Profits (& Votes) v. Ethics

Policy advisers cannot ignore these facts of life, but must also draw their bosses' attention to ethical and environmental issues which - if ignored - may cause longer term reputational damage to the organisation and the individual, let alone damage to the society in which we all live.  Here are some thoughts which may help you frame your arguments:

Fiduciary Duty

Chief Executives and others will often remind you that their primary duty is to generate profits for their shareholders, and this fiduciary duty in law (and some would say rightly) often takes precedence over the consequences for the environment, for healthy and fair competition, for customers, for employees, and for wider society if their business were to fail. Non-profits and public sector organisations have their own primary duties, and must also operate in a way which generates income and/or reduces expenditure. But organisations ignore wider, longer term and societal benefits at their peril.

Equally, however, fiduciary duty is (or should be) a long term concept. It is easy enough to maximise short-term profits at the expense of customers and other stakeholders, but directors' and executives' duties are to maximise the value of the company in the longer term. The first paragraph of this note lists a number of examples of where neglect or exploitation of customers, or the environment, has been extremely costly over the longer term.

Farrer & Co (Solicitors)'s advice for the Tax Justice Network in September 2013 makes the point about directors' duty to consider the longer term success of the company very well indeed. Here is an extract:

In circumstances where a director decides that the company will eschew tax avoidance, he or she may do so for reasons that he or she considers to be aligned with the long-term success of the company, including for example:

   (i) the adverse risk profile of tax-structured transactions in the long term,
   (ii) the desirability of investment in public health, education, infrastructure &c in the jurisdictions where the company's employees live and work,
   (iii) the need to foster the company's relationship with tax authorities and with consumers,
   (iv) the impact of tax avoidance on the wider community of taxpayers and users of public services, and
   (v) the desirability of the company maintaining a reputation for high standards of business conduct.

. . Our view that other kinds of impact may constitute a legitimate basis for a director's decision notwithstanding an adverse financial impact may be derived from the clear meaning of the [Companies Act] but it is also supported by the pre-existing case law on the corresponding common law duty . . For example in Re Welfab Engineers Ltd (1990) BCLC 833 the directors were found by Mr Justice Hoffmann . . not to be in breach of their duties when they deliberately sold a real property asset at an undervalue, in circumstances where they did so in order to protect the jobs of the company's employees.

Blueprint for Business argues that UK company law permits a purpose led approach:- "Section 172 of the 2006 Act makes clear that the primary duty of the director is the success of the company, and that in discharging they have to take account of  the Interests of shareholders (which may well vary between them) and have regard to a bunch of other stakeholders too.  Although it is often interpreted as a duty to maximise shareholder value, our view ( supported by legal opinion) is that they are not agents of shareholders but true  fiduciaries, who have to set out what they think success means. The law is certainly not as clear as it could be but it is often narrowly interpreted and poorly understood. For us a key shift in thinking is where profit is not seen as the purpose but one outcome of living out a purpose that serves society."

Blueprint for Business also makes a strong second point about motivation.  Their view is that "organisations implicitly operate with a view of the human person, usually unstated, and typically that people are self interested, motivated by money and status. A heuristic then operates to reinforce this as people respond accordingly. The diminishing returns to regulatory reform are one manifestation of this. What we are proposing, drawing on a strong multidisciplinary body of learning and everyday experience is a different view. This is that people are hard wired to seek meaning and fulfillment through work and that the quality of relationships is intrinsically important to us. The link to purpose is then that organisations with a pro-social purpose whose relationships are founded on respect and co-creation will 'crowd in' intrinsic motivation. People associated with it will lean in because they care. This is hard to introduce in large organisations but the conversations are fascinating because people are not used to being asked about what view of the person does the business have. This is a powerful agent of change."

Buyer Beware!

Separately, there is a well established business principle that the buyer is responsible for assessing the value and suitability of the thing that they are buying. ('Caveat Emptor' = Buyer Beware!) Although significantly eroded by consumer and other law, it remains the case that many companies feel under no obligation to behave ethically, even when their customers are buying complex financial and other products about which they are inevitably badly informed. This applies big time in dealing rooms.

Legally, an important case is Hedley Byrne v. Heller which held that all businesses have a general duty not to mislead, their customers - but this does not extend to a duty to protect customers from making a mistake, such as paying too much for a product - unless the customer is relying on the skill and judgment of the business's employees. There is therefore no non-regulatory protection for those naive individuals that trust their energy suppliers, for instance, to reward their loyalty, when their less trusting neighbours have learnt that such companies should not be trusted.

See also my note on consumer protection. 

Corporate Social Responsibility

Some companies are certainly very good at filling their annual reports with information about their CSR (Corporate Social Responsibility), But most CSR activity is just a way of promoting a brand. The Times' Ian King enjoyed reporting on

"a company that won six awards in only one year from the US Environmental Protection Agency. It won a “corporate conscience” award from the US Council on Economic Priorities. It published a Corporate Responsibility Annual Report solemnly detailing its philanthropic activities and its pursuit of “Respect, Integrity, Communication and Excellence” that would “integrate human health, social and environmental considerations into our internal management and value system”. And it placed on the desk of every executive a framed copy of its corporate values. It sounds impressive, until you learn that the company was Enron, the American energy giant whose collapse in October 2001 was followed by revelations that it had been fiddling its figures for years."

Indeed, modern companies seem to exercise much less social responsibility than in previous decades. The US Business Roundtable in 1978 listed CSR as one of the four core functions of company Boards. It had disappeared by 1990.

Pret a Manger hit the headlines in 2018 because it took advantage of a 'small firms' (locally baked produce) exemption to omit allergy advice from its sandwich labelling, leading to the death of a young woman. The company had built up a powerful wholesome image of serving handmade natural food. But its food contained many E-number chemicals, and its baguettes were imported, frozen, before being cooked for a final few minutes at the back of its shops. None of this might have mattered too much if it had reacted quickly and recognised that - as it was now a huge company - it should label its products properly. But it had become profit focussed under new investment fund owners and refused to change its behaviour until a coroner suggested that it had been evading the spirit of the legislation. As one commentator put it:- "Pret ... in 1995 would have said sorry and worked out how to solve the problem. Pret in 2018 basically said it didn't care." So Pret took the view - initially at least - that it would only improve its labelling when required to do so by amended regulation.

 

Martin Stanley

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