Let's nail ourselves to the stake

In the first of a series of articles, David Wheeler and Maria Sillanpaa argue that British businesses have hindered themselves by undervaluin g their workers and partners

This week the probable government-in-waiting unveiled its first ever serious manifesto for business. And business iconoclast Anita Roddick appeared in her first ever party political broadcast. Something seems to be stirring on the business policy stage. And there may be fundamental implications for the conduct of British industry and commerce in years to come.

For New Labour, the new business agenda appears to go much deeper than electoral pragmatism. It may just be a logical extension of John Smith's famous prawn cocktail offensive of the early 1990s, but when Tony Blair speaks of the need for stakeholder inclusion, he is echoing a theme which has flourished in the business world since the dawn of free enterprise.

Stakeholders are groups and individuals who may be affected by organisations or who may in turn bring influence to bear - for example, workers, suppliers, customers, the local community and shareholders. From the early experiments in worker co-operation in the early 1800s to the present-day community outreach of Grand Met and the belief in consumer accountability of BT, stakeholder inclusion has long been a powerful force in British business. In the Tomorrow's Company inquiry, the RSA and a number of leading British companies made clear their view that business needs to embrace the interests of a wide range of constituencies.

The Cadbury report on financial aspects of corporate governance and the Greenbury Report on executive pay were two further manifestations of the business case for striking the best possible balance in relationships with stakeholders. At its best, stakeholding delivers long-term wealth through the development of constructive human relationships, mutual responsibility and a shared vision of the future. Effective two-way dialogue with stakeholders is considered essential in numerous high-performing companies in Europe, the Far East and North America.

In a study conducted by two Harvard researchers, John Kotter and James Heskett, the performance of businesses which balanced stakeholder interests was compared with that of companies following a "shareholder first" philosophy. Over an 11-year period, established US companies which gave equal priority to employees, customers and shareholders enjoyed sales growth of four times and employment growth of eight times that of the shareholder first companies.

In their book, Successful Habits of Visionary Companies, authors James Collins and Jerry Porras demonstrated that the key to success for 18 US corporations with successful 100-year records was a strong commitment to developing people and an unfailing ability to capture and share knowledge. The 18 companies also outperformed US stock markets by a factor of 70.

In a study of British firms following stakeholder-inclusive principles, Kleinwort Benson found that a portfolio of 32 quoted stocks rose 90 per cent over a three-and-a-half year period compared with an all-share average rise of only 38 per cent.

Another important barrier to stakeholder inclusion is the peculiar cultural and legal framework within which British, and indeed US companies, have to operate. In Britain, the pre-eminence of shareholder interests is enshrined in the concept of "limited liability" and Companies Acts dating back to 1862.

Henry Ford unwittingly helped to establish this principle in the US at the beginning of this century. In 1916, Ford deeply upset two of his minority shareholders, Horace and John Dodge, when he decided to withhold their "special dividends". He felt that the Dodge brothers' original investments had been more than adequately compensated and declared: "My ambition is to employ still more men, to spread the benefits of the industrial system to the greatest possible number, to help them build up their lives and their homes. To do this we are putting the greatest share of our profits back into the business."

In the resulting court skirmish, precipitated by the Dodge brothers, Ford was defeated. Had he been a little less provocative and argued that reinvesting profits was in the long-term interests of shareholders, he would have won on the so-called "business judgement rule". In losing the case, he helped to establish the principle that corporate social objectives for their own sake are unacceptable, even fraudulent in US law.

In Japan and Germany, where social cohesion, consensus and even conformity are valued above almost anything else, there is nothing like the legal compulsion on companies to elevate the interests of shareholders above those of other stakeholders.

In Britain we need vibrant, forward-looking businesses which are responsive to the needs of all their stakeholders and which maximise commercial resilience as a result.

Despite the "grand impediments" to stakeholder inclusion in the English- speaking world - historic antagonism in the workplace, financial short- termism, and the cultural and legal bias towards shareholder interests - we are not short of examples of mainstream British and US businesses which have blossomed through stakeholder inclusion. Companies as diverse as BT, Grand Met, Tesco, Unipart, IBM, Levi Strauss and 3M have shown that, in different sectors of the economy, stakeholder inclusion generates all-round value for customers, employees, local communities and shareholders.

Examples are no less prolific from the more consensus-based economies of northern Europe, such as ABB, Daimler-Benz, IKEA, Philips, Skandia, Volkswagen and Volvo; and, in Japan, Honda, Matsushita and Sony.

Leading Japanese companies are renowned for their attention to ensuring mutuality of stakeholder interests. Over the past four decades this has manifested itself through a legendary commitment to quality and service to job security for workers and to technology and resource-sharing with key suppliers. Permanent employment is still regarded as a key competitive advantage in Japan. It contributes to accountability in the world force as well as securing the firm's long-term investment in training, safe in the knowledge that a competitor will not benefit from the investment by poaching the best-trained workers. Contrast this with the shattering of "psychological contracts" between workers and employees in so many businesses in the English-speaking world in recent years.

How ironic that we can trace the history of customer empowerment to the advent of the consumer co-operative movement in 1844 in Toad Lane, Rochdale, and the history of worker participation in problem-solving to the "socio- technical school" and its research in the British coal industry of the 1950s. At what point did British industry lose the plot?

The message of consumer power and worker empowerment was certainly absorbed by the best companies in Japan, the US and northern Europe. So why did so many of Britain's largest and best-established companies throw away the post-war opportunities afforded by the natural instincts of most British business people for fair play? How did we end up with the industrial dysfunction of the 1960s and 1970s, the slash and burn policies of the 1980s and the skills deficits and fat cat scandals of the 1990s?

Economists and industrial historians offer many explanations for Britain's relative commercial decline in the second half of the 20th century. Here we simply note three "grand impediments" to stakeholder inclusion which have compounded the malaise. The first is the outdated dynamic between bosses and workers which has plagued the first 200 years of British industrial capitalism.

These struggles may have been relevant when children were sent down mines and Chartists like the Reverend JR Stephens could legitimately expound on the evils of 19th-century industrialisation: "You see yonder factory, with its towering chimney; every brick in that chimney is cemented with the blood of women and little children." In those dark days, thanks to the avarice of the new industrial class, there was little evidence of compassion, still less consensus.

But in the 1960s, what a disaster that the monoliths of the British trade union movement failed to grasp the opportunity presented by Barbara Castle's proposals, In Place of Strife, aimed at securing modernisation and better behaviour on both sides of industry. Following the demise of these proposals, subsequent Labour leaders were saddled with a reputation for weak leadership and craven behaviour before trade union pressure.

Business leaders showed precious little more vision than their trade union counterparts in the 1970s. So while Nordic, German and Japanese managements forged ahead with their consensus-based industrial relations and strong customer focus, many of Britain's once proud industrial concerns sacrificed their competitiveness and sowed the seeds of their own decline or eventual demise.

The second important impediment to stakeholder inclusion in British business is the phenomenon of short-termism on the part of investors and financiers. The most glaring recent example of short-termism was the acquisition and merger mania of the 1980s and the massive job losses which resulted from successive waves of downsizing, delayering and re-engineering. Some pundits have correctly identified the underlying problem, which is the behaviour of the financial institutions and capital markets in according almost no breathing space whatsoever to British companies.

Given the third impediment, of a cultural and legal bias towards shareholders' interest, it is perhaps not surprising that in a MORI survey in 1996, two thirds of respondents said that industry and commerce do not pay enough attention to their social responsibilities.

There is now a real opportunity for British business to regain its legitimacy and set the record straight. In the next two weeks we will explore in practical terms how in the case of two stakeholder groups, customers and employees, British companies can improve both their reputation and their commercial prospects.

q These articles are based on "The Stakeholder Corporation" (to be published by Pitman on 1 May). David Wheeler is a Visiting Professor at Kingston University. He can be contacted at The New Academy of Business Centre for Stakeholding and Sustainable Enterprise at Kingston University Business School, Kingston upon Thames, Kingston Hill, KT2 7LB.