The Case for a Standing Commission on Responsible Capitalism Addressing the crisis in trust between society, business and government. Issued June 2014 - For discussion Page 1 of 7
Summary The banking crisis and its aftermath have revealed serious problems in the current operation of the economic system. This has led to widespread criticism of flaws that were previously tolerated or only recently revealed. Problems like corporate tax avoidance, high pay, environmental damage, food commodity trading, and payday lending appear to evolve because there are no limitations on business practices that do not break laws or regulations, although they are widely regarded as socially unacceptable. At present it takes a long time to address these problems; they are often tackled in a piecemeal fashion, or not at all. There are many reasons for this: The narrow definitional framework of UK corporate governance, the nature of the current legislative and regulatory systems which deal best with problems after they occur rather than anticipating them, the complexity of the existing regulatory frameworks, and the view that more legislation is not always the appropriate answer. However it occurs, the result is poisoned and polarised relationships between government, business, and society. This is not satisfactory from any point of view. This paper proposes a solution in the form of a Standing Commission on Responsible Capitalism. It would look at existing and emerging problems and decide whether the activities involved were socially unacceptable. The measure of unacceptability that we propose is: foreseeable, material harm to the interests or well-being of stakeholders. In cases where an activity failed this test, the Commission would try to help those concerned to come to some accommodation. Where accommodation proved impossible, it would set out concise preliminary arguments for legislative or regulatory interventions. Once in operation, the Commission would, ideally, be able to address problems as soon as they arose and help to find constructive solutions. With government, or other civil society backing, the Commission could come into operation in 2016. The benefits such a Commission would bring are these: The provision of a constructive, impartial framework for problem solving. This would enable companies to address problems such as high and low pay, and corporate tax avoidance. Providing policy-makers with analyses of problems with recommendations for further consideration. This would give them a basis for action without taking away the scope for further scrutiny. The provision of advance warning of problems before they became significant. The exploration of principles of improved governance that would help business and society work together more closely and more productively. After discussion with the participants in the preliminary work, this proposal will be published for open discussion in the period July to December 2014. Page 2 of 7
Introduction A proposal for a Standing Commission on Responsible Capitalism was made by Stephen Hockman QC, in a 2013 report for Policy Network, titled Legislating for Responsible Capitalism what it means in practice, This report was well received and widely discussed. We therefore decided to explore, in more detail, how such a Commission might operate. To effect this, we invited a number of people with widely differing backgrounds and skills to work, in a personal capacity, on a Responsible Capitalism Project. The aims of this project were to: Clarify the term Responsible Capitalism, which came into wide use in 2013, but somehow evaded definition. Examine several cases in which business activity appeared to be socially unacceptable, although not illegal. Consider whether a Standing Commission on Responsible Capitalism could help to resolve the resulting problems quickly and effectively. Why action is needed The market capitalism model, of which there are several varieties, has proved effective in achieving material growth and well-being for an ever-increasing number of people. Consequently, privately owned companies are given privileges such as limited liability in exchange for the economic benefits they bring. Market capitalism, as it has developed in the UK, is, however, characterised by risk taking, competition, private finance, and profit seeking. Left to itself, it assumes competition will provide efficient outcomes but has no regard for any moral requirements such as fairness or social cohesion. Moreover, businesses benefit both from state-funded scientific, technological and educational investments and from using natural resources without considering the cost to society. The responsibilities of firms to society are narrowly defined without recognition of changes in social attitudes. It is thus perfectly legal for them to engage in payday lending, and the use of care homes as vehicles for speculative profit, and remunerate managers at the expense of shareholders and employees. Such activities can inflict harm on citizens, their communities, the natural world and on future generations. Businesses, however, have only limited responsibilities for preventing or rectifying the harmful consequences of their actions. This represents not only a mismatch between the practices of private firms and social expectations, but also a failure of the market to adjust to the new social and economic risk environment. The rules now governing the functioning and accountability of markets and companies are complex. They have evolved case by case over many years and are widely distributed in statutes, the law of trusts, common law, capital market rules, and governance codes, across a wide spectrum of regulatory authorities. Nevertheless, during the past thirty or so years, both in the UK and in the world economy, there has been a succession of major crises involving companies or sectors. The 2008 banking liquidity crisis, and the subsequent recession, have thrown a spotlight on the extent of the failure of current market models to deal with issues of fairness and sustainability. The Page 3 of 7
scale of this crisis and the slowness of the subsequent recovery, mean that we cannot ignore the underlying causes. Investigations have usually followed crises and subsequent recommendations have been, at least partially, implemented. The measures taken to improve governance and oversight have not, however, prevented or helped to foresee the banking crisis, the phone hacking crisis, or the meat adulteration scandal of 2013. As a result, there is a widespread public view that not much has changed. This public mistrust is a corrosive problem, adversely affecting both business and politics; it shows no sign of declining. Indeed, a recent (April 2014) opinion poll carried out by Populus for the Financial Times showed that the majority of voters distrusted big business, and wanted tougher action against irresponsible corporate behaviour, Tackling this mistrust will be difficult. The current political process, perhaps because of its short-term electoral imperatives, does not provide for the comprehensive discussions and practical interactions which should take place at all levels of government, business, NGO s, the media, and professional institutions. For that to happen, we need a new forum for looking at policy and individual cases and examining their practical outcomes. What is unacceptable? There have been many efforts over the years to try to define and implement corporate social responsibility, and to codify good corporate governance. Such efforts undoubtedly had some benefits, but they have not prevented major problems from occurring. For this project, therefore, we decided to start from the opposite end, to see if one could define what is clearly unacceptable or irresponsible. The advantage of doing this is that defining the limit of acceptability enables business and society to have a rational discussion about how to address existing problems, and to anticipate and avoid problems in the future. For activities falling within the defined limits, this approach adds no additional burden. Over a period of some six months, we examined several examples of business behaviour that have been subject to criticism, such as payday lending, corporate tax avoidance, high pay and private equity takeovers of care homes, and measured them against the following definition of unacceptable capitalism: Unacceptable capitalism is action or inaction relating to the operation of individual capitalist enterprises or the oversight of such enterprises, by individuals, companies, regulators or legislators, which involves significant, foreseeable risk of material harm to the interests or well-being of stakeholders including shareholders, employees, customers, suppliers, the host community, and the environment. Given our limited resources, we did not look at some of the major issues of our times, such as climate change and the sustainable use of the environment and natural resources. We believe, however, that one could usefully take the same approach for such problems. Page 4 of 7
Conclusions The broad conclusions from our case study work were: 1. The common feature of the cases we examined was a serious mismatch between the formal regulations and legislation governing the behaviour of companies, and the social acceptability of that behaviour. 2. The definition of unacceptable capitalism provides a useful litmus test of what business behaviour is socially acceptable and what is not. 3. Use of a multi-skilled team, including lawyers, accountants, economists, tax experts, academics and people with experience in management or employee relations, is effective in objectively analysing issues that cross a range of legal, regulatory, and social boundaries. This approach, applied when a problem emerges, or even earlier, could make the work of regulators and legislators easier and more efficient, by providing a concise, objective summary of a problem, with recommendations for further regulatory, legislative or other action. 4. Adopting this approach could possibly have reduced the considerable and protracted problems caused by payday lending. On the issue of high pay, early action might have helped reduce the extent of the financial crisis, and the subsequent mistrust of the financial sector. In the case of corporate tax avoidance, it might have been possible to spot the adverse revenue consequences for government of the current tax regime, before it became a major political issue. Recommendations For these reasons, we recommend that consideration should be given to the establishment of a Standing Commission on Responsible Capitalism. The Commission would have the following aims: 1. To consider whether business or regulatory behaviour crosses the boundary of what is socially acceptable, and is, thus, irresponsible. 2. Where, after an initial review, this appears to be the case, to notify those concerned, and conduct preliminary investigations, including taking evidence concerning the alleged behaviour. The conclusion of this stage would be the issue of a Preliminary Finding, stating whether it is considered that a problem exists or may exist in future and, if so, the harm involved, to whom it applies and the extent to which it represents significant, foreseeable risk of or actual material harm. 3. To consider whether there is an appropriate extant body with the powers to deal with the problem. If so, to refer the problem to that body, in order that it can deal with it. Page 5 of 7
4. Where there is no suitable body, to examine the problem, to publish the preliminary finding, and to conduct further investigations and hear further representations for a period of, say, 180 days. In this period, the Commission could take the role of an arbitrator, bringing together the businesses and regulators with those being adversely affected, and trying to broker an acceptable solution. 5. After investigations and discussions, to issue a Final Opinion, setting out findings, conclusions, and recommendations for further legislative, regulatory, or other actions. 6. To consider the impact of Society s changing demands for corporate responsibility, and the progress of businesses in meeting those expectations. To research and report, as necessary, on those issues, and bring them to the attention of policy makers. 7. To define simple principles that will come, over time, to embody what we mean by Responsible Capitalism, and to suggest how the overall governance of companies and the economy could be changed to achieve this. Of course, the Commission is only likely to be able to help with this final ambitious objective when it has established a track record of credible and objective work - no small task. 8. To follow and report annually on all of the above, and on progress in implementing both previous Commission recommendations and those of ad hoc investigations covering similar ground. The establishment and operation of the Commission would incur costs, but we consider it important to avoid creating a large, bureaucratic organisation. Some senior people will be prepared to help on a pro bono or nominal fee basis. In many cases, the Commission could work closely with agencies, think tanks, pressure groups, and charities, just as we have done on this project. There would be unavoidable direct costs for office accommodation, research and administration staff, and operational expenses. Advantages of this approach There are a number of advantages in establishing a standing commission rather than adopting an ad hoc, fire-fighting approach. With a wide remit to spot problems at an early stage, the Commission could help iron out difficulties before they caused significant harm. The key advantages of the Commission would thus be: Credibility stemming from independence of vested interests; Impartiality, and hence the ability to counsel both sides in a dispute; Wide freedom of action to investigate and consult; The capacity to refocus regularly on issues that have been kicked into touch. Page 6 of 7
Next steps This draft report will be discussed with the members of the project and informally with other interested parties. After receiving everyone s input we envisage the next steps will be 1. To publish final proposals in July 2014; 2. To take feedback, July 2014 to December 2014; 3. Further work to test and finalise proposals, from January 2015 (dependent on resources) 4. To develop detailed time and cost estimates, to set up and operate the Commission; 5. Legislation to give the Commission the necessary powers and protections; 6. Full operation. We would very much appreciate your comments on this proposal, and would be happy to meet to discuss it. We fully recognise the scale of what we are proposing, but are convinced that it is both necessary and urgent. Please send comments to: Stephen Hockman QC stephenhockmanqc@6pumpcourt.co.uk and Rod Dowler rdowler@industry-forum.org Page 7 of 7