Business will never do the right thing without regulation. Discuss

Values are very fashionable, but it's a brave boss who'll cut the dividend for a higher purpose.

by Adam Gale
Last Updated: 11 Oct 2018

There aren’t many chief executives who’d stand up and say Milton Friedman was right, the only purpose for their business is to increase profits for its shareholders. Instead, you’ll see CEOs standing up at every opportunity to wax lyrical about their benevolent values. You’ll see company websites with so much CSR they make Enron looks like Friends of the Earth.

How much, if any of it, is authentic? Actions speak louder than words. For all the fanfare, businesses are not charities. Corporate philanthropy, while doing some undoubted good, takes far more of a typical large firm’s CEO speaking time than its budget.

Purpose is a much more powerful idea. Simply put, a business is far more likely to do the right thing – that is to say, treat others well and not treat them badly – when its core products and services themselves have a positive impact on the world. It’s very popular in tech land, which unfortunately illustrates its weaknesses as much as anything else.

Facebook loves to point to the social value of connecting people, for example, even if it’s a bit hazy about the fake news and online bullying that come with it. Amazon is right to say it’s giving consumers what they want, when they want, how they want, but makes rather less noise about the taxes – and until recently, the wages – it pays, or the net jobs it destroys.

The fundamental problem with purpose is that it only tends to work when what you do happens not to have any negative consequences for any other stakeholders. If you’re Salesforce – whose founder Marc Benioff famously set up the company with values of ‘inclusive capitalism’ in mind – it’s not so difficult to pay your staff well or allow 30,000 NGOs to use your service for free or invest in the local business ecosystem, because you’re profitable and rapidly growing, with a loyal shareholder base.  

Most shareholders aren’t quite so accommodating, especially if they believe that doing good is shaving points off their return.

Surely, you might ask, there’s still room for morals, some humanity in business. Management Today spoke recently with Julian Richer, the founder of Richer Sounds and author of The Ethical Capitalist. Richer is famed for a multi-stakeholder approach to business that’s resulted in accolades for service and consistent success on the cutthroat high street. He of all people, you might think, would believe in the power of business people to do the right thing of their own accord.

‘The problem with capitalism – and I've benefitted hugely from capitalism – is that it’s based on greed, so you’re not exactly attracting many nuns ,’ Richer says. ‘It's not exclusively bad, but if it weren’t for the unions, we’d still be putting children up chimneys.’

Richer strongly believes that treating people well – your staff, your suppliers, your customers, your community, the taxpayer – ultimately leads to stronger, more sustainable long-term businesses, not to mention a better night’s sleep for the capitalists themselves.  

Most business leaders are essentially good people, and when it’s a grey area or there is a clear long-term argument for doing the right thing, it’s likely many of them will. What’s unlikely, as things are, is that a model of capitalism that doesn’t prioritise shareholder return will become the norm.

‘Shareholders care about their dividends twice a year, but do they care about the employees in a mine in Angola? The twin evils here are size and distance, which remove the shareholders from that mine,’ says Richer.

This is not to lay all the blame squarely on investors of course. Many entrepreneurs are in business to make a quick buck. But for all businesses, the legal principle that gives control to the owners necessarily demands that their interests will be top of the agenda. Short of giving legal voting rights to other stakeholders, this will not change.

What will ultimately force businesses to do the right thing is enlightened self-interest. When it comes to doing good, this occurs when purpose and profit align, as discussed above. If you invest in nearby schools to improve skills, and subsequently get a decent return on that investment in the form on an expanding talent pool in the area and its consequent economic growth, everybody wins.

When it comes to not doing bad – where the combination of greed and shareholder primacy is at its most dangerous – the answer is surely regulation.

Regulation gets a bad press, sometimes deservedly so. Kafkaesque tangles of red tape do no one any good. But most of the time, they are there to protect society from itself, which often means from businesses.*

‘Look at the motor car. It’s a fantastic tool that gives us the freedom to get from A to B safely. But we have a plethora of rules and regulations for them. If we didn’t all drive on the left, there would be chaos. If we didn’t all wear seatbelts, if there were no speed limits, there’d be chaos,’ says Richer, who dismisses the idea that businesses could regulate themselves.

‘Come on. If there are no rules, we all take advantage of every little clever thing we can do to maximise profit. I’ve met a lot of capitalists. They’d buy their children Prada handbags but they wouldn’t give £1 to someone who’s starving on the street.’

It’s unfortunate, perhaps, that many decent capitalists are lumped together with their less highminded peers. There are many professional organisations too that uphold self-generated ethical codes, without the need for legislative intervention. We’re not all bad.

But by ensuring businesses operate within boundaries, the temptation to misbehave will be less, and the overall reputation of business more. Those who are enlightened enough to treat other stakeholders well without being forced to will still be able to reap the benefits through better performance.  

So while it’s tempting to look at Brexit as an opportunity for a red tape bonfire, we should be careful what we wish for – and more careful still to consider what each of these rules is actually for.  

*There’s a reason that we say ‘it’s nothing personal, it’s only business’ when we’re doing something less-than-friendly to someone.

Image credit: Pixabay/Pexels

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