Why we need to re-shape business for the 21st century

The bond between the corporation and its public purpose has waxed and waned since corporations were first established nearly two millennia ago. This has happened in response to socio-economic and geopolitical shifts, but the corporation’s foundations remained embedded in delivering public purposes alongside commercial functions. It is only over the last half-century that the sharp intensification of the profit motive has occurred. It came as markets for corporate control emerged to fill the vacuum in corporate governance created by growing dispersion of ownership.

In 1962, Milton Friedman set out a framework for business in which he described the social responsibility of businesses as being to increase profits so long as they stay within the rules of the game. It was a powerful and influential proposition that established the conventional framework for business around the world. However, it has serious deficiencies and is no longer tenable as a framework for business in the 21st century. It has been the source of growing disaffection with business, its environmental, social and political problems, and the erosion of trust in it. Those problems will intensify in the future as technological advances risk exacerbating social detriments as well as benefits of corporations, and public policy responses lag increasingly far behind innovations.

There is an urgent need for reform.

A new approach to business: purpose, trustworthiness and culture

In response, the British Academy has brought together leading academics and business stakeholders under an ambitious programme to redefine the future of business in the 21st century. The programme is grounded in an academic research and steered by practical insights from those in the business community. It began in 2016 when a Steering Group and a Corporate Advisory Group of business leaders were established to advise the programme. A set of interviews with business leaders was commissioned and published as “The Voice of Business” in 2017 and this, together with a series of events, assisted in the design of the phase one research around ten specific themes: history, purpose, trust, culture, technology, law, regulation and taxation, corporate governance, ownership, investment and social benefits. Thirteen groups of academics were then commissioned to explore these themes drawing on the best available existing evidence. They reviewed existing literatures, analysed them and developed new thinking on the themes. The thirteen papers are listed at the end of the report and many of them will be published in a special edition of the Journal of the British Academy. This report collects the findings together in a single narrative and draws out initial conclusions and policy implications which will inform the next stage of the programme.

What the research and the subsequent synthesis has found is that the proposition that the purpose of business is to increase its profit, with the rules of the game preventing excesses, is not sufficient for the 21st century. The new framework for the corporation we present in this report calls for a reinterpretation and integration of three principles: a redefining of corporate purpose that is distinct from shareholder returns, an establishment of trustworthiness founded on norms of integrity, and the embedding of a culture in organisations that enables both.

Corporate purposes are the reasons a corporation is created and exists, what it seeks to do and what it aspires to become. They reflect the contribution it wishes to make in furthering the interests of its customers, communities and societies and they are the basis on which relations of trust are created in business. They are distinct from the consequential implications for the corporation’s profitability and shareholder returns.

All corporate purposes should be intrinsic in the sense that they are core to the business and not just driven by shareholder interests. 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.

Trust relations in business are created on the basis of corporate purposes. When corporations commit to corporate purposes, they commit to the various parties that are involved in their delivery and vice-versa. This creates reciprocal benefits for the firm, its stakeholders and society at large.

The trustworthiness of an organisation is an attribute dependent on cultural norms that promote high levels of integrity. It is reliant on clearly articulated values that are adopted consistently throughout the organisation. Ethical motivations of owners, boards, managers and employees are necessary to build trustworthiness in relation to customers and other stakeholders. There is a particular duty on corporations to demonstrate trustworthiness where there is a dependency of others on it, or incapacity to avoid the consequences of its violation.

Trustworthy behaviour and corporate purpose must be enabled by a culture of honesty, integrity and other-regarding interests within the firm. It should be promoted by the leadership and embedded consistently throughout the corporation. It may be supported by external regulatory requirements but the ability of external parties to provide effective regulation is being eroded, particularly by the accelerating pace of technological advances.

Five levers to shift policy and business practice

We examine five levers that government and business may use to bring about the shift towards the new framework: ownership, corporate governance, regulation, taxation and investment.

1. Ownership

Owners of corporations have a profound influence on the promotion of corporate purposes. However, they have not exercised that influence sufficiently. The ownership of corporations is currently associated with shareholdings and the attribution of shareholder rights with property rights of shareholdings. Instead, ownership should primarily be related to the formulation and implementation of corporate purposes.

2. Governance

Corporate governance is at present primarily concerned with aligning managerial interests with those of shareholders. But it should be recognised as the means by which corporate purposes are implemented by management in the organisation. The particular form that corporate governance takes will therefore be specific to the nature of the firm’s corporate purposes and the particular requirements to deliver them.

3. Regulation

The notion that regulation and taxation are sufficient to align the interests of business with society is no longer tenable. Technological advances are lengthening the lag of regulation behind the innovatory processes and products that corporations are adopting. This is intensifying the failure of policy to correct the detriments created by corporations motivated predominantly by a profit purpose. Instead regulation should be seeking to align corporate with public purposes in those organisations and circumstances where it is most relevant because of the social function performed by corporations.

4. Taxation

Globalisation is intensifying the inability of nation states to use corporate taxation as a source of public revenue. Attempts to rectify this through alterations to the structure of corporate taxation have not been successful to date. This reflects a failure of corporations to recognise and respond to their dependence on societies and nation states through including payment of fair shares of taxes in their corporate purposes.

5. Investment

The provision of large scale, long-term investment involves the participation of government as well as the private sector. The performance of privatisations and partnerships between the public and private sector in their delivery has often been disappointing. It is in precisely these areas where corporations are performing significant public and social functions that corporate purposes should be aligned with public purposes by incorporating the latter in the charters and articles of association of the former.

The five policy levers of ownership, governance, regulation, taxation and investment offer the opportunity of reconceptualising corporations of the 21st century within a framework of defined corporate purposes and a commitment to trustworthiness enabled by corporate culture.

Download the full report Reforming business for the 21st century: a framework for the future of the corporation.

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