Thursday 15 November 2018 3:23 pm

Profit or purpose? Business must find a better balance

Last week, I attended a meeting of entrepreneurs backing Small Business Saturday (coming up on 1 December) to look at a survey of what motivates these firms.

I expected a tirade against red tape and tax. What we got was the news that, of over 1,000 SMEs polled, only 60 per cent were primarily driven by profit.

Perhaps this explains the low productivity puzzle? In any case, I was sufficiently taken aback at the event that I became the devil’s advocate for more profit.

The next day, we saw the other, uglier face of British business: the Persimmon chief executive forced out after the publicity surrounding his £75m long-term incentive plan – a bonus massively bloated by the taxpayer subsidy from Right to Buy and the sector’s oligopoly – only to be replaced by a man with a modest £40m incentive plan. Corporate greed on stilts.

These extreme examples prompt the age-old question of what companies are for. When the government manages to lift its gaze beyond Brexit, it will hopefully return to the reform of corporate governance in which Theresa May showed a fleeting interest, following my work in the coalition.

A good starting point is Section 172 of the Companies Act, which more directors should read (or re-read). Directors’ primary duties are to shareholders, but they also have a legal duty to recognise the interests of employees, suppliers, customers, the wider community, and the environment.

Many chief executives and directors probably regard this as an irritating chore to be delegated to PR people for the annual corporate social responsibility report. But it is a legal duty.

If we want this to be enforceable, we need a modification of Section 172 to make it clear that directors’ primary duty is to achieve the long-term success of the company, with the obligation to shareholders no longer paramount.

It follows, then, that shareholders should no longer have an exclusive say in key strategic decisions such as executive pay plans or in seeking legal redress for company failings.

I confess that I struggled in government to get business support for getting employees onto boards and remuneration committees. But the failure to achieve effective restraint on executive pay solely through the shareholder route has persuaded me of the need to have more diverse boards with employee representation, at least for the larger companies.

The Prime Minister herself seems to have reached the same conclusion, though the reforms her government eventually announced were significantly watered down from what she suggested two years ago.

The fact remains that if corporate governance is to mean anything in practice, there has to be a more effective regulatory body than the toothless Financial Reporting Council, with real investigative and enforcement powers for when directors fail in their duties.

The attempt to balance profit maximisation with social purpose does not necessarily require legislation. Some companies already do it – indeed, social enterprises are designed to do exactly that.

I happen to chair one of the biggest: HCT, which, with a £60m and growing turnover, is making waves in the bus industry.

Starting with a handful of volunteers and a couple of minibuses in 1993, HCT now employs over 1,500 people and operates a fleet of 730 vehicles across the UK.

But instead of distributing its profits to shareholders, it reinvests them into its transport services and projects in the communities it serves, including providing training for the long-term unemployed and creating job opportunities in deprived areas.

Another good example of a social enterprise is Belu, a British water company which donates 100 per cent of its profits to the charity WaterAid, helping people in developing countries to access clean water.

A wider definition of social enterprise might also encompass businesses like Timpson, which offers training and employment opportunities to ex-offenders, and Ben and Jerry’s, which provides funding and mentoring for refugees in the UK to start their own businesses.

It is not always easy to find top-class managers who are sufficiently business-like to make a decent profit in competitive markets and yet are sufficiently motivated to pursue a social purpose as well. But it can be done. I have seen it.

Social enterprises face the problem of scaling and depend on a combination of impact investors and reinvested profits to expand. A lot more can and should be done to support such businesses with tax reliefs and help them to raise finance and win public sector contracts.

However, it is not enough merely to encourage this kind of model. If a better balance between profit and social purpose is to be achieved, it must primarily come from a reform of the rules under which companies operate.

If we want capitalism to thrive in this country, we must ensure that business works for society, and not the other way around.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.