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Businesses must take account of society

15 May 2018 by Henry Ker

Businesses must take account of society - Read more

Investors and pressure groups are pushing companies towards more ethical business

‘Doing business ethically makes for better business’ is the motto of the Institute of Business Ethics. In our cover interview this month, its director Philippa Foster Back explained this mantra, saying: ‘A successful business will be all the more successful for taking into account its role in society.’

It is an increasingly common message that investors are starting to latch onto. In January, the world’s largest asset manager BlackRock and its CEO Larry Fink released a public letter to companies, saying: ‘To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.’

‘It is good to hear mainstream investors recognising that doing business in the right way will bring you better results,’ says Foster Back, whose interview starts on page 18. ‘In taking this stance [Fink] is demonstrating he is [using his power] more wisely than he perhaps was in the past.’

Legal & General Investment Management has likewise spoken about the issue, announcing it would vote against boards with ‘lacklustre’ diversity initiatives, publish ‘leaders and laggards’ with respect to climate change and oppose unjustified executive pay hikes.

‘The vast majority of companies are making significant progress – we simply believe there is more to be done,’ said Sacha Sadan, the firm’s director of corporate governance at the asset manager. You can read more on this in our news analysis on page 12.

“Society has the governance mechanisms in place to effect change”

It is also a theme picked up in our feature on page 39, where the authors examine the oft-neglected section 172(2) of the Companies Act 2006. This allows a company to identify another primary purpose – alongside or instead of the default ‘for the benefit of the members’, otherwise known as ‘shareholder returns’.

This growing acknowledgement by investors that socially responsible business can aid long-term success, coupled with public pressure from consumers, means companies can no longer justify any and all methods within the law to generate revenue. As Foster Back says: ‘Some assume you are behaving legitimately if it is within the law, but there is still often a question. Even if it is legal, is it right?’

Increasingly, unethical practice will be called out and society has the governance mechanisms in place to effect change. To echo Sadan, we have made progress – but there is still a ways to go.

Henry Ker is editor of Governance and Compliance

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