Ian TaylorResearcher and Policy Associate, Government Outcomes Lab
Nigel BallFormer Executive Director, Government Outcomes Lab
Social impact investing,
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In 1944 Frederick von Hayek, the champion of laissez faire economics, wrote that ‘…governments possessed enormous powers for good and evil; and there was every reason to expect that with a better understanding of the problems we should someday be able to use these powers successfully’.
Covid-19 has certainly shown the power of governments. All around the world, they have bailed out private enterprise in the face of the pandemic. The UK government alone has distributed an unprecedented £280 billion of support to businesses. This has contributed to driving UK national debt beyond 100% of GDP and over £2 trillion for the first time ever.
How will business give back?
What will taxpayers expect in return for adopting this burden? Britain has not borrowed as much since the Second World War and times of crisis require new thinking. In 1940 the precursor to VAT was introduced, and this new source of revenue helped fund the transformative creation of the Welfare State. What new initiatives await us in the wake of the pandemic?
Perhaps we should expect business to start acting more responsibly. In the 1970s & 1980s the generation of profit alone was seen as sufficient to serve society, leading to adoption of the doctrine of ‘shareholder primacy’. Since then, however, businesses have become ever more conscious of their social responsibilities, driven by investor and consumer demand for responsible behaviour. This culminated in the World Economic Forum meeting at Davos in February 2020: 60 heads of state, 250 ministers, 1,000 CEOs and 800 vice presidents of global companies came together to affirm their support for stakeholder capitalism, which promises to look after not just shareholders but the interests of customers, employees and wider society. The Nobel Prize winning economist Joseph Stiglitz declared that ‘After a 40-year experiment’, the shareholder primacy doctrine was ‘a failure’.
Priorities and tensions
Maybe a more responsible form of capitalism is indeed part of the answer to building a fairer post-pandemic world. So is government involvement needed at all? Probably - the latest in a string of prominent corporate defenestrations suggests that the voluntary adoption of more responsible conduct is unreliable. On 14 March, the Chief Executive and Chairman of French consumer products group Danone, Emmanuel Faber, was ousted by investors who complained that the company was not focusing enough on delivering shareholder value.
Faber was a champion of socially responsible business. In June last year he led Danone to become the first major listed company in France to adopt a new legal status that obliged the executives to perform for the benefit of wider stakeholders as well as for shareholders. Faber claimed to have “toppled the statue of Milton Friedman”, the intellectual architect of the 1970s shareholder primacy doctrine. However, in February, irresistible pressure mounted from investors who criticised the company’s share price performance in comparison to less socially responsible rivals such as Nestle.
The role for government
It seems that government action is vital if the productive energy of business is to be harnessed to benefit societies in a broader manner than 50 years ago. Careful thought needs to be put into choosing from the variety of government policy options available, based on the challenges involved. At the Government Outcomes Lab, we believe that a deeper appreciation of such challenges will lead to the delivery of better social outcomes for a public that suffers from pronounced levels of inequality.
To help a wide audience engage with an important debate that has no easy answers, the article Responsible Business: A Challenging Opportunity offers an overview of the discourse on socially responsible business and the new epoch the world is in. We encourage everyone, especially government practitioners, to give it a read and take up the challenge. It is hoped the piece will serve as a springboard for a conversation on what can and should be done to realise the high ambitions of a productive society.