Furthermore, existing regulations do not necessarily encourage companies to consider in a meaningful way whether their business activities could be structured to dramatically reduce or eliminate negative impacts, or conversely to contribute positively to the welfare of workers and the communities in which they operate. This approach has also led to a troubled relationship between civil society and businesses.
What if we were to revision the corporation from the inside out by reconceiving their purpose as being to contribute to long-term prosperity and sustainability? The first step is to debunk the myth of a company duty to maximise profits above all else. There is no legal system in the world that requires the board of directors to do so. Unfortunately, this belief has dominated corporate governance since the 1970s and has pushed companies to blindly prioritise short-term profits, at the expense of innovation and sustainability, as well as employee and societal wellbeing. It is also behind many of the biggest corporate scandals and environmental disasters, for example Deepwater Horizon, Rana Plaza, Luxleaks, and Volkswagen.
Financial performance is closely linked to responsible business behaviour
Protecting human rights goes beyond ethics - it should be seen as a core part of business strategy that strengthens long-term financial performance, reduces litigation and reputational risks, raises employee satisfaction and increases consumer and investor trust. Research by professors at Harvard and London Business School concluded that firms with good performance on material sustainability issues significantly outperformed traditional companies over a 17 year time horizon.
On the other hand, companies that fail to manage human rights face significant reputational risk, which implies long-term financial and brand value loss and may expose the company to legal liability. For example, German clothing retailer KiK has been brought before the court for its lack of safety measures, which are alleged to have contributed to the fire of a factory in Karachi, Pakistan. The claim could set a precedent for a new legal ground to enforce social and human rights in Germany.
Strong corporate governance puts people first
After each corporate crisis, media and regulators often point to poor corporate governance as part of the underlying problem but fail to put forward any meaningful recommendations for structural change. Recognition of a new understanding of the purpose of the corporation and reform of the corporate governance framework would complement and enhance existing regulation that seek to promote responsible corporate behaviour.
A well-run and sustainable company is managed in a transparent and democratic way and is accountable to robust standards that govern its performance in all applicable areas, including environment, human rights, labour, and tax.
Good corporate governance allows a company to look well into the future, anticipate challenges and opportunities, build capacity to create value on an ongoing basis, embrace the creation of real value for customers and wealth for shareholders as mutually reinforcing objectives, and recognize societal and environmental sustainability as essential conditions for delivering on these objectives in the long run.
Through the Purpose of the Corporation Project, we have published a short guide “Revisioning the Corporation” providing civil society organisations and responsible businesses with an introduction to corporate governance, an overview of alternative corporate governance models and potential avenues for future policy reform. The guide is available on our website.
*Cover picture (CC) Flickr Andy Ciordia