Beyond Shareholder Wealth – The Hindu BusinessLine
Companies today need a new yardstick to measure societal values in order to evolve a compassionate capitalism
Capitalism must be reformed, say its critics, to enable more equitable, socially responsible and environmentally sustainable economic growth. The engines of free market capitalist growth are limited liability companies owned by investors. For the reform of capitalism, the reform of the legal structures of these companies is essential. To understand why, let’s think about three questions.
1. Why do even good human beings with good values, when they are CEOs or board members, become tacitly complicit in bad corporate actions?
2. Why do even good companies that we admire for their high standards sometimes do bad things?
3. Why can’t companies that are admired for their business ethics create broader movements for change in corporate sector ethics?
The reason for this is that “best managed” companies are evaluated solely from the perspective of investors and stock markets. Every month, it seems, a new scandal erupts at companies with respected people on their boards. Until the fundamental concepts of good management change, capitalism will not change.
The five rungs
Most companies, even those that are well run by stock market metrics, fall low on the corporate responsibility scale. There are five rungs in the ladder. The first rung is accountability to investors and lenders – the realm of finance, business accounting, auditing, corporate law, and stock market regulators. This has so far been the main objective of good corporate governance.
The second rung is accountability to direct participants in business processes for the creation of financial value – customers, employees and suppliers; and the areas of consumer protection, labor law and commercial contracts. Along with the first, second-tier issues are the primary goal of “good business management”.
The third tier is responsibility for the effect of business operations on the physical environment; the field of environmental regulation.
The fourth rung is responsibility for the effect of company products and processes on people’s lives – their health, their education, their values.
The fifth is responsibility for the political health of the societies in which companies operate – human rights, fair democratic practices, etc. This leads to the question of corporate responsibility as citizens in societies. Are they simply takers of society’s permissions or also creators of fair conditions? All companies flounder at this level. Their view is that as long as they abide by the laws of the country in which they are doing business, their conscience is clear. The only influence they want to have over the laws is a selfish concern to make the laws easier for them to do business and make a profit.
The most simplistic interpretation of the idea that business should only be business is that the role of business in society is to manage profitable operations and create value for shareholders. Associated with the ideas of the free market, free enterprise and minimum government, it has become the dominant paradigm since the 1990s. At the same time, another set of ideas has gained great strength in global governance.
They are ideas about the governance of the entire global system of which each – individuals, companies and nations – is only a small part. These ideas were translated into the Sustainable Development Goals in 2015.
Awareness is beginning to dawn that everyone, including businesses, must act to improve the “commons” they all share – the natural environment, as well as the quality of society, including human rights. man and justice.
Corporations, which are legal fictions, have acquired the rights of citizens in society: property rights, rights to the protection of the law, rights to sue the government and the like. However, they have far greater resources to hire lawyers and lobby governments to promote their interests. Some companies are financially larger than many countries. All citizens are supposed to be equal before the law; but, like the pigs in Orwell’s dystopian novel farm animal corporations have become more equal in reality than ordinary humans.
With rights, shouldn’t companies have the responsibility, like any citizen, to build a good society?
Leaders of successful companies sometimes speak eloquently about how they motivate their employees, even enabling employees to achieve their life goals. Lofty statements indeed; and hypocritical because corporate incentive systems are designed to reward contributions to a company’s efficiency, economic growth and profits.
What about business leaders? What is the purpose of their life? To make more money for themselves and their investors? Or make the world a better place for everyone? Companies need new dashboards to measure business value. And business leaders need new yardsticks to measure societal values they don’t think about, and often destroy, in their drive to create more shareholder value.
The idea of a socially responsible business has degenerated into CSR and philanthropy attached alongside a machine that generates profits regardless of the impacts of the company’s products and operations on human health and the environment. natural. It is much easier to sign a check than to raise awareness and change behavior. The business of business remains the fact of making money. It’s no wonder that most reporting on corporate CSR activities is seen as a superficial “green wash”.
If CEOs want to change their company’s DNA, conform to the ideals of ‘conscious’ capitalism or ‘green’ capitalism, they can’t go too far because they and their boards are legally bound to be unaccountable. than to their shareholders. Thus, corporate responsibility to society remains at the bottom rung of the ladder. Even the leaders of large corporations like Tatas and Unilever operate within societal structures. Until these structures change, they are constrained to do what their hearts and personal ethics truly demand.
Therefore, the legally mandated corporate structures must change to allow companies to unleash the compassion of their leaders and employees. Companies’ licenses to operate should be linked to their performance at all levels of the business responsibility ladder. All companies must be accountable to society as rigorously as they are accountable to their shareholders. This is essential for a transformed and compassionate capitalism, and for humanity to achieve the SDGs faster.
The author is a former member of the Planning Commission and the author of Transforming Capitalism: Business Leadership to Improve the World for Everyone. (Through the billion press)
March 22, 2022