Valueism and Social Contract Accounting Get the “Thumbs-Up”

On March 28th 2019 I wrote an article “Introducing Valueism and Social Contract Accounting” for The London School of Economic Business Review. The subtitle read, “The purpose of business should be to provide a good and prosperous life to this and future generations”.

The two concepts, Valueism and Social Contract Accounting, are closely related.

Social contract theory holds that organisations, including businesses, operate under an unwritten contract with the society as a whole, in which the society allows the company to do business under the condition that its actions benefit society. The benefit to society represents the value it creates for society.

Valueism argues it is high time the implicit contract is made explicit, each business or organisation defining how it sees its obligations to society. Then, with a new accounting standard to supplement the financial accounts, real accountability to society is possible, and performance measurable.

CEO performance against the social contract can also be assessed by the board. Additionally, CEO pay, and other incentives, can be linked to performance in relation to it.

Previous attempts to align the interests of the corporation with those of society have so far failed. Public trust in business is evidence of that. Making firms accountable for their explicitly defined social contract obligations is a first step to restoring trust. But it will not happen whilst those obligations remain implicit.

On June 18th this year, the International Corporate Governance Network (ICGN) ran the first in a series of webinars titled “The Evolving Social Contract”. The title of the first webinar in the series was “Executive Pay: Reframing for the Long-Term”.

The ICGN is led by investors responsible for assets under management in excess of $US 54 trillion and is a leading authority on global standards of corporate governance and investor stewardship.

Richard Bennett

The webinar was chaired by Richard Bennett, President & Chief Executive Officer of ValueEdge Advisors LLC which “helps institutional investors engage with their portfolio companies”.

The panel included an institutional investor, Mirza Baig (Global Head of Governance and Stewardship at Aviva Investors), a representative of companies, Charlotte Valeur (Chair of the Institute of Directors), and Georgina Marshall (Head of Global Research at Institutional Shareholder Services (ISS)). ISS provides institutional investors with informed independent research and voting recommendations on the basis of reports on more than 40,000 public company shareholder meetings each year, in over 100 markets around the world.

The event gave me the opportunity to get the panel member’s views on Social Contract Accounting. I asked:

“Should companies be asked to be explicit about how they define their social contract? Should we have Social Contract Accounting to supplement the financial accounts, so companies can be held to account? And should CEO pay be related to social contract accounting?”

Charlotte Valeur

Charlotte Valeur replied first saying the social contract and social value is a very real discussion on the boards she is serving on. She added social impact should be measurable, and companies and CEOs accountable.

Charlotte added, the measures should relate to the key performance indicators of CEO performance. And, referring to social impact, she said social contract accounting should consider a range of factors, and include both the good and the bad impact on society.

In her view such impacts need to be measured in ways that can be published, so firms are accountable. Once they are it will become necessary to develop policies that then start to impact on culture of the firm, and that is where we want to get to, she concluded.

Georgina Marshall

Georgina was next to respond saying she considers it “a really great question and very thought provoking”. She went on to say, no company operates in a vacuum. All companies operate in a social environment. So, maybe this is just a natural next step to thinking about what a company’s mission and objective is and how it is going to operate, particularly in the long-term.

In terms of Social Contract Accounting, Georgina said she was not an expert in it, but based on the current situation, and after three months of crisis and what we have learned, it could be part of the big picture and how companies, investors or stakeholders need to think about how businesses operate going forward.

Mirza Baig

Mirza said he echoed the points already made and added, in the context of the current social unrest [the Black Lives Matter Protests] companies have traditionally satisfied themselves with the Google mantra of “do no harm”. And, as long as they are not explicitly supporting discriminatory actions, they feel content with that.

He then said, “I would say that when we are trying to tackle fundamental institutionalised inequalities, then that position is just not good enough”.

Additionally Mirza noted, We need companies to embrace a responsibility to be agents of change, and to look at all of the touch-points they have in society — with their suppliers, local communities, customers — and actually be proactively part of trying to rebalance some of the inequalities we have. I think documenting a social contract, explicitly, will be an important catalyst.

Colin Mayer

A few days later, on June 22nd, The British Academy hosted a webinar on “The Future of the Corporation”. The Academic Lead on the initiative, Colin Mayer, Professor of Management Studies at Said Business School at the University of Oxford, answered a similar question that I put to him.

Mayer said it is his belief, public business particularly, ought to be explicit about their social contract obligations as they see them, and they should be accountable for them.

Previously I have had positive responses to the concept of both Valueism and Social Contract Accounting from Martin Wolf, Chief Economics Correspondent at the Financial Times; John Elkington who coined the term “triple bottom Line” 26 years ago, suggesting business be run for people, planet and profit.

Additionally, Cambridge University economics professor Ha-Joon Chang said, “What you are proposing through Valueism and Social Contract Accounting is exactly in line with how I think capitalism should be reformed. I think you are absolutely right in saying that we first need to need to think what the firm (of which the corporation is only one form) and the economy are all for”.

Instituting Social Contract Accounting will be a challenge to boards. This is clear from the research by McKinsey & Company that initially led me to question whether firms are being managed to create real value. Their global survey, of directors of large companies, found that only 22 per cent thought the boards they sat on had a full understanding of how the firm creates value, and only 16 per cent thought they had a good understanding of the dynamics of the industry the firm operates in.

Whilst shocking, the true picture is much worse. Every institutional investor and analyst I have spoken to tells me these numbers are very optimistic. They suggest the true percentages are more likely to be in the low single digits in both cases.

More recent research by McKinsey on the topic of “purpose”, a companies “core reason for being”, found that of 1000 US companies surveyed “82 percent affirmed the importance of purpose, but only 42 percent reported that their company’s stated “purpose” had much effect”.

McKinsey concludes this is due to a “purpose gap”, the disconnect “between public perceptions of business and its potential for good, or between employees’ desire for meaning at work versus what they experience”.

In my view a more likely it is the fact their stated purpose is nothing more than meaningless rhetoric in many cases, and their real purpose can only be identified by looking at their actions.

If companies were required to explicitly state what their social contract commitments are, and account for them, I suggest purpose statements might start to mean something. They might be taken more seriously, and they would require real changes, starting with policy changes, which should be driven by the board.

Despite the challenges being purpose-led presents, that developing an explicit social contract would present, and that implementing social contract accounting would present, evidence of the benefits is real.

Research by author and professor Raj Sisodia suggests purpose-led companies significantly outperformed the S&P 500. More than 2,000 academic studies have examined the impact of environmental, social, and governance propositions on equity returns, and 63 percent of them found positive results (versus only 8 percent that were negative).

Are investors aware of these benefits and are they impacting their decisions? In my research to confirm what McKinsey & Company found I discovered most ‘investors’, except perhaps long-term investors, do not even understand the real value drives of the businesses they are investing in. Nor are they interested in them.

One senior policy advisor for a body representing many of the world’s largest institutional investors told me the percentage of ‘investors ‘ able to explain the real drivers of value in the businesses they ‘invest’ in is “probably around 25 per cent”, and the percentage of those who care about such indicators is “certainly in the low single digits”.

As for their opinions about the ability of analysts, upon whom many investors tend to base many of their decisions, the opinions of experts I have spoken to is scathing. And this remains the picture, long after the 2007/8 crisis and the publication of the Kay Review.

My suspicion is that this is very likely to be just as true of ESG investors, but the value of the stocks they invest in may well rise simply because there are so many impact fund managers chasing so few companies to invest in.

You may be wondering how such a system, where “the blind lead the blind”, can sustain itself. Roger Martin, in his book Fixing the Game, hits the nail on the head. He said companies are being run to create stock market value in what he has called the “expectations economy”. Creating real value for customers and other stakeholders, including society, is not their main concern.

The suggestion by Sisodia, that S&P500 companies outperform, seems to contradict the idea investors do not know what drives the value creation potential of a business, and that they do not care. But there is no contradiction if the firms with a purpose create more real value, grow, and perform better, regardless of whether investors recognise and understand the reasons or not.

However, clearly defining a social contracts and using Social Contract Accounting would help investors understand the material factors driving the success of a business, rather than leaving them to try and piece together incoherent bits of information to try and get a required level of clarity. Prof. Baruch Lev of New York Stern university described the ability of investors to get clarity from today’s financial accounting is virtually impossible in “The End of Accounting and a Path Forward for Investors and Managers” (2016).

Social Contract Accounting would also align the interests of business and society to a level that earns public trust, where Corporate Social Responsibility has failed for more than half a century, triple bottom line accounting has failed in a quarter of a century, and Socially Responsible Investing has failed since it was introduced by the Quakers in 1758.

More recent efforts to improve corporate reporting, such as Integrated Reporting established in 2009 by the International Integrated Reporting Council (IRRC) will also fail, because they are focused on reporting, not the fact companies are focused on the expectations economy rather than the real economy in the case of larger businesses — the businesses to which integrated reporting applies.

An explicit social contract and Social Contract Accounting are ways to ensure businesses return to creating real value in the real economy. They will need to understand, and be able to articulate, what value they create, who for, and how they create it. They will need to practice Valueism.

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Paul Barnett

Paul Barnett


Advocating the purpose of all enterprise should be contributions to sustainable widely shared prosperity measured in terms of human flourishing and wellbeing.