Mark Florman is a co-founder of B-Corps UK, the Centre for Social Justice and the Early Intervention Foundation.
Pre-Second World War, society – including business – did more than the State to provide a safety net for its inhabitants. The post-war consensus changed this, and the State assumed more responsibility. Business has since been left with a narrow focus on profits, failing to do enough to contribute, outside of the basic employment contract, to the communities in which it operates. It needs to do more.
Tony Blair once famously outlined a vision for a ‘stakeholder economy’ in which ‘opportunity is available to all, advancement is through merit, and from which no group or class is set apart or excluded’. These are noble aims that few could disagree with, but how do we get there?
As the Prime Minister lays the groundwork for more state intervention in the economy, we must still recognize the limits of state intervention. But by allowing business to play a bigger role in our communities, and take on more responsibility for their social footprint as well as their economic one, we can strike a balance, since this would mean extending social accountability from the limiting sphere of the state to the wider realm of business – producing stronger communities, higher and longer-term returns and sustainable growth.
To say so is neither to suggest some privatisation of civic life nor to offer a panglossian view of what business can do. Rather, it is to propose using the tools that government has at its disposal to enable and encourage businesses to take on more responsibility.
Theresa May is rightly concerned about executive pay and the difference between the highest and the lowest paid workers. But to take this approach alone would be limiting, and would stop well short of reinventing the role of the company in our political economy. Put simply, we need to measure businesses’ impact on the communities in which they operate, instead of just what their return on investment is. Companies have traditionally tried to demonstrate community spirit by trumpeting their so called ‘Corporate Social Responsibility’. This is not and never was fit for purpose, or an accurate measure of what damage or indeed benefit companies make on their environment and the people who live and work in it.
So a new benchmark is required that helps businesses to benefit from their social contribution – outside of a pure for-profit framework – by properly capturing it in a way that can then be shared with investors. To this end, the External Rate of Return (ERR) should be widely embraced. This new metric, designed in collaboration with the London School of Economics, allows all businesses of all types to properly capture, measure and publicly share their contribution to the economy, jobs, employee skills, IP creation, the sustainability of their supply chains and their impact on the environment.
Reporting of the metric is organised across five vertical themes: company, suppliers, customers, society and environment. Investors, consumers, employees, media and government can then use this information to better hold companies to account and thereby improve corporate behaviour, but as importantly, accurately capture the contribution they already make. These are more profound and impactful measures than how much the Chief Executive takes home.
A second approach is to allow businesses to incorporate as ‘Benefit Corporations’. In this reputation-driven, increasingly transparent world, some businesses are already realising that a profound and lasting commitment to their community is not only the right thing to do, but will also lead to higher returns and sustainable growth.
At the vanguard of this movement is the Benefit Company, which champions a stakeholder alternative to shareholder primacy, meaning the interests of all of the groups that a business interacts with are put alongside shareholders. Benefit Company laws have now been passed in 32 US jurisdictions and in Italy, with many other states and countries set to follow.
The forthcoming consultation by theGovernment on corporate governance should include legislation to allow the creation of these companies, so that those companies who want to incorporate in this way can do so, as they pursue growth and innovation as well as developing sustainable communities along the way. As we look to the future of Britain, we must look beyond the smaller, shorter term pressures on governance. If we don’t bring business in, very directly, to the building of sustainable economies and communities, government will face an impossible task – one that the State simply cannot manage alone.