The Future of Capitalism: To Whom are Companies Responsible?
Public and market opinion have shifted significantly since the 1970s, when Economist Milton Friedman stated in the New York Times that the only responsibility businesses have is to increase their profits. Today, the case for shareholder primacy is increasingly under fire, raising interesting questions around the role and mission of public companies.
This model was explored in a recent Policy Exchange panel discussion, The Future of Capitalism: To Whom are Companies Responsible? hosted by Sir Geoffrey Owen (Head of Industrial Policy at Policy Exchange), alongside Professor Colin Mayer CBE (Professor at Said Business School), Roger Barker (Director of Policy and Corporate Governance at the Institute of Directors) and Sir Trevor Phillips (Chair of Green Park Group). The event highlighted essential considerations for today’s businesses about the future of capitalism and surviving this shift.
Our takeaways were the following:
The business world does not run parallel to society – it is part of it
The P&O employee firing scandal demonstrated that when businesses deviate from society’s interests and expectations they expose themselves to existential risk.
It is easy to imagine the business world as a separate entity from society, running in parallel with it, rather than existing within it. However, the panel argued that business is a key part of society, and therefore accountable to it. While P&O’s sacking of 800 staff, replacing them with a cheaper workforce, may have been more financially rewarding to shareholders, it has inflicted immeasurable damage to the reputation, and therefore the value, of the business.
Businesses exist to solve problems – not to profit from them
The panel encouraged firms to think more broadly about the nature of the purpose of business. The familiar trope ‘businesses exist to make money’ is clearly becoming less and less relevant. More fundamentally, the mission of a business, according to the panel, is increasingly to solve societal and environmental problems in ways that are commercially viable – rather than profiting from them.
It is important to differentiate this from corporate social responsibility or philanthropy, since these relate to separate arms and workstreams of the company. Purpose must be central to all corners of the business.
Transparency is empowering stakeholders
Recalibrating the current capitalist model will be a challenge to companies moving forward, as the notion of ‘accountability’ is not straightforward. The increased requirements for and expectations of transparency have shifted the dial.
The historic obscurity of a company’s inner workings gave more flexibility, time, and power to C Suites and benefited shareholders. However, the transparency of reporting, company collateral, social media and sites like Glassdoor today do much to prevent companies from obfuscating the narrative. Regulators and policymakers – but also consumers, media, and employees – are successfully holding businesses to account as the balance of power shifts. The rise of greenwashing claims in recent years is a clear demonstration of this.
The significance of these themes is part of a broader sea change – one that companies will have to navigate in a changing society that demands greater social and economic equitability. While capitalism channels the innovation and creativity of the private sector, the shareholder-first approach is clearly no longer in tune with evolving societal needs.
The evolution to a system that favours improved outcomes to society will challenge businesses to both articulate and demonstrate their benefit to society in order to thrive. It remains to see who will rise to this challenge and who will sink.