Have business leaders lost touch with their true purpose?
There are many important reforms that can or may result from the Royal Commission into the financial sector in Australia. Regrettably one of them will not be a system-wide view of the way in which our banks are structured. Many commentators have lamented the absence of a recommendation for the re-design of the sector or the business models that obtain in our 5 largest financial institutions. This is a real shame as the opportunity exists for us to examine not only their culture but also the inwardly focused structures that perpetuate these outmoded cultures. We could go further and challenge the leaders of these institutions, particularly the Boards, to reflect on their true purpose, that of delivering value to all of society.
While much of the ensuing debate around the accountabilities of the banks revolved around a narrow accountability based on shareholder vs customer, other leading companies around the world are talking about a much bigger story. These leaders see the purpose of business being one that benefits all of society. This is achieved when business leaders focus on forging more innovative and beneficial products and services that contribute to building a resilient economy as well as societal social progress. Unilever is perhaps the poster child for how an organisation can thrive by adopting a sustainable business success formula that purposely manages to be net positive on society. Its portfolio of Sustainable Living brands has grown 50 percent faster than the rest of the Unilever business — and delivered more than 60 percent of Unilever’s overall growth in 2016.
In place of an inspiring vision of the purpose of business and how it can transform societies for the better, it might seem from our financial services sector that a win/lose orientation has evolved, whereby gains can only be made at the expense of customers or society as a whole. Without a clear purpose that sees business’s role as one of stewardship of all stakeholders – shareholders, customers, wider society, the environment and supply chain contributors – governance becomes a compliance task rather than as a principles-driven approach championed by all because it ensures collective prosperity.
Given that our existing governance models have failed, do we need to ask bigger questions around their suitability? For this, it may be useful to look at other jurisdictions for inspiration. Employee representation on boards, for example, is relatively common in Europe and around one thousand MNEs with operations in Europe have a European Works Council, including over 150 US companies. Board level employee representatives are present in over 90% of listed companies in Germany and in Austria. In Sweden and Norway its 70% while in France its 50%. The input from these diverse stakeholders helps management tor mitigate any values drift between the values of company insiders and the values of wider societal values.
Diversity around the Boardroom table may forewarn members of the new challenges to corporate reputations in a networked world where it is the intangibles of reputation, employee talent and customer preference that are as much the assets of the company as its cashflow.
Whether we like it or not, corporates are the major institutions in the world and are using their power – both economic and political – to shape how societies are evolving. In other jurisdictions, the ever-expanding size and role of corporates has focused greater attention on their non- financial impacts. From supply chain human rights exposures to climate change action, these risks increasingly reflect changing societal values that demand corporate reform.
Other regulators have recognised that the business of business extends well beyond the financial bottom line. In 2017, France adopted a new law known as the ‘law on the duty of care’, requiring French parent companies and their subsidiaries to institute preventive and remedial measures on both themselves and companies within their supply chain. Germany adopted a National Action Plan for Business and Human Rights, in which there is a proposal for state-owned companies and private companies with more than 5,000 employees to conduct due diligence to prevent abuses of human rights. In the UK, since October 2015, the Modern Slavery Act has required boards of companies carrying out operations in the UK and that have a turnover of at least £36 million to approve and publish an annual slavery and human trafficking statement.
Rebuilding public trust in the financial sector will require a bigger and more engaging story from business leaders about how their enterprises are enhancing Australian society beyond return to shareholders. Is this the sort of public conversation we need to have in Australia if we are to see a fundamental reform in how business in general, as well as the financial sector, will operate in the future?