What do businesses owe to society?
Is it possible to expect companies to behave ethically and still satisfy all stakeholders?
By Justin King
Justin King is Vice Chairman at Terra Firma, a Non-Executive Director at Marks & Spencer and Public Interest Body member at PwC
I believe that we are today seeing the most fundamental reassessment of the role business plays in society since the Victorian era. Many of the UK’s most well-known and respected brands were established at that time. Retailers such as Sainsbury’s and Marks & Spencer, founded in London and Leeds respectively, set out their stall (literally) to act as trusted intermediaries to consumers who were no longer able to buy direct from farmers or producers.
During the 19th century much of the food consumed, particularly by the poor, was adulterated or contaminated, resulting in a series of scandals and eventually new legislation. Brands such as Cadbury and Rowntree’s were founded on the back of the increasing demand for ‘pure’ chocolate, putting the founder’s name on the tin (so to speak) to provide reassurance as to product provenance.
We remember many of these companies for their long and proud heritage of what we now call corporate responsibility. Bournville, the ‘factory in a garden’, is testament to the Cadbury brothers’ concern for their employees, and the Joseph Rowntree Charitable Trust continues to support pressing social issues to this day. It is telling that, when such brands are taken over by larger multinationals, they go to great lengths to reassure the public that they will be careful custodians of this proud heritage.
Other leading businesses and their founders from that era are remembered for their endowment of the arts, such as Henry Tate or Samuel Courtauld, or the sciences, such as Henry Wellcome. Sometimes this generosity may have been born of enlightened self-interest, but one can argue that the subsequent good such projects did was a net gain for society.
Titus Salt, the founder of Salts Mill in Bradford, may have been motivated to create Saltaire to enhance his workers’ productivity, but the ensuing improvement in health and quality of life showed how capitalism and business could lead the way in bettering society.
Whatever your view of these industrialists’ motivations, it is hard to argue that this was not an extraordinary period. Business was generating wealth and shaping society far beyond just creating jobs and paying taxes. In my opinion, the 100 years or so since has not bettered this era.
So how is it that, after this period of generous business philanthropy, we find ourselves still facing so many questions about the compact between business and society today?
I, and many like me, believe that the capitalist system, and successful commerce, has been the generator of incredible feats and inventions worldwide. It has been the bedrock of the UK and many institutions and services we take for granted.
The National Health Service, our social security system and close to full employment are all arguments for the success of business and capitalism. Without the societal wealth that comes from successful commerce, we could not afford these elements of our social compact. Yet the financial crash of 2008 and subsequent austerity, Brexit, and the continuing public narrative about ‘fat cats’ and other business practices that are seen as unfair mean that this argument does not hold sway with the majority of the population.
It is easy to see the roots of this dissatisfaction in the financial crisis. The narrative that the rich survived, even thrived, in a crisis of their own creation and that it is the many — the middle and working classes — have paid the price for this excess is widely accepted.
It is a common occurrence to see businesses that have generously awarded their owners and managers go on to shed jobs as part of cost-cutting exercises or duck out of their obligations to retired workers.
The perception is that business is only fair to those it can profit from. And the advent of tech ‘unicorns’, which achieve fabulous wealth in a very short period of time, in many ways further illustrates the perceived business. These companies generate substantial value but very few see these rewards. Often this wealth is achieved through practices in areas such as data and tax that are increasingly seen as unfair.
No doubt these, and many other examples, played and continue to play their part in the low regard in which businesses and business people are held by much of the general public.
The rise of responsible governance?
But I see a deeper, more long-standing issue. For my entire 35 years in business I have observed the letters CSR (corporate social responsibility), and more recently ESG (environmental, social and governance), and wondered why it is that we in business feel the need to label these principles as if they are somewhat outwith the core activity and purpose of business.
When I was at M&S in the early 2000s, the mantra of “healthy back streets equalling healthy high streets” was deeply ingrained in the way the company did business. I had left by the time ‘Plan A’ — Marks & Spencer’s sustainability programme, which aims to turn the company into a zero-waste business and reduce its emissions by 80% — was launched, but it has rightly been hailed by many as one of the most comprehensive articulations of a business’s wider compact with society.
Business is, and must be, about competition, about winners and losers, about some businesses thriving, some surviving and some ceasing to exist
However, although M&S’s actions are highly laudable, it cannot be ignored that over the past 15 years or so the business’s primary responsibility to its shareholders has not been fulfilled. Having recently rejoined the board as a non-executive, it is hard to argue against that. But I believe focusing on this confuses the issue. A different and more comprehensive compact with the community you serve, and from whom you derive your ability to make profit, is necessary but clearly not always sufficient for a business to thrive. It must also do a great job for its shareholders: this will always remain an integral part of the compact.
We must remember too that consumers, who are also voters, must play their part in this change. Their behaviour is not necessarily always consistent. When I have done talks on business ethics I hear repeated outrage about the behaviour of international corporations on tax, yet when I ask for a show of hands of those prepared to pay a tradesman in cash, for a discount, many hands are in the air.
This breakdown between business and society has been coming for a long time, but it is increasingly finding its voice. This has manifested itself in legislation — vast swathes of it in recent years. All of it is aimed, I would suggest, at curbing what are seen as the excesses of bad behaviour in business, and much of it is concerned with the idea that fairness must be at the forefront of our thinking.
Business is, and must be, about competition, about winners and losers, about some businesses thriving, some surviving and some ceasing to exist. Much of what flows from this will be seen as unfair by those who are affected. I have worked most of my life in retail and today one can hardly dispute that our so-called high street is undergoing profound change. Whatever the cause of this, it is never going to feel fair if it is your job that has been lost. I believe that fairness should be part of our lexicon, but it cannot be the core objective, as many seem to think it should. Competition is at least as powerful and positive a force as collaboration in creating public good. However, business will always be inherently unfair in the eyes of many.
Developing strong business values
So what should businesses do? I admit that I am sceptical about many companies’ recent adoption of CSR and ESG guidelines — in many cases, I believe this is little more than window dressing.
However, used in a deep and integrated way, these principles can form the real basis for a different kind of business alongside a transparent, explicitly stated purpose. To be clear, this cannot be simply to maximise shareholder value. That should be the outcome of a business with clear purpose.
Businesses should have strong values, supported and reinstated from the top down. At Sainsbury’s one of our values was “respect for the individual” and as a result I would often receive letters from colleagues saying in effect, ‘How can this be a value if this is how my manager treats me?’ It became a framework to govern behaviour and a mirror for those in leadership positions.
In our information age it has never been easier to share the purpose and values of a business with every part of the community. When I am researching a company, it is always this part of the website or annual report that I turn to first. I want to see if the business understands the community that it serves and professes to be a vital part of, and how it intends to do business in a values-led and purposeful way. If I cannot see that, I do not even turn to the financial section.
If the business is consumer-facing, I want to see this come alive in every aspect of its communications about itself. To be proud of the fact that it is doing business in a different way. After all, if you do not share your values with customers, they cannot be expected to give you the vote of support that ultimately matters: their wallet.
When advising businesses on how to use these challenges to shape their future, I tell them: always start with your customer. Ask them what they expect from you and how you currently measure up.
It follows that you must do the same with your colleagues (or employees). They serve your customers and are closer to the ‘coal face’. Are you truly able to see the business through their eyes? Do they share fairly in the success of the business? Are they properly informed on the decisions that the leadership is making?
To do this well, almost all businesses need a major reset of their communication. Two ears, one mouth, as someone once said. As part of this, you must have processes through which colleagues can challenge management. The current debate is around employee directors; but I think that it needs to be much more granular and day-to-day than that.
The final area business should focus on is consistency. Is everything that you do consistent with the values and behaviours that you espouse? It amazes me how often businesses fall at this hurdle. And yet for me, it is the keystone for strong and sustainable change.
Businesses must respond to the challenges that we now face. To show that they do indeed understand that their permission to operate, to make profit, comes only with the consent of society. If they continue to behave in a way that goes against that core truth, then we will continue to see society turn against business. But if business embraces this moment, and reshapes itself to better serve society, then perhaps in 100 years this period will be seen as the moment when capitalism found a new, fairer way of doing business. One that will sustain us well into the 22nd century.
This article first appeared in the RSA Journal — Issue 1 2019