Why do good companies behave badly?

Why do good companies behave badly?

The debate began by asking what we mean by a ‘good’ company? In English, ‘good’ has both a moral and a practical meaning; we talk about doing the right thing and how well something works.

While these are two distinct concepts, there is a philosophical argument that suggests that the two are inextricably linked. Applied to corporates, it is evident that a good company should fulfil its functions effectively, but, it was suggested, there is also a moralist argument linked to purpose and the company’s role in wider society.

ICI was given as an example. For much of the 20th century, ICI was the UK’s largest and most successful manufacturing firm. After the war, the company identified that the future of chemicals would lie in pharmaceuticals and the company invested in a pharma division. It took 20 years for that division to break even, but the company stuck with it, as it was key to the overall mission. With the discovery of beta-blockers, the fortunes of the division changed and pharmaceuticals became both a major product area and profit centre for the company.

During that period, the company’s stated aim was “to be the world’s largest chemical company serving customers internationally through the innovative and responsible application and related sciences. Through the achievement of our aim, we will enhance the wealth and well-being of our shareholders, our employees, our customers and the which we serve and in which we operate.”

By the 1990s a different business model had become more prevalent. The ICI mission statement changed to reflect that move. “Our objective is to maximise value for our shareholders by focusing on businesses where we have market leadership, a technological edge and a world competitive cost base”

The strategy was well received by the stock market, but quickly went sour, in 1996, ICI was expelled from the FTSE index and in 2007 it was taken over by the Dutch firm AzkoNobel. Why did the aim of creating shareholder value fail so spectacularly? Is it true that without another purpose a business cannot deliver shareholder value properly?

Does a good company behave badly when it focuses mainly on shareholder value or can a company be a good corporation while keeping shareholder returns as its primary motive?

The debate considered purpose, behaviour, shareholder and shareholder values.

Thoughts on purpose:

Oprah Winfrey was quoted as saying, “I do what I’m passionate about and the money follows”. This can equally be applied to corporates. Companies, particularly large ones, comprise a collection of individual interests, so without a shared purpose, there is no inherent collective interest.

Companies that create a strong, shared purpose create the kind of culture that will build a good business that will ultimately deliver shareholder value.

Thirty years ago, CEOs never talked about share price or finance, they discussed successes and future direction. Today’s CEOs are judged (and remunerated) by share price, this has changed companies significantly and how they are run.

Thoughts on behaviour:

If the sole focus is on returns, then perverse incentives can be inadvertently created leading to bad behaviour. Financial incentives, for example, are often misplaced making money for individuals rather than building success for the organisation and so increasing shareholder value.

Companies need to be careful of they way they set targets and the culture created around this. Where there is a fear of failure around targets, this can lead to misconduct as executives become focussed on meeting the target rather than delivering the business objective.

Businesses need to put the right systems and processes in place to incentivise the behaviours that will deliver the company’s aims and in doing so they will increase returns. This should be driven by the creation of a strong ethical culture that will stimulate good behaviour; creating clear expectations of behaviour.

Thoughts on shareholder value:

A company cannot deliver shareholder value simply by setting it as the overall corporate aim, yet this is a trap that many organisations fall into. It fails, as an objective, because it often indicates that the business has lost its purpose, with ICI as the classic example of how this can go wrong.

That is not to say that shareholder value per se is wrong. On the contrary, businesses need to be profitable and generate returns. However, this should be an outcome of running a business well, rather than the primary mission.

Businesses must also be wary of the idea of striving to ‘maximise’ shareholder returns as this can focus attention on how to deliver returns rather than how to be the best at what the company does. Once targets and rewards focus on how to deliver better returns, companies tend to inadvertently incentivise the type of behaviours that lead to miss-selling, cutting corners, compliance failures and other forms of misconduct that result in highly damaging reputational scandals.

At its most simple, the overall aim of a company should be compatible with delivering shareholder value. If there is no alignment between the two, then the company will struggle.

Thoughts on shareholders:

The problem we face is the lack of alignment between the motivation of shareholders and the aims of the organisation. While shareholders clearly want to make money over the shortest period, this can conflict with the overall aim of the business and how it seeks to achieve those aims. Companies can struggle to ensure that shareholders embrace and support their goals. This is particularly the case when a business is looking towards innovation and development for the long term which may mean delivering less for shareholders in the short term.

There is also an argument that suggests that companies need greater democracy. When the employees, customers and suppliers who care about the long term future of the business have little say in the company, but shareholders with no long term interest do, this can create conflict and lead to decisions being made that may not help with the sustainable development of the business.

The GoodCorporation View:

Companies do indeed need a clear sense of purpose. They also need to ensure that they have the right systems in place to ensure that an ethical approach to business will be taken even when significant pressure is on to deliver short-term results. This can fall under the remit of the ethics and compliance team who should be able to measure corporate culture and behaviour in order to raise awareness at board level if and when activities or incentives in the company run the risk of creating reputational damage.

At the moment very few ethics and compliance teams have any metrics and are therefore failing to deliver adequate information relating to culture and behaviour to the board. From our experience of assessing organisations, good behaviour and culture should be measured and quantified so that boards can use this data alongside financial information in order to manage their businesses successfully.

 

GoodCorporation Business Ethics Debate – December 2015