Julie Froud & Karel Williams
We need a new approach to corporate regulation: a fair and just balance between the rights of companies to trade and their obligations to the common good. To date policy ideas have focused on corporate reform or voluntary agreement. We argue that to guarantee reciprocity corporate responsibility needs to be obligatory, and take the form of ‘social licensing’.
The idea of social licensing began in the mining industry in the developing world. It involves a formal or informal agreement between a corporation seeking to extract natural resources and the community affected by these activities. The agreements vary according to what matters to citizens and cover social benefits which can include labour standards, environmental protections, provision of roads or schools or safeguards for sacred sites.
Something like a mining social license should be applied to private and public corporations operating in the foundational economy of high-income countries. In this zone of the economy, public and private providers deliver essential goods and services from water and retail banking to schools and care homes. In the foundational economy, as in territories with mineral deposits, businesses should offer some-thing social and meaningful in return for the right to extract cash from a territory through their pipe and cable networks and branch systems.
The activities of private companies like supermarkets or not-for-profits like universities would then be brought into public jurisdiction, on the understanding that the rules which govern their corporate social responsibility are not private and voluntary but public and obligatory. The proposal is for more government which can represent the social interest of citizens with multiple identities; and for less reliance on company-level governance as a way of balancing the stakeholder interests of owners, managers and workers.
Over the past 30 years, the UK has got into a business-friendly mess by offering corporations rights without duties. And the policy response should be fundamental constitutional reform which adds duties to the grounded corporates operating in the foundational economy. Social licensing is the kind of disruptive innovation we need at this point of crisis in the UK.
Corporate rights without duties
In the post-1979 period under Thatcher and Blair, there was a well-intentioned and highly rhetoricised attempt to release ‘enterprise’ and to encourage ‘wealth creation’ by empowering corporate management. This has predictably landed us in a right mess over power without responsibility because successive UK governments have offered corporations rights without duties. They have also expected too much from voluntary corporate social responsibility backed up by corporate governance and economics-based regulation which have both offered feeble social protections.
The corporations which concern us here are of three kinds. First, publicly held (for profit) companies which have shares tradeable on the stock exchange, like Tesco or Lloyds Bank. Second, privately held companies through which fund investors like private equity or wealthy individuals, like Jim Ratcliffe of Ineos, control tiers of limited liability companies. And third autonomous, not for profit corporations like housing associations and universities, created or transformed as a result of the Treasury’s aversion to public sector debt and desire to shrink the state.
Privatisation, outsourcing and public private partner-ship have in the past 30 years diminished the state-run sector and expanded the sphere of the corporatised. Here the state grants profitable activity or territorial concessions to corporates and gets little in return other than minimum service obligations specified in an incomplete contract. Broader issues like the payment of living wages have been neglected – in outsourced prisons or private equity care the business model offered direct cost reductions levered on lower wages while indirectly increasing state welfare costs on housing benefit and pensions.
Cost-cutting was the standard strategy of for-profit corporates under financial market pressure to increase returns. Nineteenth century utilities like UK railways typically earned 5 per cent or less. But 10 per cent plus return on capital employed is now the standard PLC requirement and a private equity target in levered transactions where private equity needs surplus over the 7 per cent paid to bondholders. The result is that firms like Ineos have retreated from the social responsibilities often accepted by old-style corporates like ICI which trained the young and subsidised canteen and clubs for lifetime employees who got defined benefit pensions.
The problems were compounded when successive UK governments deliberately created a ‘business-friendly’ environment in the hope of competing against other countries. Business-friendly for Thatcher and Blair meant public policies that released companies from duties. At large expense, governments took over investment in training and infra-structure with the aim of attracting mobile investment and then offered corporates low tax rates with the aim of creating jobs and stimulating growth.
Most striking was the experiment in releasing companies from their social duty to pay taxes in the jurisdiction in which they operate. The standard UK corporation tax rate has been reduced from 52 per cent in 1979 to 17 per cent by 2020; and government accepts the avoidance of profits tax via debt-based financing when the surplus is taken as interest. The tax authorities tolerate all kinds of schemes and structures whose rationale is tax minimising. And, when these issues are raised, the corporate PR will insist: ‘We meet all our legal obligations.’
Our misgivings about rights without duties are increased if we remember that this same state is also giving away the privilege of limited liability without getting anything in return. Nineteenth century limited liability was a stop-loss privilege originally granted for the social purpose of encouraging investment by individuals in major infrastructural projects like railways and harbours. Now it is increasingly used as a profit-insulating device for the private advantage of corporates disconnecting a chain of individual investments and projects, as in property development using special purpose vehicles.
The hope of government was that some kind of economic and social responsibility could be enforced by two new corporate control techniques which were invented in the UK in the 1980s and 1990s – corporate governance by non-executive directors and economics-based regulation of privatised utilities. But both have in different ways disappointed.
Corporate governance after the 1992 Cadbury report brought us governance by non-executive directors and promised stewardship, accountability and challenge to management. The end result is more of the same because post-Cadbury governance reinforces the primacy of the shareholder interest enshrined in successive Companies Acts. Practically, governance has failed to restrain top management pay which has increased much faster than profits or turnover. And it has manifestly failed to control risk-taking in banks like RBS or outsourcing companies like Serco or Carillion.
Government regulation has been defined very narrowly as a matter for economists and paid lobbyists. The economists installed to regulate utilities after the 1980s did not have an accounting understanding of how financialised corporates work and consequently in water did not stop the companies from paying out profits as dividends while funding investment by taking out debt. UK and EU corporate lobbyists gave us deregulation of finance before 2008 and Dieselgate in cars which was about regulation as certification with-out enforcement.
Adding duties in the foundational economy
If all this is regrettable, many assume that the imbalance between corporate rights and duties cannot be easily changed in the 2010s and the 2020s. Surely, the forms of capitalist competition have changed since the 1980s and we live in an era of globalisation when transnational companies are footloose? The logic of our world is international and inter-regional competition to attract and retain mobile capital through ’business-friendly’ regimes which release companies from their old duties not impose new ones.
This is true – but only up to a point. The tradeable and internationally competitive sectors are part of the economy, not all of the economy. In these sectors, companies like Ford and Pfizer in cars or pharma are footloose and mobile. But many other sectors of the economy are effectively sheltered from international trade and contain firms grounded by the networks or branches which allow them to access local demand. Tesco or your local water company are solidly anchored.
The majority of sheltered, grounded corporates are to be found in the foundational economy which supplies wellbeing-critical daily essentials to the population. This includes health, education, care, food distribution, housing, public transport, pipe and cable utilities.
And if we add all these activities together their share of UK employment and output is more than 40 per cent of the total; if we added other sheltered corporates outside the foundational sectors, more than half of the UK economy consists of corporates not exposed to international competition.
The longstanding obsession of UK policy-makers with tradeable and competitive activities has prevented them from focusing on the general characteristics of foundational activities which make them interestingly different and create opportunities for social licensing.
These activities are all economically anchored because networks and branches are necessary to deliver their goods and services to a local population. Digital technologies are weakening the requirement for local retail branches on the high street but the digital players like Amazon and Ocado still require regional warehouses and local van delivery. Education, health and care, the largest foundational employers, will for the foreseeable future require local branches.
● These activities generally have stable, non-cyclical demand. Because foundational goods and services are daily essentials, the demand is there as long as the population remains. The private firm’s decision in foundational sectors is not can we produce more cheaply elsewhere but do we want to serve this market. Private firms which pull out from provision in a territory lose turnover and the possibility of profit. In many publicly funded activities like health and education, branches and networks are (or should be) provided according to national standards.
● Providers in these activities are in direct and mutually-dependent relations with communities or user-groups whose wellbeing depends on the supply of essential goods and services. And the provision of foundational goods and services is not only a matter of public, political concern but also increasingly one which requires citizen input. The 19th century foundational economy of gas, water and sewerage was designed and delivered by engineers; 21st century older care requires citizen deliberation on what should be the proper balance between meeting the biomedical and social needs of the old.
Foundational providers typically benefit from limited competition and sheltered streams of revenue as they draw their customers and profits from communities in specific catchment areas. Which means these corporates are already state dependent insofar as the state sets the rules of the competitive game.
The rules of the game may be contractual and specific, as with rail franchising or social care where providers already contract with the state to serve territories; or the rules may be regulatory and general as in out of town supermarkets where new competitors can only get planning permission if they meet a test of ‘need’. Elsewhere the state can be permissive as when it allows retail banks to close branches at will, so that a town like Hebden Bridge has no bank branch; or offer inducements as for investment in rural broadband rollout.
If we consider these characteristics, the foundational economy is the natural sphere in which we might think of tilting the balance between corporate rights and duties through new policy interventions. The argument is that in return for their sheltered existence, foundational producers owe some-thing to local communities or groups, and therefore should be brought within new kinds of regional and national regime which are citizen-friendly.
Social licensing as disruptive social innovation
The standard objection to social licensing is that it is not frontbench-ready policy of the kind produced by the think tanks clustered around College Green. And, in some ways, that is also the great virtue of social licensing because it would be not a technical fix but a disruptive social innovation of the kind which an intellectually tired Labour party and a politically challenged and disunited kingdom needs.
Labour certainly needs a new take on its corporate policy which is at present dominated by the proposal to renationalise rail, water and energy. Complex technical infrastructure should be in public ownership but nationalisation costs money and public ownership only works if it is backed by a subsequent stream of Treasury-sanctioned public investment. In any case, the reach of public ownership is inevitably limited and for other corporates Labour’s only policy is better governance through putting workers on boards and reforming audit.
Labour’s corporate policy should be sufficiently comprehensive to include all key for-profit corporates like retail banks and supermarkets. And we should not assume that the absence of corporate profit means the presence of social responsibility when autonomous corporates like housing associations can behave very badly as financialised property developers. Adding more non-executive directors (with non-standard backgrounds) will not lever enough change.
Hence, our radical idea is to make corporate social responsibility obligatory through an explicit political arrangement that gives corporate enterprises or sectors privileges and rights to trade whilst placing them under reciprocal obligations to offer social returns on issues such as sourcing, training or payment of living wages. The issues covered would be financial as well as productive, including, for example, limits on the use of debt finance.
The scale and scope of licensing agreements would vary. They might be national with whole sectors, including all the firms above a certain size threshold, for example large super-market chains on the treatment of suppliers or on preventive health. In other cases, they would be specific to regions and localities, for example, regional rail or bus companies would have different social obligations in Birmingham or rural mid-Wales.
The key point is that this kind of arrangement would only work if the UK’s government machinery was radically over-hauled and new forms of citizen participation were taken seriously. And arguably after the Brexit vote, this is the kind of jolt which our political system needs because it would be both unsettling and constructive.
In government, we need decentralisation and relaxation of central Treasury control with devolution of political decision-making which goes beyond elected mayors and city deals. Licensing is strategic here because it would be partly the responsibility of local and regional government. And this would be politically constructive because (one way or another) the centralised British state is breaking up with Celtic nations in the lead. Social licensing would give regional governments (including the English ones) some-thing relevant and worthwhile to do because the provision of mundane goods and services in the foundational economy is intertwined with the multiple identities of people as consumers, workers, and local residents.
And participation then becomes crucial. Social licensing would powerfully reinforce the case for institutional innovation through new forms of deliberation like citizens’ juries and assemblies which would engage ordinary citizens in policy choices and priority-setting in new ways. And in such cases there would be a need for a for corporate managers to engage in public negotiation which would be a shock for the present corporate system built on PR spin and lobbying behind closed doors. Both developments would take social licensing out of the sphere of technocratic regulation.
All of this sounds radical, but the good news is that we can start out on this radical road with modest steps not big fights. Government already has everyday contact points with grounded firms in foundational sectors. When government provides grants or revenue, or when firms want something like permissions or training, we need to end something for nothing government. Right now, at every contact point, government could and should be asking what social value citizens get in return.
This essay is taken from Everyday Socialism, a new Fabian Society pamphlet edited by Rachel Reeves MP.