The Future of the Company – The Global Challenge

Big business has become disconnected from the broader society within which it operates. A narrow focus on short-term returns has prevented businesses from investing in innovation to foster long-term sustainable growth.

The common understanding of the purpose of publicly listed companies, particularly in Anglo-American markets, is that they exist to maximize shareholder value. Publicly listed companies are under tremendous pressure from activist shareholders, takeover threats, and general market dynamics to generate short-term value by spinning off parts of the company, buying back shares, and laying off staff. External pressure is compounded by executive compensation schemes that are heavily weighted towards stock options. In theory, incentive compensation systems should reduce agency costs so that managers will act in the interests of shareholders. In practice, they create perverse incentives to extract value from the company at the expense of customers, employees, organizational health, the community in which the business operates, and ultimately society as a whole.

A number of unintended consequences result, including:

  • The failure of companies to adequately consider and respond to societal challenges, such as environmental damage and climate change, due to the perceived cost;
  • Erosion of trust between society and the corporate sector, including the role of corporations in shaping public policy, which in turn leads to a loss of trust in democratic processes; and
  • Firm mismanagement through stock manipulation, insider trading and tax evasion, with a number of associated firm-level and macroeconomic risks including treating employees as disposable; undermining investment, research and development; hollowing out whole organisations; turning executives into caricatures of self-interest and greed powered by narrowly focused remuneration schemes; focusing talent in the corporate world on systematically extracting value rather than creating it; stock price manipulation; and fueling market failure and economic crash.

Inequality has greatly increased in the last twenty years, in part due to the failure to translate corporate profits into increased salaries across the firm. Even as worker productivity has continued to rise, real worker wages have essentially flat-lined. At the same time, executive compensation has markedly increased due to the afore-mentioned stock option schemes. Rising inequality within companies has in turn contributed to macro-level inequality that threatens to concentrate economic and political power in the hands of a privileged few.

The biggest questions we face go to the very core of business: what is the purpose of the corporation, and specifically of the large listed company with dispersed shareholders? Will the current model of large publicly listed companies survive the next decade, and if not, what will it be replaced by?

Another question is about the alternatives to public companies, such as B-corporations, co-operatives, companies controlled by foundations, privately held companies, partnerships and family-owned businesses. Many of these alternatives have shown themselves to be capable substitutes for corporate bodies, but will they pick up momentum and drive the way forward? Will they eventually eclipse publicly listed companies? Research by the CFA Institute shows that global equity listings have declined by 17% between 1998 and the end of 2012, from 56,119 to 46,674. US stock exchanges were hardest hit, losing nearly 50% of their listings from their high of 9,253 in 1997. Europe has also seen a significant decline of 23% of its listed companies, while Asian exchanges have seen the least change with less than 5% lost. Given the sharp decline in number and longevity of public companies, it is unsurprising that many ask if a model of public limited company will survive the next decade.

Perhaps the most pressing issue today for financial regulators is the question of how to address short-termism in the markets and its significant influence on the strategies of public companies. It is widely acknowledged that an excessive focus on quarterly returns fed into the 2008 crisis but opinions vary widely on the causes of and solutions to short-termism. What is the role of financial markets and investors in promoting responsible capitalism? Can we turn institutional investors into patient capital, willing to invest in innovative research that will yield returns in the long-term? And conversely, is it possible to limit short-term trading, or at least to reduce its impact on the governance of companies?

Stewardship has become a central focus of regulators seeking to push markets to a long-term orientation. What do good stewardship and responsible investment look like in practice? Is it reasonable to expect institutional investors and corporate managers to serve as good stewards and act sustainability?

The Future of Work – Options and Possibilities

The current discussion about the future of work seems to be monopolised by the version of the future in which technology destroys jobs. It has gained an air of inevitability, as if it is the only possible future. NESTA’s open minded report suggested that the “robots hypothesis” resonated because it connected “two powerful themes in popular culture: the rapid advance of IT, and the startling growth in inequality.” But there is a problem: it hasn’t happened before.

Indeed, the idea that investment in more productive technologies leads to unemployment is dismissed by economists as “the lump of labour fallacy.” In the past, investment in the new technologies has created new capacity and new wealth, which was re-invested to create more, higher value jobs. If this time is different, we need to understand why this is so.

There are candidates. Brynjolfsson and McAfee’s claim that digital technologies are different because they create exponential growth is one. Another is that companies can no longer draw on plentiful resources or cheap energy to drive new investment platforms. A third is that previous waves were driven by manufacturing, which generated new value through productivity gains and created the social conditions for trades unions.

However, it is also the case that this fear typically recurs after a crisis. It is not coincidence that Keynes wrote his famous essay on the challenge of technological unemployment just after the 1929 crash.

So it is also worth considering reasons why it might just be a phase. The economic historian Carlota Perez has a model of technological development that describes five long waves, or surges, since the Industrial Revolution. Each is around 50-60 years and follows an S-curve pattern; the last quarter of each is marked by saturated markets, diminishing investment opportunities and declining returns. The first part of the 20th century was dominated by the oil and auto surge; the latter part by ICT. The ICT wave is now reaching the turning point at which returns start to fall.

On this model, finance is looking for new opportunities, and although it is too early to say what the next platform will be, and we’re still 10-15 years away from it, it is possible to imagine that the next technological surge might be built around, say, a material such as graphene.

David Autor concludes that much of “the labor market woes” of the past decade are not down to computerisation, but to the financial crisis and reduced investment (starting with the dot.com collapse) and the impact of globalisation on labour markets. And he suggests that many middle-skill jobs will prove more resistant to unbundling than advertised; while computers can do specific tasks, turning collections of tasks into self-contained jobs, and then automating them, requires substantial investment. In the long run, people are both more flexible and cheaper.

One implication is that the question of the future of work may actually be about power in the labour market. This leads to broadly political interpretations of the future of working conditions, ranging from Guy Standing’s formulation of the fragile “precariat”, facing intermittent, insecure work, David Weil’s description of the “fissured workplace”, in which many functions are sub-contracted, and the rise of campaigns for the Living Wage. Perhaps the dividing line is best-expressed in Alex Payne’s widely circulated open letter to the tech venture capitalist Marc Andreesen: “You seem to think everyone’s worried about robots. But what everyone’s worried about is you, Marc. Not just you, but people like you. Robots aren’t at the levers of financial and political influence today, but folks like you sure are.”

The Future of the Company – Impacts and Implications

Tailored solutions will be needed to respond to the unique characteristics of each region. For example, the continental European, Chinese, Japanese and Anglo-American economics and business models are each very different. Germany is characterized by a small number (less than 700) publicly listed companies with worker representation on company boards, whereas mandatory board-level employee representation would be a controversial proposition in the UK or the US. The EU will be forced to confront and reconcile these types of discrepancies in the corporate governance models of its Member States as it asserts an increasingly active role in company law, which has traditionally been under the purview of national governments.

Outside of the EU, we need to bring Asia, the Middle East and Africa into the discussion of sustainability, workers’ rights and human rights more generally. This will require thoughtful balancing of the local context with international standards. In the context of human rights, the UN Guiding Principles on Business and Human Rights outline the responsibilities of States to enforce the principles of international human rights law and of companies to respect those principles. But more work is needed to translate the framework into context- and industry-specific guidelines. It is in the implementation of general principles and the reconciliation of potentially contradictory rights that compromises will be most needed.

If this process is successful, we may see a gradual reduction in inequality leading to less social unrest and less partisan politics. We may also see an increasingly prominent role for business in developing both soft and hard law in a transparent way, acting individually and in concert through more progressive collaborative initiatives than the current trade and industry associations that dominate policy circles in Brussels, Washington and London.

We need a new vision for the role of business in society. Part of the reason why the focus on maximizing shareholder value and short-term profits has captured business for so long is due to the failure to create consensus around an alternative conception of the purpose of the corporation. A model of corporate governance narrowly focused on maximizing shareholder value in the short-term is unbalanced and self-destructive. The paradigm that will rise to replace the current one will need to have a more holistic understanding of profit as one indicator of the long-term health of the organization, amongst others. The profit-making motive will sit comfortably alongside a consideration of a broader responsibility to the interests of society.

This new paradigm must be translated into the existing framework of incentives and regulations for corporate governance and accountability. It needs to be reflected in market mechanisms, in particular in the way that financial markets interact and influence companies. The role of shareholders in corporate governance will have to be rethought in order to protect their role in ensuring management accountability, whilst freeing companies from the imperative to maximise the stock price as at all costs.

In order to achieve transparency and accountability, companies will need to provide an accurate accounting of their environmental and social impacts, through required disclosure and through increased pressure for meaningful information from consumers. Boards of directors will also need to revise their decision-making process to consider the effect of the company on the environment and society. Companies should be expected, encouraged and even required to develop long-term plans charting their way towards environmental and economic sustainability. It will be necessary to devise holistic measures for measuring corporate success in the long-term, reflecting their ability to create value in a responsible manner. These metrics should be reflected in incentives for corporate executives as well as for institutional investors. We need to consider whether the current level of public investment in research and development is sufficient and properly allocated to achieve transformative change. Public-private partnerships, while not without flaws, are one path to support and stimulate green growth.

At some point, we will be forced to acknowledge that the current approach to governing companies is broken. Perhaps after the next financial crisis, but hopefully sooner. Certainly as we are forced to respond to climate change, which cannot be addressed by governments alone without the support and investment of business.