Photo: Bloomberg
Photo: Bloomberg

Opinion | Aligning profit with purpose for sustainable business

The view that a firm must not use shareholder money for the benefit of others has been contested

The notion of the company dates back to 11th century Italy, when Italian seafaring merchants received money from passive investors, in return for a share of the profits from their voyage. More formal manifestations of the company took shape centuries later, beginning with the East India Company in 1600, which by royal charter was awarded a monopoly of English trade with Asia. In the 18th century era of Adam Smith and classical liberalism, companies assumed the form of private enterprises free of governmental influence or direction, with the intent that private enterprises are capable of delivering benefits to all levels of society. When the English parliament passed the Joint Stock Companies Act of 1856, it became possible for citizens to follow a simple procedure and register a company with their liability limited to the extent of their investments.

Since then, companies have been at the centre of a complex and evolving relationship between economics, government and society, propelling capitalist progress. Companies have produced life-saving drugs, put cellphones in the hands of every other human, brought information to our finger tips, and are now gearing up to explore outer space. In doing so, they have had to balance the interests of various stakeholders they serve—shareholders, customers, employees and society at large.

An inflection point in this journey came in 1970, when Nobel-prize winning economist Milton Friedman wrote in an essay in The New York Times that the sole purpose of a company is to generate profit for its shareholders. A company’s profits belong to its shareholders, and the company must not apply shareholders’ money for the benefit of others. This view has since been highly contested by the evolving theory on sustainable business and the stakeholder model of governance, which requires companies to consider the interests of various stakeholders.

In the last decade, for example, 35 American states have authorized the incorporation of benefit corporations, or B corps. These are for-profit companies like any other, with the exception that the best interest of these corporations is defined to include positive impact on society, employees and environment, in addition to profits. Well-known companies like Patagonia, and Ben & Jerry’s are B corps. If Ford Motor Co. was a B Corp in 1919, Henry Ford would have won his famous case against the Dodge brothers, and gone on to reduce prices and raise employee salaries.

In India, too, the primary company legislation, the Companies Act, 2013, has codified fiduciary duties of directors, which include promoting the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, its shareholders, the community and for protection of the environment. Therefore, the law now specifically requires that decision-making by Indian boards must consider the interests of various stakeholders and take balanced decisions after considering the trade-offs.

This has been taken forward further by the Indian securities regulator that requires the top 500 listed entities to disclose their environmental, social and governance initiatives in their annual Business Responsibility Reporting. It now has also introduced voluntary Integrated Reporting that requires disclosure of the six capitals (financial, manufactured, intellectual, human, social and relationship, and natural) to enable informed investment decision-making.

Further, the ministry of corporate affairs in March 2019 issued national guidelines on responsible business conduct, which have been introduced to give form to India’s international commitments such as the International Labour Organization’s core conventions (including those pertaining to the minimum age of employment of children) that were ratified recently, the UN Guiding Principles for Business and Human Rights, and the 2030 Agenda for Sustainable Development.

This is line with international trends, where the largest holdings are of institutional investors; 20% of Standard & Poor 500 companies are held by three big US investors. The conversation on long-termism and significance of purpose to this end is being led by large investors such as Blackrock. Such trends travel east on planes and not ships. Therefore, one would expect India’s company law regime in the future to be based on a flatter global corporate world, where purpose will be a key factor in decision-making.

There is clear legislative intent on having a purpose-driven corporate India. In the long term, companies are likely to be more widely held, with relatively lower concentrated holdings by shareholders, and be driven by a well-rounded purpose. This is not only supported by legal frameworks, but also by the very nature of inter-generational Indian businesses that are inherently aligned with long-term goals and nation building. The gen-next is aligned with this view too; a recent survey by a large global technology company found that 80% of its millennial employees cared more about working for a purposeful organization than they did about their own compensation.

When the intent is to build a long-term sustainable business, profit and purpose can be well-aligned. Young business leaders must therefore learn to develop a broader perspective of the world, and understand the impact of their actions and decisions on society at large.

Kapil Viswanathan & Cyril Shroff are, respectively, vice-chairman of Krea University, and managing partner of the law firm Cyril Amarchand Mangaldas

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