Business doesn’t need a ‘social purpose’ revolution
THERE is no shortage of candidates for the title of the most dangerous business idea of the moment. Management-by-algorithm may remove what humanity there is left in the corporate world. The office-less future may dissolve workers into angst-ridden atoms. I want to suggest a less obvious contender for the title: “social purpose.”
The idea of social purpose can be heard wherever high-minded people gather to talk about business. In America, BlackRock, Inc.’s CEO Larry Fink argues that companies should have a “social purpose beyond financial performance,” and that this purpose should involve a “positive contribution to society.” In France, the 2019 PACTE Act gives companies more freedom to pursue social as well as profit-maximizing purposes. Globally, almost every management consultancy or accountancy worthy of the name has a practice devoted to the promotion of the p-word.
Yet the clamor for social purpose may be heard today most loudly in Britain, the country that invented the limited liability company. The British Academy, a club of prominent academics, recently concluded a four-year project on the future of the corporation with a tortuously alliterative definition of the purpose of business: “creating profitable solutions for problems of people and planet, and not profiting from creating problems.” More than 900 British businesses, from local firms to high-street brands, have jumped on the “purpose” bandwagon.”
It’s tempting to dismiss the academy’s work as yet more well-meaning guff, up there with mission statements and “we are the world” advertisements. What does it mean for a corporation, as opposed to an individual, to have a social purpose? And what is the distinction between a business purpose and a social purpose? The French defense and technology company Thales SA spent six months working on a statement of its corporate purpose, consulting more than half its 86,000 workforce, only to come up with “building a future we can all trust.” Terry Smith, the boss of the £29-billion Fundsmith Equity Fund, is so sick of Unilever Plc’s habit of dolloping the term on everything that it produces that he exclaimed, in a recent letter to investors, that “a company which feels it has to define the purpose of Hellmann’s mayonnaise has, in our view, clearly lost the plot.”
There is undoubtedly lots of verbiage and virtue signaling going on here. But so is something much more dangerous: The people at the heart of the social-purpose movement want to reprogram corporations to solve social problems that governments and voluntary organizations have proved incapable of solving. Corporate activists have drafted a Better Business Act to update the 2006 Companies Act and put “social purpose” at the heart of British law. The British Academy has provided a blueprint for a new corporate regime.
Directors will be held to account for reaching social purposes rather than financial goals. Shareholders will have a duty to advance corporate purpose as well as their right to derive financial benefit from ownership. Auditing committees, consisting of both insiders and outsiders, will hold companies to account for their impact on “people and planet” equipped with new measurement systems and the ability to deprive the business of its corporate charter. Colin Mayer, the founding director of Oxford’s Said Business School and the leading guru of the movement, lists as examples of “social purpose” tackling inequality, social exclusion, climate change, biodiversity loss, and the future of work.
To realize just how radical this is you need to grasp two things. The first is that the purpose movement doesn’t want to broaden the range of options available to business. There is nothing in current corporate law to prevent companies from pursuing “social purpose” if they so wish. Managers can emphasize the rights of stakeholders rather than shareholders, as Unilever does with so much preening; or they can turn their companies into “B” or benefit corporations that make an explicit commitment to put social and environmental concerns on an equal footing with financial ones; or they can straddle the divide: household names such as Waitrose, Ocado, and Boots have created online “B corps aisles” so that consumers can add ethics to their weekly online shop. There is no shortage of fund managers who emphasize ESG (environmental, social, and governance considerations). “This change must apply to all businesses by default,” say the supporters of the Better Business Act. “It must no longer be optional to benefit wider stakeholders beyond shareholders.”
The second is that the “purpose” movement is much more than stakeholder capitalism in new clothes. The advocates of stakeholder capitalism only want to undo the Chicago School revolution of the 1970s that put shareholder value at the heart of the corporation. The advocates of social purpose want to go much further and undo the liberal revolution of the 1850s. Before the liberal revolution, businesses had to demonstrate that they were pursuing a social purpose in order to earn the privilege of limited liability. This might mean anything from building a bridge or colonizing the New World, but it inevitably involved going cap in hand to the government to plead your case, a process that could take months and cost serious money.
The liberal revolution made incorporation both quick and easy — a right rather than a privilege, argued Robert Lowe, the author of the 1856 Joint Stock Companies Act and, more than anyone else, the father of the limited liability company. All that was needed was for a group of people to sign a memorandum of association for the company to be registered. This led to such a frenzy of company-making that Gilbert and Sullivan wrote an opera lampooning the innovation, Utopia, Limited; or, The Flowers of Progress.
Purpose-driven capitalism would put politics back at the heart of the corporation: Deciding what the world’s problems are, let alone how to solve them, is an inherently political task, and not one for which CEOs are particularly well trained, given their lavish incomes and insulated lifestyles. The British Academy lists “inequality” as an example of an obvious problem to be solved. But people have argued about the virtues and vices of inequality since the birth of civilization. Is inequality necessarily a scourge as the academy assumes? Or is it the price we pay for freedom or innovation — or, indeed, for the prosperity that is a precondition for the welfare state?
At best, the purpose-driven formula is a recipe for paralysis as companies debate world-betterment ad infinitum (the academy recommends that all “stakeholders” should play a role in such discussions). At worst, it will lead to the rule of the “purpose police,” a self-selecting group of politicians, regulators, and managers who take it upon themselves to define what social purpose means in practice and then harass companies who fail to meet their prescribed goals.
And for what? Putting social purpose at the heart of business would not have saved the world from the biggest economic disaster of recent years — the global financial crisis. The underlying problem was not that predatory lenders lent so much money to people who had poor credit scores. It was that the lenders had so much money to lend to high-risk people in the first place. Politicians from both parties in the US not only had an explicit policy of extending the “American dream of home ownership” to more Americans, including those with “non-traditional financial profiles.” They had at their disposal two “government-sponsored enterprises” — Freddie Mac and Fannie Mae — which had a social purpose written into their corporate charters: to increase the number of poorer Americans who owned their own homes.
Nor will it calm the anti-business storm that is reshaping the politics of the West. “Social purpose” will make it harder for companies to do their basic job — competing with each other to produce the best products and services at the lowest prices. The historic sustained growth that followed the liberal legislation of the mid-19th century can hardly be an accident. The enshrinement of social purpose will provoke accusations of hypocrisy, as CEOs make grand statements from the slopes of Davos, or else adopt one set of standards for America and another for China. Above all, it will stoke cultural resentment. The populist movement that has given us Brexit and President Donald Trump is driven by a sense that the sort of people who talk loftily about “social purpose” — our high-minded credentialed elite — have taken over an ever-wider range of institutions from universities to the media. Add companies to their list of trophies and you will feed the forces of revolt.
I’m not counseling complacency about the state of the world. Climate change is a giant comet heading for the planet, to borrow the labored metaphor at the heart of the new (and dismal) Leonardo DiCaprio vehicle, Don’t Look Up. There is ample evidence that, once inequality exceeds a certain point, it can produce social instability. But there is nothing to be gained by mixing politics and business even more than they are already mixed. Problems such as inequality and, yes, climate change, are political problems best solved with democratic input. Subcontract them to members of the Davos class and you hollow out democracy while kindling popular fury. And revolutionary entrepreneurs do their productivity-raising wonders not because they listen to well-credentialed people talking about “social purpose,” but because they are monomaniacs in the grip of world-changing ideas.
The genius of the mid-19th century reforms was that they let business be business. We reverse that singular innovation at our peril.
BLOOMBERG OPINION
