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Home / Business

Comment: Companies must use profits for good of society not just shareholders

Daily Telegraph UK
By Phillip Ullmann
9 May, 2018 08:51 AM5 mins to read
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We must start to share the profits of our industry more fairly, or there will be no profit for anyone. Photo / Getty Images

We must start to share the profits of our industry more fairly, or there will be no profit for anyone. Photo / Getty Images

I am a business leader. My job is to run my company and make a profit. I am also a citizen, so I know that my business does not exist in vacuum. I am part of society and so is my business. Unless that society grants us licence to operate, there will be no profit and no business.

That licence is now in question, society's patience with business stretched thin. Profit is and must remain one of the key driving forces of business, but who receives that profit? If it is only a remote few, the cost in public trust will become unsustainably high and our licence will be withdrawn.

We must start to share the profits of our industry more fairly, or there will be no profit for anyone.

Change is overdue.

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This week at the Social Market Foundation (SMF), a think-tank founded on the idea of fair markets and sustainable business, I'm publishing a paper setting out how making our firms into genuinely social businesses can make us and our society richer. Some of the changes that are needed can be made by businesses themselves.

Mine has already started. At Cordant we turn over £850 million ($1.7 billion) a year serving 5,000 clients and placing 125,000 people in jobs each year.

We've capped the dividends that shareholders - who include me and my family - receive from the business.

We've capped the pay that executives - who include me - can receive at 20 times the wages of our lowest-paid staff.

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Soon, we'll put a share of the company's profits in a pool that all our workers can share in.

But many changes will need politicians to show real leadership and work with us to strike a new covenant between business, the state and the society we both serve.

Section 172 of the UK Companies Act should be revisited, made broader to ensure that the interests of company's stakeholders should rank alongside shareholder value in executives' decisions.

The days of companies driven by "shareholder value" and nothing else are over.

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Companies should use their profits for the good of society as well as investors. Independent statutory auditors should assess how well a firm is set up to deliver social impact and meet the aims each business would set out in a Social Mission Statement.

We must start to share the profits of our industry more fairly, or there will be no profit for anyone.

Politicians should also take a lead in helping determine how those investors can judge genuinely social businesses. The people and institutions whose capital underpins our businesses are demanding better of us, how are they to judge us?

Larry Fink of Black Rock is quite right to say he wants to invest his clients' money in firms with a plan to maintain their social licence to operate. But how do investors know which businesses deliver real social impact?

The patchwork of sustainability indexes is too inconsistent and arbitrary to command real confidence. If legislators help create a shared framework of understanding about how to measure a firm's social impact, business leaders can deliver real improvements - and be compensated on their performance.

The aspect of business life in modern Britain that has done most to erode public trust in business arises when the state becomes the customer.

Flawed public procurement deals that leave taxpayers bearing all the risk are the best way anyone has yet devised to persuade voters that the modern economy really is a rigged game.

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New rules are overdue, starting with reform of the Public Services (Social Value) Act to ensure that contracts are awarded on the basis on social value, not simply price: putting public services in the hands of the lowest bidder is bad for taxpayers and that is ultimately bad for business. We are all paying for Carillion's collapse, a cost measured in public money and public trust.

It's vital that we restore trust in business to deliver public services, and not just because today's public sector depends on business.

Updating the state and its services to support the population of the 21st century will mean making the overdue leap to disaggregate the demand side of this market, putting control in the hands of citizens who will increasingly commission their own services from accountable social business that employ locally, share profits, and cap pay and dividends.

I'm publishing my paper in Westminster because it's our political conversation about business and economics that's in greatest need of change.

Too often debate about the model for a modern economy pits a public sector, statist, option against a private sector, profit-maximising, vision.

In other words, it's either the government that controls resources on behalf of voters or a corporation on behalf of shareholders. Social business can offer a middle way that uses the drive of a profit-seeking company to benefit both investors and the wider public.

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Other countries are getting ahead of this curve.

France and its corporate sector are embracing social business, shaping the agenda instead of being driven by events. In the UK, we have seen some promising starts. In 2016 Nigel Wilson of L&G led an excellent Mission-Led Business Review for the Government, but where's the follow-through from Whitehall?

Politicians who want to save Britain's open market economy from public anger need to get a firm grip on this agenda. I'm pleased that Guy Opperman, the pensions minister, is engaging with this agenda and will be speaking at the SMF.

For business, change is inevitable.

A generation of young people is growing up with the idea that business is something that offers them unfulfilling jobs that do nothing for the world except deliver profits for other people.

We must show them that good business is ultimately based not on money but on people and their well-being. Because if we do not answer the questions that people are asking about business, answers will be forced upon us.

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Phillip Ullmann runs Cordant Group.
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