Reforming business for the 21st century
by Professor Colin Mayer FBA
31 Oct 2018
Corporations were originally established with clear public purposes. It is only over the last half century that corporate purpose has come to be equated solely with profit. This has been damaging for corporations’ role in society, trust in business and the impact that business has had on the environment, inequality and social cohesion. In addition, globalisation and technological advances are exacerbating problems of regulatory lag. Together, these issues are intensifying the need for a reconceptualisation of the corporation around purpose. The Future of the Corporation programme represents the most comprehensive attempt to date to provide this reconceptualisation. Our research suggests a need to develop a new framework for the corporation around three interconnected principles.
- The first is well-defined and aligned purposes. Corporate purpose is the reason why a corporation exists, what it seeks to do and what it aspires to become. Profit is a product of the corporate purpose. It is not the corporate purpose. In some, but by no means all cases, corporate purposes should include public purposes that relate to the firm’s wider contribution to public interests and societal goals.
- The second principle is a commitment to trustworthiness. When corporations commit to purposes, they commit to the various parties that are involved in the delivery of those purposes and vice-versa. This creates reciprocal benefits for the firm, its stakeholders and society. These arrangements rely on relations of trust.
- The third principle is embedding an enabling culture. The trustworthiness of an organisation is reliant on clearly articulated values that are adopted consistently in the culture of the corporation.
Achieving a shift to this new framework will require coordinated action using five levers.
- First is ownership. Corporate ownership is currently equated with shareholders. Instead it should be associated with defining and implementing corporate purpose. The rights and responsibilities associated with corporate purpose should replace property right views of ownership. Different types of owners are suited to different types of corporate purposes and activities. This points to the need for diversity in corporate ownership.
- The second lever is corporate governance. Corporate governance is currently associated with aligning the interests of management and shareholders. Instead it should be linked to the implementation of corporate purposes. Boards cannot control some of the largest risks relating to globalisation, the environment and technology. New performance measures are needed for executives to ensure conformity of corporations’ activities and investments with their purposes.
- The third lever is regulation. The notion that competition, regulation and taxation are sufficient to align the interests of business with society is no longer tenable. Technology is intensifying the problem of regulatory lag. One concrete proposal in this regard is to promote ‘forward compliance’. More generally, a fundamental overhaul of regulation is required that encourages companies which perform significant social functions to incorporate public purposes in their corporate purposes.
- Fourth is taxation. Globalisation has eroded the corporate tax base by allowing corporations to arbitrage tax domiciles and transfer liabilities to lowest tax jurisdictions. Our research paper identifies and debates the main reforms that are currently discussed. However, none of these are without their problems, pointing to the need for a closer association of corporate with public purposes in determination of fair levels of taxation.
- The final lever is investment. Public as well as private investment is required to deliver large-scale, long-term infrastructure investments. Attempts to achieve this through privatisations, public-private partnerships and private finance initiatives have often been disappointing. It is in precisely these areas, where corporations perform important public and social functions, that private and public purposes need to be aligned through the adoption of public purposes in corporate charters and articles of association.
Together these five levers of ownership, governance, regulation, taxation and investment offer the opportunity of promoting corporate and public purposes around trustworthy organisations with enabling cultures of integrity.
Professor Colin Mayer FBA is academic lead of the Future of the Corporation programme and Professor of Management Studies at the University of Oxford.
The Future of the Corporation Phase 1: Developing a new framework for business considered ten themes which will shape the future of business. Read the full report Reforming business for the 21st century: a framework for the future of the corporation.
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