Time for business to go social

Posted on December 23, 2016

The search for ethical business (Olu Eletu - photographer)

The business pages

Peter Babudu

“The question we face is whether… profitable, well-run businesses combined with integrity and long-term commitment to the work force and communities… are simply incompatible with the current Anglo-Saxon model of shareholder capitalism.” The Rt Hon Sir Vince Cable, Cadbury Lecture 2016

Sir Philip Green at BHS, Mike Ashley at Sports Direct and Fred Goodwin, formerly of Royal Bank of Scotland – these are all business leaders accused in recent years of putting short-term profits ahead of their organisations’ long-term economic and social impacts, with reckless intent.

But this issue of whether businesses, and their leaders, should be held to account, legally or publically, for their behaviour and a ‘moral’ responsibility to their workers and local communities isn’t a new one.

Alongside steam power, the Industrial Revolution led to the creation of the UK’s first ethical businesses, many of them born of the Quaker faith, such as Cadbury and Rowntree’s. For these organisations, the well-being of their company’s bottom line went together with that of their workers and their workers’ families.

Centuries later, a range of ‘responsible’ business models exist in their wake – including the UK’s growing social enterprise sector, co-operative movement, mutuals, and employee-owned partnerships

The expectations treadmill

That tension, however, between profits and social good remains as strong as it ever was.

Tellingly, both Cadbury and Rowntree’s are no longer family-run businesses, but owned by the global food conglomerates Modelez International (formerly Kraft Foods) and Nestle. And, despite political efforts since 2008 including planned action by the Prime Minister, there is still a remarkable amount of pressure on businesses to focus almost exclusively on shareholder return and only do things that will maximise their profits, typically in the short term.

As a result, whether it is the demand that public companies report quarterly or the general ‘expectations treadmill’ (i.e. market expectations of company performance continually increase and eventually actual performance struggles to keep up), it is often difficult for businesses to pay sustained attention to the social impacts of their work.

This creates problems for business, consumers and government alike: making it harder for commercial organisations to balance the economic and social consequences of their actions, consumers to know where to get the most genuine social bang for their buck, and government to identify where (or how) to encourage businesses to be more social.

Driving corporate citizenship

UK company legislation does explicitly permit company directors to pay attention to their ‘fiduciary’ duties which go beyond maximising return to shareholders, such as having a mind to the interests of employees, the impact of their operations on the community and the environment.

More broadly, there is a big move towards better corporate citizenship from paying staff a living wage or fair taxes to constantly reviewing the ethics of your supply chain. And more and more businesses have a significant ‘mission-led’ component to their work. 

A recent report by Deloitte commissioned by the Office for Civil Society and Big Society Capital, ‘In pursuit of impact: mission-led business’, estimated that there are 123,000 mission-led business in the UK with a turnover of £123bn (4.3% of the UK economy) and 1.4 million employees. This is alongside many examples of major businesses such as Unilever and PwC, paying increased attention to their corporate social responsibilities.

Achieving sustainable success

Yet even with this success, more could be done. To be truly sustainable, every business must understand the effect they have on their employees, the communities in which they operate, the environment and the outcomes they try to deliver – which aren’t captured in their bottom line. In time, there should be no profit without purpose.

The situation will only change, however, if government, in conjunction with the relevant major stakeholders, makes a systematic effort to incentivise businesses to say more about what they do socially, and for the pioneers in this area (from charities to profit-with-purpose companies) to play a central role in making their approach the norm.

The government’s recently published 'Mission-Led Business Review' looked at a range of options for encouraging more businesses to become explicitly mission-led, from new legislation and guidance (such as model mission-led articles) to voluntary frameworks (similar to B-corps) and increased tax incentives.

These steps seem sensible, and it’s right that the government is looking at how to encourage businesses to be more ethical, rather than to force all businesses to comply with hard-to-enforce legislation. But again, there’s a good argument for going further. 

The new normal

Understanding the impact of your operations should be a standard expectation. And, where you don’t know what the impact of your operations are, over time government should get more concerned from a regulatory perspective in finding out, or at least rewarding those who can give a good account of what the mission of their business is, and how much progress they are making towards achieving it.

At the same time, if mission-led businesses are to become the new normal, there needs to be a simple framework available to help them do it. Crucially, they should also not be penalised for acting to mitigate any negative effects they could have – for example, paying staff a living wage and running due diligence on suppliers etc.

Subject to Brexit, EU legislation – which comes into force in 2017 – will mandate that large companies (those with over 500 employees) must report on their policies, risks and outcomes relating to environmental, human rights and related issues. Provided this EU Directive is implemented, it should be a great first step in getting business to become more social.

There will also be an important role for the current social sector, which has more experience in understanding and communicating the social impact of its work, to guide business to do a good job of this.

It’s an area that TSIP will be looking at closely in the coming months – contributing our thoughts and ideas about how mission-led businesses can be helped to thrive. Because if business is to have a long-term purpose and be sustainable, it must be ‘on a mission’.