COMMENT: Colin Mayer of the Saïd Business School at Oxford University makes the case for a new management perspective that empowers companies to flourish while making a positive impact
When Emmanuel Faber was ousted as chief executive of Danone last month, it appeared a disastrous setback for advocates of a more socially conscious capitalism: one of the standard-bearers of the creed had been pushed out under pressure from activist investors.
But look more closely, and there are reasons to be optimistic about the tide of change sweeping through corporations.
Nestlé, the Swiss consumer goods giant, announced plans last year to spend £3bn on measures to cut greenhouse gas emissions, a major financial commitment to carbon reduction. According to a McKinsey survey in February, nearly a quarter of companies have begun to use internal carbon pricing, setting a charge on their own emissions to determine how this could affect their balance sheets. Tech giants including Amazon have set ambitious climate targets.
The maximisation of profit for the benefit of shareholders at the expense of other stakeholders is a mistake
The days when Milton Friedman famously stated that the purpose of business was solely ‘to increase profits so long as it stays within the rules of the game’, have passed. In recent years, whether in papers and books, or at events hosted by the likes of the World Economic Forum, we have seen a growing recognition that business needs to change.
The need for firms to put the rhetoric of purpose into practice has never been greater. But how do companies bridge the gap between making well-intentioned pledges and delivering on legitimate corporate purposefulness?
With Bruno Roche, former Mars Chief Economist, I recently published a freely available Oxford University Press digital book entitled: Putting Purpose into Practice: The Economics of Mutuality, in which we put forth the case for a new perspective on management. It is one that empowers business to outperform its current self while restoring its positive impact on society and the planet. Breaking down the core elements of this management innovation, it is possible to offer a step-by-step guide that puts purpose-talk into practice.
In realising corporate purpose, business must first acknowledge and accept three statements: The purpose of business is not to create profit. The purpose of business is to create profitable solutions to the problems of people and planet. It is not to profit by creating problems for people and planet.
That’s not to say that there is anything wrong with profits. They are the lifeblood of business, and are needed to sustain it as well as provide it with resources to fund growth, investment, and research. But the maximisation of profit for the benefit of shareholders at the expense of other stakeholders is a mistake grounded in the presumption that this is the best way of making profits. Firms must realise that it’s their commitment to corporate purpose and to those who contribute to creating the common purpose that will define their success and profit.
It is this commitment to purpose that fosters reciprocal relations of trust between the firm and its stakeholders. In turn, this gives rise to more loyal customers, more engaged employees, more reliable suppliers, and more supportive shareholders and societies. And this results in higher revenues, lower costs, and more profits.
For business to be purposeful about becoming a force for good, it needs the metrics, practices and incentives that will drive corporate behaviour
In doing this, business must also look for new metrics for assessing non-financial performance – in other words, there’s more to business than just money. As the saying goes, in business “you manage what you measure”, so you should expect good performance from good management. For business to be purposeful about becoming a force for good in society, it needs the metrics, management practices and incentives that will drive corporate behaviour towards this goal. Without business enlarging the core of what it measures, mobilises and manages, it will never truly change its behaviour.
Businesses must also rethink the boundaries of the “firm”. The conventional view of the firm is that it comprises a set of assets, such as buildings, plant and machinery, and land, over which it has property rights of control. It then contracts with a variety of parties, such as customers, suppliers, distributors, employees, and investors through arrangements that bind them together with the firms’ assets. Together property rights and contracts define the boundary of the firm.
But to become truly purposeful, businesses must build relationships of trust and shared commitment well beyond those boundaries to areas where conventional business has not previously been allowed to trespass.
The departure of another CEO last year was a reminder of how things have changed. Jean-Sébastien Jacques was forced to quit as chief executive of Rio Tinto after a backlash from shareholders over the destruction of two Aboriginal rock shelters in Western Australia. The anger over the blasting of the 46,000-year-old shelters to make way for a mine was a reminder of the broader social responsibilities of businesses.
Once we think in terms of extending the boundaries of the firm by creating relationships of trust. then opportunities open up that previously were inconceivable. The purpose of the firm becomes the profitable solving of the problems of people and the planet. It is a way of enhancing value for shareholders as well as the prosperity of society at large.
Colin Mayer is Peter Moores Professor of Management Studies at the Saïd Business School, University of Oxford, and the lead academic on the British Academy “Future of the Corporation” Programme.
Emmanual Faber Nestlé Mars societal purpose GHG emissions Rio Tinto