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1. The Virtue of Enterprise: Responsible Business for a New Economy A ResPublica Essay Collection January 2013 2. About ResPublica The ResPublica Trust (which operates…
  • 1. The Virtue of Enterprise: Responsible Business for a New Economy A ResPublica Essay Collection January 2013
  • 2. About ResPublica The ResPublica Trust (which operates under the trading name ResPublica) is an independent, nonpartisan think tank. We focus on developing practical solutions to enduring socio-economic and cultural problems in the UK. Our ideas are founded on the principles of a post-liberal vision of the future which moves beyond the traditional political dichotomies of left and right, and which prioritise the need to recover the language and practice of the common good. Based on the premise that human relationships should once more be positioned as the centre and meaning of an associative society, we aim to foster a ‘one nation’ approach to social and economic inequality so that the benefits of capital, trade and entrepreneurship are open to all. A vibrant democracy and market economy require a stronger focus on virtue, vocation and ethos. Consequently our practical recommendations for policy implementation seek to strengthen the links between individuals, institutions and communities that create both human and social capital, in order to achieve a political space that is neither dominated by the state nor the market alone. New Economies, Innovative Markets This workstream seeks to provide practical solutions for a moral capitalism and sustainable economy. This includes encouraging new market entry, ensuring supply chain resilience through more localised control, promoting greater diversity of business models and facilitating wider asset distribution, in order to achieve an economy based on trust and reciprocity. ResPublica Essay Collections ResPublica’s work draws together some of the most exciting thinkers in the UK and internationally to explore the new polices and approaches that will create and deliver a new political settlement. Our network of contributors who advise on and inform our work include leaders from politics, business, civil society and academia. Through our publications, compendiums and website we encourage other thinkers, politicians and members of the public to join the debate and contribute to the development of forward- thinking and innovative ideas. We intend our essay collections to stimulate balanced debate around issues that are fundamental to our core principles.
  • 3. 1 Contents The Virtue of Enterprise Foreword Introduction by Phillip Blond 3 4 Section 1 - A Culture of Crisis? Business Practice vs. Public Expectation 1. Tackling the Trust Deficit - Ian Powell, Chairman and Senior Partner, PwC 2. Taxing Times: Corporate Values and Consumer Value - John Mann MP 3. Leading by Example: Challenges for the Public Sector Outsourcing Industry - Stephanie Elsy, Consultant 4. Towards a Responsible Pay Structure - Professor Baroness Ruth Lister CBE 5. Information Asymmetry: The New Inequality? - Nathan Newman, Commentator 6 9 13 16 19 Section 2 - The Contradictions of Modern Markets 1. Culture and the Good Corporation - Professor Roger Steare, Cass Business School 2. Passive Consumers or Market Players? The Case for Bank Account Portability - Andrea Leadsom MP 3. Meet the New Economy - Simon Caulkin, Fellow, ResPublica 4. Are Governance and Innovation a Contradiction in Terms? - Dr Eric Jackson, Commentator, Forbes 24 27 31 34 Section 3 - The Company of Tomorrow 1. In Pursuit of Shared Value: Why Successful Enterprise is Social Enterprise - Chi Onwurah MP 2. Responsible Capitalism in Practice: Leading by Example - Michael Izza, Chief Executive, ICAEW 3. Future-proofing the Boardroom - Lucy P. Marcus, founder and CEO, Marcus Venture Consulting, Corporate Governance Expert 4. Putting a Price on Value - Anthony Kleanthous, Consultant 5. A Proposal for Self-governing Corporations - Professor Shann Turnbull, Principal, International Institute for Self-governance 38 41 44 48 52
  • 4. 2 About the Contributors Phillip Blond is an internationally recognised political thinker and economic commentator, who has offered strategic consultation and policy formation to governments, businesses and organisations across the world. He founded ResPublica in 2009. Simon Caulkin is a Fellow of ResPublica and a writer on management and business. He spent sixteen years as the management columnist for The Observer, and is also a former editor of Management Today. In 2010 he was named columnist of the year by the Work Foundation. Stephanie Elsy has worked in the delivery of public services for over 30 years, spending 15 years as a CEO in the charity sector before entering local politics. After retiring from local government she moved into management consultancy, and in 2012 formed her own consultancy. Michael Izza was appointed Chief Executive of the Institute of Chartered Accountants in England and Wales (ICAEW) in 2006. Prior to this he worked as managing director of several businesses at Spring Group Plc, having qualified as a chartered accountant in 1986. Dr Eric Jackson is the technology and China correspondent for Forbes. He is also Founder and Managing Partner of Ironfire Capital LLC, which runs a technology-focused hedge fund and angel fund. Anthony Kleanthous is a sustainability writer and consultant. He is WWF-UK’s Senior Policy Adviser on Corporate Accountability and Innovation, and a member of the Steering Committee of the Chartered Institute of Marketing’s Sustainable Marketing programme. Andrea Leadsom MP in 2010 became the first MP for South Northamptonshire to be elected with a majority of over 20,000. Prior to this her career included 10 years at BZW and Barclays, where she was Financial Institutions Director. Alongside this, she has acted as trustee and chairman to the charity the Oxford Parent Infant Project. Professor Baroness Ruth Lister CBE is a Labour peer and Emeritus Professor of Social Policy at Loughborough University. She is former director of the Child Poverty Action Group, and now its Honorary President. She is a patron of the human rights organisation Just Fair. John Mann MP was elected as the Labour Member of Parliament for Bassetlaw in June 2001. He sits on the Treasury Committee, and is Chair of the Parliamentary Committee Against Anti-Semitism. Before entering Parliament, he worked for the Amalgamated Union of Engineering. Lucy P. Marcus is the founder and CEO of Marcus Venture Consulting, and Professor of Leadership and Governance at IE Business School. She also writes a column and hosts a TV show at Reuters. She was awarded the 2011 Thinkers 50 Future Thinkers Award. Nathan Newman is a lawyer with an extensive history of supporting local policy campaigns. Among other fields, he has worked as a labour and employment lawyer, freelance columnist and technology consultant. Chi Onwurah MP is the Labour MP for Newcastle upon Tyne Central, and since 2010 has acted as Junior Shadow Minister for Business, Innovation and Skills. She has Chartered Engineering status, and was very active in the Anti-Apartheid Movement. Ian Powell is the Chairman and Senior Partner of PwC. He joined the UK firm as a graduate trainee in 1977 and is also a qualified chartered accountant. Professor Roger Steare is Visiting Professor in Organisational Ethics and Corporate Philosopher in Residence at Cass Business School in London. He has been Professor of the Week in the FT Business Education pages and is the author of the MoralDNA™ concept. He is also a Fellow of ResPublica. Professor Shann Turnbull is an author and researcher, and the Principal of the International Institute for Self-governance. He has written and taught extensively on the concept of corporate governance.
  • 5. 3 Foreword Foreword
  • 6. 4 Phillip Blond Introduction Phillip Blond
  • 7. 5 A Culture of Crisis? Business Practice vs. Public Expectation Section One 1 The Virtue of Enterprise
  • 8. Tackling the Trust Deficit Ian Powell, Chairman and Senior Partner, PwC A trusted organisation is a more resilient organisation. Trust is key to harnessing and directing raw ‘entrepreneurial spirit’ to drive growth that’s responsible, sustainable, and considers the interests of others. However, recent events have triggered a collapse in public trust in business, government and institutions of all types. For UK business as a whole to regain public trust, we need our political and business leaders to stand up and be counted, by reaffirming the positive role that business plays in society. Trust is a very powerful asset. Without trust, business life becomes much more difficult – as demonstrated by recent events ranging from the global banking crisis, to the phone-hacking scandal, to the ‘shareholder spring’ of revolts against companies’ remuneration policies. When trust evaporates, people and businesses stop communicating and collaborating, and seek to defend what they have rather than innovating to create something new. Each of these natural responses to the absence of trust has a further impact: they restrict growth, both in specific businesses and in the economy as a whole. In the past few years, it has been the financial services industry, banking in particular, that has been most directly under the spotlight. But similar challenges have also emerged in other sectors ranging from energy to media, and from pharmaceuticals to social networks. The negative impacts on share price, cost of capital and liquidity can be measured and are both immediate and significant. The impact on morale, innovation and behaviour is more difficult to measure but perhaps even more damaging in the long term. This is why trust is a critical asset for sustainable business growth and economic prosperity. However, unlike many other assets, trust cannot be bought or sold. Nor is building trust in today’s world a public relations exercise. Instead, an organisation and its people can only earn the trust of society by consistently demonstrating the right behaviour: exhibiting values, and perhaps a vision of the future, that outside observers feel are aligned with their own. This alignment can only be sustained over time through true authenticity, both on the part of organisations and of the individuals within them. New responsibilities for leadership A key element of establishing trust is authenticity. And the need for authenticity has major implications for business leaders. Traditionally, their primary duty was to run their business well and so create financial value for shareholders. Things are no longer so simple. Today, leaders have growing accountability to an expanding array of stakeholders, each with their own varying definitions of what constitutes “value”. For many of these interested parties, financial performance is now less important than behaving in a socially responsible way. An organisation’s own employees fall into this category.
  • 9. 7 A further challenge for today’s leaders is the pressure from the investor community for businesses to deliver short- term financial performance. This is a focus that tends to take precedence over all other aspects of the private sector, risking a situation whereby all other priorities become secondary to hitting the financial targets, and only if these targets are hit do the leaders get credit for everything else. Experience shows that the need to deliver short-term financial performance puts trust and authenticity under pressure. More generally, the focus today in society is not just on what a business or public sector body achieves, but on how it achieves it. If it does things in a way that people like, then this builds a sense that it has social legitimacy, in turn generating trust and loyalty. This shift suggests that organisations with strong ethics are likely to succeed over those without. And in setting the right ethical tone, the values and behaviours exhibited by those at the top are key to how everyone in an organisation acts every day. As one business leader said; “I strive to communicate the right values every day — and sometimes I even use words.” Of course, it is crucial for leaders to communicate their values in a straightforward and consistent way, but as this comment illustrates they also have to behave in the right way. People watch behaviours, and what leaders say and do need to match up. Organisations whose tone and behaviours at all levels are aligned with the interests of those they affect and society as a whole can succeed in reinforcing trust with each individual interaction. Where this happens, I believe it is a strong sign that leadership is fulfilling its responsibility to be authentic, by revealing the organisation’s true DNA and then letting other people decide for themselves whether it is worthy of their trust. A corporate strategy can only succeed through being aligned with thousands of interactions every day, not simply through a statement of strategic intent. And achieving this alignment demands clarity throughout the organisation about why it exists, together with a deep understanding of people’s expectations and attitudes towards it. Stability and sustainability in a volatile world Even where trust is being earned, it is by nature fragile: it is axiomatic that trust takes years to earn and seconds to destroy. Today this is truer than ever. Trust is often built transaction by transaction, and is conditional on the individual’s last contact experience. So a leader – and the organisation being led – may always be only one bad experience or error of judgement away from losing trust. This fragility is compounded by the speed and transparency of communication today. The rise of social networking means word of one bad customer experience can spread like wildfire. And many people seeking information and forming opinions about a business will rely on distant acquaintances on Facebook or celebrities on Twitter more readily than on what’s said by the press, governments, or companies themselves. To manage the resulting threats to trust, leaders must ask questions of themselves and their businesses from the viewpoint of different interest groups, and take account of the answers in their behaviour and communications. What is the source of our social legitimacy? What values and cultural norms shape our decisions? What behaviours do our values and incentive plans really encourage? How are our desired values and behaviours connected throughout the organisation? A further risk is that even the most deeply-embedded culture and values can be challenged at any time from within the organisation. When this happens, hard decisions need to be taken. To sustain the right culture, visibly tackling bad behaviour is as important as being seen to reward good behaviour. It may also be necessary to turn down potentially profitable business opportunities when pursuing them would run counter to the right values. In my view, every business should have a clear, straightforward and easily understood statement of its values. And the ability to challenge unacceptable behaviours is a key element of transparency and trust. The vital role played by behaviour underlines that doing business responsibly ultimately depends on people rather than processes. Given the growing complexity of organisations and the pace of change in the surrounding environment, rules and policies will never be enough to ensure the right behaviour at every transaction and contact point. So rules must be underpinned by principles: a shared sense of purpose that’s led from the top and resonates right the way through the organisation, a common culture that means people will instinctively do the right thing even when no-one’s looking. Tackling the Trust Deficit The Virtue of Enterprise
  • 10. 88 Closing the trust deficit through a national plan of action In recent months, these shifts in the landscape of trust have been highlighted for me by a series of round-table discussions that we at PwC held with CEOs, chairmen, CFOs and senior non-executives in both the public and private sectors. The debates were wide-ranging, insightful, and full of practical ideas for tackling the “trust deficit”. One comment in particular has stuck with me. It came from a CEO who made the observation that a big part of the public’s lack of trust was ignorance about what business does, and about its true impact on society. Business does many fantastic things. It creates jobs, growth and wealth. It pays the wages and creates the profits from which tax revenues are generated. It innovates to improve people’s standard of life. It builds infrastructure and communities. And it exports world-class products and services, bringing resources into the country in return. However, business is all too often depicted not as benefiting society, but as selfishly pursuing its own interests regardless of the costs to others. The impact of this steady drip-feed of negativity should not be underestimated: a recent Ipsos MORI poll showed that while many things make people collectively proud of being British, only 4% feel proud of British business. This reflects a sentiment with profound consequences. It fuels an environment of cynicism and suspicion towards business that is at odds with the real values and behaviours of the vast majority of business leaders. And this cynicism in turn risks undermining global trust in the UK as a place to do business – one of the UK’s traditional strengths and a source of real competitive advantage on the world stage. Put simply, if we in this country don’t regard the UK as a trustworthy and conducive environment for business, then we have no grounds for complaint if the rest of the world takes the same view. For the future wellbeing of the UK we must take urgent action to protect and build trust in British business, both at home and abroad. A concerted plan of action would have three major elements: a government that stands up for business – quite rightly holding business to account but also seizing every chance to reinforce the important role of business in wider society, leaders who set out a clear vision for the role of their business in society and rise to the challenge of converting rhetoric into reality, and robust dialogue with investors and other interested parties which includes reporting on the non-financial performance measures. Responsible capitalism: A new licence to operate Clearly a pressing objective for business leaders is a return to growth, and the opportunities and benefits that this will bring. But growth can only be sustainable if leaders in business and government pull together and shoulder their shared responsibility to regain trust. These efforts must extend to defining and embracing authentic values and behaviours. In many ways, there has never been a more exciting time to be involved in business: witness the unprecedented opportunities brought by developments such as globalisation, remote working and instantaneous global communications. But these advances also bring new obligations. Responsible capitalism is no longer just a phrase to insert in the chairman’s introduction in the annual report; increasingly it makes up the core of a business’s licence to operate. Companies that ignore this sea-change may find themselves isolated in their industry, frozen out by their own customers, unable to recruit good talent, or even regulated out of existence. By contrast, an organisation that rises to the challenge and earns trust through authentic behaviour will be more integrated into its communities, more resilient to shocks, and given more leeway by its investors, customers, regulators and other interested parties if and when a crisis hits. This will enable it to direct its raw ”entrepreneurial spirit” to identify and seize growth opportunities, invest in innovation, and take risks, while staying true to its underlying principles throughout. This is why trust is key to responsible capitalism, and to its delivery of responsible, sustainable growth. The extent of the trust challenge demands a long-term persp
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