9 December 2016

Should there be more to business than profit?

By Edward Davies

Business, by its very existence, is one of the best tools for social mobility, driving employment and economic growth. It creates jobs, provides skills and training for employees, promotes economic activity among suppliers, invests in innovation and delivers products and services to customers.

In 2015, the private sector employed 21.8 million people in England alone – and 66 per cent of employers funded or arranged training or development opportunities for their staff, at a cost of £45.4 billion.

More and more businesses support employees to save for the future and to balance work and family life. And many businesses go beyond this.

The CSJ’s new report, Everyone’s Business: Making Business Work for All, highlights a range of organisations that are embedding commitments to a portfolio of social and environmental goals into the heart of their business strategies.

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In particular, it examines the B Corporation movement: businesses that achieve high levels of social and environmental performance and recognise the power and potential of business to do good (both in terms of what it does and how it does it). It also looks at a range of social enterprises, new ways of working and simple best practices that are becoming increasingly widespread.

There are an increasing number of businesses working with wider social benefit in mind. Others are looking to social, environmental and financial goals in how they do their work – for example, cutting carbon emissions as a by-product of their work. Others are ensuring that some of their profits or staff time are given to support charities and communities.

Ninety, which specialises in agile digital transformation, is seeking to bring about social change by generating £1 billion for charitable grants and social investment over a 30-year period. Ninety passes 90 per cent of its distributable profits to its charitable foundation, while the remaining 10 per cent is distributed to staff and key partners.

Invariably, these businesses are finding that supporting recruitment and retention, increasing employee engagement, and improving their reputation is resulting in huge benefits to their brand value and reputation, their employee productivity and ultimately, their bottom line.

Any business not considering its place in society, in other words, is selling itself short. And yet many are doing so.

Too many still prosper at the expense of society, with little regard for the wider economic, social and environmental consequences of their actions.

For this reason, public trust in business and levels of employee engagement are both low: Edelman’s Trust Barometer finds that 54 per cent of the UK population do not trust business to do what is right, while research by the CIPD finds that just 36 per cent of employees are engaged with their work.

Furthermore, research by YouGov finds that the majority of the public believe that business would abuse its staff and customers if left to its own devices.

Bad practices are not necessarily widespread – but a series of high-profile cases have led to a culture of mistrust in business.

The public’s expectations of business are also rising. In a survey of 7,700 millennials across 29 countries, Deloitte found that 87 per cent believe that business success should be measured by more than just financial performance. And 54 per cent believe that business has no ambition beyond profit.

Our report makes over 20 recommendations about how this movement can go further, with government and business working together towards the mutual goal of a society where everyone can thrive.

We’ve found several barriers, both real and perceived, that are hindering the ability of business in the social sector to improve their capability, scale and therefore impact. For example, the Government must emphasise the importance of social enterprises within the remit of Local Enterprise Partnerships and place support for them, with business skills and advice, within the remit of Business Growth Hubs.

Our review found that many businesses are finding effective and innovative ways of supporting social objectives, alongside delivering a financial return. It is in the interest of business, government and wider society that such approaches are further encouraged and supported.

One key change would be making a “purpose declaration” a requirement of incorporation, to signal that the role of business extends beyond profit maximisation.

Despite the contrary evidence in relation to business benefits, there is often pressure on company directors to prioritise short-term pressures and shareholder interests over long-term investment. This despite the fact that such investment is crucial for long-term financial performance, as well as for value creation for society more broadly.

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Efforts should also be made to encourage a longer-term approach, for example by introducing longer-term financial incentives for company directors, shareholders and fund managers.

Ten years ago the Companies Act was introduced, with a provision that business should “have regard’ for considerations beyond profit. But the provision is so weak as to be meaningless. It is time that the Government reviewed the Companies Act, and strengthened this provision, pushing stakeholders’ interests closer to shareholders’, to both parties’ advantage.

The businesses of the future will recognise the need for social, environmental and financial goals to be aligned and the potential for shared value to be created where this is done. This will allow both the positive social and environmental impacts of business and businesses profits to be maximised.

Edward Davies is the Policy Director of the Centre for Social Justice.