The Role of Business in Social Welfare
James Perry
I started my career working for a great Quaker business, Cadbury Ltd. As a trainee I was fascinated by what made the business tick, and so I became friendly with the in-house librarians. Their role was to curate the organisational memory of a business that had been founded with social as well as financial goals, as part of the temperance movement. Chocolate as a weapon against gin, Cadbury as a social intervention, to tackle social distress and human indignity and to model community – while making money.
And then I watched as a new regime in London took over and undertook an internal change programme bluntly named ‘Managing for Shareholder Value’. The librarians lost their jobs and I watched the founding values being systematically extracted from the business, on the basis that they were getting in the way of ‘shareholder value’.
When my brother and I began our own business, we were naïve. Years before, our parents had started a craft baking business, which employed mostly recovering addicts. While this turned out to be a disastrous recruitment policy, it reinforced the idea to us that there was a choice about what sort of business one might create: on the one hand the early Cadbury business’s purpose-led approach; on the other the shareholder-value one latterly imposed on Cadburys. We didn’t even think about it; we opted for the former.
But we needed risk capital to grow the business, and it was only after numerous discussions with venture-fund managers that we realised that the choice we thought we had was an illusion. Fund mandates, operated quite properly by venture fund managers, could not accommodate a desire to create social or environmental value. Their mandate, and so their legal duty, was only to create financial value for their investors.
Inadvertently, a system was created where entrepreneurship in the UK was monocultured into profit. All of the broader, human goals that every entrepreneur starts out with were being systematically extracted by the financial markets, much as they were from Cadbury Ltd, ‘managing for shareholder value’. Thus King Midas was institutionalised into our society.
In the event, my brother and I went on a hair-raising journey to finance our business without surrendering our purpose, which is a cracking story but not one for today – suffice it to say, we entered the financial collapse ridiculously over-leveraged. Literally overnight we then watched our bank go bust, our sales plummet by 15 per cent; we breached every covenant with our now-broken bank; a terrifying, cavernous cash hole opened up beneath our feet.
In the subsequent two-year fight for our financial life we learnt a lot about the spirit behind the invisible hand and about who your friends are. It was these friends who enabled us to avoid a distressed equity sale and hence protect our ability to retain our social purpose.
Mercifully the business is now scaling, debt-free and cash generative, and employs around 700 people. In retrospect it was a terrific experience and one that left me fascinated by this question of the social purpose of business and of investment capital. I have spent the last eight years researching and experimenting in this field.
During the twentieth century an orthodoxy emerged in business schools that ‘the social responsibility of business is to maximise profits’. The rationale for this was based on evidence – business is the greatest source of wealth creation, innovation and employment known to humankind. The data suggested that as economies liberalised and developed, everyone benefited. Social responsibility was outsourced. Governments took responsibility for solving social problems and charities sought to clear up behind them. For a while it sort of, on the face of it, worked.
But the twenty-first century is starting to tell a different story. On the one hand, capital markets have become more sophisticated as information has experienced a revolution. As capital has become more mobile and intermediated we have seen it blown into great drifts, leaving the rest of the landscape sparsely covered. On the other hand, government is increasingly unable to honour the social contract and retain legitimacy. For many charities the scraps from the table become ever scarcer.
But all the hand-wringing over tax avoidance, executive remuneration, lobbying influence, zero-hour contracts, social immobility, widening inequality, predatory lenders and so on is to rage at the symptoms. Why are we demonising people for working the rules of the game? And what is the actual cause of these symptoms? I rather respected the Google CEO Eric Schmidt when he toured Europe a couple of years ago to make the point that it is his legal duty to legally avoid paying tax. He pays higher returns to investors – his fiduciary responsibility – when he mitigates tax liabilities. His point – that he would be happy to play by different rules but that it isn’t his job to set them – seemed a fair one to me.
So there is a big challenge here. The paradigm under which our society was conceived – where business’s role is to maximise profits; government’s is to get out of the way of this wealth creation and use tax revenues to solve social problems; charity’s is to mop up after the other two – is no longer fit for purpose.
The misalignment between business and society is acknowledged in its institutions. They are created to oppose each other and compete, locked in a zero-sum game: HMRC versus the tax accountancy industry; the CBI versus the TUC; environmentalists versus extractive industries; the financial services industry versus the FCA; big business versus the competition authorities; private versus public; labour versus capital.
That it is failing is obvious. But how do we respond in the face of such a systemic flaw? The core of it must be the concept of alignment – when we align interests, we are able to collaborate rather than only compete. Much like Hegel’s Geist, if you’re that way inclined.
Economists will tell you that there are three inputs: land, labour and capital. Well, Marx valued the labour at the cost of the others; the Greens value the land at the cost of the others; and our current economic system values capital at the cost of the others. It is becoming increasingly obvious that our economy needs instead to value all three, together, in harmony. But how do we do this? The frontier of this question is the place where government, civil society and business meet.
We have three million organisations in the UK. Of these, 2.7 million are companies limited by shares, focused on creating financial value. Some 300,000 are ‘civil society organisations’ such as registered charities, companies limited by guarantee, community interest companies, co-ops and industrial provident societies. They are focused on creating social and environmental value.
What distinguishes the 300,000 from the 2.7 million is the concept of an asset lock. All of those civil society organisations have some sort of asset lock, or bar on financial distributions. This is how we determine that they are, indeed, social – rather than a vehicle for private interest. The unintentional effect of this asset lock is to exclude social purpose organisations from the capital markets. Perhaps more significantly, it is to exclude the capital markets and business from explicit social purpose. This in turn has the effect of ensuring that any economic value created by social-purpose organisations is incidental and that any social value created by business is also incidental.
The future, therefore, lies in ending this Berlin Wall between civil society and the capital markets. It lies in expanding the concept of fiduciary responsibility to allow for the creation of social value, and in expanding the concept of social value to allow for the creation of economic value.
This future was elegantly illustrated by the first social impact bond in 2010, where private investors contracted with government through a social-purpose partnership to intervene with short-sentence male offenders. If the private investors could reduce recidivism, they would be paid out of the savings made by government. The private investors then contracted with charities to deliver a broad set of interventions with those offenders to help them put their lives back together. Because they had skin in the game, the private investors were focused on the outcomes in a way that government could not be. Why this first social impact bond has caught the imagination is because of the big idea at its heart: achieving alignment between the creation of social and financial value. Great things are possible when the incredible skills and talent in the financial markets and business are put to work to solve social problems in a way that creates value for both society and investors.
The social impact bond market and the social investment market as a whole continue to develop – the UK is seen as a world leader in this emerging field, with Big Society Capital, the new Access Foundation and so on. Over time this may well have a profound impact on government and how it operates. But an even bigger strategic transformation in the role of government and charity will come if the role of business is allowed to change.
A strategy director of a global business recently gave me his personal definition of business. He sees it simply as ‘a tool for the efficient organisation of tasks’. Business people, like everyone else, can see the increasingly obvious flaws in the system design, and for them it is personal – winning the game under its current rules often makes them a pariah. So there is a new breed of business leaders and investors whose response to all this is to use the profoundly powerful tool of business to create social and environmental – as well as shareholder – value; ultimately, to use business as a means to solve social problems.
This is not such an outlandish idea as it may at first appear. It is after all already the case that business meets social need when it delivers quality goods at reasonable prices and when it creates and distributes wealth – including wealth in the form of jobs – throughout society.
So these entrepreneurs are challenging the core bipolar principle of our system design: that they must either, on the one hand, be excluded from intentionally creating social value; or, on the other, be excluded from capital markets. The most tangible example of this is the global ‘B corp’ movement. Business leaders from around the world have come together to challenge and change the system. Thus far it has benefited from bipartisan political support. Launching such a movement in the UK was a core recommendation of the G8 Social Impact Investment Taskforce, established by the Prime Minister in 2013.
In September 2015, B corps will launch in the UK with a community of business leaders who are using their businesses to solve social and environmental problems. They range in industries from financial services and investment fund managers to consumer brands; from technology businesses to outsourced public service providers. By using the tool of business to solve social and environmental problems, they can scale. By having clear measurement and analytics tools, they create the possibility that all businesses can measure what matters and move beyond the ‘single bottom line’. Notably, one of the biggest companies considering certifying as a B corp in the UK is a global professional services firm, interested because they recognise the importance of measuring social and environmental – as well as financial – value.
The future for social welfare does not lie with government trying to do it all alone, with some help from cash-strapped charities. It lies in a new system where government, business and charities all play their part. Separately, pulling in opposite directions, none of them can respond to the challenges of our time. Aligned, pulling together, they can.