King's College London

Hetan Shah is Chief Executive of the British Academy and a Visiting Professor at the Policy Institute, King's College London.

Calls to improve society often focus exclusively on government, or sometimes extend across to civil society. But we have a curious collective blindspot where business is concerned. Most public discussion of the private sector tends to take two forms: it is either vilified or entirely forgotten. When it crops up in public debate, it is often when business has behaved egregiously – think of recent scandals involving Greensill, Wirecard or Southern Water. Otherwise, most people ignore it. But business is a third pillar of society alongside government and civil society, and given the post-pandemic challenges facing us – from inequalities to climate change – we will miss a valuable opportunity if we ignore the positive role that business can play in society.

Taking the long view, business has historically combined purpose with profit. In recent decades this has narrowed, with a focus much more on maximising shorter term shareholder returns. Over four in ten business leaders say that the role of the private sector is to profitably meet needs without profiting from creating problems for people or planet – what we at the British Academy have called “purposeful business”. The UK has adopted legal, regulatory, governance and reporting rules that accommodate purposeful business but do not necessarily encourage them. While this enables innovators to incorporate purpose alongside profit, it does not give them a level playing field. Few companies take up the option that exists within the law to adopt purposes beyond promoting shareholder interests, and there is insufficient appreciation and enforcement of directors’ duties under the law.

The British Academy has conducted a four-year review of the future of the corporation. It has been a major programme of research which has produced 17 academic papers involving more than 40 researchers, engaging over 200 experts in 29 deliberative, evidence-generating roundtables, and convening over 100 stakeholders in eight policy labs. Our final report considers how can we shift from an ecosystem of policies and practices driven almost entirely by financial goals to one focused on purposes that solve problems. We provide a suite of possible reforms which can help support purposeful business, building on what is already working and needs scaling up.

With a supportive legal, regulatory, governance and reporting framework in place, we argue that there are two mechanisms that together are required to deliver coherent reform:

1. Accountability: using the legal, regulatory, governance and reporting framework to hold companies to account for complying with corporate purposes of profitably solving problems of people and planet and not profiting from creating them; and,
2. Implementation: ownership, measurement, finance, innovation and investment through which people harness the potential of markets to deliver profitable solutions which benefit customers, the workforce, investors, communities, society and the environment.

To strengthen accountability for corporate purpose, we recommend that:

• Governments put purpose at the heart of company law and the fiduciary responsibility of directors.
• Regulators are given new powers to hold directors and controlling owners to account for their corporate purposes. Regulators responsible for particular business sectors that provide public functions require utilities, banks, and other licensed companies they oversee to adopt purposes which align with their public interests and engage with their stakeholders about them.
• Companies place purpose at the heart of their annual reporting and demonstrate to their stakeholders how their ownership, governance, strategy, values, cultures, engagement, measurement, incentives, financing and resource allocation deliver it.
• Investors engage with companies about the nature and implementation of their purposes, and evaluate their performance and future prospects against them.

But reforming business involves more than accountability and compliance with law, regulation, governance and reporting. It is also about the values, commitment, culture, and cooperation of people who implement corporate purpose. Strong ownership and inspiring leadership of purpose are crucial in building close relations between institutions and companies to finance entrepreneurship, innovation and investment in purposeful businesses. Such leadership puts purpose at the heart of companies’ governance, measurement, valuations and incentives, and forges common purposes between business and government to solve local, national and global challenges.

To promote more effective implementation of corporate purposes, we recommend that:

• Companies identify long-term committed holders of blocks of their shares. They develop internal values, cultures and systems of measurement and incentives that encourage embedded ownership of purpose throughout their organisations.
• Investors develop the expertise required to support long-term financing of small, local as well as large, global purposeful businesses. They promote measurement and reporting of company purposes and ensure that required systems of data and information are available to evaluate company performance against them.
• Regulators address impediments that may exist to companies having long-term committed shareholders. They encourage international standard setters to promote systems of measurement and accounting for company purposes and ensure that financial reports reflect the costs and profits of delivering them.
• Governments, companies, and non-governmental organisations co-invest in partnerships based on common purpose around tackling issues such as inequality, social exclusion, climate change, biodiversity loss and the future of work.

This is not an academic exercise – the zeitgeist is changing. More than 7 in 10 of the public think that businesses should have a legal responsibility to the planet and people alongside maximising profits. Corporate leaders also support the agenda. Speakers at our report launch included the President of the CBI and the chief executive of the London Stock Exchange. Jonathan Geldart, Director General of the Institute of Directors, noted, “Businesses are increasingly taking a broader view of their purpose so that they serve the interests of all their stakeholders, rather than a sole focus on maximising shareholder value. Our own research of our members has shown that almost half of directors feel that companies should have a stated social purpose to help solve problems in society. This report sets out the practical steps and policies that need to be implemented in order to deliver this.”

The government has been consulting on its white paper around corporate governance and audit with an objective to restore public trust in the way that the UK’s largest companies are run and scrutinised, ensure that the UK’s most significant corporate entities are governed responsibly and keep the UK’s legal frameworks for major businesses at the forefront of international best practice. This provides a real opportunity to create a policy framework that supports and encourages purposeful business, which can work with government and civil society to respond to the challenges of the post-pandemic era.