Ruth Lea: To be ethical is to be profitable

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The Independent Online

We are hosting an event with the Caux Round Table tomorrow, which is concerned with the social responsibilities of business within a global context. I expect the evening will be about business's social responsibilities, not just in a global context but also in a national context. This issue, and the related issues of "ethical business", "business's contribution to society" and "corporate social responsibility", are fascinating, involved and full of moral dilemmas. There are, all too often, no easy answers.

When discussing business's social responsibilities, I am defining "business" quite specifically as a profit-generating organisation that sells goods and services. And, as many of the dot-com companies have discovered, if profits aren't made, life can be brutish and short. And where there are shareholders who have entrusted their savings (individual) or entrusted other people's savings (institutional), directors are accountable to them and must aim to maximise "long-term shareholder value". Whatever directors do, they must always be aware of this basic objective. Maximising the returns for shareholders is at the heart of any "ethical" business along with, firstly, a commitment to the "reward" principle in which people are paid according to their performance and, secondly, the professional, law-abiding, diligent and honest behaviour of directors. Even though this concept of an ethical business puts accountability to shareholders at the centre, this doesn't mean directors should ignore other "stakeholders". Directors have responsibilities to their employees, suppliers, customers and the environment. These responsibilities are enshrined in law (at least in developed countries). The term "ethical business" seems almost to have been hi-jacked, quite spuriously, by the ethical investment industry (also known as "socially responsible investment") in which businesses are, to my mind, somewhat arbitrarily divided into the "good" and the "evil". The latest manifestation of this development is the "FTSE4Good" in which the Manichaean distinction between good and evil seems to have reached new heights of arbitrariness. Of course, tobacco companies, arms manufacturers and operators of nuclear power stations were cast into outer darkness. But Tescos? The Royal Bank of Scotland? Turning to business's contribution to society, I'll start with the traditionalist's view. Traditionalists say that business provides people with a huge range of goods and services; that it provides most of the jobs and generates most of the employment; that it contributes virtually all the tax revenue to the Exchequer either directly (through, eg, corporation tax) or indirectly (through their employees' tax payments); it generates most of the money for pensions and insurance pay-outs; and finally it is inventive and innovative. On this view, the most socially responsible act business canperform is to be a successful business – and little else. Good works are out and are regarded as a distraction from running the business. I have a great deal of sympathy for this view – providing, of course, businesses are also "ethical". It has much to recommend it and undoubtedly focuses on what business is and what business can uniquely contribute. But business does not function in a vacuum, and however much it may wish the activists, regulators and litigators to go away, they will not. The recent anti-capitalist demonstrations have graphically shown this. Increasingly, businesses have to respond sensitively to people's concerns about, for example, child labour, dealing with corrupt Third World regimes and environmental despoliation. If business ignores these concerns of shareholders and customers it will suffer where it hurts – its bottom line.

Social responsibility, therefore, makes good business sense as well as legitimising business activities in people's eyes. Sometimes businesses may feel that the activists' interventions are quite unfair. Even though, for example, Greenpeace's attack on Shell's proposals for the disposal of the Brent Spar oil platform was fundamentally flawed, consumer boycotts (especially in Germany) forced Shell to alter its plans. And what about Corporate Social Responsibility (CSR) in which businesses integrate social and environmental concerns in their business plans? Well, many directors are already involved in CSR-type programmes because they see them as adding to the business's reputation and enhancing shareholder value. They are to be unreservedly supported.

Ruth Lea is head of the policy unit, Institute of Directors