Time to amend why companies exist?

A recent amendment to the UK Companies Act now requires directors to act with regard to the long-term and in making decisions stipulates they look at employee interests, business relationships with suppliers, customers and the impact on the community and the environment. Is it time for New Zealand to follow the international lead and make explicit what is meant by the best interests of the company, asks Ron Ainsbury.  

Duffle and Co, based in Wellington, markets ethically-sourced purses, bags, wallets. Little Yellow bird provides fairtrade-sourced uniforms made from organic cotton. And Ethique, a Christchurch-based business, produces solid shampoos and conditioners obviating the need for plastic bottles. 

These may not be household names but they are at the forefront of a revolution. They are not charities nor are they not-for-profit businesses. These are three of the 21 certified B-Corporations in New Zealand. 

Peter Drucker once said the purpose of business is to create and keep a customer. 

The founders of B-Corps have identified their customers and they are working hard to meet their needs. 

In developing and building their business they consider the impact of their decisions on their workers, customers, suppliers, community and the environment – using business as a force for good. 

And they are gaining market share. 

A 2018 survey found that United Kingdom B-Corps recorded an average year-on-year growth rate of 14 percent in the last year, compared to the national GDP growth rate of 0.5 percent at the start of 2018.

It also found that B-Corp fast-moving consumer goods (FMCG) brands are growing on average at 21 percent a year, well ahead of the national average of three percent across their respective sectors. 

But a change in ownership could see new owners dropping B-Corp certification.

To protect against this, founders of a company could take advantage of a new structure, now available in 33 states of the USA: the Benefit Corporation. Italy and Colombia have introduced versions of the US structure. 

A benefit corporation is a traditional corporation with modified obligations, written into its legal structure, committing it to higher standards of purpose, accountability and transparency: 

a)
Purpose: Benefit corporations commit to creating public benefit and sustainable value in addition to generating profit. Sustainability is an integral part of their value proposition. 

b)
Accountability: Benefit corporations are committed to considering the company’s impact on society and the environment in order to create long-term sustainable value for all stakeholders. 

c)
Transparency: Benefit corporations are required to report, in most states annually and using a third-party standard, showing their progress towards achieving social and environmental impact to their shareholders and in most cases the wider public. 

Patagonia founder, Yvon Chouinard, explains: “Benefit Corporation legislation creates the legal framework to enable mission-driven companies like Patagonia to stay mission-driven through succession, capital raises, and even changes in ownership, by institutionalising the values, culture, processes, and high standards put in place by founding entrepreneurs.” 

 

Why not in New Zealand? 

The argument that “I need to put my shareholders and profitability first before I consider other stakeholders” won’t wash any more. 

Several studies now provide ample evidence to counter this belief, neatly summarised by London’s Financial Times: “Companies with a purpose beyond profit tend to make more money.” 

It is not just small companies. The global giant, Unilever, whose Sustainable Living purpose was introduced in 2010, has revealed that its most sustainable brands grew 46 percent faster than the rest of the business and delivered 70 percent of its turnover growth in 2018. And Unilever annual dividends continue to grow. 

Blackrock’s CEO, Larry Fink is right when he wrote to CEOs: “Without a sense of purpose, no company, either public or private, can achieve its full potential.” 

This is echoed in the New Zealand Institute of Directors Four Pillars: “The purpose of companies has typically been seen as maximising shareholder value. To remain competitive and sustainable in the long-term, purpose beyond profit is important.” 

A recent amendment to the UK Companies Act now requires that directors must act with regard to the long-term and in making decisions stipulates employee interests, business relationships with suppliers, customers and others, impact of the company’s operations on the community and the environment. 

Perhaps it is time for New Zealand to follow the international lead and make explicit what is meant by the best interests of the company? 

Either amend the law to require that in making decisions directors take into account the impact on a wider group of stakeholders and not just investors or introduce a New Zealand Benefit Corporation. Or both?    M

 

Ron Ainsbury is an internationally-experienced executive, consultant and coach. After some 20 years abroad he is based in the Wairarapa from where he consults to business. He continues research as a Senior Fellow at the Rotterdam Business School Innovation Research Centre focused on how to encourage business to use ESG issues as spurs to innovation and new business opportunity creation. 

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