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A Call For Corporations: Making a “Firm Commitment” To Society

A new book by a business school professor lays out a plan for a radical rethink of the purpose of the corporation.

Submitted by: Francesca Rheannon

Posted: May 02, 2013 – 09:00 AM EST

Tags: sustainability, capitalism, ethics, business school, regulation, carbon, governance, colin mayer, leadership, csr

 
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By Francesca Rheannon

Lately, I’ve been hearing a new kind of vocabulary applied to capitalism. Words like “disruption,” “biomimicry,” “benefit corporation,” “living within planetary thresholds” are beginning to populate discussions about capitalism for the 21st century.

It feels like a sea change is swelling in the way the corporate capitalism is being envisioned: at a fundamental level, toward a reorientation of the very purpose of the corporation. In an upcoming post, John Elkington, who coined the term “the triple bottom line,” writes: “system change is the new game in town.”

Such system change will require shifts on many fronts: not only in the way business measures its value and its impacts, but also in the political realm (to break the stranglehold of business dinosaurs on the throat of public policy), in technology (to work with, instead of against, Nature), and in the education of new entrepreneurs.

Colin Mayer Wants To Transform Business

As Professor of Management Studies at the Saïd Business School at Oxford University, Colin Mayer is intimately involved with the education of business students. His book, Firm Commitment: Why the Corporation is Failing Us and How to Restore Trust in It, which has been out in the U.K. for a while, Firm Commitmentwas just published in the U.S. It calls for a redefinition of the purpose of the corporation, so that public companies can better serve the needs of society, i.e., their stakeholders, rather than just their shareholders.

I had a conversation with Mayer about his book and his suggestions for transforming the way business does business.

Francesca Rheannon: You write about the role of the corporation and about how its failures contributed to the financial crisis. What is the central flaw of the corporation? 

Colin Mayer: The main problem is that the corporation has become dominated by one particular interest group, the shareholders. The interests of the shareholders are often not aligned with other parties -- the customers and communities more generally. And while shareholders are an important group in the organization and funding of corporations, their position should not be an exceptionally dominant one. That’s because the role of the corporation really is to further the interests of parties beyond those of the shareholders.

The original purpose of the corporation was not the interest of its shareholders, but over time for a variety of reasons, the responsibility of the directors running the corporations has become to promote the interests of their shareholders. Part of that comes from the fiduciary responsibility to the shareholders but it is also [a pressure] exerted on the corporations from the market -- from the risk of being taken over; from the incentives under which the company operates, which are closely aligned with the share price performance of the company and increasingly from active intervention from institutional investors.

Independent Corporate Boards

You call for independent boards of directors as a means of balancing the interests of stakeholders with shareholders. Where are they coming from, if not from the corporation? 

What I discuss in the book in relation to independent boards is that it is important to have a group of very involved independent directors that are giving proper oversight to the running of the corporation to be sure that it upholds the values by which it says it is being run and to take responsibility if the corporation fails to do that.

Examples of where this is done very effectively include Bertelsmann, Carlsberg Brewery, and automotive parts supplier Bosch, all of which are owned by industrial foundations. Those foundations have boards that oversee the operating companies below them and make sure that those organizations abide by the principles and values of the foundation. And that significant oversight provides the appropriate checks and balances on the way the corporation is run.

An Urgent Agenda

This kind of change could take a long time, but many are saying that corporations have to start putting the interest of the larger community over the interests of the shareholders now if we are to survive. In this world of intensifying crises, how do you see your concept in relation to those who see the world's needs as much more urgent?

I regard this as an extremely urgent agenda -- the most important issue of this decade. I set out an agenda designed to deal with this as a matter of top priority, spanning everything from the way we educate the future leaders of organizations, to the principles and values that those leaders should be following, to the way this gets into public policy.

The critical element is to find a way of aligning the private interests of corporations with the public interest in terms of the promotion of things other than just financial capital and materiality -- to think rather of ways of promoting their interests in natural capital, social capital, community capital and even the capital of education and trade. And a powerful way we can do that is through the corporate tax system, essentially insuring that corporations have an incentive to take account of those wider social and public interests beyond those of pure commercial considerations.

Using Taxation To Promote Good Corporate Action

Could you explain how that would work? I know the EU has proposed a financial transactions tax. Are you thinking of something like that -- or beyond that? 

I'm thinking of something bigger than just the financial transactions tax, which I don't think is adequate by any means. I'll give you the illustration of carbon emissions.

Currently we try to deal with emissions through trading, which requires permits. Essentially what we have is a regulatory system that tries to prevent emission of carbon particles. But what that the carbon cycleeffectively does is to encourage corporations to find ways of circumventing regulation.

A much more effective way of dealing with the issue is to tax companies that emit carbon particles. Even more significantly, we need to subsidize companies that diminish carbon in the atmosphere through a variety of technologies -- lean technologies, solar and other renewables, and carbon absorption techniques -- so that one is not simply stopping companies from emitting carbon but also looking for ways to support companies that reduce the scale of carbon emissions. That is a much more powerful technique.

Making A Tax On Carbon Work

There is so much opposition to raising taxes these days – and so much tax avoidance. How could a carbon tax be made acceptable and effective?

Such a tax is not providing revenue for government; rather it is part of the mechanism under which corporations are operating in exactly the same way as the market provides prices.

In the context of a system of taxation that isn't seeking to raise revenues, this could be entirely revenue neutral, because it incentivizes corporations to do what is socially beneficial while taxing things that are socially destructive. In that context, tax avoidance would be deemed to be socially destructive.

We must change the culture of the corporation, the culture of taxation, away from it being something contrary to the interests of the corporation to saying it's not contrary at all; it's not raising taxes on average for corporations; it is promoting an ethical principle amongst corporations that aligns their interests with those of society.

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Colin Mayer thinks that business schools have a critical role to play in bringing around this new ethical corporate culture. By educating the new generation of business leaders in the structures and conduct necessary to promote real purpose of the corporation – to serve its stakeholders – business schools can counter the defeatist notion that fundamental change is impossible.

Hopefully, that will create corporate leaders who make a “firm commitment” to capitalism’s new evolutionary stage.

The opinions, beliefs and viewpoints expressed by CSRwire contributors do not necessarily reflect the opinions, beliefs and viewpoints of CSRwire.

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