REUTERS | Dominic Ebenbichler

The purposeful company: Big Innovation Centre call for evidence

Back in March at the GC Leadership Forum, we heard an inspiring keynote about the purposeless company from Will Hutton, chair of the Big Innovation Centre and Principal of Hertford College, Oxford.

Hutton’s proposition is that many companies have – for a variety of reasons – become ownerless, purposeless vehicles driven by short term shareholder requirements that are at odds with a wider concept of the utility of commercial action. We have lost the narrative of capitalism as a tool, not for growth for its own sake or to enrich the few, but for directly improving our lives by making useful things and providing useful services.

The Big Innovation Centre has now published an interim report and launched a call for evidence on its suggested policy options around the purposeful company.

While purpose is key for a company to be successful economically, the interim report argues that:

“the British ecosystem militates against purposeful companies with its uniquely fragmented, diversified shareholder base, a particular legal and regulatory system that imposes short-term profit maximisation on company boards, and too few forces that counteract these tendencies.”

The interim report goes on to discuss what meaning is and why it matters (there is an interesting table on page 6 of the interim report, illustrating how meaning is created by some innovative companies). The interim report then discusses and outlines 21 policy options to provide better conditions to allow companies to increase long-term value creation.

Options clustered around five key themes

The policy options are clustered around the following five key themes:

  • Business implementation and remuneration (suggestions around the formation of companies, company reporting and executive remuneration).
  • Corporate governance and commitment devices (suggestions around increasing directors’ duties (reforming section 172 of the Companies Act 2006) and restricting the role that can be played by short-term shareholders).
  • Blockholding, monitoring and engagement (suggestions around privileging the position of active, long term, major shareholders).
  • Strengthening asset manager capability (suggestions aimed at empowering and engaging smaller shareholders).
  • Reversing the decline in equity ownership (suggestions around tax, government and employee investment).

Options include increasing company reporting and executive accountability 

A number of the options seem unlikely to win immediate support from organisations that are already challenged by a complex and frequently-changing regulatory environment.

For example, policy option 2 requires companies to produce annual purpose statements or reports, to complement other recommendations, including:

  • Requiring companies to form around a purpose (option 1).
  • Creating guidelines to aligning executive remuneration with delivery of purpose (option 5).
  • Broadening directors’ fiduciary duties to include the expression of purpose (option 8)
  • Introducing public benefit corporation legislation along the US model (option 9).

Fostering and rewarding commitment, restricting short-termism

Further options are aimed at moving towards a model where committed shareholders take major positions, and hold them for the long term, engaging pro-actively with the companies they own (for example, options 12, 13, 14, 15, 18 and 21).

Alongside these, are suggestions that look at reducing the advantages of debt funding (option 20) and limit the power of short term shareholders in a takeover situation (option 10), as well as reforming accounting standards to better reflect investments in assets (particularly intangible assets) that align with the company’s purpose.

The resulting picture is of a company that is intimately involved with its owners, who hold the directors accountable for fulfilling the company’s agreed purpose. According to the report:

“Great companies are enabled by the pursuit of clearly defined visionary corporate purposes, which set out how the company will better peoples’ lives.”

Closing date for comments 20 June

The Big Innovation Centre stresses that the policy options are not recommendations, and are being put forward for feedback. Comments are invited by 20 June 2016, and a final report with recommendations is promised in the autumn.

Sara Catley

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