When companies expand their stated corporate purpose beyond profits for shareholders, individual board members should be held accountable for fulfilling those new goals. If a company falls short of its stated obligations to customers, employees or the planet, investors should vote the directors out.
That’s the recommendation of a new report from The British Academy, the U.K.’s premier organization for researchers in the social sciences and humanities. The report is the result of a four-year long study into evolving nature of corporations.
Colin Mayer, a professor of management at University of Oxford’s Said Business School who serves as the academic lead for the Academy’s “Future of the Corporation” program, said that the public is right to be skeptical of companies that say they believe in stakeholder capitalism and have a purpose beyond profit.
He noted recent research from Harvard University finding that most companies whose chief executives signed the Business Roundtable’s much-heralded new Statement on the Purpose of the Corporation in 2019 subsequently failed to take any action to change their company bylaws or corporate governance policies to actually ensure implementation of a broader, more holistic view of the a company’s role in society.
“At the moment it is extremely difficult to realize the good companies that are taking this seriously from those doing it for promotion purposes,” Mayer said. “What this report is trying to do is say, how can we give real substance to those stated intentions and how can they be converted from fine words into goals we can believe?”
“The major hurdle”
The report recommends that companies adopt clear metrics for measuring their progress in fulfilling all of their stated purposes and that they publicly report their performance on these measures.
Mayer said that in discussions with the boards of 60 largest North America and Europe companies and 50 large institutional investors, the Academy’s Future of the Corporation group repeatedly heard that a lack of agreed benchmarks for assessing performance on more holistic goals was a problem. “The metrics to date have been the major hurdle against the effective implementation of corporate purpose,” he said.
Since in business, money talks, companies should be assessed on how much they invest in actually fulfilling these broader commitments to employee welfare, diversity, environmental stewardship and community, the Academy said.
It also said that companies must align incentives within the business so that employees are all working to meet these broader purposes and not just rewarded for meeting revenue, profit or cost cutting targets.
Jonathan Geldart, director general of the Institute of Directors, said he supported the Academy’s conclusions. “ Our own research of our members has shown that almost half of directors feel that companies should have a stated social purpose to help solve problems in society,” he said. “This report sets out the practical steps and policies that need to be implemented in order to deliver this.”
While the report charges corporate boards with doing more to guarantee the business is meeting its purpose—and challenges investors to ensure boards are doing their job—it also calls on companies to be more accountable to a broader group of stakeholders, such as employees, customers and suppliers.
Mayer pointed to the example of Unilever, which he said has begun holding town hall-style meetings with customers from around the world to listen to their feedback and criticism—and not just with the intention of figuring out how to sell them more soap in the next quarter.
He said that companies should want to be held accountable for living up to their stated purposes because doing so creates trust. “That trust translates into less customer churn and more sales, more engaged employees, and more reliable suppliers,” he said. “That ultimately benefits the company itself and makes it more profitable.”
While investment funds that say they use “environmental, social and governance” criteria to guide their asset allocations are playing an increasingly important role in pushing companies to be better global citizens, Mayer said the pressure from these funds was insufficient to bring about real change. At worst, they provide public relations smokescreen that permits companies to continue to act as they always have.
“The ESG measures as they have currently been put forward are too vague and too inconsistent, and there is too much discrepancy between them,” he said, adding that many of the benchmarks the ESG funds use are also not properly audited.
He said instead companies should lay out their own metrics that make sense for their stated purposes and then be transparent about their progress. He said corporate auditors should be responsible for offering assurance on the way this data is collected, tabulated and presented.