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Professor Colin Mayer of Oxford University’s Saïd Business School explains how greater transparency will be key to making 21st century capitalism fit for purpose
From its early origins in Roman law, the corporation has been legally bound by public duty and social responsibility. Throughout most periods of history, fulfilling a social purpose has been an obligation on all those who held the public license to operate as a corporation.
Even the largest and, in the case of the East India Company, most pernicious corporations in history could be said to have had a stated purpose, a reason for which they operated.
It is only in the last 60 years, with the emergence of shareholder primacy, that there have been exceptions to this rule. Most people who have studied business and management, from CEOs of publicly listed corporations to “School of 2019” MBA graduates, will be familiar with the principle of shareholder primacy.
After six decades of capitalism prioritising profit, today’s largest businesses form a corporate system that lacks purpose
Most closely associated with the economist Milton Friedman, the principle divests corporate directors of any responsibility other than to maximise profits for their shareholders.
That maxim has become the sole purpose of the corporation, removing the trust that is essential to well-functioning markets, which should deliver benefits to all participants.
What does this 60-year shift have to do with, for example, the $60m court battle that Uber and Lyft have sworn to fight to prevent their drivers changing their legal status from independent contractors to employees? What connects it to Greta Thunberg’s vows to strike for the climate, Democratic nominee Elizabeth Warren’s threat to break up the big tech firms, or Jeremy Corbyn’s proposed shared ownership funds, which would reallocate 10% of company shares to employees in what the Financial Times describes as one of the biggest state raids on the private sector to take place in a western democracy?
After six decades of capitalism prioritising profit and promoting a set of policies designed to encourage this, today’s largest businesses form a corporate system that lacks purpose. But are we witnessing society re-imposing its will? And how can businesses respond?
In the US, the Business Roundtable of CEOs, chaired by Jamie Dimon, is one of the most vocal and powerful groups to offer a direct answer to the demands of consumers, the electorate and employees. The Governance & Accountability Institute estimates that ESG reporting has already increased over fourfold since 2011 among the S&P 500.
And, to judge by the shift in opinion among the next generation of business students and young entrepreneurs, doubts over the assumption of shareholder primacy are set to grow. Millennials are even more vehement about the return of purpose to the heart of capitalism; according to this year’s Global Leadership Survey by the Young Presidents Organization, nine in 10 young corporate leaders feel that the purpose of business is to have a beneficial impact on society, over and above the pursuit of profits.
Business Roundtable’s statement will only prove to be more than a carefully stage-managed display if it follows through with action
We have reached the point where regulators and lawmakers are feeling significant pressure to make reforms. The last thing they wish to do is break the system or replace capitalism as the leading paradigm in the 21st century. So, deciphering the effects of the rise of shareholder primacy, and regaining control over its most malignant impacts, is the challenge that unites academics, lawmakers and corporate leaders in this generation and the next.
The rules and conventions of corporate law, governance, measurement and finance – all currently designed to privilege shareholders – need an overhaul.
Indeed, Business Roundtable’s statement in August, in which it made a “fundamental commitment to all our stakeholders” will only prove to be more than a carefully stage-managed display if it follows through with action. As new corporations enter maturity, go public and gain influence in the 21st century, their leaders and investors will need to acknowledge a formula that lends primacy to corporate purpose instead of shareholder profits. This will require us to use the levers we have to hand.
While it may take a decade or more for the legal and regulatory frameworks to catch up with advances in digital technology, these will be needed to settle disputes – such as those over the status of workers in casual labour in the gig economy, who are increasingly raising questions over the purpose of corporations like Uber and Lyft.
Conventions and policies regarding corporate governance will also need to adapt to catch up with prescient figures such as the leading corporate lawyer, Marty Lipton. Lipton proposed as far back as 1979 that CEOs and investors needed to commit to stakeholders to ensure short-term profits did not come at the sacrifice of long-term gains for business and wider society.
Many businesses, including B Corps, now measure and report their performance against a “triple bottom line”. Non-financial metrics for measuring business impact and performance are an important element of corporate renewal, and their implementation relies on these metrics being taught at business school and taken seriously in boardrooms.
While advocates for corporate reform can expect dissent, this evolution is intended to restore trust in the corporation, not to marginalise shareholders
Financial institutions and private investors are starting to invest more responsibly, with stock exchanges offering green bonds and major financial institutions divesting from fossil fuels and shifting considerably towards impact investing and ESG-based funds.
How we shift these levers – law, governance, measurement, and finance – to make corporations more trustworthy and accountable to society will be the subject of the next major report by the Future of the Corporation – a major commission by the British Academy examining the purpose of business in 21st-century society – to be published in November this year.
While advocates for corporate reform can expect dissent from some quarters, this evolution is intended to restore trust in the corporation, not to marginalise shareholders. The reason the idea of a corporation has been successful for nearly 2,000 years is that it has evolved to meet the needs of the time. This ability to adapt to the expectations of society and deliver more benefit than harm is what makes the corporation so valuable. With reform, the corporation can find its purposes and deliver prosperity for all.
Professor Colin Mayer is Peter Moores Professor of Management Studies at University of Oxford Saïd Business School and academic lead of the Future of the Corporation at the British Academy.
This article is part of the in depth Inclusive Capitalism briefing. See also:Lyft Uber Elizabeth Warren Greta Thunberg Governance and Accountability Institute Business Roundtable