Stakeholder engagement can rescue capitalism from crisis
There is a growing sense of unease about the economy across much of the country.
Perhaps it’s the stories of runaway executive pay, or that feeling that some of the biggest profits go to big businesses able to engineer one-way bets.
While inequality of income might not have got worse in recent years, there’s a widening gulf between the overall wealth of those with assets – be it houses or hedge funds – and those without.
Read more: Guest Notes: Save capitalism by taking on the cronies
We can see this unease expressed as an appetite for political change, especially among younger voters under the age of 30, many of whom find that home-ownership has become an unaffordable dream.
Politicians are all too aware that a growing chunk of the electorate is attracted to the idea of change. But what kind of change will actually make things better?
As a businessman, I have come to believe that there is something wrong with the way we organise businesses – and I have been taking steps to try to help put things right.
The Cordant Group, which I helped build into a business with a turnover of over £850m a year, has thousands of clients, and found jobs for over 125,000 workers over the past 12 months. And last year, we turned Cordant into a social business.
In the average FTSE firm, chief executives tend to be paid over 100 times what their average worker receives. At Cordant, no one is able to earn more than 20 times what any other staff member makes.
We have capped what we pay out to the shareholders, too. Soon, we will put a share of the company’s profits into a profit-share pool to pass out among our workers.
What I have come to realise is that profit is our discipline, not our purpose. Getting the way we manage and motivate those that work for us right is what ultimately drives what we do – which is why we are moving away from being a business that focuses first and foremost on money, towards one that focuses on people.
To me, the real problem with our economy is the whole idea of ownership. In a capitalist system, those that own equity in a business should not only get a slice of any dividends, but also exercise ownership, and the responsibilities that go with that.
Cordant is a private firm, and the small number of shareholders are able to exert direct influence over me and the board. But what about the many publicly listed businesses in Britain?
Ownership, it seems, has become detached from the issue of corporate control. This is ultimately why executive pay is increasing faster than the returns investors are getting on what they put into these firms.
I would like to start a wider conversation about how we could reform free market capitalism – to make sure that it works for everyone.
This is why this week I am publishing a paper with the Social Market Foundation, a think tank founded on the idea of fair markets and sustainable business.
I suggest that we rethink the 2006 Companies Act – Section 172 of it, to be precise. This piece of legislation requires company directors to have regard for the interests of their company’s stakeholders – defined as employees, suppliers, customers, as well as the wider community and environment.
Rather than simply have regard for such stakeholders, why not give them a formal role?
Previously, when politicians have toyed with this idea, they have thought in terms of offering places on the board to workers and other representatives. I believe we should instead look seriously at an idea emerging from France.
President Emmanuel Macron, faced with a slow-growing French economy, has been forced to think strategically.
Remarkably, for a country with a tradition of strong chief executives, he is considering a change that would disperse oversight within corporate governance structures. Under his proposal, firms could turn themselves into a mission company, required by law to set out their wider set of responsibilities to stakeholders, not just shareholders.
Rather than putting stakeholder representatives on boards, a separate council of stakeholders would then assess how effectively the board did what it set out to deliver. Ultimate oversight, quite rightly would still rest with the board directors. But a wider set of opinions and ideas could feed in, perhaps shaking up some of the group think.
We might be leaving the EU, but Europe still has much to teach us. A global Britain should not be so conceited as to believe it has all the answers. If France can think about bold reform, we should be contemplating change too.
Capitalism should not be a dirty word. But unless we are prepared to think seriously about how we change things, it could soon become one.
Read more: Virgin Money share price rise attracts City watchdogs’ scrutiny