Wanted: smart laws for smart businesses

Take a single day’s news from the UK in the summer of 2006. One of Britain’s most reputable companies has been criticised for not disclosing the health risks of its product, although these are only a thirtieth of the amount considered dangerous by the regulator. A French company is axing 800 jobs in the English China Clay industry. The UK’s deputy prime minister John Prescott is under pressure for accepting hospitality from an American gambling billionaire. German-owned Thames Water has pledged to invest £150m to replace ageing water mains and thereby avoided a punitive fine. Meanwhile the new Companies Act grinds its way towards the statute book, dogged by a debate about the way the duties of directors should be described.

What do these stories imply about the changing nature of responsibility?

Firstly, that the boundaries of what we like to call business, and what we like to call society have changed in ways that render much of our rhetoric obsolete.

Secondly, that we the public are confused and cynical about the role a business should play in society. We don’t seem to know what we want from business.

And thirdly, especially important for our lawmakers and all who seek to influence them, that both regulation and business representation need to change to meet the needs of the new century.

The changing boundaries

In 1990 there were 3,000 trans-national companies and now there are over 40,000. Globalisation now means much more than operating across national boundaries. Following the removal of barriers to the free flow of capital, labour and services, we are witnessing the emergence of truly global companies characterised, for example, by an international management cadre and a distinctive company culture which draws on the mix of backgrounds represented by staff and stakeholders.

Earlier generations of these companies started in Europe and America. Now the new global companies are emerging from roots in India, like the Chinese Haier, or Infosys, an Indian company which doubled its income every year for 8 years.

These companies operate in countries with varying levels of wealth, infrastructure and government experience and their actions can have a dramatic effect on their hosts’ fortunes. The pace of development, the emergence of new markets and their own growing power provide them with unprecedented opportunities as well as new burdens of expectation about their potential to influence issues such as human rights, poverty, health and climate change. This burden of expectation extends to the requirement of each to act, and be seen to act, responsibly within the markets they operate.

The push and pull of corporate progress

A well-led organisation will always seek to create the optimal value in all its relationships. In a way, that is simply good leadership. The most impressive corporate leaders have always been those whose vision of a successful business stretches beyond the product and the profits to their positive impact on the world around them.

Society’s expectations of business have been changing for centuries. The best businesses have adapted voluntarily to those changing expectations, and shown leadership by example. Others have dragged their feet, until compelled by law. The Factories Acts in the nineteenth century and the Equal Opportunities legislation in the second half of the twentieth century offer examples from the UK.

Corporate progress towards greater responsibility has always been the result of both push and pull. Visionary leaders in business pull their organisations to higher standards. People like Gottlieb Dutweiler in Switzerland, Karl Zeiss in Germany, Robert Owen, the Cadburys, the Levers, the Rowntrees, or John Spedan Lewis in UK; the Swartz family who founded Timberland, the de Prees of Herrmann Miller in the USA, and more recently Ricardo Semmler in Brazil.

The push comes from society, from anti-slavery campaigners like William Wilberforce, from leaders of trades unions, from consumer leaders like Ralph Nader, and from environmental activists like Greenpeace.

But what does all this mean when the canvas on which the company is painting is a global one? How does a Chinese-born global company play its part in tackling climate change? How does an oil company which wants to pay its taxes behave when moving into a territory where there is no established framework of corporate taxation? Is it irresponsible for a French company to remove jobs in Cornwall, or a British company to shift jobs from Maidenhead to Mumbai? Where are the global Wilberforces and how should companies deal with them?

Our concept of business needs to change

As the boundaries change so does our understanding of business.

If we were to believe what we read in most reports, business is no more than a glorified utility — a licence to print money — in which sales and customers are guaranteed, the profits flow like leaks from an ageing London water main, and all directors have to do is be chauffeured to the office to collect the profits and decide the dividend.

What is missing in the usual discussion of business is the sheer discipline and creativity of business, the daily quest for solutions. A few years ago, as Al Gore pointed out when he gave the Tomorrow’s Company Annual Lecture earlier this year, people were in despair over the effect of cholorofluorocarbons (CFCs) on the ozone layer.

He cited an example of Nortel (who in 1987 were the largest Canadian user of solvents containing CFCs) who acted as a visionary leader by working with chemical manufacturers to find a solution that was CFC-free. By making the necessary investment Nortel showed the whole industry a revolutionary way forward and saved approximately $4m.

Profitability, which is so often perceived as the measure of how much a business has extracted from human beings, is actually one measure, albeit not the only one, of how effectively a business has created and offered a product that people somewhere need. The job of a company director is not to enrich shareholders; it is to create and sustain a living being called a company so that it flourishes in all its relationships and fulfils its wealth creating purpose.

What this means for lawmakers and regulators

It is through these spectacles that we should be asking lawmakers to visualize the framework within which businesses operate. Try and think of business activity less as a form of white collar crime, and more as we view the arts — a creative activity which needs rules and limits, but will only fulfill its potential if it is given room for self-expression.

One look at the debate on the current Companies Act shows us how far from this reality we actually are. On the left, we have the CORE coalition and unions and environmental groups queuing up to extend the scope of mandatory environmental reporting, and the government being encouraged to load directors’ duties to the company with a series of subordinate clauses about duties to stakeholders.

On the right we have the CBI, and other trade associations convincing Gordon Brown that the statutory Operating and Financial Review (OFR) was somehow a burdensome extension of social reporting. The unintended consequence of their attempt to reduce the burden on business has been to increase it by imposing uncertainty, and in the process they have destroyed a carefully crafted reporting framework which would have been a modernising force within boardrooms and capital markets.

There are those who think business should be told how to be good, and they are wrong for entrepreneurial reasons. And there are those who think the market is perfect in delivering the information that we need from companies. They are wrong because they are blind to market failures in information and accountability.

Business thrives on a firm enabling framework: tell people broadly what you expect but leave them free to colour in the detail, and to be held accountable by shareholders and stakeholders for the judgements they make.

Do not give them a paint-by-numbers kit. Do not demand that directors simultaneously have regard for the interests of five stakeholder groups. Just give it a clear duty to promote the success of the company through all of its relationships, and an accompanying duty to report on its progress.

Do not instruct it to report how many warblers it has saved for the planet. Do require it to tell us what its own values and standards are, and then let it choose its own way of reporting how it has lived up to them. A business that is told to comply with outside expectations will tick the boxes with a heavy and bureaucratic heart. A business that has set out what it stands for will feel a very strong need to demonstrate that it practises what it preaches.

Less is more

The first law I had to deal with as a young manager was the 1974 Health and Safety at Work Act. The beauty of this act was that most of its power was indicative rather than prescriptive. Every company had to have a safety policy, indicating what the company must do to ensure that its staff and stakeholders were reasonably protected against accidents. The policy would specify who in the business was responsible for implementation and how the fulfillment of these responsibilities was to be monitored and communicated.

It created what we in Tomorrow’s Company call a virtuosos circle of governance. But the act did not make me or my managing director follow a rigid script. It left that to our judgment, while creating an inescapable framework through which we could be held accountable for how we exercised that judgment.

There is a moral here for regulators — and for trade associations in the UK from the CBI downwards. What we need is not less regulation, but smarter, more enabling rules within which we free business to be enterprising.

How can companies lead, manage and benefit from a diverse workforce whilst maintaining a core purpose and set of values? is one of the four key questions being explored in the Tomorrow’s Global Company inquiry. This inquiry is bringing together leaders from some of the world’s leading global companies to examine the purpose and role of global business in the future.

Mark Goyder is Director at Tomorrow’s Company, a business-led not-for-profit research and agenda-setting organisation committed to creating a future for business which makes equal sense to staff, shareholders and society. www.tomorrowscompany.com