Capitalism is at a crossroads. On the one hand, it is arguably in a historically dominant position. On the other, it is increasingly seen as having become ‘extreme and self-destructive’, linked to growing social and political unrest fueled by historic levels of income inequality.
A paradigm favouring shareholders and short term corporate management is driving wide-spread income inequalities, corruption, human rights violations and unprecedented environmental damage.
All this means companies, business associations, think tanks and business leaders increasingly recognise the need to change. There is growing acknowledgement that companies will have to broaden their understanding of purpose, such as calls from a shift from a shareholder-centric to a stakeholder-focussed capitalism.
The World Economic Forum recently launched the Davos Manifesto 2020, aiming to re-define the purpose of a company. In this model, a company “serves its customers by providing value proposition”, supports fair competition, has “zero tolerance to corruption” and pays “its fair share of taxes”.
This change in discourse towards more transparent, fairer and responsible business is a positive step; however, societies will need to see that corporations, including the partners of WEF Davos 2020, take clear actions and openly report on their progress against the commitments they are making.
Numerous attempts to implement positive change by committing to standards such as the UN’s Sustainable Development Goals and voluntary standards on Environmental, Social and Governance have been undermined by the inability to enforce standards in a consistent manner. Inconsistency in practice has resulted in ineffective implementation. The current complexity of the corporate reporting environment, and the needs of local governments and regulators to obtain relevant information from companies, can also create challenges.
Improving long-term managerial behaviours through leadership diversity and recognizing corruption risk exposure
This shift towards a broadened purpose of the company means that corporate anti-corruption measures also increasingly will need to expand their focus beyond their traditional emphasis on anti-bribery and compliance.
For instance, a diverse management team can significantly enhance the openness of the leadership environment, and mitigate bribery and corruption risks. Bribery scandals such as the Fresenius Medical Care case, which concluded in 2019, are good examples of to how a subsequent change towards a more diverse leadership can create a more resistant and effective corporate culture in the future.
Running a global business and supply chain is subject to significant corruption risks. Existing Business Integrity tools can provide useful recommendations and suggest good practice on how to prevent or mitigate corruption risks through comprehensive anti-corruption programmes. Following the massive bribery scandal at Siemens discovered in 2006, most recommendations aimed to improve the compliance environment through awareness raising and capacities of staff.
On the other hand, if business goals do not take a specific business environment into ac-count, these tools and recommendations can underestimate the potential for tensions be-tween conflicting goals for management and employees. In other words, if you want to run a corruption-free business, you will likely have to adjust your respective revenue growth targets accordingly and design a long-term transformation plan.
Two key measures to track success in these areas are:
1. In order to enable all stakeholders to better understand a company’s progress to implement and maintain an open, diverse and fair leadership environment, a company should disclose KPIs (Key Performance Indicators) measuring diversity including on gender at its various managerial levels.
2. To enable all stakeholders to better understand a company’s commitment to revenue growth targets, while taking specific regional corruption risks into account, companies should start adjusting business goals for risk, including corruption risk, and developing KPIs accordingly.
Assuming full responsibility for the local workforce and quality of local supply chain, and transparent political engagement can make an immediate difference
A standard feature of calls for a renewed definition of business purpose is that businesses have a responsibility for improving the societies in which they operate, such as fairly paid jobs, including for local suppliers, and paying local taxes while also respecting human rights.
Overall societal vulnerability to corruption may increase if significant parts of society are unable to support themselves through a reasonable household income level, or if public finances are not sufficient to support public services and sufficiently well-resourced institutions.
Our third key measure for success is:
3. In order for people to understand a company’s progress implementing and maintaining its commitment to each of the communities it operates in, a company should disclose KPIs that demonstrate average staff pay levels and average executive remuneration. This would also mean dramatically accelerating the implementation of transparency measures such as the disclosure of detailed corporate ownership and public country-by-country metrics, in particular around tax payments.
Corporate political engagement can contribute to society, if it advances the interests of a broad range of stakeholders. However, if political engagement creates undue influence on, or unequal access to, political decision makers, there is a risk of skewing policy decisions away from the public interest.
TI-UK’s most recent Corporate Political Engagement Index highlights that ethical companies tend to outperform competitors by more than 10% over five years; companies with strong integrity infrastructures outperform competitors by 7% on their shareholder returns; while companies involved in political corruption scandals face up to 20% fall in their stock prices. Responsible and transparent reporting on political engagement can lead to more investment-friendly and fairer market conditions.
A fourth and final key measure that would show companies are truly committed to a new way of doing business would be:
4. To enable stakeholders to understand a company’s progress implementing and maintaining a transparent and multi-stakeholder political engagement processes in a consultative way, companies should provide reporting and KPIs that disclose and justify political contributions and lobbying activities throughout their supply chain.
In coming years, as the links between corporate models and behaviours and societal impacts become ever clearer, pressure on companies to prove they are putting words into action is only going to get stronger. In 2020, these four measures would be a good place to start.