Companies are made up of people, they should benefit people too, writes Paul Lindley.
Believe it or not, businesses don’t exist.
People exist. People sign pieces of paper to form companies. People make business decisions, and people receive dividend cheques if those decisions are successful. They hire and fire, buy and sell, invest and divest. Every action a company takes is a decision made by a person.
These same people are not only business men and women. They are also sons and daughters, mothers and fathers. They vote, donate to charity, support sports teams and have hobbies.
They do the things we all do, because they, like you and I, are human. Just like us, they never know all the answers, they are vulnerable, they make mistakes, and they learn from their mistakes. And just like you and I, business people have ethics, they have a conscience, and they have values.
The humanity of businesses has become increasingly forgotten. The dominant economic theory of the 1980s, Monetarism, defined companies as entities of their own; their sole purpose making a profit. Milton Friedman, the architect of Monetarism claimed companies have no social responsibility to the public or their community, that they should exist purely to create value for their shareholders.
The ideas of the 1980s will not serve us today. The philosophies of Reagan and Thatcher are out of date, if they ever were valid. The belief wealth will trickle down from the wealthiest few, and the only purpose of business is to 'maximise shareholder value’, does not understand how modern companies thrive, or how to help our communities thrive with them.
Trust in our economy, our institutions and our businesses is falling. Our productivity is lagging, as are the wages of our workers. All while the share of wealth for the wealthiest continues to grow. Here we see the consequences of Monetarism, and the ideas of the 1980s.
I want to see businesses help our community, our environment, and our country. I want to see our workers treated with respect and dignity, our economies to grow sustainably and the growth to be shared with everyone. And I know, from my own experience, that companies are more successful when they have a purpose beyond profit.
Why do we need to bring humanity back to business?
Capitalism needs reform.
We have plummeting trust in big business. We see scandal after scandal; BHS, Volkswagen, Sports Direct, Patisserie Valerie, Carillion. There’s the President’s Club dinner, Oxfam scandal, and MeToo. We’ve seen phone hacking by the media, corruption in the police, mortgage flipping by MPs. Fake News is everywhere. Each undermines our trust in institutions.
In 2017 the IPPR called for a fundamental reform of the British economic model. The capitalism of the 1980s is no longer creating rising earnings for the majority of our people. Young people today are significantly poorer than their parents. Since 2010 the UK’s real GDP has risen by 12%, but adjusting for inflation, salaries have fallen by 6%.
Why is total income rising, while people’s income falls? Wealth goes to the balance sheets of large companies, staying as cash, rather than benefiting society. Generational and regional inequalities are bigger than ever before, and across the world productivity growth is at a standstill. Our system is broken, unfit for the challenges of the 2020s.
If capitalism doesn’t reform, our trust will continue to erode. Reform must start with the heart of capitalism; our businesses.
How do we bring humanity back to business?
The metrics for success must change
In line with Monetarism, many businesses have focused on the present: short-term profits, short-term wins for shareholders and short-term bonuses for executives. Each takes the humanity out of business, because we, as humans, fundamentally care about the long term.
Instead, our companies should look to the future, delivering against both short-term and long-term metrics. We should not only measure the tangible value they deliver to shareholders and the profits they declare, but equally the long term, long lasting benefits they create.
“It’s time to end the era of shareholder primacy, the company must focus on customers, employees, the company itself, and the communities with which the company does business”.
In other words, the company must focus on people.
The way capital is owned must change
Essential to Monetarism is the ownership of capital by a select few. The ownership of wealth is intended to inspire innovation, the gains from which will trickle down. But the unequal ownership of capital in the economy is what drives inequality. According to the IPPR, the share of national income going to capital has increased in recent decades, and is likely to rise further. We need new models of company ownership to reduce inequality and ensure the benefits of growing national wealth are widely shared.
The IPPR recommends, and I advocate, creating a Citizen’s Wealth Fund, giving the public a share of the UK’s corporate and other assets; along with the expansion of employee ownership trusts, which give employees majority ownership of the companies they work for.
The Way Prosperity is Measured Must Change
GDP is a fundamentally flawed means of measuring national prosperity. It counts only economic output, and not whether the output is good or bad for society. It tells us what businesses are producing, but not if they are treating their workers well, contributing to their community or to social causes. Again, we see the influence of Milton Friedman’s monetarism. Even in our measures of the economy, we take into account only the economic output, the value created for shareholders, rather than the value created for people.
Former US Presidential Candidate Robert Kennedy understood the problems of GDP. He prioritised the health of his communities, and the quality of life of workers, over economic output alone. As Kennedy said:
“Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage.
It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl.
Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.
It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile.”
His words are true today. We need a new measure to calculate value, which captures not just profit, but the way profit is shared, the good created in communities, and the wellbeing of the people who make up the economy.
Fortunately, we don’t need to invent one. Until the 1850s, social progress was measured by a collection of indicators known as ‘Moral Statistics’. These quantified incarceration, literacy, crime, education, life expectancy and disease. While the moral statistics of the 1850s need to be updated to meet today’s values, they placed human beings at the centre of their calculation. Their unit of measure was bodies and minds, never pounds and pence.
We should not return to 19th century capitalism, but we can still learn from our forebears. Instead, the Sustainable Development Goals (SDGs) should guide reporting for business. The SDGs are measurable, impactful, and easy to understand for ordinary people. They are far better indicators for business success than earnings-per-share or this quarter’s EBITDA. Our companies will be judged on the extent to which they are meeting these goals- by regulators, investors, and their capital owners, by employees and customers. By people.
We need purpose led business
Defining our businesses by more than profit isn’t just the right thing to do, it’s the smart thing to do. Consumers, employees, investors and innovators increasingly want purpose led businesses. We are coming to realise purpose is not only compatible with a successful business, purpose helps make business successful.
Ella’s Kitchen, the company I founded 13 years ago, is now the biggest baby food brand in the UK with global turnover of over $100M. It is often seen as one of Britain’s key entrepreneurial success stories of the last decade.
But the point of Ella’s Kitchen was never just to make a profit. It had a mission, a purpose which prompted me to start a business in the first place. Ella’s has loyal customers, who spend money on their products, allowing the business to make a profit. It then takes a profit to deliver social goods.
For example, a Christmas dinner product, from which all profits are pledged to a children’s charity programme. The reports I’ve presented to Parliament on changing baby feeding regulations to improve health outcomes. The Ella’s Kitchen books which help kids learn to cook from scratch. The Veg for Victory campaign to change the culture of, and advice on, weaning.
Ella’s Kitchen has been successful. It has seen up to triple digit sales growth annually, is consistently profitable, and has had very satisfied shareholders AND stakeholders. All achieved while using business as a force for good. I know from experience business can change the world, while making sustainable, growing profits and creating wealth.
Across the business world we are seeing this change happen: a move away from the Friedmanite focus on Monetarism, and narrow-minded goal of short term profits. Instead, businesses are taking on a growing appetite for purpose. These groups want purpose led businesses because it is financially responsible, economically responsible and socially responsible.
How corporations are responding to our new demands
Companies have realised purpose is profitable. A weakness has been exposed in our current system, but there is also great cause for optimism. A new business narrative offers British entrepreneurs huge opportunities to thrive, but also opportunities for corporates to strengthen, for jobs to improve and for an increase in fairness and job growth across the economy.
Leading the way is the B Corp community- a global movement dedicated to redefining success in business. The community found that purpose-led businesses are flourishing. 86% of UK B Corps that re-certify feel the certification has benefited their business. Year-on-year growth rates of UK B Corps is 14%, 28 times the national economic growth of 0.5 percent. Leading UK B Corp brands are growing, on average, 21% in 2017, compared to a national average of 3% in their respective sectors.
Impact investor, Leapfrog, reported an average growth of 43% for purpose-led portfolio companies. According to Deloitte, 73% of CFOs now recognise the direct link between running an ethical, sustainable business, and increasing financial performance. It is more profitable to be purpose led. Unilever’s purpose-driven brands are growing twice as fast as the rest of its business. The company is now an active supporter of The B Corp community.
Marks & Spencer are now 10 years into their sustainable business programme. Danone’s mission requires business practices to help build a healthier future. It has recently become a B Corp. Even Blackrock CEO Laurence Fink acknowledged: “Society is demanding that companies, both public and private, serve a social purpose.”
Eric Ries, the San Francisco entrepreneur and author of The Lean Startup, has created a new US stock exchange, one with additional rules for companies and investors designed to reward long-term shareholding and business strategies to generate long term results.
We are departing from Monetarism and the belief in the short-term bottom line. It is against a backdrop of ethical crises in business, and a lull in British productivity that mission-led businesses come to the fore. The healthiest companies are no longer those who pursue profit at all costs. Businesses do well by doing good.
Our way forward
To put humans at the heart of business thinking and structures, we must use two uniquely human traits. Both are fundamental to the success of a business.
The first is ideas. Human beings are the only animal capable of imagining something that doesn’t exist. They have the ingenuity to communicate it, collaborate on it, and revolutionise our lives by inventing it- all through innovation. Entrepreneurs know that to make ideas free-flowing, easily embraced, and likely to be developed, an organisation needs a culture which encourages communication, collaboration and inquisitiveness. An ability to fail, learn, adapt and succeed.
Corporate cultures should encourage autonomy, taking initiative, the mastery of new skills, and connectedness in order to share, inspire and be inspired. Businesses that recognise people’s aspirations will encourage more innovation, have happier staff, and improve the bottom line as a result. Innovation is essential to revive our stagnating productivity.
The second uniquely human trait is trust. Trust is fundamental to human wellbeing. It’s oil to the engine of a democratic society. It’s what connects the moving parts of a business, ensuring the corporate machine keeps turning. When we lose trust, everything jams. At best, it grinds to a halt. At worst, it explodes.
Trust is difficult to define. You know when you have it, you know when it’s gone. It can take years to build, seconds to break and forever to repair. It’s subjective. It’s personal. It comes from within. Trust is fundamentally human. Businesses don’t trust businesses- people trust other people.
Trust is clearly breaking down in society. Especially institutional trust. Especially the trust in business and businesses. Research from the Washington Post shows over a generation we have gone from a trusting society- where roughly 50% thought people could be trusted- to one where less than 30% now do. The breakdown of trust is bad for society and bad for business.
Trust is not some liberal, hippy invention. It delivers cold hard cash. It drives a company’s performance. In 2015, Concerto Marketing and Research Now completed a study into the benefits of drives of brand trust. When people trust a brand, 83% recommend it to other people. 82% will buy its products and services frequently. 78% will look to it first for the things they want and give its new products and services a chance. 50% will pay more for its products and services; and 47% believe it’ll inform them about products and services they like.
If you want people to buy more, try more and pay more, then harnessing brand trust is key. To create brand trust outside your business, you have to create trust inside your business.
Reforming Our Economy
We need to reform the way our economy operates, so it will better provide benefit to all of our society. We need to bring purpose into business, harness the trust and ideas human beings are capable of, and continue our transformation into a truly purpose-led nation.
While there are so many examples of companies taking the initiative, and transforming the way they do business, we cannot depend on individuals alone. We need a policy plan which promotes social enterprise, responsible business, and a sustainable economy. Government needs to take action too.
We should seriously consider trial ideas like Public Wealth Funds, design long term fiscal voting incentives, address the dangers of modern-day monopolies, and improve regulation. We should encourage employee ownership and use the Sustainable Development Goals at the heart of evaluation, report, taxing and investing in our companies.
I have advocated for a new type of company: Public Benefit Companies. The social impact of these companies can be audited similarly to how charities are audited by the Charities Commission, and in exchange for the additional reporting it would require, such companies should have significantly lower rates of corporation tax.
Finally, to view the purpose of a business through a people centric lens, I propose a new model to attain corporate success. Based on Maslow’s Hierarchy of Needs- from both a corporation and an employee point of view, we should first ensure we can live- make profits, be financially sustainable and pay decent wages. Then we should learn. Constantly. Learn from mistakes, learn from knowledge and data, from listening. We should allow our people to become more self-fulfilled by mastering new skills and perspectives. We should build businesses to have purpose and legacy they can leave to the societies they serve- encouraging every employee also to leave their personal legacy in the company.
If we reform our economy, and do it quickly, we may save capitalism as the way we run our economy, create our wealth, so we all lead better lives.
Never forget that people exist. Businesses are built by them and for them. The wealth they create helps human lives be lived better. Companies are made by people coming together for a common purpose- and they thrive when that purpose is more than profit.
In recent years business has lost that purpose. We have put profit above people, cash flow above communities and balance sheets above beliefs. As a result, our trust in the system has declined, and human beings a worse off. If business fails to work for more of society, our system will collapse. We have the opportunity to change things.
We can learn much from the etymology of the word company. It is forged from com and panis. It literally means ‘with bread’. It's about people coming together to break bread: Companions. People together, building prosperity together. People.
About the author
Paul Lindley is an award-winning British entrepreneur, social campaigner and best-selling author. He is the founder of Ella's Kitchen, the UK's largest baby food brand, and is a campaigner dedicated to social change. He is the co-founder of The Key is E, supporting African entrepreneurs whose social businesses benefit children; Chair of Robert F Kennedy Human Rights UK and the Mayor’s newly established London Child Obesity Taskforce.