Responsible Capitalism

  • 15 Mar 2019

Capitalism is the engine that has delivered huge prosperity for the world, while other systems appear to lead to restrictions in freedoms and authoritarian regimes. However, capitalism is not perfect, and is in danger of being replaced by something much worse. We therefore need an independent and robust legal framework and responsibility of the players (us) towards our larger society.

Unfortunately, there is a common view that Executives are the agents of the shareholders and that their sole responsibility is to maximise shareholder value even if it is to the detriment of the environment and society. This was put to me when Chairing and running a public company and I vigorously reject this notion as short sighted and ultimately immoral but perhaps even more importantly, I do not think it is good for business in the long term.

Where management has not embraced the highest moral values, it often results in disaster. An example that I experienced was Enron who owned the data centre that my cloud computing company rented. It had one of the largest Social Responsibility budgets and had won many accolades as a great employer and supporter of the community, however this was based on an immoral business model.

There are countless other examples including VW and the emissions scandal, to the worst of all, the big financial institutions which caused the Great recession in 2008. It is in the investment banks that you hear most about shareholder value, but the loss of moral compass was responsible for the largest loss of share holder value ever.

Lord Brown ex CEO of BP goes further and says that you can not have a Corporate Social responsibility budget for washing your sins away, as so many CEOs seem to think, but rather the culture of the organisation must be to do good and to make a profit. He does not believe that the two are mutually exclusive. He advocates the removal of Corporate Social Responsibility budgets as it is seen as the “ do good budget”, leaving the rest of the organisation to do what it likes ( as Enron did). This idea, he argues in “Connect”, is dead. Rather the whole organisations should live by the highest moral standards.

We are all experts at telling Government , the police, teachers and Judges what they should do, but as Mohamed Yunis said to me when I asked “ what can you do? -You should be the example”

So the first thing we should do is to ensure we conduct ourselves ethically, being cognisant that we are part of a larger socio economic system.

However we may wish to do more than this. What else could we do?

We are all players, what we can do as business owners is sign up and operate our businesses by 3 very simple guidelines?

 I will give at least 1% of my profits to help those most at need in Society. I will encourage employees to become involved in the community and where possible facilitate support for employees to help. For instance giving time for community projects, sports clubs, helping aged or disabled.

 I will train and develop my employees to assist in them realising their potential.

 The Chief Executive will never earn more than x10 the average salary of the firm.

Some might say that giving 1% will make very little difference against what the government can do. However research does not support this theory. Charitable contributions can have an impact out of proportion to their size, as much as x10 the effect that government schemes have. Charities can move much quicker than government and know the issues on the ground.

Training and developing staff is vital for the employee, for the company and for the country. Germany, for example, focusses a lot of resources on developing its workforce. Britain traditionally does not, often preferring to recruit, but the productivity results heavily favours the German model.

Finally openly stating that the Chief Executive will not earn more than x10 the average in a firm will do a great deal to douse the “us and them” feeling which is becoming prevalent. The City view that you have to pay what people are worth completely ignores the fact that we do not know what they are worth and that this is largely cultural and fashion. It is interesting that in 2017 FTSE CEO’s earn several hundred times the average salary, whereas back in the 1950’s these CEOs earned about x20 .

In 2011 the average UK CEO boss (not FTSE) earned x22.1. In Japan the average figure for all CEO s was x11.1 or half the UK figure. The good news is that legislation is now in place for public companies so that these figures are displayed in annual reports from 2020. This may help.

However we cannot legislate to be good, we have to live by a set of values where maximising profits at any expense is rejected.

Paul Barry-Walsh
Chairman of Fortress Availability Services Ltd

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