A regular briefing for the alternative asset management industry.
Last week, Travers Smith lawyers joined business leaders and academics at Harvard Business School to debate the purpose of companies. The conference, Reimagining the Role of Business in the Public Square, discussed what we should expect from large corporations on issues such as climate change and human rights.
A few participants (most strikingly the law professor, Lucian Bebchuk), were sceptical that business could be relied upon to make the significant changes that are needed to address global challenges, especially if that involves forgoing profit – but most were convinced that a more responsible form of capitalism offers a win-win opportunity for those that grasp it. In any event, regulators from the SEC and the London Stock Exchange made clear that further mandatory disclosures of the external impacts of business were on the way – although there is significantly more opposition to that objective in the US than there is in Europe.
No doubt there will be more direct regulation requiring business to act – especially in the EU, where, for example, an initiative to require companies to identify and mitigate negative environmental and social impacts has significant momentum. But should businesses have a more general responsibility to prioritise societal concerns, even when they are operating within the law, and even if doing so conflicts with their financial objectives?
The (widely discussed and often misinterpreted) 1970 essay by Milton Friedman – The Social Responsibility Of Business Is to Increase Its Profits – is frequently said to have articulated the free marketeer's answer to that question, but business leaders now typically argue that they do not focus on profit at all costs. The US Business Roundtable recently restated its position on the purpose of the corporation, asserting that: "we share a fundamental commitment to all of our stakeholders". In the UK, the Corporate Governance Code says that the role of the board "is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society", and large companies (public or private) are required to explain each year how they have taken account of stakeholder interests in their decision-making.
...some businesses are taking matters into their own hands and using the flexibility that UK law currently affords companies to define their purpose more broadly than shareholder value alone.