Good corporate governance is a competitive advantage, April 5, 2017
5th April 2017
Today’s recommendations on corporate governance from the UK parliament’s Business, Energy and Industrial Strategy (BEIS) select committee prepare the ground for a repurposing of corporate Britain as profound as the repurposing of the country that must come with Brexit.
The committee’s hard-hitting report has underlined the vital role of reformed corporate governance and a refashioned industrial strategy. This is crucial to the achievement of a new frontier of competitive advantage and profitability based on long-term thinking. It prepares the ground for reforms the government plainly recognises are required, with its impending white papers on corporate governance and industrial strategy.
The accumulated evidence from across the world is that improved profit and performance follow the pursuit of purpose — the clearly articulated and self-conscious insistence, shared by managers and owners alike, that a company first exists to promote societal and human betterment.
Every company has the potential to make a significant contribution to society. At the most basic level, businesses offer goods and services people want. In the process, they provide capital, jobs, skills, ideas and taxes. But many companies don’t emphasise this. Instead they focus internally on what they can get from society: cheaper inputs, higher prices and softer regulation. Externally, they promote their often tiny contributions to corporate social responsibility — products they have donated or community programmes to which they have contributed — while ignoring what is contributed day to day by the business.
This focus undermines credibility and trust in business. Where companies just exist to extract value from society, it is no surprise that this results in the kind of abuses of customers, staff and pension schemes that have hit the headlines in recent years. In in some cases, these abuses have attracted fines. Trust is damaged and any efforts to engage, even genuine ones, are widely regarded as cynical and selfish manoeuvres.
Companies that succeed in building a profitable relationship with the external world instead define themselves through what they contribute. Thus every company should state its purpose in its articles of association, the written rules about running a company agreed by its shareholders and directors, and it should be reported on annually. There must be alternative corporate forms available to give boards choice on how they are governed. Reporting, including accounting, must be overhauled so that stakeholders have fast access to the information that matters to them.
We fully agree with the BEIS committee’s recommendation to move away from long-term incentive plans towards equity with long holding periods. These incentive plans are based almost exclusively on financial targets and encourage short-termism. The ambition to fill more senior roles with women is a welcome and timely recommendation. We also endorse their recommendations for companies to report their people policy — their approach to investing in and rewarding employees at all levels.
These reforms must be complemented by transforming how the asset management industry approaches the ownership of companies. The flow of equity and credit to companies that promote purpose must be maximised. With some smart nudges, billions of pounds could be unlocked to invest in purposed companies.
In essence, companies’ maxim of “knowing your customer” needs to be broadened to “knowing your stakeholder”. This, in turn, has bearing on governance. We support the recommendation of more specific reporting of information to a range of stakeholders, including the long-term consequences of companies’ decisions. Delivering purpose — and securing the benefits that come from it — requires a mindset change, as well as reform of the business ecosystem. But if Britain is to navigate what lies ahead successfully, nothing less will do.
Clare Chapman and Will Hutton co-chair the Big Innovation Centre’s purposeful company task force, a consortium examining how to support the development of value-generating companies