Tom Proverbs-Garbett looks at the changing face of a corporate’s social responsibility. 

Back in the 1960s and 70s, eminent economist Milton Friedman told us that a corporate’s social responsibility is solely: ‘to increase its profits’.1 Or perhaps he didn’t. Perhaps, on the cusp of 1980s excesses, Friedman was making an altogether more subtle point about the tendency of directors and managers to try to rule all they see, and instead they should concentrate on profits for shareholders ‘in open and free competition without deception or fraud.’2 Whether this implies an ethical element to the pursuit of profit is hotly debated.3 Yet the influence of the sentiment is not: if the main responsibility of business is to maximise revenue and increase returns to shareholders, then reflection on any further purpose of the business – and particularly any social purpose – tends, by definition, not to take place.4 The business does what is right for the bottom line, regardless of social good. The two may align, but by accident rather than design. 

In the context of the shareholder primacy model, informed as it has become by agency theory,5 the aim of corporate governance becomes the effort to ameliorate tension between owners, the shareholders, and their agents - directors, who manage the business for their benefit. That leads to benefits to the internal interactions of actors in a business, but not necessarily to the social actors affected by the operation of that business. That companies and those who lead them should consider the benefit to wider stakeholders is argued to be not just an ethical position, but one that is owed by virtue of the privilege of limited liability.6 

In the UK, a subtle change of perspective is baked into the Companies Act 2006. The Act directs that directors of companies must, in making decisions, act to promote the success of the company for the benefit of its shareholders but in doing so must have regard to – in other words consider – certain stakeholders and associated factors.7 Shareholders are still at the heart of corporate decision-making (as beneficiaries), but there is a recognition that the impact of a company on society is something that should be part of decision-making
– and that such an approach will benefit shareholders (an approach known as enlightened shareholder value).8 

A cultural shift 

The world of business is undergoing something of a cultural shift, as a new generation joins the workplace with a much greater sense – at least in terms of choosing and challenging employers – of social justice and meaning.9 If the culture of a business becomes more attuned to its impact on society, that, in turn, reframes the approach to doing business, moving from compliance to ethically weighted questions: from ‘could we?’ to ‘should we?’10 By building a culture that reflects its shared ethical values, a business is likely to consider wider society as part of its business-as-usual approach; the two are interlinked. Yet if the simplicity of making money for shareholders is no longer a sole driver, for any of the reasons already given, then the company needs an aim – a purpose. 

Purposeful business, purpose and the role of ESG 

The British Academy, in its Principles for Purposeful Business, suggests the aim should be to ‘produce profitable solutions to the problems of people and planet, and not to profit from producing problems for people or planet.’11 There is a distinction here between an aspirational purpose – why a company does what it does – and the idea of purposeful business – solving problems.12 Nevertheless, there is a connection: working out what the solution that any given company can offer will be the purpose of that company.

Whether one subscribes to the idea of purpose-driven business being a game changer or not, it is a fact that the leadership teams of many corporates are taking this approach seriously.13 As it calls for an element of organisational self- reflection, it is suggested that most leaders would want to say that their organisation does or intends to provide some sort of wider benefit to society. Certainly, that is the case with employees: a survey reported in the Harvard Business Review in 2018 suggested that nine out of ten employees would trade a portion of earnings for greater meaning in their work.14

So, an effective purpose of a company is likely to be the reason why it exists and how it contributes to the common good. Not maximising shareholder returns, as Friedman has been interpreted as saying,15 but rather finding an answer to the existential question of how to contribute to common, wider goals.16 This is where ‘ESG’, the umbrella term for environmental, social and governance issues, can do work.

As practitioners, we used to talk a lot about Corporate Social Responsibility – known as ‘CSR’ – the idea that business should contribute to society and the environment, be aware of its impact, that it should ‘give back’. ESG moves beyond CSR, which has been criticised for being strategic.17 Where CSR is about activity, ESG is about purpose: rather than a business seeking to ‘do good’, it should seek to ‘be good’, embedding in its governance structures fundamental strategic approaches intended to benefit the social and environment context of the organisation. It is the idea of responsible business. 

The ESG agenda is not without its critics, in particular of its wide scope (leading to a nebulousness that obscures intended outcomes) and the inclusion of governance (a tool for control and, at most, a mechanism for the making of normative judgements).18 For present purposes, it is sufficient to say that this terminology and these concerns are a huge talking point for the corporate world. Recent research on business leadership and the approach to ESG found that 88% of boards are engaging on ESG issues because the materiality to the business is recognised; 52% of boards have come under pressure on ESG issues from customers; 46% have faced pressure from employees.19

Crucially, this is not about sacrifice. The point is not that shareholders lose out or that businesses disregard profit
for doing good. There are significant opportunities from embracing the ESG movement; even its wide scope can
be an advantage, lending itself to new, interdisciplinary and innovative ways of working.20 As we saw above, there is a growing expectation that a business will have an ESG strategy, from employees, customers, debt funders and investors.21 That narrative is an opportunity to explain what makes a company different – evidencing its purpose in action.

However, to access this opportunity is likely to require commitment. Indeed, some commentators have argued that a separate ESG strategy is redundant and that, to be successful, ESG considerations must be embedded in overall strategy given they (should) guide and drive it.22 This is practically indistinguishable from a stakeholder capitalist model, the idea that the wider purpose of a company should be ‘sustainable enterprise value creation rather than solely increased profitability’.23 

Has anything changed? 

There is an argument that the Companies Act 2006 already imposes an obligation on a director of a company to take into account wider stakeholder factors.

As we saw earlier in this article, under section 172 of that Act, directors must act in the way they consider, honestly, to be most likely to promote the success of the company for the benefit of its members.24 In doing so, they must have regard to a number of stakeholders and stakeholder factors: the likely consequences of any decision in the long term, the interests of employees, relationships with suppliers and customers, the impact on the community and the environment, and reputational issues.25 This is intended to be nothing more than a list of ‘sensible rules of business’, according to the explanatory notes of the Act.26 Considering the impact of a company’s actions on society should be hardwired into decision-making. 

There are, however, calls to make this more explicit. The ‘Better Business Act’ campaign is a proposal for changes to section 172 so that it imposes a duty on directors to advance the purpose of the company, rather than to promote the success of the company for its shareholders albeit in the context of considering wider stakeholder interests.27  Section 172(2) permits a company to create purposes other than the benefit of its members and, if it does, ‘success’ is achieving those altruistic purposes. Yet, this is an exception – the point is to make stakeholder concerns the default and paramount concern, linking inextricably the purpose of a company and its impact in and on society. 

In an ESG context, a commonly adopted framework through which to identify actions is the United Nations’ Sustainable Development Goals (‘SDGs’).28 This is a list of proposed outcomes which focus on ending poverty while also addressing sustainability issues. The attraction of the SDGs is that a company can choose to work with those goals that are a natural fit for the business, its purpose (if it has one) or the concerns of its stakeholders.29 The focus might be on Goal 4, ensuring inclusive and equitable quality education and promoting lifelong learning opportunities for all, or Goal 5, achieving gender equality and empower all women and girls, or Goal 13, taking urgent action to combat climate change and its impacts.30

This will be separate from a business’ purpose, but indicates the sort of issues to which, through its purpose, it can start to contribute solutions (in however small or large a part). Again, this is a move away from thinking about ESG issues as something that happens to the company, an external factor to be dealt with as best the company can, to informing its actions and decision-making at every level.31 With focus on acting in the interests of stakeholders, this is in many respects a restatement of stakeholder capitalism.

UK Corporate Governance Code consultation

In early June 2023, the Financial Reporting Council released proposed changes to the UK Corporate Governance Code.32 This is important as, while the Code applies to premium listed companies on the London Stock Exchange, its position as the pre-eminent statement of governance best practice is unrivalled.

Two pertinent changes were proposed as part of the consultation: first a move towards outcome-based reporting and activity. Leaders should be able to describe why a company’s chosen governance practices assist in its strategic endeavours, led by its purpose, giving practical examples. The second, linked, change is an explicit acknowledgement that annual reporting should demonstrate how environmental and social matters are taken into account in a company’s governance, and how this contributes to the delivery of its strategy.

Cumulatively, the question boards will be expected to answer is: ‘What is the impact of the E, S and G on your business model and your overall strategy in the context of your purpose?’ Linking, by development or design, strategy, purpose and ESG means that regardless of the wider, academic debate about shareholder or stakeholder primacy, high-performing boards must consider why their organisation does what it does, where environmental and social issues sit in this mix of aims, and how any chosen or applied governance framework facilitates delivery.

Conclusion

There is demonstrably space for seeking to improve matters for all stakeholders and wider society while still driving successful business. The rapid rise of ESG, now a central reputational and financial question for all organisations,33 means that identifying ‘purpose’ is no longer progressive but a prerequisite to running an effective business. Only by knowing why you do what you do and what impact you want to have in the world will you be able to progress those aims and decide how to measure success; the demands of the workforce for a sense

of meaning and the urgency of the climate crisis a clarion call.34 After all, both the ESG agenda and the concept of business purpose are about outcomes not intentions, actions not words.

1. Friedman, M. (1970) ‘The Social Responsibility of a Business is to Increase its Profits’, New York Times Magazine, May 13.
2. Friedman, M. (1962) Capitalism and Freedom, Chicago: University of Chicago Press, 133.
3. Clarke, T. (2020) ‘The Contest on Corporate Purpose: Why Lynn Stout was Right and Milton Friedman was Wrong’, Accounting, Economics and Law, vol. 10(3), 1-46; Elrick, J. and Thies, C. (2018) ‘The Social Responsibility of Business: Milton Friedman Reconsidered’, Journal of Markets and Morality, vol 21(2), 297-307.

4. Rigby, D., Elk, S. and Berez, S. (2022) ‘Purposeful Business the Agile Way: Turn Squishy Debates into Concrete Action’, Harvard Business Review, 56-58.
5. Weinstein, O. (2019) 'Understanding the Roots of Shareholder Primacy: The Meaning of Agency Theory and the Conditions of its Contagion', in Clarke, T., O’Brien, J. and O’Kelley, C. (eds.), The Oxford Handbook of the Corporation, Oxford: Oxford University Press, 139-167.

6. Mayer, C. (2022) ‘The Research Background to the Final Report of the Future of the Corporation Programme on ‘Policy & Practice for Purposeful Business’, Journal of the British Academy,
vol. 10(5), 1-15.
7. Section 172 Companies Act 2006.

8. Explanatory notes to the Companies Act 2006, para. 325.
9. Langan, R. and Menz, M (2022) ‘Does Your Company Need a Chief ESG Officer?’ Harvard Business Review, available online: https://hbr.org/2022/02/does-your-company-need-a-chief-esg- officer
10. Australian Institute of Company Directors (2020) ‘Governing Organisational Culture: Tool’, AICD. com, available online: https://www.aicd.com.au/organisational-culture/business-ethics/change/ governing-organisational-culture.html.
11. Mayer, n 6.
12. Ibid, 2.
13. Clarke, n 3.
14. Achor, S., Reece, A., Kellerman, G. and Robichaux, A. (2018) ‘9 Out of 10 People are Willing to Earn Less Money to do More-Meaningful Work’, Harvard Business Review, available online: https:// hbr.org/2018/11/9-out-of-10-people-are-willing-to-earn-less-money-to-do-more-meaningful-work. 15. See for example Clarke, n 3.
16. Friedland, J. and Jain, T. (2022) ‘Reframing the Purpose of Business Education: Crowding-in a Culture of Moral Self-Awareness’, Journal of Management Inquiry, vol. 31(1), 15-29, 18.
17. Barnett, M. (2019) ‘The Business Case for Corporate Social Responsibility: A Critique and an Indirect Path Forward’, Business & Society, vol. 58(1), 167-190.
18. Larcker, D., Tayan, B. and Watts, E. (2021) ‘Seven Myths of ESG’, Rock Center for Corporate Governance at Stanford University Working Paper, available online at: https://ssrn.com/ abstract=3956044.
19. Board Agenda, Mazars and Henley Business School. (2023) ‘Leadership in
ESG Integration: A Study into UK Board Oversight, Implementation and Disclosure’, available online: https://www.mazars.co.uk/content/download/1154446/59067133/version//file/Leadership-in-ESG- integration-Report-of-findings.pdf, 3.
20. Rigby et al., n 4.
21. Board Agenda, n 18.
22. Samans, R. and Nelson, J. (2022) ‘Stakeholder Capitalism’s Promising Resurgence’, Sustainable Enterprise Value Creation, Cham: Palgrave Macmillan, 3-34.
23. Ibid., 20.
24. See n 7.
25. Ibid.
26. See n 8.
27. The campaign is led by not-for-profit body B Lab UK, which also certifies organisations that make particular commitments addressing environmental, social and economic challenges, known as ‘B Corps’; see, https://betterbusinessact.org/.
28. United Nations Department of Economic and Social Affairs, Sustainable Development, available online: https://sdgs.un.org/goals.
29. Jimenez, D., Franco, I.B., Smith, T. (2021) ‘A Review of Corporate Purpose: An Approach to Actioning the Sustainable Development Goals (SDGs)’, Sustainability, vol. 13(7), 3899-3920.
30. Ibid.
31. Ibid., 3899.
32. Financial Reporting Council. (2023) ‘UK Corporate Governance Code: Consultation Document’, frc.org.uk, available online: https://www.frc.org.uk/getattachment/a92c8f2d-d119-4c4b-b45f- 660696af7a6c/Corporate-Governance-Code-consultation-document.pdf.
33. Maaloul, M., Zéghal, D., Amar, W. and Mansour, S. (2023) ‘The Effect of Environmental, Social, and Governance (ESG) Performance and Disclosure on Cost of Debt: The Mediating Effect of Corporate Reputation’,

Corporate Reputation Review, vol. 26, 1-18.
34. Joly, H. (2021) ‘Creating a Meaningful Corporate Purpose’, Harvard Business Review, 28 October, available online: https://hbr.org/2021/10/creating-a-meaningful-corporate-purpose.