Professor Colin Mayer explains how this current era is set to reconfigure corporations for decades to come
Every 50–60 years, or so the theory goes, the world of business undergoes an epoch-changing transformation. In a 1970 New York Times essay, Milton Friedman proposed ‘there is one and only one social purpose of business… [which is] to increase profits so long as it stays within the rules of the game’, an ethos which has guided boardroom behaviour ever since. Nearly half a century before, the world experienced the 1929 Wall Street Crash and Great Depression, which led to the development of global accounting standards.
Prior to that, the 1856 Joint Stock Companies Act marked the birth of modern capitalism by establishing the principle of limited liability for corporations. No longer did UK businesses need to be chartered by Queen and Parliament to build canals or turnpikes.
As any observer with even the slightest interest in business will probably glean, the corporate world is currently following a similar arc of transformation.
‘It’s like sitting in the Age of Enlightenment and observing what’s happening,’ says Colin Mayer, the School’s former Dean and Emeritus Professor of Management Studies. ‘It’s an incredibly exciting time to be researching and studying business.’
Colin can be afforded the historical purview: analysing the vicissitudes of corporate culture has been his life’s work. Since graduating from the University’s Oriel College in the 1970s, his career has seen him lecture at Harvard, Columbia, MIT and Stanford and act as Chairman of economic consultancy Oxera, not to mention becoming the School's first professor in 1994. Having reached the maximum retirement age for professors, he stepped down in September.
Business is confronting numerous issues and an immense shift in technology – that combination will change business
His conviction that business is undergoing one of its most seismic periods of change – a subject he’s currently exploring as part of the British Academy’s Future of the Corporation programme – is borne out by some of the momentous developments he outlines below.
‘Business is currently confronting a large number of issues at the same time, such as its environmental impact, inequality, social exclusion, and the growing number of scandals: Carillion, Wirecard, Wells Fargo,’ he says. ‘Alongside these societal and environmental pressures, there’s been an immense shift in technology and the opportunities it presents for business. The combination will fundamentally change the nature of business.'
Age of crisis
There’s also been the polycrisis of the pandemic, which Colin believes prompted existential soul-searching, making companies reassess their businesses – ‘because in many cases, they faced being no longer viable’.
Perhaps there’s no greater litmus test as to whether businesses are slowly rejecting the Friedmanite philosophy of shareholder primacy than observing how they have responded to the climate emergency.
In August 2021, the Intergovernmental Panel on Climate Change published a damning report stating global heating is 'unequivocally’ being caused by human activities, and only an immediate reduction in greenhouse gases over the next decade could help limit warming to close to 1.5°C.
The corporate world is certainly culpable: much of the environmental destruction the planet has suffered since the Industrial Revolution has been caused by businesses. Indeed, just 20 companies (including investor-owned Chevron, Exxon, BP and Shell) are responsible for 35% of all energy-related carbon emissions produced worldwide since 1965, according to recent analysis by the Climate Accountability Institute.
If the longevity of the planet, and ergo the survival of their products and services, isn’t a strong enough reason for businesses to align with the climate change movement, the prospect of shamed stakeholders might be. In May, both ExxonMobil and Chevron suffered shareholder rebellions from investors unhappy at what they perceived to be a sluggish response to the climate crisis.
The idea that corporate life should be remodelled was echoed by former Unilever CEO Paul Polman – now Chair of the School and co-founder of Imagine, a foundation driving corporate action towards the UN’s sustainable development goals – who said in a 2019 speech: ‘Capitalism, which has been responsible for the growth and prosperity that has done so much to enhance our lives, is a damaged ideology and needs to be reinvented for the 21st century.’
There could be financial benefits for those companies providing innovative solutions to tackle the climate crisis, especially as many countries have vowed to become carbon-neutral by 2050. Mark Carney, UN Special Envoy for Climate Action and Finance, has called it the ‘greatest commercial opportunity of our age’.
The purpose of corporations
Such opportunities could come from developing new technologies or energy sources, or in the services sector – consulting clients on achieving net-zero emissions, or even avoiding litigation. Tesla, which played a huge role in popularising the electric car, recently achieved a market cap of the next nine biggest carmakers combined. Morningstar reported that 2020 saw ESG funds ‘significantly outperform’ the market average.
Meanwhile, Danish pharmaceutical company Novo Nordisk saw its net profit increase by 10% for the first six months in 2021, not long after reframing its purpose from manufacturing insulin to ‘defeating diabetes’.
Covid has brought purpose to the top of agenda
Purpose-led businesses received a major boost in summer 2019 when the influential Business Roundtable lobby group in the US (members include Jeff Bezos and Tim Cook) announced they would drop the shareholder-first principle and pledged commitment to ‘improving our society’, as well as employees and the environment, promising to ‘set a new standard for corporate leadership’.
Covid-19 accelerated another tectonic change for corporate culture: the sudden move to remote and hybrid working. During the lockdowns of 2020-21, bosses had no choice but to invest trust in their home-working employees, marking a profound ideological change.
Indeed, empowering employees to do their jobs from home during the lockdowns led to increased productivity for many firms – UK staff worked 25% more time in the year since the pandemic started, according to February 2021 data from NordVPN Teams.
Colin believes the benefits for business will be positive: ‘It changed the culture of organisations in a very fundamental way, which is exactly what they needed to do to instil their values in their people. This is what drives successful businesses, rather than continuous monitoring and high-powered incentives.’
The first few months of the Covid-19 pandemic also saw some remarkable examples of corporations retooling their business models to support local communities, such as perfume-makers Givenchy and Christian Dior shifting production to hand sanitisers, or fashion brand Zara sourcing material for PPE. ‘Covid has done an amazing job of bringing [purpose] to the top of agenda,’ says Colin.
Another long-lasting motif of Covid-19 could be increased government intervention in corporate affairs. During the pandemic, governments scrambled to provide financial stimulus for businesses in a way that would have been inconceivable two years ago, paying wages for furloughed workers or ensuring companies’ survival through grants and loans.
It arguably marks the first time that government has been so involved in business since the 1970s, when the Keynesian model fell out of favour due to high inflation and low corporate profitability. Since then, a free-trade, low-tax model based on Friedrich Hayek’s ideas has held sway over modern business, with corporations creating wealth and governments only intervening during crises.
The direction of travel for business has changed
‘The direction of travel has certainly changed for business,’ explains Colin. ‘Up until 2019, the revenues of many businesses were growing much bigger than the GDP of many countries.
‘There was also the sense that government was hamstrung by the public sector, with many public services contracted out to the private sector. Since the pandemic, there’s been a reversal and a realisation of how dependent businesses are on governments to bail them out when things go wrong.’
The big tech goliaths may bristle, but, as economist Mariana Mazzucato pointed out in her book The Entrepreneurial State, government support was behind many of tech’s biggest innovations, such as Google’s search algorithm (supported by a National Science Foundation grant) or Elon Musk’s Tesla and SpaceX, which both received billions of dollars in US government loans and public support.
Family-owned businesses are also set to undergo radical change. The most dominant form of enterprise ownership in the world (in the UK it accounts for over half of all private sector employees), they have the most substantial share block holding (according to a 2017 Franks/Mayer paper). But change won’t come from regulation.
‘There’s the realisation [for owners] that their children are simply not willing to inherit companies they don’t perceive as producing benefits that go beyond purely financial returns,’ says Colin. ‘The current generation of family owners increasingly appreciate that if they want their children to take over their businesses, they need to change.
‘Many family businesses are associated with disparities of inequality, so this [generational shift] could change how they treat their employees, plus ensure the goods and services they provide are affordable for populations around the world.’
With business facing an inclusivity problem (only 19% of households in the least developed nations are connected to the internet) ‘it needs to make access to its products much more equally distributed across the world, such as poorer parts of developed countries, and in the developing world too', says Colin.
The ethical stance of younger generations could see purpose embedded in many corporations, not just family-owned firms.
People look for inspiration when they enter corporations
‘When people enter corporations, they’re looking for something inspiring,’ says Colin. ‘Increasingly the attitude of new recruits is around the satisfaction they’ll derive from the job, as well as the money they could earn. So, to recruit that talent, organisations will need to articulate and demonstrate why they exist and why they were created. Leaders will no longer be a commander-in-chief, but a communicator-in-chief.’
With fewer than half (48%) of Gen Z respondents to a 2021 Deloitte survey believing business has a positive impact on society, corporations could see action on women’s rights and climate change assimilated into their business models.
But until this generation occupy positions of power, maybe the onus should rest with contemporary directors with long-term perspectives. As the Oxford Review of Economic Policy article ‘Business in Times of Crisis’, co-authored by Colin among others, says: ‘Progress on such issues requires sustained commitment, over many years, by organizations.’
Business and corporations have always been innately futuristic, their modus operandi built around notions of growth, accumulation and investment. Whether directors steward their companies with purpose, accountability, devolved decision-making and increased state intervention remains to be seen.
‘The way in which business interacts with society and the natural world needs a fundamental re-conceptualisation,’ says Colin. ‘Just as in the Age of Enlightenment, hopefully the outcome will be a radical improvement in the way in which we engage with business, and the way it engages with us.’
- Business faces seismic change due to societal and environmental pressures combined with rapidly advancing technology
- The role and relationship of government and corporations has evolved, as shown by the pandemic
- The successful leadership model is no longer one of commander but of communicator