Business and the Public Good: Part 1

Business and the Public Good: Part 1

Coronavirus, and its effect on our personal, family and working lives, is leading many of us to think differently about things we have previously taken for granted or not thought much about. Life, family and our own financial security seem now to matter so much more. People are wondering what life will be like in future: will things go back to normal or will things be different in future? Of course I don’t know the answer, but my guess is that a new normal will be established. I hope that new normal will involve more of us being more sensitive to other people’s needs and doing our bit to helping make the world a better place. In this and a following blogpost I want to explore the role of business in this. Here I outline what I see as the challenge. In the second post I suggest some ways of addressing it.

The last 20 years have offered plenty of evidence of businesses, and those people running them, putting themselves first and second. We saw eye watering bonuses paid to financial workers, followed by mind boggling sums to bail out banks and followed by massive fines to banks for various crimes including money laundering, mis-selling and manipulation of interest rates. Few protested, our capacity for outrage must have been dulled. There was a sense of resigned acceptance that there was little anyone can do about it. Such acceptance was tempered with a growing cynicism and lack of trust in finance.

Outside financial services, in the UK, journalists were found to have hacked the private phone conversations of celebrities, politicians and members of the public. Toyota settled $1.3 billion to resolve a criminal investigation into safety, admitting it misled United States consumers by concealing and making deceptive statements over safety issues that caused cars to accelerate as drivers tried to slow them down. Big Phama has been fined £billions for criminal activities and Volkswagen’s cheated emissions tests.

Were these isolated incidents or is/was there a systemic problem? We should accept that mistakes happen and that complex technical equipment can have safety defects. We should not accept serious ethical failure; what we need is a systemic mechanism to prevent it. My suggestion to help bring this about is for businesses to consider how they contribute to society, the ‘public good’, and for large companies’ annual reports to report publically, and in a balanced way, how boards consider their companies have so contributed. Many businesses create value for society but some do not. Financial statements do not distinguish between profit made by creating value and profit made from taking value created by others. That should change.

Business cannot exist without society and society wants or needs business to raise standards of well-being. In an ideal world there would be a ying-yang relationship between business and society, where business benefits society and society enables responsible businesses to flourish. Unfortunately some people in business seem to see society as, in effect, their prey to be devoured which fits well with the Western ‘we want it now’ culture. The idea of a hunter who eats what s/he kills makes a poor metaphor for business – it corrodes trust; a better one is of a farmer who grows food and husbands livestock while looking after the environment. This approach builds trust which is good for business and for society, and it necessitates a long term approach. 

RULES AND REGULATION

How could we make business leaders more like farmers? When something bad happens, the response of governments, indeed almost anyone in a position of authority, is to think about more rules. But having more rules is not the answer; the financial crisis exposed their limitations. People game rules. A compliance mind-set can mean that people do not have to worry about whether something is right or wrong or even sensible. We may have reached a point where there are just too many laws and rules. Perhaps we need more emphasis on ‘common law’ where actions are interpreted according to precedent, principle and common sense rather than compliance.

MEASURING VALUE

Adam Smith, the 18th century Scottish economist, philosopher and author, divided incomes into profit, wage, and rent. In profit-seeking behaviour, entities create value in a competitive environment by engaging in mutually beneficial transactions. He wrote in Wealth of Nations of an invisible hand which promotes the public good irrespective of the intention of the profit seekers. Rent, by contrast, transfers wealth from one party to another and does not in itself contribute to value creation. Its positive aspect is that rent can help assets be more efficiently used. So unproductive land can be let to a farmer who can grow food. Another form of rent is economic rent where wealth is transferred from one party to another through the latter being able to benefit from special privileges conferred by favourable or ill conceived regulation. Such privilege might include benefits from monopoly or oligopoly, quota, licence, regulation and state support. Economic rent is where money earned exceeds that which is economically or socially necessary; it does not add value, nor does it serve the public good.

These days, because legislation and regulation are so entwined with business, it is often hard to distinguish the profit from value creating activity from profit earned from economic rent. Economic rent is likely to feature wherever ‘profits’ are made that are higher than can be explained by competitive forces alone. This clearly applied to the profitability of the banking sector in 2006. How else could you explain global banking profits of $788 billion, over $150 billion greater than oil, gas and coal, and global banking profits per employee that were 26 times higher than the average of other industries? Such profitability was due in large part to economic rent allowed by market imperfections such as lack of competition, information asymmetry, and state guarantees to depositors.

Written by Paul Moxey, SAMI Fellow and Visiting Professor of Corporate Governance at London South Bank University and author of a textbook on corporate governance and risk management. He has chaired the CRSA (Culture, Control and Risk Self-assessment) Forum since 2000. He lectures widely and provides executive education and consulting support on governance, risk management, business ethics and culture. A former financial controller, company secretary and management consultant, from 2001 to early 2015 he was Head of Corporate Governance and Risk Management at ACCA where he was involved in governance developments across the world, including speaking at conferences and other events in five continents as well as a considerable amount of writing. His main work interest is in the behavioural aspects of governance and risk and his last major project at ACCA was to lead an ESRC funded international research study of corporate culture and behaviour. 

The views expressed are those of the author(s) and not necessarily of SAMI Consulting.

SAMI Consulting was founded in 1989 by Shell and St Andrews University. They have undertaken scenario planning projects for a wide range of UK and international organisations. Their core skill is providing the link between futures research and strategy.

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