By Francis West
CEOs of big business aren't trusted by the public.
A toxic combination of executive salaries, bailouts, pricing structures that appear to hit consumers rather than profits and the Rana Plaza tragedy has taken its toll. A 2013 Ipsos MORI poll found only 34% of people questioned trusted business leaders to tell the truth. Perhaps the clearest indictment is that trust in business leaders has been eroded to the extent that only government officials are seen as less credible, according to the annual Edelman Trust Barometer.
So it was with no small hint of irony that MPs met last night to debate 'transparency and public trust in business'. Ranging from the corporate responsibility to respect human rights, transparency of environmental impacts and labour standards in the supply chain, the scale of the issues raised clearly demand attention from the public, private and third sectors alike.
There are a number of tangible steps that can change behaviours and better align business with public expectations.
Numerous businesses have a sharp sense of responsibility and already take such steps (and more) as they seek to strengthen their relationship with the public.
1. Define the social purpose of a business
The world has changed greatly in the 45 years since Milton Friedman stated in The New York Time Magazine "there is one and only one social responsibility of business – to use it resources and engage in activities designed to increase its profits".
The most progressive businesses now openly reject this approach. The B-Team is an alliance of industry leaders, including Sir Richard Branson and Paul Polman, CEO of Unilever, that clearly states "the private sector can and must redefine both its responsibilities and its own terms of success… Plan A - where companies have been driven by the profit motive alone - is no longer acceptable".
This view has academic backing, with Harvard Business School professor Michael Porter arguing for a 'shared value' model, whereby it is in the financial interests of business to create long-term social value.
There are undoubtedly products and services that will not fit neatly within this utopian win-win vision. Nevertheless, the fact that initiatives such as A Blueprint for Better Business are encouraging corporate boards to consider and articulate their purpose within, and value to, society, is a useful first step.
2. Adapt internal incentives and external engagement
Targets and pay for senior business managers need to be adapted to consider social and environmental performance, not just profit. Without this, talk of a social purpose for business will remain limited to discrete philanthropic projects disconnected from the core operations of a business.
Such changes are feasible. Managers within GSK's Developing Countries and Market Access Unit enjoy incentive schemes that reward volume growth rather than profit. This means it is now in managers' interests to increase access to medicines.
Corporate governance – hardly the most accessible topic – should be a matter of public discussion. This is patently a political issue, defining the rules by which businesses are run and ultimately where resources are focussed.
Some suggest that extractive companies could re-build trust with populations affected by their operations by offering community leaders a place on company boards. Integrating NGO engagement into planning and business processes is a similar tactic that brings external perspectives and expectations into the heart of the business. Save the Children has seen the benefits this can engender through our work on the Children's Rights Business Principles.
3. Maximise long-term shareholder value
While it is wrong to say (as many do) that company directors have an absolute legal obligation to maximise shareholder value – and therefore ought to blithely de-prioritise social and environmental impacts – it is clearly a social norm that permeates many businesses. However, the notion that shareholder value is best achieved through an exclusive focus on short-term profit is false.
In many cases it is shareholders that are demanding changes of the businesses in which their savings are invested. According to a recent YouGov poll, over half of British savers want their pension funds to make sure companies address issues of tax justice, poverty pay and extreme high pay.
This argument is not limited to shareholder activists. It is being made at the heart of the City.
Aviva Investors, one of the UK's largest investors, "believe that companies conducting their business in a responsible manner with good corporate governance, high standards of integrity and a sustainable business model deliver better long-term returns to shareholders".
But this investor pressure will not be brought to bear effectively without government intervention. The data available to investors to make decisions on non-financial concerns is largely inconsistent and incomparable. Aviva are clear that 75% of companies do not report on sustainability issues at all. "Without legislation it will be decades before sustainability reporting is common practice,"’ they say.
This is one example of how smart regulation, too easily palmed off as 'anti-business', is in the interests of a more sustainable economy and the private sector in general. It will also help to restore trust. The public want more regulation of business, by a four to one margin.
The same survey showed that trust in financial services had risen by ten per cent, with 64% of people saying this was due to better regulation and 61% saying it was due to government enforcing regulation.
4. Ensure businesses are not abusing human rights overseas
Tragedies such as the Rana Plaza building collapse rightly prompt a great deal of soul-searching on the part of the British public as to the working conditions and rights of those people who make the products we buy on the high street.
It is to the government's credit that it developed an Action Plan on Business and Human Rights to help address this emotive issue. But more could be done to ensure this plan is being put into action.
The obvious place to start would be with those businesses that receive government funding or support to invest abroad. At an absolute minimum, you would expect that businesses enjoying government support to improve livelihoods in developing countries would be required to conduct and report human rights due diligence throughout their operations and supply chains.
This point was reflected in the parliamentary debate last night, with Lisa Nandy MP stating that "it is time for a more proactive approach" and calling on the government to "ensure that businesses receiving export credit support or development partnership funding have to show they are meeting the standards of the UN Guiding Principles [on business and human rights]".
5. Publish tax policies and payments
Thanks in part to the government’s efforts at the G8 last June, multi-national tax avoidance is no longer the elephant in the room on corporate accountability. Nevertheless, most large companies still struggle to meet the tax transparency standards that campaigners and the public expect.
The issue is as relevant as ever and has severe implications abroad as well as in the UK. Improved tax collection links to issues as seemingly remote as undernutrition: Countries collecting more than 20% of their GDP in tax had an average level of undernourishment of 15% during 2005–08, while those collecting less than ten per cent had an average rate of undernourishment of 32%.
Save the Children estimates that if all developing countries were to mobilise 20% of GDP in tax revenue, an additional 3.72 million children’s lives could be saved between 2015 and 2030. Clearly, an international agreement on disclosure of profits made, taxes paid and other relevant financial information by multi-national firms in every country in which a firm is present would have wider benefits than restoring the UK public's faith in business.
These steps – while challenging – represent grounds for optimism. Many companies are at the forefront of such initiatives, recognising that greater transparency and accountability to shareholders and society is not only right, but in the interests of long-term financial performance. It is a shame that an issue of such importance – and one that has widespread cross-party and sector support – is debated so infrequently by parliament.
Francis West is senior private sector adviser to Save the Children.
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