In a previous blogpost, I outlined the problems caused by business narrowly focussing on their own interests. Here I look at some ways forward.
THE PUBLIC GOOD
Adam Smith said that ‘by pursuing his own interest a person frequently promotes the interest of society more effectually than when he really intends to promote it.’ He was cynical about the good done by people who purported to trade for the public good.
We live in an age of greater transparency and openness. If the law or accounting standards expected companies both to operate in the public good as they make profits and report publicly how they have done so, then companies will do that. There is no need to specify how much public good is done or how they should do it. Boards can decide how they think they can best describe how the company generates public good. Readers can judge. Quality reporting about what is done should mean that companies which are effective in both in making profit and doing public good will be rewarded. They will have access to cheaper capital, the most talented employees will want to work for them and people and businesses alike will want to do business with them. It is necessary of course that reporting must be balanced, true and understandable and that glib, empty or misleading statements are dealt with. Companies must restrain themselves from using such reporting as a public relations exercise. Our social media age should help to ensure that any such misleading reporting is quickly highlighted.
It may be better not to define the public good because definition could invoke Goodhart’s Law (see footnote) and encourage people to game it. The public good is of course not just about economic good. While economic well being is nice, other things are equally if not more important. Bhutan has the concept of Gross National Happiness and, theoretically at least, is governed so as to raise happiness. Unlike GDP, it is not one target but a basket of targets across nine areas so its susceptibility to Goodhart’s Law should be limited.
The concept of public good gives a clear moral steer or compass but tremendous flexibility in how companies can contribute. This idea may sound radical but the UK company law framework already went some way towards this when it adopted the enlightened shareholder concept in the UK Companies Act 2006. The Act, in section 172, conferred a duty on directors to promote the success of the company and, in the course of making their decisions to that end, they are required by law to ‘have regard’ to:
- The likely consequences of any decision in the long term.
- The interests of the company’s employees.
- The need to foster the company’s business relationships with suppliers, customers and others.
- The impact of the company’s operations on the community and the environment.
- The desirability of the company maintaining a reputation for high standards of business conduct.
- The need to act fairly as between members of the company.
It is implicit that, in having such regard, directors do not cause the company to harm the community or the environment. An amendment to include explicit reference to the public good would merely provide a subtle but vital direction in legislation to boards and companies. Section 172 would seem to have had very little influence on boardroom thinking but this should be changing as the Companies (Miscellaneous Reporting) Regulations 2018 require directors to explain how they have had regard to these matters in performing their duty to promote the success of the company. This requirement has also been incorporated in Provision 6 of the 2018 UK Corporate Governance Code.
THE ROLE OF SHAREHOLDERS
At present this legislation can only be enforced by shareholders. Shareholders have never attempted to enforce this through the courts and it is not clear how, if at all, boards pay attention to it.
Given that a substantial proportion of the shares of large listed companies is owned by institutional shareholders investing on behalf of millions of people, it is reasonable to expect such companies to have regard for the public good. Most smaller businesses do this already. To a great extent, they rely on trust and common sense within the business to operate rather than on relying on detailed internal controls. They are generally formed and evolve to meet a market need and in so doing contribute to the public good through Adam Smith’s invisible hand; they are not usually able to exploit the benefits of oligopoly or game regulation.
Institutional shareholders should be encouraged to take an active interest in how their investee companies work in the public good.
Considering the public good would also provide a directional steer for regulation and supervision and could enable considerable reduction in regulatory complexity. Supervisory action taken transparently by reference to the public good should be simpler to enforce. A financial institution or company would have a clear test and would know it might have to explain its actions. Surely this would be better than slavishly checking compliance with a regulation which may have unintended and unfortunate consequences.
DOING THE RIGHT THING AND ETHICAL SELF-ASSESSMENT
Before their emissions scandal, we would think of Volkswagen as being a major contributor to the public good – the makers of the first people’s car. The revelations about emissions testing do not really change this but they tarnish an otherwise fine reputation. It is unlikely that top management initially approved the use of a device to cheat emissions. We can imagine a situation where clever engineers are engaged in innovation finding new ways to do things. Results are generally rewarded and there may be some pressure to perform. Finding a way to make emissions test results look better may have been more an intellectual and engineering challenge to solve rather than an attempt to deceive. Their supervisors may have been impressed with the engineering cleverness of the solution and not given a thought to the ethics of what they were doing, or at least not thought about the ethics until it was too late.
This is the problem with ethics in companies today and this is the systemic problem. People are too busy to think about ethics and consider whether their actions would be viewed as ethical by people outside the organisation. There is a simple solution and it complements the suggestion that companies report how they contribute to the public good. Companies could introduce a process of ethical self assessment where workshops are held where staff consider hypothetical dilemmas and consider questions like ‘is there anything going on here which would cause embarrassment if it became more widely known?’. Such a process would provide essential time for staff to reflect and consider whether there is anything unethical going on. Asking this simple question at VW in a way that allowed people to answer without fear would almost certainly have resulted in some people answering ‘yes’. The workshop facilitators could have found out what was going on and serious problems could be communicated upwards. The holding of such meetings should mean that unethical behaviours are unlikely to happen in the first place. Someone will question if it is the right thing to do before the action or soon enough to prevent damage.
VIRTUE HAS ITS REWARDS
Companies which contribute to the public good and assess their ethical health and explain how they have done so will find favour with shareholders, customers, suppliers and staff. There is an intrinsic satisfaction which most people derive from doing something good. The overall effect should be to promote trust in and outside the workplace which in turn would promote enterprise and lead to a healthier, more prosperous and happier society and reduce the regulatory burden. All this should help economies recover from the Corona Pandemic.
ABOUT THE AUTHOR
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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Footnote: Any information derived from comparison with social or economic measures can be misleading or dangerous because a measure turned into a target for policy will lose the information content that qualified it to play the role in the first place because people game it. This phenomenon is sometimes known as Goodhart’s Law after the economist Charles Goodhart.