• From your perspective, how has the role and purpose of corporations evolved?

In the first half of the 20th century, there was a growing belief that management should consider the role of the corporation in society alongside its commercial and financial performance.

In the second half of the century, spurred on by Milton Friedman’s views about the business of business being business, the pendulum swung against the corporation doing anything other than promoting the financial interests of its shareholders. In this century, in face of growing concerns about the environmental and social impact of business, the pendulum was swinging back again towards a broader definition of the purpose of the corporation, only to be stopped in full swing by concerns about ESG and purpose washing. At present, there is considerable confusion about what precisely should be the purpose of business.

 

• How can we understand the relationship between purpose and profit?

The reasons for these gyrations in the understanding of the purpose of business is a perceived conflict between management on the one hand meddling in politics instead of sticking to its business and financial expertise, and on the other hand failing to recognize the environmental and social consequences of its actions. That there is a conflict between the two is at the heart of the failure to define the purpose of business correctly.

While Friedman was right to recognize the centrality of profit to business, he was wrong to presume that profit was the purpose of business. Profit is derivative of the purpose of business and the consequence of the successful realization of a business purpose; it is not per se the purpose of business. The purpose of business is to solve problems that you and I face as individuals, societies and the natural world. But business must do this in a particular way. It must do it in a form that is commercially viable and profitable, because business is not about charity or philanthropy. It must not profit from solving problems in a way that creates problems for others.

So, the purpose of business is to produce profitable solutions for the problems of people and planet, not profiting from producing problems for either. It then follows immediately from this that a profit derives from solving, not creating problems. Or to put it even more simply, companies “profit without harm."

Profit without harm is the equivalent of the Hippocratic Oath in medicine – “do no harm." Do no harm is impossible in business because it is always making hard choices about whether to support its employees by charging higher prices to its customers or employ people in one part of the world by laying off those elsewhere. However, it should not profit from inflicting harm, and we are legitimately outraged by cases of where businesses do.

 

• What role does corporate ownership play in this context?

Ownership is critical to achieving this because owners exert two important functions. First, they are the recipients of the profits that companies generate either in the form of dividend payments or capital gains on their shares; and second, they exert control through the voting rights they exercise on their equity capital.

That means that owners are the ultimate assessors of the success of the corporation, and they oversee the appointment and removal of directors and certain significant transactions. It is therefore the controlling shareholders who determine and sanction the corporate purpose and oversee its implementation. Identifying appropriate forms of ownership therefore lies at the heart of establishing desirable corporate purposes.

 

• We increasingly see alternative models of corporate ownership, from foundations to employee ownership to steward-ownership. When it comes to steward-ownership, how do you see it supporting companies that want to prioritize purpose?

Many different forms of ownership are observed around the world. They range from state ownership to cooperatives and mutuals, to employee, family, and private capital ownership, and publicly listed corporations. A particularly interesting form of ownership is what is termed “enterprise foundations." These are companies that do not simply have a foundation – many companies have philanthropic foundations – but instead are owned by their foundations.

Enterprise foundations are observed in many countries around the world, most commonly in Europe and especially in Denmark where they account for approximately 60% of stock market capitalization. [26]

The advantage of enterprise foundations is the long-term perspective they bring to the purpose of the enterprises they oversee. They provide an anchor to ownership which allows the boards of enterprises to pursue their corporate purposes over long horizons. Some of the largest foundation owned enterprises are listed on stock markets and therefore have a parallel form of ownership in which dispersed institutional and individual shareholders sit alongside controlling foundation owners. That permits liquid, short-term investors who provide external equity capital to co-exist with long-term stable owners. Enterprise foundations are one example of a general class of steward-ownership firms in which the control rights of the firm are separated from economic rights to cash flows.

In essence, steward-ownership is a form of dual class-shares in which voting rights of shareholders are separated from cash flow rights by employing more than one class of shares. This is commonplace in the US and elsewhere, and some of the most successful businesses in the world, such as Alphabet/ Google, adopt this form of share ownership.

The justification for the use of dual class shares is very similar to that of steward-ownership, namely, to preserve the vision and ambitions of the founders and ensure that their enterprises can fulfil their long-term objectives and purposes.

The obvious concern that this separation of control rights and economic interests raises is that the interests of the controlling shareholders may deviate from those of the financial investors. They may therefore create a divergence between the purpose of the firm and its financial success. As a result, flotation of corporations with dual class shares frequently raises concerns from institutional investors about the governance of such firms.

However, that misses the point. As described above what is required is to align economic interests not just with those of their investors but also with those of individuals, societies and the natural world, in other words with a purpose of solving not creating problems for others. By separating control from economic interests, the problem-solving purposes of business can be specified in relation to societal and natural world interests, while financial rewards to those employed inside and investing in the firm are linked to the value of cash flow rights.

This provides a powerful way of preserving and protecting long-term problem-solving goals, while at the same time aligning economic with social and environmental interests. It reverses the process of aligning societal and environmental interests (or lack of them) with economic interests by establishing the delivery of societal and environmental solutions as the determinants of economic performance. That makes external shareholders, rather than as at present, the environment and society, the true residual claimants of the firm.

 

• If you imagine the corporation of the future, what will be needed? What do you envision? What gives you hope?

Reimagining the corporation of the future comes from a real understanding of the failures of the past. The failures come not from emphasising the importance of financial interests but from failing to appreciate that these should derive from addressing not creating problems for individuals, societies and the natural world. That makes ownership the linchpin because what needs to be owned is not just the assets of the firm but the purpose that underpins their deployment. The assets should serve a purpose for mankind and the natural world that in the process delivers economic benefits for their possessors.

We have to date relied on markets and competition to provide that alignment. But as we have come to appreciate, if the fundamental driver of business is not to promote social and natural world flourishing and wellbeing as well as generating economic benefits for investors, then competition for the economic benefits exacerbates not solves social and environmental problems. Competition for private benefits exploits the interest of others, not protects them.

However, if we turn this on its head and make solving not creating problems the driver of economic benefits then competition for economic benefits enhances not detracts from broader societal and environmental interests. Ownership plays a key role in achieving this by establishing the stewards and trustees of the problem-solving corporate purpose as separate from the recipients of the economic interests. Furthermore, by reducing reliance on regulation and taxation to deliver societal benefits, firms’ financial value is increased, not diminished.

Once we recognize and implement this then the world we inhabit will be fundamentally changed from the divisive and polarized existence we are increasingly confronting. Capitalism will have been re-established as the incredibly powerful instrument for promoting human and natural world flourishing that was intended of it.

This does not require a revolution to achieve it, but, until it happens, we will continue to endure crises and conflicts of ever-increasing frequency and amplitude that threaten our political as well as economic systems.

 

Thank you so much for the interview!