Finding true north on the corporate moral compass

Most boards will say they have one; but, when they consult it, they may find that the organisation’s (moral) purpose has shifted

By WILLIE CHENG

The Business Times, 20 March 2023

 

OUT of the many debates on corporate morality that have been held since the emergence of the corporation, four seasons and themes have emerged:

Season 1: “We are good”

Modern corporations operate on the free-market model envisaged by 18th-Century philosopher Adam Smith, considered to be the father of modern economics.

Smith believed that people are selfish but not self-centred and, therefore, are basically good. He argued that rational self-interest informed by moral judgements based on fairness and justice would promote the best interests of society, guided by the “invisible hand” of the market.

According to a 2018 British Academy paper analysing the historical role of corporations in society from antiquity to the present day, social purpose has long been a defining trait of the corporation since the concept of legal personhood appeared.

The study observed that “1950 to the 1980s proved to be the heyday of worker-orientated, industrial paternalism, but by the 1990s, the social contract between America and the ‘good corporation’ had disappeared”.

So, what exactly happened?

Season 2: “Do well”

What transpired was a shift in thinking from the “good corporation” to one with no social responsibility but an exclusive focus on financial success for its shareholders.

The credit (or blame) for this fanatical focus on “doing well” falls on the Nobel Prize-winning economist Milton Friedman. In 1970, he famously wrote that “the one and only one social responsibility of business (is) to use its resources and engage in activities designed to increase its profits”.

Advocacy for his position led to mantras such as “maximum shareholder value” and “greed is good”. The pernicious effects of shareholder primacy carried to its excess can be seen in climate change, rising income inequalities, the global financial crisis, and social activism against companies such as Occupy Wall Street.

Season 3: “Do good”

As these issues became more evident in the last two decades, there were pushbacks and calls for reforms to this model of brute capitalism. It came from all quarters: social activists, eco-conscious consumers, responsible investors, regulators and even corporate leaders championing sustainability.

The proposals for a new form of capitalism had two core ideas:

• Companies should meet the needs of not just shareholders but also the broader group of stakeholders (customers, employees, suppliers, investors and the community);
• Companies and the people who run them should focus on values (both human and community) and not just value (profits and economic gains).

The calls gained traction. The corporate world coalesced around the sustainability movement, which began with concerns about human sustainability on planet Earth. Over time, the sustainability agenda evolved to focus on the impact of environmental, social and governance factors on companies.

Season 4: “Do right”

In August 2019, 181 chief executive officers and members of the Business Roundtable in the US signed a Statement on the Purpose of a Corporation. They essentially committed to moving away from shareholder primacy (which was their stance in their 1997 Statement on Corporate Governance) to stakeholder capitalism.

Since then, there have been significant discussions on “corporate purpose”, with soul searching by many corporations for their own corporate purpose.

“Purpose” implies “moral purpose”. Professor Colin Mayer of the University of Oxford defined the (generic) purpose of business as “producing profitable solutions for the problems of the people and planet, and not profiting from creating problems”. The World Economic Forum and other prominent organisations have adopted this definition.

In their search for the deeper meaning of what they do, many corporations found a collective consciousness of moral rights and wrongs among their people. It reflects today’s more woke world of greater concerns about social injustice. The effects of responding to the Covid-19 pandemic, geopolitical tensions (Ukraine war, US-China relations) and the climate crisis have also raised a broader awareness of what a better world should be.

In the process, some corporates began finding themselves exercising – and, in many cases, pressured by employees, customers and others to exercise – their corporate conscience.

For instance, in July 2020, civil rights groups organised a month-long advertiser boycott of Facebook to protest against the platform’s handling of hate speech and misinformation. Over 1,000 advertisers publicly joined in, while many quietly scaled back their spending.

Exercising corporate conscience can entail taking a visible stance and speaking out on social and political issues that are not directly related to the company’s business. And in some cases, it entails making difficult business strategic decisions on questions of right and wrong, even forgoing business at high costs to themselves.

For example, over a thousand companies have abandoned or scaled back their activities in Russia in response to the Ukraine war. Those that have exited, some at tremendous costs, include Adidas, American Express, H&M, McDonald’s, Shell, Starbucks, Uniqlo and Visa.

These pressures to address political and societal issues will only mount. Ignoring them will become more difficult as the world becomes more political – and more politically correct.

Role of boards

Every board should have a moral compass and consult it frequently.

Having a moral compass starts with proactively and openly communicating the board’s position on moral values.

Most organisations have a code of ethics and conduct. That is good but not enough.

Morality is more than ethics. Morality has to do with reasoning and behaving according to values that extend beyond narrow self-interest.

There should be a focus on organisational values and leadership. As the apex body, the board sets the tone for corporate morality by encouraging and reinforcing moral reasoning and behaviour.

It would be impossible to list down all moral values. Instead, specific moral values would be apparent from the discussions within the board and in its dialogues with management and shareholders regarding moral attitudes and stances taken as priorities are set and decisions made.

Directors can influence and affect the corporate moral compass if they individually are driven by a strong personal moral compass. A compass that points to true north, whether it means standing up to a dominant shareholder or CEO, going against the consensus, or giving the real reason for resignation rather than masking it as “for personal reasons”.

The right board members for “doing right” has never been more in demand in this season of corporate morality.

The writer is the former chairman of the Singapore Institute of Directors and author of the Doing Good collection of books and writings