Last week I had the privilege of participating in “The Future of the Corporation: Business for Society Conference” held in Santiago. The conference was organized by the ESE Business School of Universidad de los Andes and the International Academy of Management. This conference brought together leaders from the Chilean business, investor and government sectors, together with civil society represented by NGOs and experts on the role of business society from around the world. I’ve been to a lot of conferences in my time, but I can honestly say this was one of the best I’ve ever attended. One of the reasons for this was the commitment of Professor Alfredo Enrione to position the conference as a starting point for ensuring that the Chilean business community contributes to a Chilean society that is sustainable over the long term.
All speakers were excellent but I was particularly captivated by the address “Moral Challenges to Business and Society,” given by Cardinal Peter K.A.Turkson, President of the Pontifical Council for Justice and Peace. His talk built on ideas published in a 2012 guidebook called Vocation of the Business Leader (VBL) and the already often-cited 2015 encyclical on climate change Laudato si’, on Care for our Common Home by Pope Francis, with an emphasis on the role of business in society.
Since I am not a particularly religious person and strongly believe in the separation of Church and State, I wondered how well the Cardinal’s view would square with my own very secular one regarding the role of business - both companies and investors - in contributing to a sustainable society. While there were a few points that were specifically relevant for the Catholic segment of the audience, it was a speech that was both moving and compelling, and one that raised an issue I have been working on for some time—the role of the board of directors.
Cardinal Turkson discussed three objectives of business: (1) To produce GOOD GOODs, (2) To provide GOOD WORK, and (3) To achieve GOOD WEALTH. Each of these objectives has what he called two “practical principles.” As the Cardinal was explaining each of these, I was asking myself: “Just how practical are these principles given how grounded they are in the Catholic faith?” My conclusion is that they are all eminently practical and doable in the secular world. But they can only be put into practice with the strong support of a company’s board of directors. Let me explain.
Producing GOOD GOODS has the principle that business contributes to the common good by producing goods and services that are truly good and and that truly serve. While values are inevitably involved in making this choice—take gambling for example—the point is that the corporation makes choices about what it does and doesn’t do. Similarly, the principle of maintaining solidarity with the poor by being alert for opportunities to serve deprived and undeserved populations and people in need is not simply charity. Scholars like Professor Stuart Hart, another one of the excellent keynote speakers, have made a compelling case for the opportunity businesses have in serving the “Base of the Pyramid.”
Providing GOOD WORK is based on the principles of: (1) making a contribution to the community by fostering the special dignity of human work and (2) embracing subsidiarity by providing for employees to exercise their gifts as they contribute to the mission of the organization. The first principle is especially controversial since Cardinal Turkson argued: “This means that business must always subordinate profits to generating employment.” But he went on to point out that pursuing short-term profit at the expense of employees is bad business over the long term. And, consistent with the second principle, it is clearly good business to develop the company’s human capital.
The importance of long-term thinking—at the core of today’s debate about sustainable development—is prominent in the two principles for achieving GOOD WEALTH. First, businesses should model stewardship of the resources under their control, including financial capital, human capital, and environmental capital. Stewardship involves recognizing the negative externalities created by a company’s activities, externalities which harm society and which will harm the company itself over the long term. While Cardinal Turkson did not touch on this point, this is where integrated reporting has an important role to play. When companies are reporting on their performance on all of these capitals they will manage them better. Helpful here is The International <IR> Framework published by the International Integrated Reporting Council.
But it is the second principle for achieving GOOD WEALTH that is likely to be the most trying for many since it requires businesses to be just in the allocation of benefits to all stakeholders: employees, customers, suppliers, and the community. Some may see this as a slippery slope into philanthropy and in violation of the prevailing view that companies exist to maximize shareholder profit. It is here that the role of the board of directors becomes important.
The common ideology is that the board has a fiduciary duty to put the interests of shareholders first. In fact, the duty of the board is to the long-term interests of the corporation itself as explained in “Why Boards Must Look Beyond Shareholders.” Investors are obviously important, but other stakeholders can be critical as well. It is ultimately up to the board of directors to determine the company’s role in society as expressed in how it allocates the benefits it produces. Its authority to do so is confirmed by papers on fiduciary duty that have been written by prominent law firms in all G20 countries and a number of other ones. These are available on the Duty of Board Directors page of the American Bar Association’s “Sustainable Development Task Force” website and the “Sustainability & The Fiduciary Duty of Boards of Directors” page of the UN Global Compact’s website.
In his concluding remarks, Cardinal Turkson himself addressed whether these objectives and principles can apply “in the real world,” both in reality and as it is taught in business schools. But he rightly noted that the world is what we make it to be. We aren’t given institutions, laws, and regulations in the same way that we have been given our planet. We create them. Today, boards of directors have the authority needed to create the world we want for our children and ourselves. One that is sustainable and just, and both of these go hand in hand.
How can we achieve that? I’d like to humbly suggest adding one more objective to the Cardinal’s three: to practice GOOD GOVERNANCE. It too comes with two principles. The first is to take responsibility for identifying the significant audiences for the corporation and the time frames it uses to evaluate its impact on them. The second is to be transparent in reporting on the material issues that affect these audiences. Boards of directors, are you listening?
