Companies’ social purpose
February 20, 2019
Over the last few years we have seen companies come under increasing scrutiny from the public, media and politicians. In response, we have seen a new Corporate Governance Code, new disclosure regulations and extra requirements for investors. One theme that has emerged is a new emphasis on companies’ social responsibility. This trend has the potential to shape the corporate landscape as well as impacting wider society.
In July 2018, the UK Corporate Governance Code was updated, applicable to accounting periods from 1 January 2019. The new Code requires companies to consider their contribution to society. Principle A used to state that “Every company should be headed by an effective board which is collectively responsible for the long-term success of the company”. In the new Code it is now “A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society”. The UK Corporate Governance Code is not alone in this assertion. The QCA Corporate Governance Code, tailored for small and mid-size quoted companies, also advocates social responsibility. The Code’s third Principle is “Take into account wider stakeholder and social responsibilities and their implications for long-term success”.
Larry Fink, Chairman and CEO of BlackRock, the world’s largest investment management corporation, published his annual letter to chief executives last month. The letter focuses on corporate purpose, with the theme following on from last year’s letter in which he posits that society is losing faith in governments’ ability to address social and economic issues and “increasingly is turning to the private sector and asking that companies respond to broader societal challenges”.
This year’s letter continues the theme. It states “Trust in multilateralism and official institutions is crumbling”, and reiterates that “Society is increasingly looking to companies, both public and private, to address pressing social and economic issues”. Fink also urges companies to define their purpose beyond profit. “Purpose is not the sole pursuit of profits but the animating force for achieving them … profits are essential if a company is to effectively serve all of its stakeholders over time – not only shareholders, but also employees, customers, and communities.”
Although Fink proclaims that society has lost faith in governments and is now looking to businesses, there are many who would argue that companies have lost the public’s trust as well. In an article for the Financial Times, Standard Life Aberdeen’s Keith Skeoch writes that trust needs to be restored in businesses, citing Carillion and Lehman Brothers as examples of corporate failures that have done long-lasting damage to workers and communities. He also argues that “asset managers need to recognise that what is good for equity shareholders is not always in the interest of everyone who matters”. He notes that this is a big shift, “since the 1930s investors have believed that what is good for equity shareholders is also good for the corporation and other stakeholders”.
There are others who are pushing for investment institutions to fulfil a societal purpose, namely through stewardship of the companies they hold shares in. In a Financial Times article on stewardship, Catherin Howarth and Paul Dickinson of ShareAction reason that “effective stewardship of companies is not simply a tool to enhance long-term financial returns, it is the central device by which investment organisations can deliver on their purpose in society”. They point out that “big investors are strongly placed to encourage boards to invest in people through fair wages, adequate opportunities to learn and train, better health and safety and preparing workers for the future”.
So what is meant by a company’s social purpose? The UK Corporate Governance Code says “businesses underpin our economy and society by providing employment and creating prosperity”. It would seem that businesses should make decisions that will benefit their workers well into the future. This could mean having reasonable pension schemes in place, avoiding ‘short-terminism’ and taking responsibility for the environment. Larry Fink says companies are responsible for issues ranging from protecting the environment, to retirement, to gender and racial inequality. There is a clear trend towards companies being held to standards beyond simple financial returns, and that this will be enforced through the ever-tightening regulatory requirements.
Last month the Financial Reporting Council published a consultation paper on a new Stewardship Code. The proposed changes include a new definition of stewardship, which says that investors should “create sustainable value for beneficiaries, the economy and society”. We will be publishing an article on the consultations next month.
The changes we are seeing will have a significant effect. It is crucial that boards of directors are aware and prepared for new regulatory changes and shareholder expectations. MM&K is a leading advisor with a wealth of experience providing advice to remuneration committees on a range of issues surrounding corporate governance and regulatory requirements.
For queries and further information, please contact Harry McCreddie