Are short-term profit targets bad for business?

Are short-term profit targets bad for business?

At a debate organised by GoodCorporation and hosted by Baroness Sharp at the House of Lords on 20th May 2009, Will Hutton, Vice-Chair of the Work Foundation spoke on corporate governance and corporate responsibility. Will said that companies need to have a much clearer statement of their purpose that should be challenged and agreed by more active non-executive directors.  Shareholders, he argued, need to understand that long-term growth cannot be achieved if the focus remains on the continued delivery of immediate profit.  Great businesses are here to do more than make money; if they have a clear, acknowledged business purpose, they will deliver profit.  This, he urged, should be the new business model for the next decade.

To ensure that this is achieved, he called on businesses to have an Annual Intention Statement.  Non Executive Directors should then be constitutionally required to hold the Board to the delivery of this statement.

He also called for Boards to acquire a greater understanding of fair and proportional rewards for business success in order to reduce the ‘cash for failure’ image that has tarred certain corporations in recent months.

Current notions of CSR also came in for criticism. This, he determined, could distract companies from focusing on their core purpose. He lamented the last minute changes that were made to the Operating and Financial Review that he felt had missed an opportunity to embed better long-term thinking into business.

In line with all good debates, not everyone agreed. Others felt the supply of strong, confrontational non-executive directors (NED’s) was too small.  There have been significant examples of boards not performing.  What was needed at board level was cognitive diversity – a broader range of experience and expertise rather than an Old Boys Club.  Appropriate training for NED’s was also mooted. The need for some type of independent review of the performance of the NED’s was also discussed.

Active ownership was called for, with institutional shareholders playing a more involved role.  To achieve this, better communication and dissemination of the right information would be needed.  It was also suggested that there be a code of practice for shareholders as well as more calibrated opportunities for shareholders to register their dissent.

Looking at banks in particular, it was argued that mega-banks were not necessary.  Some supported Will Hutton’s call for the introduction of a Glass-Steagall type act or at least, some derivation of it that would separate commercial and investment banking.  Stock lending also came in for criticism.  Predictably perhaps, some would ban the practice, while others supported it, provided it was practiced with transparency.

It was clear from the debate that we need to rebuild faith in both the markets and in business.  But if, in doing so, we can turn this into an opportunity to hard wire checks and balances into our corporate system we will create corporations with purpose that deliver both growth and profit resulting in wealth creation rather than wealth transfer.

GoodCorporation Business Ethics Debate May 2009