We need a radical reformulation of the roles and responsibilities of business, says Colin Mayer
Colin Mayer directs two major research programmes on responsible business at Saïd Business School and the British Academy programme on the Future of the Corporation. In a new book to be published by Oxford University Press later this year, entitled Prosperity – Better Business Makes the Greater Good, he argues that our incorrect depiction of business and financial systems threatens our economies, environment and existence.
Oxford Saïd recently conducted a survey of the career beliefs and attitudes of young people (between 18 and 26 years old) in the UK, USA, China, and South Africa. Despite living in very different cultures and economies, survey respondents were remarkably consistent in defining success in business as ‘having a positive impact on others and society’, and in demanding that businesses ‘speak out’ on a variety of social issues. This reinforces other studies that portray millennials as valuing purpose and passion over pay.
But in reality, for many people this sounds like a triumph of hope over experience. Some of them entered the workforce just as the global financial crisis took hold, when getting any job was a challenge, let alone one that was meaningful. Today, the gig economy – often a glamorous term for a string of short-term, lowly paid jobs – is intensifying a sense of insecurity. Though we might yearn for purpose and passion, we are more likely to get poor pay and performance.
The reason is that, while we as individuals prioritise purpose and passion, business doesn’t. It prioritises something much more mundane – profits. Virtually every business school course starts by telling its students that the purpose of business is to produce profits and everything follows from it – accounting, finance, marketing, operations, and strategy.
It is enshrined in economics, governance, law, and regulation. It gives directors not merely a licence but a fiduciary obligation to minimise tax, wages, and environmental spend to enhance shareholder value. As a result, it is the source of deprivation, inequality and environmental degradation, and one of the causes of the political, social and environmental crises we are encountering around the world.
Profit primacy is fundamentally wrong. Profit is not a purpose. Purpose is why something is created, done and exists and what it aspires to become. It is the reason for being and the reason for business. The purpose of business is to benefit us as customers and communities and in the process produce profits; but profit is not a purpose per se.
The reason why this confusion of cause and effect is so significant is that it underpins the most important determinants of the success and failure of business – relations and trust. By prioritising profits, conventional business and economics destroy the fabric of relations and trust. They do this by promoting self- over other-regarding interests and rights over responsibilities. They mean that every time we engage with a company as a customer, supplier, employee or investor, we do so knowing that its interests are fundamentally divergent from ours.
Businesses should prioritise their purpose – supplying reliable cars, cheap washing machines, or good advice – for our benefit, not profits at our expense. By so doing they then establish the relations of trust with their customers, suppliers, employees and investors that in turn promote the commitments and contributions of those parties to the success of the firm. It is the basis of the reciprocity and reciprocal obligations on which firms, people, and society depend for their mutual prosperity.
This is not about moralising. One concept to have emerged recently is that of ‘doing well by doing good’. It is a seductively attractive idea that has an immediate appeal; but it has serious limitations. It presumes that the only legitimate forms of businesses are those that do good – enhance society or improve the environment – and that doing good is only legitimate if it does well, i.e. makes money.
The truth is that most businesses do a mixture of good and bad, and many do good without making much money or certainly not as much as they could do if they were not doing good. Constraining firms to do well by doing good is almost as misconceived as expecting them to do consistently well.
Instead of constraining purpose to be either about making money or doing good, we should encourage companies to have a plethora of purposes. We should be promoting diversity of purpose as a way of exploiting the unlimited potential that the corporate form provides. This is particularly important in the current era of the fourth industrial revolution, when science and technology offer opportunities on an unprecedented scale to transform society for the better by addressing some of the most profound problems we currently face in relation to energy, health and transportation.
While corporations will have far greater potential over the years to come to enhance social wellbeing, they will also be capable of almost untold damage. Past business innovations on the back of new technologies have often had devastating and unintended consequences for our environment, health and security. Placing purpose ahead of profit will be critical in ensuring that the mistakes of the past are not repeated in the future.
The power of putting purpose ahead of profit derives from the understanding it provides to others about the nature of the organisation with which they are engaging. Requiring companies to demonstrate how they fulfil purpose makes everything else – accounting, finance, marketing, operations and strategy – follow from it. The reordering lends credibility to the delivery of purpose by establishing how ownership, governance, leadership, culture and management are aligned with achieving it.
Purpose before profit has profound implications for the design of financial, legal, regulatory and tax systems. These currently look to competition policy and regulation to constrain companies whose private interests in profits are often diametrically opposed to those of policymakers in social wellbeing – and as a consequence create conflict at the expense of cooperation. Prosperity: Better Business Makes the Greater Good describes how the primacy of purpose extends to policymaking in promoting an alignment rather than divergence between private and public interests.
Purpose is also at the heart of the British Academy programme on The Future of the Corporation. Launched in October 2017, this seeks to establish a new model for business that is fit for the 21st century. It includes a research and public engagement programme to create a blueprint for a redefined corporation in the 21st century, inform and influence policy and practice, and empower corporations to transform their purpose and governance. The programme has already gained considerable traction and engaged senior business leaders and policy-makers from around the world.
But it is not just business research, policy and practice that will be transformed by the new theory of business; so too will business education. It will lay the foundation for new forms of education that will replace the current approach of starting from the assertion that ‘the purpose of business is to create shareholder value’ with a question: ‘what is the purpose of business?’ Having identified the myriad of answers to that in the present and past, and the still more dazzling array in the future, business school programmes will then seek to identify the ownership, governance, laws, regulation and public policies as well as the business practices that will assist with achievement of those purposes.
The new approach to business will lay the intellectual foundations as well as practical understanding for the role of corporations in contemporary society that will inspire our leaders and followers of the future. Saïd Business School will be at the forefront of promoting this in the years to come.
About Colin Mayer CBE
Colin Mayer is Peter Moores Professor of Management Studies, a Professorial Fellow of Wadham College, an Honorary Fellow of Oriel College & St Anne’s College, Oxford, a Fellow of the British Academy and the European Corporate Governance Institute and a member of the UK Competition Appeal Tribunal.