Governance

The history of things

The company: It is generally agreed that these now-ubiquitous structures were born in the 1600s, before really hitting their stride in the late 1700s when the concept flourished in the United States. In discussing the nature of business in 2050, I start in the past, because, relative to human development, something born a few centuries ago is only just learning to walk!

Plenty has changed since the Dutch East India Company set out to monopolise the spice trade: industrialisation and urbanisation, antibiotics, anaesthetics and longer lifespans, the democratisation of technology, and a growing inequality of wealth. Yet over the same time period, the essential structure of ‘For Profit’ (FP) companies has not. The FP company structure continues to enable limited liability and joint stockholder ownership, and companies continue to be created to pool money and enable high-risk, high-investment, high-reward activities (think sugar, spices, slaves, gold back in the day).

Separately, we’ve created the Not-for-Profit (NFP) organisation, a ‘company lite’ version, to enable social good. Same, same, but different.

Demands on both the for-profit and not-for-profit sectors have increased over time: more transparency, greater accountability and regulations, regulations, regulations... But is this duality right for society anymore? Should we separate NFPs from FPs? Or indeed, FPs from NFPs?

This begs a larger question: should profit be separate from purpose? If every company has a purpose and every purpose has some value, and plenty of NFPs make a very healthy profit, should we retain different structures?

The world is changing

If you find it difficult to envisage 2050, you’re not the only one. In fact, futurists tell us that across all humankind, we can only conceive four different future scenarios. That’s right, general consensus among our most forward-thinking imaginations only generates four possible futures: one that’s more or less like now (continuation), one that’s positively transformative (game changing), one that’s degenerative (collapse) and one that’s rigidly limited (disciplined). All are possible, some are probable, but are any preferred?

What we can all agree on is that the world is on the cusp of great social, environmental and economic change. Key markers indicate we’re approaching a threshold. These threshold moments appear when there’s increasing complexity (such as the Internet of Things) and emergent behaviours arising (such as global activism in which children are rejecting schooling to campaign on climate change). The impact of accelerating technological change on human beings, and our social and economic behaviours, is unprecedented. In the blithe brevity characteristic of our digital age, ‘change is the new normal’.

“…these individual choices are based on an individual’s perception of ‘good’, and this ‘good’ is driving both new market engagement and conscious disengagement from ‘business as usual’.”

What is interesting is how markets are responding to changes and, at the same time, how we are seeing the effects of genuine consumer activism. Among my social circle (noting that I live in an inner city ‘bubble’), it’s difficult to organise a straightforward social event these days; some will only eat organic, another may boycott a venue in protest of wage disparities, others must be within walking distance because they don’t use fossil fuels and, always, there are the ever-growing ranks of vegans.

Comically, these demands mirror the famous early 90s coffee scene from LA Story but, significantly, these individual choices are based on an individual’s perception of ‘good’, and this ‘good’ is driving both new market engagement and conscious disengagement from ‘business as usual’. These ethically-minded consumers are driving a conscious economy that’s forcing market change, to which companies must respond.

To clarify, I’m not suggesting that companies aren’t already shifting to meet these emerging market trends – the new normal is all about change, after all. The question I pose is: Can we expect current governance and company structures to handle these changes?

Corporate social responsibility – What now?

In December last year, Professor Bryan Horrigan contemplated whether corporate performance measures should include a social license to operate. Given social license may be viewed as a link between FP and NFP organisations, this suggestion shows how thinking is changing. While Horrigan rightly concludes ‘a company’s performance, overall governance, and social licence to operate are all inter-connected’, this is an emergent element of the complex modern corporate environment.

Does this inter-connection mean we’ll just see a mollifying growth in Corporate Social Responsibility (CSR) programs, or some forms of CSR that blur the lines between a FP company and its NFP recipient-partner? Does having a social license to operate inherently make you ‘good’, or just ‘good enough’? And according to whom? Ultimately, it is according to your shareholders – the ones who pool the money to fund the risky activities, remember? But, in this inevitable shake-up of purpose and structure, I hope we reach something more robust.

Larry Fink’s Annual Letter to CEOs in 2018 called for ‘a new model of shareholder engagement’; one that properly integrates ‘environmental, social and governance matters’ in investment. This year, he wrote of the inextricable link between purpose and profit and the expression of purpose increasingly demanded by millennials in the workforce. Fink highlights that the largest transfer of wealth in history is occurring right now, from baby boomers to this new generation of purpose-driven consumers. Another emergent element, another threshold, signalling movement towards this newly conscious economy: the focus on social improvement rather than profit. In this paradigm, human benefit, rather than financial gain, could define profitability.

And while we’re on governance

The Australian National University recently released research that showed that companies making above-average profits were more likely to breach their environmental or social obligations than poorer performing firms. The work showed internal corporate governance measures and increased regulation doesn’t always prevent poor corporate behaviour – a theory backed up by plenty of contemporary evidence.

Governance is not #winning at the moment. High profile, large-scale scandals suggest that either we’re not serving governance well, or governance is no longer serving us.

A similar question was posed by the AICD NFP Governance and Performance Study: ‘Is the current model of NFP governance sustainable?’ The emerging elements of threshold change in NFPs include: gender equity on boards; the loss of ‘kitchen-table’ governance; increasing risk and regulation; sustainability issues; and declining community trust in NFPs. Importantly, it is concluded that we mustn’t ‘assume a governance model that works now will be as effective in the future, as NFP governance goes through a period of unprecedented change’.

Like everything else, governance is getting more complex. And entropy loves complexity.

Concluding with the start

Companies operating in a conscious economy – an ethically competitive marketplace driven by a generation of consumers who believe the corporation’s role is to improve society with each and every action – would look very different to our current company descendants of Dutch East India.

I propose that in the not too distant future we will not need a divide between FP and NFP; it’s not a divide that will serve future generations or the future increasingly conscious consumer. If profit becomes human-centred, there’s no need to define a difference. Philosophically, and ultimately structurally, a company could only exist to improve society. We need these new structures that are responsive to social change and consumer demands; structures that work for the common goal of social improvement, and we need to govern those structures true to that purpose.

To this end, we must start appointing values-based directors. Directors who are able to govern unblinkered, with not only an eye, but also a hand firmly on those four possible futures. Directors who are willing to consider that what is now, may not always be. But that alone is not enough, we must also lay the path for them; engage them now and engage them often in defining what a corporation could and should be.

Building a new generation of directors in step with a powerful new generation of consumers, law-makers and change agents will yield profound social consequences: new ways of operating, new ways of understanding, new ways of structuring, governing and distributing our collective resources in a conscious economy.

The question is not whether we should act to meet this change, but when.

And the answer is now.