Encouraging “purposeful” business

REINVENTING CAPITALISM is all the rage. The British Academy, a scholarly body, issued a provocative report in 2018 arguing for the replacement of profit-focused shareholder capitalism with a system in which corporations embrace social purpose. A follow-up manifesto published on November 27th tries to explain how to do this. But fixing capitalism is easier said than done.

The report lays out eight principles to guide implementation of corporate purpose. These range from changing laws and regulations to improving metrics and governance. Some are sensible. Establishing common standards for measuring social impact would be a vast improvement over the current hotch-potch of competing (and often misleading) measures of how firms fare on environmental, social and governance matters. Ideas for reforming corporate governance, including improving board accountability, are useful.

Some ideas are problematic or downright barmy. The report makes the extraordinary claim that “ownership does not relate to the assets of a firm but to its purposes”. The experts insist that every company must by law have a purpose “that is not solely about profit”. So would strategies that maximised profits become illegal, unless they also solved poverty or climate change? And which of those goals would the purpose police deem more worthwhile? There is only passing mention of the sorts of trade-offs that bosses must make between the competing claims of rival stakeholders.

The report is heavy on “should do” recommendations and light on incentives needed to achieve those goals, notes Luigi Zingales of the University of Chicago. He argues that forcing firms to have a social purpose is an unjustifiable infringement of freedom. Making bosses come up with cuddly corporate-purpose statements is likely to produce a swarm of platitudes.

The report notes that the corporate purpose of Novo Nordisk, a Danish drugs firm, is to “drive change to defeat diabetes and other serious chronic diseases”. The Academy applauds the firm’s use of the Future-Fit Business Benchmark, a tool for assessing governance. Sadly, these virtues did not prevent it from charging outrageous prices for its insulin in America, leading to lawsuits and congressional inquiries. The firm denies wrongdoing. In September it responded to public outrage by offering cheaper insulin to American diabetics—but only after Eli Lilly and Sanofi, rival drugs giants, had done so first.

The academy’s clear-headed first report asked important questions about the role of business in society. Its muddled follow-up (which Mr Zingales describes as “something in between policy prescription and a self-help book”) seems destined to end up as a doorstop.

This post was originally posted at https://www.economist.com/business/2019/11/30/encouraging-purposeful-business.

Leave a Reply

Your email address will not be published. Required fields are marked *