand the social responsibilities of business.
For decades the free market argument was straightforward: companies should be judged by one metric, the bottom line. As Milton Friedman, the Chicago school economist (and another Thatcher guru) put it, ‘there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game’.
Shareholders own companies, Friedman argued – only they can decide what a business is for. Just as governments should not interfere in setting the purpose of a company, neither should its employees exercise their own ethical judgements without the express permission of shareholders. Friedman’s arguments have expression in legislation: company boards have a fiduciary duty to maximise shareholder value.
Yet, as Ferdinand Mount’s intervention yesterday exemplifies, this idea is increasingly being challenged – and not just in seminar rooms with people talking about ‘responsible capitalism’. Many within the business community itself now argue that a narrow focus on shareholder value can be self-defeating. It can result in overly short-termist investment decisions, demoralised staff and damaged relationships with customers and wider society. Shareholder value is best pursued ‘obliquely’ – for example through the aspiration to create great products, contribute to a local area or to become a great place to work.
Part of this is because there is growing pressure for companies to accommodate wider social responsibilities into their business models. Only one in three voters think that companies should exercise the freedom to do whatever they think is right, within the law, to grow their business. Two thirds believe either that companies should take account of wider social considerations.
The law can be a blunt instrument in achieving this directly. The contexts that companies operate in vary markedly, from the geographical areas they are situated in to the demographics of their staff and the nature of their products. Legislation will always struggle to capture some of this complexity. Furthermore, laws are often better at preventing harm, than promoting positive social good: health and safety legislation can help reduce accidents, but is unlikely to enhance job satisfaction, for example.
But Corporate Social Responsibility has failed to fill the gap too. Too often it feels tokenistic and detached from the core business of companies themselves. Occasionally, it can even leave businesses on the defensive – with CEOs asked to explain whether small acts of voluntarism are designed to compensate for the wider social impact of the firm itself.
All this seems to imply three big shifts:
- First, that the idea that businesses have social responsibilities is now the mainstream position
- Second, that the suggestion that regulation can solve all this directly lacks credibility
- Third, that corporate social responsibility can no longer be understood as separate from the core business of a company. It has to be ingrained in the way it works.
There are plenty of examples of where this is happening already. Heathrow Airport has built connections with the local community in an effort to ensure nearby residents benefit from the jobs on offer there. As this Demos discussion paper describes in more detail, half of the £76,000 jobs on site go to people who live in one of the local boroughs of Ealing, Hillingdon, Hounslow, Slough and Spelthorne.
Some of this takes place through the Heathrow Academy, which supports local unemployed residents back in to the workplace through training that addresses everything from employability skills and pre-employment training to more job specific skills in retail, aviation and logistics. The Heathrow Academy has improved the retention of employees at the airport, delivered cost savings and improved turnover.
Other businesses have found impressive ways to give their staff a meaningful voice in the workplace – Pret a Manger, for example, gives the staff its branches a vote on whether new staff are hired after a trial day. And there are big steps being taken forward on transparency for consumers across a range of sectors, from more clarity on where food was sourced to what companies will do with people’s personal data.
These innovations are a long way from ‘the business of business is business’ – instead they signal a much needed shift in corporate culture and an essential component of the ‘good growth’ that Demos will be exploring in more detail in 2013.