Purpose-led firms: resolving tensions in stakeholder capitalism and redesigning the economy?

Capitalism as we have known it is dead. This obsession we have with maximising profits for shareholders alone has led to incredible inequality and a planetary emergency.

Marc Benioff

The above is a declaration made not at an Extinction Rebellion rally, but the 50th World Economic Forum in Davos in 2020.

As the leaders of major companies ponder how to renew their social license amid dissent at perceived managerial excess, stakeholder capitalism – the idea that firms should focus on the needs of customers, employees, suppliers, communities, and wider society – is enjoying a moment.

The concept is not new. In 1932 Adolf Berle and Gardiner Means set out in ‘The Modern Corporation, and Private Property’ a model of corporate governance that dominated the next forty years as the managers of large public firms tried to balance competing interests. Its replacement with maximising shareholder value (MSV) in the early 1970s emerged from frustrations at the strategic confusions in which such firms became mired, as they grew into what management writers termed ‘garbage-can organisations’ whose managers could not make up their minds.

In a seminal 1970 article setting out the MSV ideals that would eventually take over corporate life in the Anglosphere Milton Friedman put the blame on the ‘analytical looseness and lack of rigor’ around the social responsibilities assigned to business.

Yet it is hard to refute the argument that the private sector - which in any market economy contains the bulk of human talent, assets and touch points into our lives - must have a role to play in tackling the complex problems confronting us. Not least when the MSV model is responsible for generating so many of those challenges. How then might firms be a force for good without losing the clear sense of purpose beloved of MSV advocates, in ways that go far beyond superficial PR exercises?

A new report by ReGenerate, funded by the Joseph Rowntree Foundation and the Department for Culture, Media and Sport, provides a potential answer. The report, ‘Helping purpose-driven business to thrive’, sets out several practical steps that could be taken to ensure that businesses are increasingly set up and run to benefit society whilst delivering profits.

The key difference between purpose-driven and profit-maximising businesses is that purpose-driven companies, although seeing profits as one vital outcome, are nevertheless focused on benefiting society through its core business activities. This means they are often more likely to maintain a positive social and environmental impact, including the provision of good jobs. Crucially, it is up to the company to determine its purpose, thus avoiding the strategic confusion of earlier stakeholder-oriented firms. It may be something that has an impact on a global scale, such as Tesla whose mission is to accelerate the world’s transition to sustainable energy. Equally, it may be something local such as Anglian Water whose purpose is to bring environmental and social prosperity to the region it serves.

Technically, there is nothing now to stop an individual or team from setting up a purpose-led business or declaring their existing firm as such. Indeed, ‘purpose’ has become a key consideration for many existing firms, driven in large part by the social conscience of employees and customers. But problems quickly arise in connection to financing growth. Although the worldwide impact investment market is expanding steadily, it is still dwarfed by mainstream capital markets and the normative behaviours they demand through rigid performance frameworks.

This means that any such company whose purpose endears it to an initial of wave of investors, consumers, employees, suppliers or others has no guarantee that subsequent investors will be as equally bought in. Nor is there a reliable way for consumers to distinguish between truly purpose-driven firms and those engaged in more cynical ‘purpose-washing’ - the practice of presenting a brand as if it operates according to a larger purpose, when in reality it only operates to serve itself.

ReGenerate’s report identifies three overarching reform areas to solve these problems:

• Purpose-led businesses need a clearer and more accessible way of incorporating their business, that fully protects their purpose and signals it to the marketplace.
• Every effort should be made to make it cheaper and easier for companies to report their impact, and for this information to be comparable and accessible, to better guide investor and consumer decision making.
• The ecosystem that supports businesses in their efforts to be purpose-driven and to help consumers identify them needs to be turbo-charged to cope with growing demand and make the most of the momentum behind it.

The UK has long been an early adopter around corporate governance and the time is ripe for policy to catch up with social changes. Half of business leaders now think businesses should operate in this way. Given that this sentiment is strongest in younger generations it is likely a trend that will grow in strength in the coming decades. By redesigning the economic system to unleash and empower the latent desire of business people to contribute more to society, the Government could finally make some meaningful progress towards creating shared prosperity in an environmentally sustainable way.