A framework for business in the 21st century
The synthesis of the ten themes covered by our research has brought out three principles which could help in the development of a new framework for the future of the corporation: corporate purpose, trust and culture. A corporation must have a set of clearly defined and aligned purposes — the goals it actively pursues and its contributions to societal goals or public interests. These should be complemented by an inherent commitment to trustworthiness and supported by an enabling organisational culture. The key features of this framework are that it integrates these three principles and requires corporations to take account of a range of stakeholders.
Defining and aligning a corporation’s purposes
Corporate purpose is the reason a corporation is created and exists, what it seeks to do and what it aspires to become.[1] It reflects the contribution it wishes to make in furthering the interests of its customers, communities and societies and is the basis on which relations of trust are created in business.[2]
Corporate purpose is distinct from the consequential implications for the corporation’s profitability and shareholder returns[3]. The purpose of corporations is not to produce profits. The purpose of corporations is to produce profitable solutions for the problems of people and planet. In the process it produces profits, but profits are not per se the purpose of corporations.
That distinction is fundamental and its confusion in the Friedman Doctrine has been the source of many of the defects of current business practice and policy.[4] All corporate purposes should be intrinsic in the sense that they are core to the businesses and not just driven by shareholder interests.
On the other side of the coin, corporate purpose is sometimes automatically equated with public purpose — the revealed preferences of societies and the public.[5] There are some circumstances in which the purposes of corporations should indeed be equated with those of the public interest. For example, a close alignment and observance of public interests in corporate purpose is particularly relevant to some companies that perform important social functions, such as utilities. However, other corporations should be able to pursue purposes that are not necessarily prescribed by public preferences.
The importance of corporate purpose derives from the fact that it is the basis on which relations of trust are created in business.[6] When corporations commit to a purpose, they commit to the various parties that are involved in the delivery of it and, in return, the parties to the firm commit to the attainment of the corporate purpose. This creates reciprocal benefits for the firm, its stakeholders and society at large.[7] It promotes more loyal customers, more engaged employees, more reliable suppliers, more supportive communities and more participative investors. In other words it raises revenue and lowers costs, thereby benefiting firms as well as their associated parties.
There are two reasons why societies become entitled to make claims on corporations and their purpose, both based on the principle of reciprocity:[8]
1. Corporations rely on society’s legal, social and political systems for adjudication and protection. They depend on access to infrastructure, health, education and other public resources, and they are a constant source of social and economic disruption.
2. While efficiency and market competition are often cited as forces that might steer firms to promote public purposes, pervasive market failures suggest public purpose cannot be left entirely to the competitive forces guiding profit-seeking corporations. A web of market imperfections obstructs that goal.
Defining a corporation’s public purposes quickly raises difficult political questions. Public purposes cannot be determined by the corporation alone due to limitations in the ability of corporate governance systems to balance and judge competing stakeholder interests, and the fact that corporations interact within political and social structures. Developing robust systems and approaches for balancing these competing interests will require a significant effort on the part of business leaders and policy makers.
Another challenge is the meaningful measurement of corporate and social purpose. Most current measures of corporate purpose are accounting measures of material and financial capital and profit. Public purposes also require holistic action-guiding measures for environmental, social and governance impacts. However, none are yet satisfactory, and measurement remains the most important condition for creating a working approach to managing and delivering aligned purposes.
Public purposes are particularly relevant to corporations that perform public functions. These include utilities, corporations with significant market power, private infrastructure providers, corporate partners in private finance initiatives and public private partnerships, and banks. There is a particularly strong case for aligning the purposes of these corporations with their public purposes. Elsewhere such alignments should be restricted to those aspects of corporate activities that raise particular public interests, in relation to, for example, corporate taxation, human rights and corruption.
Embedding a commitment to trustworthiness
Most existing business theories focus on the importance of respecting contractual obligations, but trust and trustworthiness are as important as legal obligations.[9] All disciplines that interact with business — including law, finance, economics, sociology and psychology — recognise the importance of trust.[10] Trust embodies a set of values, including competency, reciprocity, consistency and dignity that reduce risk, bind parties together and build value.[11] In a global, digitally-connected society where reputation is built via random networks over which corporations have little or no control, the successful corporation of the future will be built on trustworthiness, defined as “a robust disposition to fulfil given commitments”[12].
Our research tests, examines and distinguishes between a number of circumstances and implications of possible public policies to increase the trustworthiness of corporations[13]. One conclusion is that the overall social benefits of policies that aim to ensure corporate trustworthiness will not always outweigh their social costs. If everyone had a moral right to deal with a trustworthy corporation, then that right would apply regardless of any utilitarian cost-benefit analysis. An alternative is to encourage stakeholders to ‘cost in’ any possible harms arising from breach of trust and adjust their terms of trade accordingly.
Furthermore, our research argues that only under certain circumstances should there be an absolute right to trustworthiness from a corporation.[14] There is a particular duty on corporations to demonstrate trustworthiness where there is a dependency of others on it, incapacity to avoid the consequences of its violation, or subordination of the interests of one party to those of another. Elsewhere, well-founded trust and trustworthiness are valuable. They promote the social efficiency of capitalism, decrease its risks, allow for respect, validate reciprocity and safeguard dignity.[15]
Building trustworthiness through the distribution of corporate duties is desirable and costly, and this responsibility can and should be encouraged by a range of internal and external measures. Particularly important in this regard is the culture of a corporation.
An enabling culture
There is consensus on the importance of corporate culture and its integrative and holistic essence, but little on how it is defined, let alone measured and influenced.[16] The concept of corporate culture derives from anthropological and sociological studies of the 1970s and 1980s. Most definitions centre on similar ideas of organisational culture as a social phenomenon, concerning mental and physical values, and relating to the facilitating or hindering of certain kinds of action. Culture is a multi-layered framework that can be developed to different degrees in different sectors and industries as well as in different units within a firm.
Culture is vital as a facilitator of strategy and is particularly important when implementing corporate changes, notably technological change.[17] Several studies have demonstrated a clear correlation between negative business performance and cultural obstacles.[18] A weak or damaging culture is recognised as a cause of excessive risk aversion, thinking in silos instead of multilaterally, and linear rather than networked transfer of information. But, despite this, corporate culture is still seen as a ‘soft’ resource, elusive to define and difficult to measure and manage. The proliferation of measurement frameworks for organisational culture, using a mix of qualitative and quantitative techniques is not assisting efforts to clarify and apply the concept.[19]
A key aspect of culture is its role in promoting ethical standards of integrity and honesty in corporations as reflected in their values and codes of conduct and in particular, “other-” as against “self-regarding” or selfish interests of their employees.[20] Those values must be respected and adopted throughout the corporation to avoid wide disparities between a corporation’s declared culture and the actual norms and expectations operating within the organisation. False culture can block change, defeat governance and provoke financial instability. One source suggests culture accounts for 20–30% of the differential in relative corporate performance. [21]
To be more than empty words, culture needs to be embedded in organisational practices.[22] There are a number of ways of doing this, most of which rely on the organisation’s leaders to demonstrate the core values and strategic priorities of the culture, ensuring flat hierarchies and avoiding micro-management. The style and delivery of leadership and the life-cycle of the corporation itself will influence corporate culture and it is constantly changing as, for example, some workers choose flexible and independent work in preference to linear job-for-life employment that corporations once championed. While culture usually evolves organically, there are circumstances where a corporation might actively change its own culture: in response to external or internal targets and pressures or radical changes in management.[23]
Together, the three principles of defined corporate purposes, trustworthiness of corporations and enabling corporate cultures offer the potential to reconceptualise corporations as humane and productive and address the challenges, needs and opportunities of society in the 21st century. But how should we bring them about?
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[1] This section primarily references Hsieh, N., Meyer, M., Rodin, D. and Van’t Klooster, J. (2018) The Social Purpose of Corporations: A Literature Review and Research Agenda. British Academy (FOTC Paper 2). Any assertions or findings presented which are more specific are referenced separately.
[2] Kirby, N., Kirton, A., Crean, A. (2018) Do Corporations have a duty to be trustworthy? British Academy (FOTC Paper 3)
[3] Hsieh, N., Meyer, M., Rodin, D. and Van’t Klooster, J. (2018) The Social Purpose of Corporations: A Literature Review and Research Agenda. British Academy (FOTC Paper 2)
[4] Buckley, P. (2018) Can Corporations contribute directly to society or only through regulated behaviour? British Academy (FOTC Paper 13)
[5] Hsieh, N., Meyer, M., Rodin, D. and Van’t Klooster, J. (2018) The Social Purpose of Corporations: A Literature Review and Research Agenda. British Academy (FOTC Paper 2)
[6] Kirby, N., Kirton, A., Crean, A. (2018) Do Corporations have a duty to be trustworthy? British Academy (FOTC Paper 3)
[7] Kirby, N., Kirton, A., Crean, A. (2018) Do Corporations have a duty to be trustworthy? British Academy (FOTC Paper 3)
[8] Hsieh, N., Lange, B., Rodin, D., Wolf-Bauwens M. L. A. (2018) Getting Clear on Corporate Culture. British Academy (FOTC Paper 5)
[9] This section primarily references Kirby, N., Kirton, A., Crean, A. (2018) Do Corporations have a duty to be trustworthy? British Academy (FOTC Paper 3). Any assertions or findings presented which are more specific are referenced separately.
[10] Kirby, N., Kirton, A., Crean, A. (2018) Do Corporations have a duty to be trustworthy? British Academy (FOTC Paper 3) p29
[11] Ibid.
[12] Ibid.
[13] Ibid. p41
[14] Ibid.
[15] Ibid. P64
[16] This section primarily references Hsieh, N., Lange, B., Rodin, D., Wolf-Bauwens M. L. A. (2018) Getting Clear on Corporate Culture. British Academy (FOTC Paper 5). Any assertions or findings presented which are more specific are referenced separately.
[17] Ibid. p11
[18] For example, Goran, J, Srinivasan, R. & LaBerge, L. (2017) Culture for a digital age. McKinsey & Company: McKinsey Quarterly, July.
[19] For a detailed review of frameworks, see Hsieh, N., Lange, B., Rodin, D., Wolf-Bauwens M. L. A. (2018) Getting Clear on Corporate Culture. British Academy (FOTC Paper 5) p16–20
[20] Crean, A., Gold, N., Vines, D., Williamson, A. (2018) Restoring Trust in Financial Services: Governance, Norms and Behaviour. British Academy (FOTC Paper 4)
[21] Hsieh, N., Lange, B., Rodin, D., Wolf-Bauwens M. L. A. (2018) Getting Clear on Corporate Culture. British Academy (FOTC Paper 5) p12
[22] Coleman, J. (2013) Six Components of a Great Corporate Culture. Boston: Harvard Business Review. 2- 4.
[23] Hsieh, N., Lange, B., Rodin, D., Wolf-Bauwens M. L. A. (2018) Getting Clear on Corporate Culture. British Academy (FOTC Paper 5) p27
