LinkedIn Dialog
Purpose of the Corporation

Christopher Halburd ... Re-imagining the purposeful corporation

Burgess COMMENTARY

Peter Burgess

Purpose of the Corporation 328 members Member Information and settingsShare group DiscussionsPromotionsJobsMembers Search Christopher Halburd Unfollow Christopher Re-imagining the purposeful corporation Christopher Halburd Solicitor & Mediator at Skinner & Associates Top Contributor British capitalism is broken. Here’s how to fix it | Will Hutton bit.ly The long read: The country is heading towards a social and economic crisis marked by desperately high levels of inequality. But it’s not too late to create a fairer society in which most people flourish Like (2) Comment (7) Unfollow Reply Privately5 days ago Comments Beate Sjåfjell, Paige Morrow like this 7 comments

John Montgomery John John Montgomery Chairman, One Global Chris, Thanks for sharing this article. Will Hutton points out the fundamental philosophical question that is not addressed in our Western democracies: what should be the rights and responsibilities of our corporate citizens? The author's suggestion to adopt a Companies Act for the 21st century begins to address this question. For inspiration, the UK can look across the Atlantic pond to the US where 27 states, including Delaware, have recently adopted benefit corporation legislation. As this group already knows, a benefit corporation is a for profit corporation that is identical to a regular corporation in all particulars except that it must (i) provide a public benefit, (ii) measure the provision of such benefit against an independent third party standard and (iii) report periodically to the shareholders and public about how well they are providing such benefit. In California, for example, a benefit corporation must provide a material positive impact on society and the environment from its operations taken as a whole. Generally, the fiduciary duties of directors are extended to all of the corporation's stakeholders, including society and the environment. The net result is a form of corporation that is legally required to exercise a social and environmental conscience in addition to the usual pecuniary one. The use of such a corporate form is strictly voluntary. The benefit corporation gives entrepreneurs and business leaders a clear choice between doing business in an entity that is prone to altruistic behavior because it has a social and environmental conscience or in one that is prone to sociopathic behavior because profit maximization serves as the corporation's moral compass. Like (1) Reply privately Flag as inappropriate 3 days ago Christopher Halburd likes this

Miguel Miguel Padro Senior Program Manager at Aspen Institute Business and Society Program Thanks for sharing, Christopher. Mr. Montgomery, I appreciate your comment but I'm afraid we in the US have very little inspiration to offer! I don't see the benefit corporation example as a pathway towards Mr. Hutton's vision. I agree that Mr. Hutton raises a fascinating and important question about what society should demand from companies in exchange for the privileges of being a corporation. But this is not a question the benefit corporation movement raises. Benefit corporation status is voluntary and simply having the option to legally charter as one does nothing to change the companies that might not otherwise internalize the full downside costs of their business operations. Mr. Hutton is suggesting something far more ambitious in my opinion. Like Reply privately Flag as inappropriate 3 days ago

John Montgomery John John Montgomery Chairman, One Global You are spot on Mr. Padro. Unfortunately, the political process of getting benefit corporation legislation adopted resulted in compromise. It would have been fantastic if every corporation in every state with benefit corporation legislation were required to be a benefit corporation but, unfortunately, that was not feasible. There is simply too much resistance. In order to get the California bill passed, for example, the benefit corporation legislation had to be a voluntary, opt-in provision of the corporation code. Before benefit corporation legislation was adopted, Governor Schwarzenegger had vetoed a constituency statute, which would have extended the fiduciary duties of directors in California corporations to other stakeholders, in addition to shareholders. More than 30 US states have constituency statutes, which are similar to the Companies Act of 2006. The opposition was in California was fierce. It would have been impossible to get benefit corporation legislation passed in California, and every state where it has been adopted, if it had required all existing corporations to become benefit corporations. Those in power in existing corporations and their counsel are simply too terrified about the implications of being required to operate their corporations with a social and environmental conscience. You are absolutely correct in pointing out that benefit corporation legislation does nothing to change the overwhelming majority of corporations who will continue to externalize as many of the negative consequences of their businesses as possible. The hope is to create an alternative global legal matrix that spawns benefit corporations with legal architecture that requires the exercise of a social, environmental and pecuniary conscience and have enough successful companies using this model emerge over time to inspire conventional corporations to convert. B Labs, the not-for-profit that has sponsored US benefit corporation legislation, likens this process to building a cathedral, the cathedral being a new economy in which all business is conducted as if people and place matter. Unfortunately, this approach may take a while. When most people learn about benefit corporations, their initial response is often, 'Shouldn't all corporations do business this way?' You are right, Mr. Hutton suggests something far more ambitious. It would a bold step forward if his Companies Act for the 21st Century required all corporations in the UK to become benefit corporations. Like Reply privately Flag as inappropriate 2 days ago

Peter Burgess Peter Burgess Founder/CEO at TrueValueMetrics developing Multi Dimension Impact Accounting Thanks for sharing the Hutton article. Many of the points he makes seem so obvious, one has to wonder how on earth the investment community was allowed to do so much damage with almost no push back from anywhere. I have a number of thoughts about this, but the one issue I want to see addressed as soon as possible is the framework of metrics that are being used in our modern enviro-socio-economic system to measure and report on progress and performance. Profit, stock value and GDP growth are measures that have helped produce the results that Hutton writes about. Something better is needed and something better is possible. This essay describes how my thinking on this has evolved ... and indeed is continuing to evolve: http://www.truevaluemetrics.org/DBpdfs/MDIA/TVM-Short-Introduction-to-7D-Capitalism-and-MDIA-141212a.pdf I subscribe to the idea that we manage what we measure ... and that if you want to change the way the game is played, you change the way the game is scored. The corporation is an amazingly efficient economic entity at its best ... the key to real progress is going to be to get the corporations to optimize for people and planet as well as profit ... all together. Delete 2 days ago

Ellen Stenslie Ellen Ellen Stenslie PhD-Scholar at Norwegian University of Life Sciences I very much agree with the statements of Mr. Montgomery here. I'm just wondering why the author (Hutton) does not address the similar legal model in the UK, namely the Community Interest Company. While different in it's structure and background, this is a model intended for social entrepreneurs integrating societal purpose into the very core of the organization as well as generating profit and adopting business methods. There are currently around 10 000 CICs in the UK, and the number has grown rapidly over the last few years. The way I see it, if you visualize a continuum of mission orientation with the social enterprise/social business in the middle, and the traditional charity and business respectively at opposite sides, the Benefit Corporation in practice seems more similar to the conventional business, while the CIC seems to be more charity oriented. However, they both represent a societal shift towards the middle, where traditional sector divisions seems to matter less and less in the modern economy. What is challenging, however, is to decide whether this shift implies more market liberalism (i.e. the crisis of the state and more market based approaches to social and environmental issues). As such, companies may only move in order to gain new business from solving these issues, and to legitimize their own existence. The truly sustainable company with societal purpose would entail a significant institutional shift on multiple levels. Getting rid of strong norms of shareholder primacy, profit maximization, and the current drivers that are problematic in an environmental context is challenging. The endless need to increase sales, producing as cheaply as possible, and to produce all sorts of goods that are simply not sustainable, nor perhaps necessary, require a bigger systemic shift than only changing the corporation. But it is an important start, and if we manage to rewire companies to work for the good of the planet and the people, it would be a tremendous jump forward. Unlike Reply privately Flag as inappropriate 10 hours ago Peter Burgess likes this

Vincenzo Bavoso Vincenzo Vincenzo Bavoso Lecturer in Commercial Law at The University of Manchester This is a very interesting discussion with some potentially ground-breaking reflections on the way business is to be conducted and regulated. I think that Will Hutton is in fact implying a level of philosophical and regulatory shifts that we are very very far from achieving. Recent Law Reforms in the UK have already attempted to partly do this, but the result is that we have moved further away from the desired goal, following instead what until very recently was the undisputed orthodoxy in business regulation, notably shareholder value maximisation. This resulted in fact in further attenuating the level of accountability of business vis-a-vis society - think about the liberalisation of the object clause in the corporate constitution or the reluctant (and inconclusive) attempt to embed a stakeholder approach in s.172. Benefit corporations (or similarly socially oriented forms of organisation) would indeed be a great step forward if they were the mandated form of business organisation for all those ventures that have an impact on societal interests - food industry, biotechnology, pharmaceutical, finance... But as aptly argued above, they remain voluntary, so essentially they do not tackle the main problems of 1) creating accountability where this is most needed, and 2) allocating value and resources where it is socially desirable. This line of argument, that benefit-type corporations are more desirable than the more traditional form of association, leads to the more ambitious goal of redefining the scope and significance of limited liability in the 21st century. It might be worth reflecting critically on whether this legal framework is indispensable at all and suitable anyway to the challenges we face today. Let's remember that despite numerous reforms and amendments, limited liability rests on a Victorian legal foundation and it would not be blasphemous to just reach the conclusion that, as it is, it is inadequate to regulate business in the 21st century. Perhaps a revisited form of concession theory as envisaged by Prof. Dine could be an answer. This is my personal contribution to the debate: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2458921 Like Reply privately Flag as inappropriate 3 hours ago

Miguel Miguel Padro Senior Program Manager at Aspen Institute Business and Society Program Thanks for everyone's comments here. Lots of food for thought. I do not think that benefit corporation legislation (and other similar forms) has ever aspired to be a universal code for companies. Benefit corporation legislation is intended to provide a convenient template for entrepreneurs looking to start a social enterprise. I fear that we get seduced by hopes for benefit corporations that the movement is not designed to achieve. I'm personally biased towards people inside the system who design and make products, who manage supply chains and make critical operational decisions every day. Small strategic and operational choices at Pepsico or Chevron can have far larger positive or negative impact on the system than any collection of behaviors at benefit corporations. I do worry that too often we ignore or discount the critical importance of positive change in large, complex, (and yes, often disappointing) global corporations. The great challenges from where I sit are, how to accelerate these kinds of innovations and practices? How do we develop more capable and effective leaders inside these companies? How do we design incentive systems that properly value these kinds of practices (and devalue practices that socialize costs on to society in order to privatize gains?) Our notions of corporate purpose are critical because current conventional wisdom stands in the way of much needed progress on these areas inside companies. Peter- I am glad people like you are working on the metrics piece of this. Developing metrics is one thing but how do we get decision makers inside companies to value the 'right' metrics? Do you have any insight into how this change takes place? Like Reply privately Flag as inappropriate 6 minutes ago

Peter Burgess Founder/CEO at TrueValueMetrics developing Multi Dimension Impact Accounting I did my first degree in engineering. Subsequently I learned some economics and accountancy because it quickly became apparent to me that not many engineers were involved with the very big decisions being made about almost everything. The situation is pretty much the same 50 years later! Much of my career was in management accounting ... helping companies to earn more profit. I was pretty good at it because I believed that if you fix the factory, fix the product, the profit will take care of itself. To do this effectively people at the hands on level have to know precisely what they need to do to make things better ... and this is about measurement, it is about measurement of the right things and knowing what will add up to a good results in the aggregate. In one situation where accounting talk was not making much progress, I was made VP of manufacturing of a quite large factory (about 1300 employees). I knew a bit about the factory ... but not a huge lot. I did know cost accounting and how the factory was spending its money, how materials flowed through the system and what products should be a priority. From my engineering training, I understood feedback loops. By moving a factory management meeting from 9 am next day to 8 am today about today's production work, we fixed problems by 9 am the same day to improve today's results rather than merely grumbling about it next day. Little initiatives like this made it possible to increase the throughput of the factory by a factor of three. Another little initiative related to the costing of castings. For many years the cost accounting for the foundry was done on a cost per lb basis. Using this approach, less weight means less cost for the product. Our engineers had made our product less and less heavy ... and less and less strong ... and we were heading for disaster. Worse, the foundry had more and more difficulty making these very light castings, and scrap was ridiculously high. A standard cost system which reflected the way castings were made in the foundry and the difficulty and scrap changed everything. A lower cost foundry, less scrap and a better product. The lesson is that metrics are needed in the right place and in the right form. Make small decisions right, and most big decisions will take care of themselves. A good system of metrics will enable critical information to be aggregated and reported in summary form to top managers and investors, and the same data should be able to flow down to all the decision makers that are determining performance every minute of every day. Money profit accounting is pretty good ... but it only has a singular focus on improving the state of the business and its profit performance. A broader set of data that includes impact on people and planet but structured in a manner similar to double entry accounting is a framework for measuring everything that will work. It will work even better when the same framework is used for the analysis of state, progress and performance not only for the business organization, but also for a place and for individuals and for products and for processes ... all of which interact to deliver a decent quality of life (for some) and also have impact on the environment and ecosystems in a multitude of ways. I must also add that conventional accounting's understanding of state (balance sheet) and flow (P&L account) is important but entirely missing when politicians, policy makers and pundits talk about GDP growth being the solution to all problems economic. A huge amount of corporate wealth has been derived by gutting the balance sheets of their customers. We measure the flow (GDP) and think this is good when it is not. TrueValueMetrics and Multi Dimension Impact Accounting (MDIA) need to be simple ... but they must be able to reflect reality ... and not ignore anything that is important. An exciting challenge!