On “Purposeful Business”: why the British Academy is mistaken
Whilst nobody would claim that everything is great in the business world, the British Academy has greatly missed the mark. Of course, we can find some interesting ideas in the manifesto. For example, as The Economist writes, the establishment of some minimum common standards for measuring the social impact of business practices would be an improvement over the current mix of competing (and often vague) measures of how organisations fare on environmental, social and governance issues. Also, ideas about cooperation, collaboration and partnerships between the private and public sector in relation to large-scale and long-term investments may be a sensible call, which could be discussed further.
However, even these more practical ideas leave one wondering how feasible they really are. For example, let’s take the idea that corporate investment should be made in partnership with private, public and not-for-profit organisations that contribute towards the fulfilment of “corporate purposes”, and that new regulation should be introduced to better align the different stakeholders around the same purpose. Of course, “partnership” and “cooperation” always sound lovely, in the abstract. You’d be hard-pressed to find anyone who is opposed to partnership, or to cooperation. But as is usually the case will well-meaning platitudes, it is not so clear what this means in practice. As the now voluminous literature on inter-organisational relationships tells us, when trying to collaborate across different sectors, managing competing aims is actually quite complicated, even when these aims are mandated by law or imposed by external pressure. It also raises important questions about the criteria that are going to be used to choose the companies or sectors that need to adhere to the new rules, the intrusiveness of these new rules, the trade-offs that decisionmakers will need to manage and the incentives needed to achieve these new mandated aims. The Academy’s manifesto does not provide much of an answer to these fundamental issues.
The Academy’s 2019 manifesto also makes the claim that “ownership does not relate to the assets of a firm but to its purposes”, and seems to call for the adoption of different accountability mechanisms, such us Germany’s and Austria’s “two-tier board systems”. The claim about ownership is controversial, to say the least. Does it mean that organisational strategies which do not take “purpose” into account and try to maximise profits become illegal? Would this be enforced by a “Purposeful Business Police”? What if different “purposes” collide? Either way, the two-tier board systems is not the right answer to current problems. In fact, if we look at two of the most recent business scandals (involving two of Germany’s global titans, Deutsche Bank and Volkswagen), we can see how the two-tier board system (particularly the upper-tier supervisory board and how it can easily become a mess) is also fraught with flaws and shortcomings.
Essentially, the British Academy has just rehashed the old argument for “Corporate Social Responsibility” (CSR), and for replacing “shareholder value” with “stakeholder value”. Their proposals suffer from the same (now well-rehearsed) problems as earlier versions of CSR advocacy. Contrary to what the Academy suggests, businesses should be free to choose which path to follow. Leaving firms free to choose between profit maximisation, “purpose”, or both (if they are able to balance multiple aims) does absolutely not mean that most firms will forget about “purpose”. This more Hayekian view of the firm allows for businesses to make choices, to make mistakes, and to be judged by society for the choices they make. This will involve judgements about the price and quality of the product itself, but also about the firm’s wider conduct, and whether their behaviour is deemed “ethical”. This view of the firm seems, unfortunately, to sit on the opposite side of the Academy’s.
By choosing to maximise profits, firms can still be an incredibly powerful tool for solving our problems in the world. And this – despite some scandals, which often are created in the first place by the wrong incentives given to firms – is what has happened until now. It is the profit motive that has made it possible for hundreds of millions of people to escape absolute poverty and for countries to become richer. Also, as Austrian economist Joseph Schumpeter suggested in his innovation theory of profit, the profit motive is the best form of reward for any entrepreneur who wants to innovate. And it is usually through innovation and the search for new ways of making money that global challenges such as hunger, poverty, sustainable city development, more affordable and cleaner energy can ultimately be better achieved.
The idea that “purpose” should come first seems to be an unjustifiable infringement of business freedom, which over time will weaken the profit motive, will further hinder innovation (which is already being limited by excessive regulations) and will reduce the capacity of firms to solve the world’s problems. Hopefully, for the benefit of society, the long wish-list of “should do” promoted by the British Academy will simply remain a brainstorming academy exercise.
Recommended further reading:
- ‘Corporate Social responsibility‘, Economic Affairs, Vol. 29.4
- ‘Corporate Governance: Accountability in the Marketplace‘ by Elaine Sternberg
- ‘Misguided Virtue. False Notions of Corporate Social Responsibility‘ by David Henderson
Giovanni Caccavello is a PhD student at Strathclyde Business School, Glasgow. He previously worked at EPICENTER.