What Is The Good Company?

John Kay

 7 August 2015 @JohnKayFT



Okay John, thank you very much for joining us today to discuss the concept that you recently put forward in a column in the Financial Times – the concept of a good corporation, a good company. In your article you mentioned that economic thinking in centre left parties across Europe is in disarray. Where do you think are the problems and what are the weaknesses of current economic thinking?

Well, I think the central problem for the European centre left is that it has been left rather stranded by the collapse of socialism essentially, both intellectually and empirically. Oddly, I think socialism had polarised political debate in Europe for 100 years. And that’s a problem, as I see it, for both left and right. The left has to come to terms with the market economy but it hasn’t really thought through how it does that and what is good about markets and what isn’t, and what its revised critique of the market economy is.

And equally, there’s a problem on the right as well, which is that the political right in Europe was always a rather mixed coalition of people who felt threatened by socialism: conservatives, traditionalists, economic liberals, people who came from a religious background of various kinds. And they discover now they don’t have very much in common, which is why we get the fragmentation on the right and incoherence on the left, which seems to me characteristic of modern European politics.

Right. And if you say there should be a revised critique of the market economy, what would you think should be the key elements of this revised critique?

I think the central idea is to say that markets function because they’re embedded in social institutions. And once you’ve got that point, that markets do not function by virtue of what I’ve sometimes called the model or the American business model, which is that the best way to economic growth and prosperity is to stimulate greedy individualism and impose as few restrictions as possible on that.

Successful modern economies actually require much more collective activity than that implies. And by collective activity I don’t only, or even primarily, mean state activity. I mean people working cooperatively in teams. The corporation is actually the central institution of the modern state.

And the notion that the corporation is something that you can fit into that model of self-interested individualism so that it’s just – it’s either an entrepreneur writ large, you see this extraordinary personalisation of a company, say in American and American-influenced business literature, where everything that happened in General Electric happened because Jeff Immelt willed it. And you only have to think about General Electric for a moment to see that that couldn’t possibly be right. But you have this cult of the heroic CEO, which is a product of the last 30 years.

Or you get an equally mistaken variant of it, which says that managers are just agents of the shareholders and look at it in terms of principal agent models. And I think if you think about the reality of the corporate economy at all you’ll realise that neither of the descriptions bears very much relationship to the way the large corporations actually function, or could or should function.

Now, you mentioned in your article also that you see stake-holding as one of the key elements of the social embeddedness of markets. What kind of stake-holding do you mean? Is it the discussion that was had in the UK in the 1990s, or is it more alongside the German model? What kind of stake-holding do you have in mind?

Even in the UK in the 1990s there were variants of it and some people who talked about this clearly thought it was promoting a German model. Now, there are aspects of the German model that I think are part of the way we should be thinking about this. Then there are aspects which are not.

I think the German model very much has the idea that the corporation is embedded in the community, which is an important part of what it is we’re talking about.

On the other hand, the German model puts a degree of emphasis on representative institutions, of having boards that have, supervisory boards, that have substantial worker representation on them, of having organised labour very much involved in the management of corporations. And I don’t much want to go down that road.

I think corporations ought to be run by professional managers but that the professional managers of the corporation ought to have a clear idea of the multiple objectives that have to be achieved by a successful business. The idea that it is about shareholder value maximisation is, at its best, rather empty rhetoric and at its worst can do a good deal more damage than that.

So you say that the interest and the role of the wider stakeholder community has to be incorporated in decision-making, but not necessarily in the way it is institutionalised in Germany? Even though, as you know, some of the resilience in recent years of the German economy has been attributed to, in particular, co-determination.

Yes, right. You’re describing exactly what I believe and co-determination is a particular historic German model of doing this, and not necessarily adaptable in other places. I don’t have to spell out that the German political history is really rather peculiar and fortunately unique.

And the way to push this debate forward, I think, is not to say that some other European countries we should copy particular institutions in Britain or in any other European country. It’s rather that we ought to learn general principles from what has worked and what has not worked elsewhere.

Okay. For instance, like shareholding, stake-holding of the workforce is one of these principles, but how it will be, or should be, adopted is up for grabs?

I think that’s exactly right, that good corporations are run with the interest of shareholders and other investors, employees, customers, suppliers and the community at large in mind. But how you actually achieve that is best thought of as a culturally-specific issue. And it’s one that will be done differently in some of the smaller European countries that are characterised by very high degrees of social cohesion, the Scandinavian countries for example.

These will be different from the ways in which it’s done in larger European countries, Germany, France and Britain. And each of these, as we’re describing, have their own particular histories and institutions, and particular characteristics of their corporate sector.

Okay. And before we come to the actual concept that you put forward, the good company, could you explain to us why you say that the profit-making corporation is the centrepiece rather than alternative forms of organisations, such as not-for-profits, cooperatives, and so on and so forth?

Well, it’s been made the centrepiece over the last three decades or so and has been made it by….it’s a mixture of an intellectual movement on the one hand. That is, economic models have been used to present this particular structure, which has, I think, in part been seized on partly by parties of the political right.

All this is associated really with the changes in political direction that followed, particularly the election of Thatcher and Reagan in 1979, early 1980s, and then followed by the political events of the collapse of the Soviet Union through the following decade. So that there were these practical developments on the political scene that combined with a set of intellectual arguments to have got us to the slightly market fundamentalist position that we have today.

Okay. And if you would like to describe what you think the key elements of your concept of the good company would be? What are the hallmarks of the good company?

I think the good company is one that understands the multiplicities of its social role. The reason corporations, or the justification rather, for the existence of corporations in the modern economies is first and foremost that they produce goods and services that people want; together with delivering satisfying work environments to the people they employ; together with existing in harmony with the community in which they operate; and together with earning good returns for stakeholders and delivering to other investors the returns which they have expected. Good companies have to do all of these things.

And I think of the job of the professional manager of one of these companies as it’s kind of like steering a boat in a slightly turbulent sea or river. You are buffeted one way or the other and sometimes you go too far in one direction and sometimes too far in the other. And the job of the manager is to maintain some sort of course in the face of all these conflicting pressures.

And you mention in your article that the social contract has too often been broken in recent years. What should the new social contract be in your view and what role should the good company play in this?

And as a follow-up, obviously you’re sketching a scenario that is not reality at the moment. What do you see are the key steps that should be taken towards this scenario of a better functioning market economy?

First of all, the ways in which the social contract has been broken, I think is that people – some companies – have broken the implicit contract that there was between them and the society in which they functioned. And I’ll cite as an example the financial sector as plainly the striking example.

The banks have always been interested in profits. They’ve made profits but they didn’t even end up as profit-making, as directly profit-making institutions. They ended up very largely as being institutions that were run for the financial benefit of a smallish group of senior employees.

Whereas the traditional role for a bank, and I believe a continuing one, is of an institution which is certainly there to make profits and can make rather good profits, but it sees itself as a community institution. And historically in Britain, the bank manager was a community figure along with the local doctors and priests and accountants and the other professional people in the community.

That concept is completely gone and I think to our considerable disadvantage. It exists rather more in Germany with your, particularly your savings and community bank sectors than it does in the UK.

In fact, it exists rather more in the United States where there’s still quite a lot of community banking of this kind. But that’s the banking we need rather than the predominantly trading activities that are what Deutsche Bank has become, or BNP Paribas, and which brought down Royal Bank of Scotland in the United Kingdom.

But if you were a policy-maker now and would like to set sail towards a more socially embedded market economy, what would be the first priorities? What kind of policies would you implement in order to get there?

First of all, I think we have to recognise that the rhetoric has run a good deal ahead of the reality. That we say these things are aggressive, profit-oriented corporations and some of them are. But the reality is most companies, the most successful companies, are run, even in terms of making profits, are run with a wider sense of the role of the corporation that I’ve been describing.

And that was behind the paradox which led me to write the book, Obliquity. This is only one example of it but there are many of them that in a complex and imperfectly understood environment, pursuing a goal directly is not necessarily the most effective means of achieving it. That to say, “Our purpose is simply to make profits,” betrays a kind of instrumentality that actually gets in the way of actually making profits. And that’s precisely what happened in our financial system.

Bear Stearns famously had a sign saying, “We make nothing but money.”  And in the end they proved not to be very good at making money, because it was a business that was essentially destroyed by the greed of their own employees. A business that is only there to make money for the shareholders is not going to command much in the way, or anything in that case, in the way of employee loyalty.

So we have to start by recognising that reality is different from the way in which it is widely described. I put it this way: the American business model is not a good description of how the American economy actually functions and isn’t.

So what we’re talking about most of all in this area is, I think, a set of cultural changes, so we’re not going to change it by passing legislation or regulations. As I see it, the British legislation is, and in other European countries as well, is entirely consistent with the kind of view of the corporation which I’ve described.

What we need is to change the rhetoric and that’s a job for people like me who write. It’s a job even more for politicians that frame the terms of public debate.

Yes. I’ve read your book, Obliquity, and I agree with the general analysis. But isn’t a part of the problem, if the aim is to embed corporations more in the social framework, that the stated aim of the corporation, in that sense profit-making, is best achieved through ways that are not really flagged up? Wouldn’t it be better if complementary aims would be clearly communicated, flagged up in a sense, rather than being seen as something that is just happening alongside the stated aims in order to create a trust that is absolutely necessary to really socially embed these corporations?

Yes. I think that is absolutely right. And the way I framed it in that book, and I’ve done this often in talking to people about these issues, is to contrast these two mission statements of ICI from the 1980s and ICI from the 1990s. The one said, “Our aim, our objective, is the responsible application of chemistry and related sciences. And through achieving that aim, we will make money for our shareholders, the community, etc etc.”

And that is actually what they did for 50, 60 years. And with that in mind, they moved from one business to the other gradually over a period of years and were Britain’s leading industrial company.

They then decided to focus on creating shareholder value and within a decade had lost most of the shareholder value with which they started.

So we need to change our thinking about corporations and change how companies are actually communicating. And that should lead to a cultural change that is better suited towards a market economy that is socially embedded?

I think that’s right. I think we have changed the rhetoric rather more than we have changed the reality, but that has created several problems for us. One is that people think they ought to be moving the reality of corporations towards the rhetoric, and that has made the functioning of corporations worse. We are reducing the legitimacy of business activity in the eyes of the population at large.

And we’re left the left with this unsatisfactory position where they say either – there are two versions on the European left as I see it at the moment, of how you reconcile yourself to the market economy. One is, you say, “You leave it alone and clear up the mess afterwards.” And the other is, you say, “We can run this better through loads of regulation.”

The truth is, neither of these work. It’s more of a changing the culture or influencing the culture of how it is that business behaves.

All right. So that’s not an easy task but it’s certainly one that the European left and basically all political forces in Europe will have to deal with in years to come. John, thank you very much for joining us today.

Thank you.

The above text is the transcript of a Social Europe podcast with John Kay. You can subscribe to the Social Europe podcast on iTunes, download the MP3 file or use the audio player below to listen to the episode.