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Economists debate the role of firms in society – but can mutuals fill the middle ground?

Mutual businesses can incorporate broader factors, including social objectives, into strategies and decision making.

Andrew Gall, BSAWhat is the role of business in society, and where must governments step in to protect consumers, employees and communities?

A recent survey of prominent economists asked for views on this question.

The group, which included economists and former central bankers from the UK and Europe, was asked how much they agreed with a statement which summarised what is sometimes called enlightened shareholder value.

This is a slightly broader remit than that envisaged by the purist view that maximising shareholder value is the only goal needed for organisations. The statement was:

It is best for society if the management of publicly traded corporations only considers the impact of their decisions on customers, employees, and community members to the extent that these effects feedback to affect shareholder wealth.

18% of the economists agreed that it was best if managers of publicly traded companies considered the impact on stakeholders subject only on the effect on shareholder wealth. Based on the economists’ comments, this was from a theoretical view that giving managers too many differing objectives could risk giving too much managerial discretion, unless there were suitable accountability and incentive structures in place.

45% disagreed with the statement. However, it was not because of some deep faith in businesses to solve society’s issues. Many of these respondents recognised that there are effects that fall on other stakeholder groups and are not incorporated in the firm’s pricing – so called externalities – which mean that corporations can’t be relied upon to sufficiently look after wider stakeholders. There are also more broad-minded shareholders who would value the companies they own contributing to social goals. And social norms will constrain what firms can do in any case.

Oliver Blanchard, formerly Chief Economist at the International Monetary Fund and now at Massachusetts Institute of Technology, opened up the debate on social media, saying "… the answers show how confused we, the economists, are on the topic. Nearly none of the answers deal with the central issue: … The relevant question is: should firms behave differently?”

If shareholders are not willing to trade off profits, if consumers are not willing to pay higher prices, if CEOs who try get fired, or the firms which behave better go bust, is the world a better place?”
 

 

Yet he considers that, "The room for firms to deviate from profit maximisation is limited,” so that if societal issues such as climate change are left to firms we are more likely to get words rather than action, greenwashing rather than actual progress. As such, the government is likely to have to use laws and regulation to bring about change in relation to societal objectives. Others agreed that the government must step in as corporations would not act to the extent needed. 

However, alternative forms of business may offer something of a middle ground.

Previous BSA research found that employees at mutual building societies were much less likely than bank employees to agree that profit maximisation was the main purpose of the organisation, and they also thought that wider groups of stakeholders received more of the value created by the business than was the case at shareholder owned banks. This research has since been replicated and extended for Danish cooperative banks.

In a new report the think tank Demos suggests cooperative and social enterprises demonstrate how purpose-driven organisations could boost the UK economy.

These pieces of research indicate that mutual ownership can give more scope for businesses to address societal issues, by bringing the interests of wider stakeholder groups into the organisation’s decision making.

Of course, this is not automatic, and relies on strong governance, clear strategic focus and implementation.

But examples abound in the mutual sector – innovations that focus on helping first time buyers afford house purchase, launching UK Savings Week to get people saving, a focus on lending on sustainable and energy efficient housing, keeping branches open and supporting communities - showing businesses can have a meaningful, positive social impact without being directed by government.

 

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