Can you force a business to be responsible?
Economist Phil Mullan, one of my fellow panellists, argued that businesses’ sole aim should be to make profit and that any attempt to make the company look responsible to society was either a cynical attempt to improve the company’s reputation or, in the worst case, a deceitful side show.
Mullan explained that good business almost entirely meant being fair and reasonable to customers, staff, and suppliers. You could feel the heckles of the audience raise, but his opening remarks were a great backdrop for the debate that ensued.
Business needs to make a profit and provide a return to shareholders, and without doubt this should be the overriding objective of any business leader. But to do this, the company has to have the trust of its stakeholders including its customers and shareholders.
Listed companies especially will not be forgiven by shareholders when there is even a whiff of impropriety. In September 2008, when confidence in the banking system reached rock bottom, the banks’ share prices nose-dived as confidence and trust in the sector evaporated. The banks didn’t even trust each other enough to lend to. Many banks and financial institutions failed.
In 2002, when accounting firm Arthur Andersen was convicted of obstruction of justice for shredding documents related to its audit of Enron, the damage to the Andersen name was so severe, its 89 year history ground very swiftly to a halt.
The irony in the banking sector is that it’s one of the most heavily regulated industries. But far from this regulation helping, it seems to have created a “tick box” or a “can we get away with this?” mentality. Regulation should encourage corporate responsibility, not rescind that responsibility to a regulator through an approvals process or become a substitute for sound business judgement.
So if regulation is not the answer, how do we ensure companies act responsibly? We need to do something simpler; make companies more transparent about what they’re doing and therefore more accountable. This will open up their actions even further to market and stakeholder scrutiny. More transparency will encourage an ongoing two way debate about business activities. This will tie the company’s actions and responsibility even more clearly to their executives’ wallets via the share price.
Contemplating a falling share price will always focus the mind of a board executive; more than a phone call from a regulator or a polite email from the company’s own head of corporate responsibility.
Throughout October and November, The Independent Online is partnering with the Battle of Ideas festival to present a series of guest blogs from festival speakers on the key questions of our time.
Richard Janes is a director of Hotwire’s Banking & Finance practice. Hotwire is hosting a Battle of Ideas satellite event in London on Wednesday 10 November to launch its report into what it will take to restore confidence in the UK financial services sector.
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