The purpose of life
Is to give purpose to lives,
So that society thrives
While the world survives.
Over the last forty years there has been a remarkable transformation in the corporation. Forty years ago, 80 per cent of the market value of US corporations was attributable to tangible assets—plant, machinery, and buildings—as against intangibles—licences, patents, and research development. Today, intangibles account for 85 per cent of the market value of US corporations.1
The millennium was a turning point when for the first time investment in intangibles exceeded that in tangibles in both the United Kingdom and the United States.2 We might once have been nations of shopkeepers, buildings, and office blocks—lots of office blocks—but no more. The turn of the millennium marked the turn of America and Britain into nations of brands and brains.
Reliance on intangibles might feel like placing ones faith in magic; an economy of magicians not manufacturers making nothing but air—the weightless economy. But it is no such thing. The sixth age of the corporation marks the most remarkable period of our existence. It is indeed a corporation sans machines, sans man, sans money, sans everything.
Take Facebook and its founder Mark Zuckerberg as examples. In 2008 Mark Zuckerberg made a very costly decision when he failed to employ two people who had recently left Yahoo. Instead the two went to the Red Rock Café in Mountain View, California to write computer code on laptops perched on wobbly tables. It was the code for sending messages on cell phones in a cheaper and more reliable form than either SMS or MMS. In October 2009, they raised $250,000 from five ex-Yahoo friends.
The two people were Brian Acton and Jan Koum, and the company they formed was called WhatsApp, which in 2014 they sold to Facebook for $19bn. Instead of employing Acton and Koum for a few thousand dollars back in 2008, Mark Zuckerburg ended up buying their corporate form for $19bn.
This story is made all the more remarkable by the fact that this was a company with not just no machines, no men, and no money—it was burning money. In the six months prior to the purchase, WhatsApp made a loss of $230 million. What was Mark Zuckerberg thinking when he purchased a loss making company with no assets, no people, and lots of liabilities for $19bn? Was Mark a magician or mad?
The mindful corporation is an extraordinarily efficient concept. The creation of a corporation worth $19bn on the back of an idea that involves few people, a handful of computers, little space, and next to no capital stands in marked contrast to the previous ages of the corporation with their fleets of sailing ships, hoards of labourers, belching factories, teams of service providers, and gleaming transnational headquarters of far-flung corporate empires. They have given way to the mindful corporation.
At the same time as it is an elegant culmination of a process that has been in progress for 600 years, since the mindful corporation is sans machines, sans man, sans money, sans everything, it crystallizes both the wonders and the woes of the corporation. On 19 August 2004, Google came to the NASDAQ stock market at a share price of $85 per share in an initial public offering that valued the company at more than $23bn. Today the founders Sergei Brin and Larry Page are each valued by Forbes at more than $40bn.
But Google not only exemplifies the extraordinary concentration of wealth that the mindful corporation is creating, which by comparison puts the tens of millions of dollars of annual income earned by investment bankers into the poverty category, it also illustrates another form of concentration: concentration of power. When Google came to the stock market, it issued two classes of shares—one class that was made available to the public at large and another class that was just held by the founders. The latter had ten times the voting control of the former. As a result, today Sergei Brin and Larry Page retain control of Google, or Alphabet as it is now known, with a majority of the votes.
This ownership structure was deemed by many analysts and investors at the time to be a violation of good corporate governance and a threat to the ordinary investor. Thirteen years later at the time of writing in January 2018, the share price of Alphabet stands at more than $1,000, a twelve-fold increase since its issue—not bad for a period during which the S&P index has only somewhat more than doubled. In this case at least, concentration of power does not appear to have acted to the detriment of its investors. Other social media companies, such as Facebook and LinkedIn, and Internet companies, such as Alibaba, also came to the stock market with dual-class share structures that allowed their founders and partners to retain control.
But whether the concentration of ownership and power acts to the detriment of society more generally is a moot issue. Concentration of wealth may be fully justified by the enormous contributions that the founders have made to our lifestyles and well-being; and retention of voting control may be required, as the founders claim, to preserve their corporations’ clarity of vision and purpose. But have no illusions—the mindful corporation is creating extraordinary disparities of wealth and power in the hands of those with the minds to create them that make the landed gentry of the past look like impoverished downtrodden farmers.
This is the last in a long progression of changes to the role of the corporation in contemporary society during its six ages of existence. At the outset it was a public agent—an instrument of king and then Parliament to promote the national interest in building an empire and then the infrastructure on which we rely to this day.
With freedom of incorporation, the stranglehold of the state was relaxed and families controlled its development. However, it remained firmly rooted in and dependent on the nation state. Even when it grew into major manufacturing industry and families ceded control, it was dependent on the state for its prosperity. But with the emergence of, first, the financial service and then the transnational corporation, which is not only international but also stateless, the corporation has become footloose.
Not only has it become footloose, it is also timeless. Kings and parliaments provided a permanence and durability to the purpose of the firm. This was then adopted by families that passed corporations through several generations of owners—such as the Barclays and the Cadburys. As families relinquished control to outside investors, ownership was initially retained by individual investors, the euphemistic widows and orphans, for extended periods of time but then transferred to institutions that have held them for progressively shorter periods of time as portfolios of assets to be traded at will, a phenomenon that has been observed around the world.
So from entities with persistent ownership beholden to their nation states, corporations have transitioned into organizations with investors with no commitment to any particular nation or generation other than the present. The result is that the interests of the corporation have progressively diverged from those of the societies within which they operate.
Much of what we observe in terms of both flourishing and failures of societies around the world is attributable to the way in which the corporation has evolved. The remarkable growth of China, India, Japan, Korea, and Singapore in the post-WW2 period has come on the back of the emergence of corporations owned by the state in China, by banks and other corporations in Japan, and families in India, Korea, and Singapore. The failure of Africa and the Middle East to demonstrate similar flourishing reflects an absence of indigenous corporate sectors outside of the resource extractive industries and over-reliance on foreign subsidiaries. The problems that have recently emerged in Asian economies of environmental pollution in China, of growing levels of income inequality in India, of monopoly distortions in Korea, and of conflicts in bank–firm relations in Japan are associated with the failures of their corporate sectors.
Closer to home the widening disparities of income within corporations between executives at the top and employees on the shop floor can be attributed to the changing nature of the corporation. So too can the disparities in wealth between those who own and control corporations and the rest of society and the failure of governments to be able to raise tax from highly profitable transnational corporations. So too can the breakdown in trust in the financial sector where the interests of shareholders and executives have diverged from their customers and creditors.
That a single organizational form can perform so many different functions, from the one-man enterprise to the corner shop to the conglomerate, from social enterprise to manufacturing to public infrastructure, from the no-tech to the low-tech to the high-tech, is truly remarkable. That the corporation can explain the growth of nations around the world and the failure of others to progress is indicative of its macroeconomic significance. That the different nature of the corporation is associated with social benefits and ills, and its changes over time with their emergence and eradication, suggests that it is to the corporation that we should turn for both the source of our prosperity and our impoverishment.
The fact that the corporation has become footloose and timeless could be a source of tremendous well-being that frees it from the political constraints and historical conventions to which we are currently subject. To the economist the combination of well-functioning competitive and complete markets together with well-governed corporations that pursue the wealth of their shareholders is the source of economic prosperity.
With the emergence of the mindful corporation we could therefore be on the edge of the most remarkable prosperity and creativity in the history of the world. On the other hand, we could equally well be at the mercy of corporations that are the seeds of our destruction through growing inequality, poverty, and environmental degradation that give rise to social disorder, national conflicts, and environmental collapse on scales that are almost impossible to conceive of today. We are therefore on the border between creation and cataclysm, and the corporation is in large part the determinant of which way we will go.
Our future therefore depends on reinventing the corporation for its seventh and final age. But before describing what it will take to get us from here to nirvana rather than into a collapsing supernova, we firstly need to look backwards to understand where we are and how we got here to the cusp of nirvana and supernova.
For the most part, the intellectual history of the corporation is one of benign neglect that lagged far behind the emergence of economics from the Age of Enlightenment. To the extent that the joint-stock corporation was discussed, it was largely to suggest that it should not exist. For Adam Smith, specialization of labour was a source of economic prosperity but the corporation was infested with conflicts of interest between management and shareholders to the point that ‘negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.’3
It was the market and exchange rather than the corporation that was the source of economic prosperity. Even for Alfred Marshall—the grandfather of industrial economics writing more than a hundred years later—the existence of the corporation rested precariously on the integrity of the English gentleman: ‘It is a strong proof of the marvellous growth in recent times of a spirit of honesty and uprightness in commercial matters, that the leading officers of great public companies yield as little as they do to the vast temptations to fraud which lie in their way.’4
It was not until Ronald Coase, writing in the 1930s, that the corporation was given a more solid foundation as an alternative lower-cost way of organizing economic activity than the marketplace.5 Once one thinks of the corporation in these terms then it clearly takes on a relevance of its own as a legitimate subject of study, and from this sprung the intellectual underpinnings of business-school education and scholarship.
But what continued to dominate economic analysis of the corporation was precisely the issue that had concerned Adam Smith and Alfred Marshall—its dependence on managers who at best were negligent and at worst fraudulent.6 Since it is the shareholders who bear the cost of their managements’ negligence and frauds, it is the shareholders who should have the right to prevent them from engaging in such malpractices. With the risk of failure goes the right to govern the corporation and shareholders should have ownership rights to elect, remove, and reward management—corporate governance.7
The only problem with this elegant solution was whether shareholders would in practice exercise those rights. So long as the shareholder was the founder of the firm, or a family, then the answer was yes. But if the shareholder was one amongst many institutional investors as we have today then the answer is no. Shareholders might have the rights but they do not have the incentives to exercise them.8
It is this failure of governance with which all the ills of the corporation today are associated. Two hundred and fifty years after Adam Smith first identified the problem, we are still trying to grapple with it. The joint-stock corporation should not have existed but not only have we allowed it to but we have encouraged it to become the most important institution in our lives, and we are paying the price for it.
So, looking through an economic lens, nearly all policy towards the corporation has been concerned with solving this one issue of how to make management more accountable to their shareholders. A front cover of The Economist published in 2015 proclaimed ‘capitalism’s unlikely heroes’ to be the hedge-fund activists who strike terror into the boards of public corporations by purchasing blocks of shares in companies and then demanding seats on their boards with a view to shaking up and shaking out their negligent if not fraudulent management.9 They are the new corporate raiders—the Carl Icahns and the Lord Hansons of the 2010s—the heroes of The Economist’s capitalism who will bring us to our state of nirvana.
Well let me tell you, if this is nirvana, I’m the Virgin Mary, which for a variety of reasons is unlikely. The new corporate raiders will bring us no more happiness than their predecessors. On the contrary, they will accelerate the cataclysm to which I previously referred and bring us to supernova not nirvana.
There is considerable irony in the conclusion that the market is needed in the form of a market for corporate control to ensure that the corporation fulfils Ronald Coase’s objective of being more efficient and lower-cost than the market. This reductionist conclusion brings the corporation back to its primordial market form, and once again we end up being without a theory of the corporation.
The reason is that the intellectual conception of the corporation from Adam Smith to the present is fundamentally wrong. The basic defect of the corporation is not its lack of accountability of management to its shareholders or the failure of shareholders to exercise their rights of control. On the contrary these are the very attributes of the corporation that make it into such a remarkable and valuable institution.
Why? Three things: contract and market incompleteness, unenforceability, and infeasibility. Let me unpack that economic and legal jargon. The idea that shareholders bear the risks and rewards of the corporation rests on the notion that everyone else—namely, we as employees, customers, suppliers, and creditors—are protected by contracts that ensure that we are paid, supplied, and repaid. The firm is a ‘nexus of contracts’,10 binding together the employees, customers, suppliers, and creditors. Only shareholders do not have contracts that ensure that they are paid a dividend or can claim their money back. Once invested, a shareholding in a firm becomes its permanent capital that cannot be claimed back and only sold to others through, for example, stock markets. So shareholders as a group are exceptionally exposed to the fortunes of the firm.
But that rests on the assumption that we as employees, communities, and creditors are indeed protected by contract. As the employees in the Cadbury factory in Somerdale when Cadbury was taken over by Kraft, those who work in the sweatshops in Bangladesh, or those who inhale the pollution of Beijing have experienced, contracts are very restricted. And as nations and taxpayers discovered during the financial crisis, even if they exist, they are not enforceable if the borrowers—the banks in that case—do not have the money to repay them.
Most seriously of all there are many for whom contracts and markets are simply irrelevant. They are not relevant in much of the developing world, such as for those living in the slums of Kibera in Nairobi. They are not even conceivable for future generations who do not have a voice let alone a contract to protect them from the destruction of what should be their as much as our rainforests and environment.
Shareholders are not therefore by any means the only party exposed to the misfortunes of corporations, and the more that we strengthen the rights and powers of shareholders, the more we threaten the interests of others. The Somerdale plant was closed by Kraft the acquirer of Cadbury to enhance the value of its acquisition; the sweatshops of the world are a product of Western corporations scouring the earth for lowest-cost suppliers; and the sale of inappropriate financial products is undertaken by banks to make money at the expense not for the benefit of others.
So long as the corporation is viewed as just an instrument of its shareholders then these problems will become worse and bring us to a point of social, political, and environmental catastrophe. But the solution is not simply to transfer control to another party—employees, customers, or the state. That merely creates other problems. Mutual organizations owned by their employees or customers are unable to raise substantial amounts of capital and therefore operate in low-capital industries such as retailing and wholesaling. Publicly owned corporations are bureaucratic, inefficient, and distorted by conflicting political influences.
Most seriously of all, control by employees, customers, the state, or shareholders comes at the expense of the party which is not represented at all—future generations. Mutual organizations demutualize to allow current generations of customers and employees to benefit at the expense of future generations. Founders of mindful corporations capitalize the future value of the entities that they create through initial public offerings. Hedge funds extract the capital value of corporations they target by seeking higher dividend payments and repurchases of shares. In other words, the ‘financialization’ and ‘securitization’ of corporations have converted them into rent-extraction vehicles for benefiting current generations of owners at the expense of future generations.
What makes the corporation so remarkable is that it equally has the power to do the opposite—to be our saviour and source of social as well as economic well-being—provided that we recognize that our intellectual conception of it is fundamentally wrong and that the separation of its control by management from its ownership by shareholders or its control by other parties is its attribute not its deficiency.
How can this be so? The law recognizes that the corporation is a legal personality distinct from its shareholders. Its directors owe a fiduciary responsibility to the members of the corporation who are in general its shareholders, but in so doing the directors may legitimately uphold the interests of many other parties—its employees, creditors, customers, and communities. The directors can and should balance the interests of different parties in pursuit of the prosperity of the corporation. And owners should ensure that the corporation pursues its long-term not just its immediate prosperity, which may, as the Court of Delaware, the leading jurisdiction over US corporations, has reaffirmed on several occasions, involve forgoing short-term for long-term shareholder returns.
But the delicate balance between the interests of different parties and generations is jeopardized by an excessive focus on shareholder returns or stakeholder interests. While the law permits and even encourages directors to uphold the well-being of others, the market for corporate control and the hedge fund activists make it increasingly difficult for them to do so. That is why nearly every country in the world with the exception of the United Kingdom protects management through long-term stable shareholders, takeover defences, and board structures that impede the replacement of management.
It is through the separation of management and long-term owners from their shareholders that the corporation is able to commit first and foremost to its purpose in delivering the largest social networks, the best Internet search engines, the cheapest washing machines, or the most reliable cars. To deliver these purposes it commits to many different parties including but not exclusively its shareholders and to future generations as well as to the present. And it is this notion of the corporation as a remarkable instrument of commitment rather than contract or control that has been missing from our conception of the corporation. It is the power to commit to its purpose and to different parties to different degrees in the delivery of that purpose that makes the corporation such a powerful institution.
The corporation is not a ‘nexus of contracts’ between the parties to the firm. It is the opposite; it is a nexus of relations. Those relations are based on trust. That trust depends on commitment and that commitment is to the purpose of the corporation––a purpose that inspires and unites all to a common goal of producing profitable solutions to problems of people and planet. In so doing, the parties to the firm recognize and respect their joint interests and contributions to the realization of the corporate purpose and benefit from the mutual relations of trust that it engenders––a more committed work force, more reliable suppliers, more loyal customers, and more supportive investors.
Why have we failed to recognize this until today? The answer is that the failings of the corporation have not until recently been so manifest. Adam Smith was writing in the second age of the corporation when it was still a public instrument of Parliament. So while he recognized the potential for the corporation to do damage, it was not the central concern of his time. By the time we get to the third age and Alfred Marshall, the corporation is owned by families and then individuals who in many cases, such as the Barclays, Beechams, Boots, Cadburys, Colmans, and Reckitts were people of high integrity and social conscience—many Quaker families. It is as we move to the fourth age of the rise of the financial institution, the fifth age of the transnational corporation, and the sixth age of the mindful corporation that the power to defraud, destroy, and exploit becomes all too evident.
But while the mind of the corporation is remarkably nimble, the mind of man is not always so. We cling on to intellectual paradigms far beyond their sell-by date. As Schopenhauer said, ‘All truth passes through three stages: first it is ridiculed, second it is violently opposed, and third it is accepted as being self-evident.’11 As The Economist article illustrated, we are currently between stages one and two. The problem with accepting the normal rate of paradigm progression to stage three is that time is extraordinarily short and by then the damage that will have been done may be irreversible.
So before it is too late and before I exhaust your patience, let me then turn to what we need to do to reinvent the corporation for its seventh age—an age of what should be re-creation not cremation—the age of the trusted corporation.
The three key determinants of the corporation are purpose, ownership, and governance. If the purpose of the corporation is just to make profits then we are sunk. That is not the purpose of the corporation—it is not what it has been, it is not what it needs to be, and it is not what it should be going forward.
The purpose of the corporation is to do things that address the problems confronting us as customers and communities, suppliers and shareholders, employees and retirees. In the process it produces profits, but profits are not the purpose of corporations per se. They are the product of their purposes. All the most successful corporations know this to be the case, but what is much less well understood is how to do it and what it takes for those companies that are not doing it to do it. Some believe that they only have to say it in mission and corporate social responsibility statements and it will happen. That has no plausibility; the tough part is committing to purpose to an extent that it becomes irreversible, because only then is it credible.
Some of the most successful corporations in the world do exactly that. Examples are Bertelsmann the media company, Bosch the automotive supply company, Carlsberg the brewery, and Tata the Indian conglomerate and owner of Jaguar-Land Rover. All of these have one thing in common—they are all owned by what are termed ‘industrial foundations’—foundations and trusts that own companies. These industrial foundations devote their profits to investing in their businesses and giving any surplus to charity. But the primary purpose of the industrial foundations is to ensure that the companies below them, such as Bosch and Carlsberg, abide by their purposes, principles, and values as set down by their founders. If they fail to do so then it is the boards of the foundations that take responsibility for this.
And herein lies the germ of understanding of how one goes from good intention to commitment. What define these successful and enlightened corporations are combinations of clearly defined purpose, stable and supportive ownership, and accountability of boards and directors to the fulfilment of that objective. These are the ingredients that translate the entrepreneurship of the founders into legacies that are of enduring value to humanity. Not only are these then worthy sentiments, they are commercial commitments. Consistent with this, while the financial performance of foundation-owned firms is not much better or worse than that of other firms of equivalent size and sector, their performance differs markedly in one respect—they survive. While matched samples of similar firms on average die within twenty years, foundation-owned firms typically survive for at least sixty years.12
What such enlightened corporations do is to deliver on their stated purpose by balancing and integrating the five different components of capital that comprise their business activities—human capital (employees, suppliers, and purchasers), intellectual capital (knowledge and understanding), material capital (buildings and machinery), natural capital (environment, land, and nature), social capital (public goods, trust, and social infrastructure), and financial capital (equity and debt). The balance has changed over time. In its first and second ages, the corporation was a public enterprise producing social capital in the form of canals and railways; in its third age it created material capital in the form of manufacturing industry; in its fourth age it augmented human capital in the service firm; in its fifth age it generated increasingly large amounts of financial capital in the transnational corporation; and in its sixth age intellectual capital has been most in evidence.
There is one form of capital that has never featured prominently in the corporation until recently and which, by contrast, has been consumed voraciously, and that is natural capital. One of the reasons why we stand on the precipice of cataclysm is the failure of the corporation to protect natural capital. But it is not its only failure because, in transitioning to financial and intellectual capital, the corporation has also jettisoned the social capital that originally defined its charter. A preoccupation with financial capital has come at the expense of the preservation of social as well as natural capital.
What is required is for corporations to balance their production and usage of different types of capital. As Chapter 6 discusses, to do this corporations need to have accounts that record their human, intellectual, natural, and social capital as well as material and financial capital. They should report their production of these assets and their usage and abusage in their balance sheets, and they should state their net worth in relation to all of them, not just their financial and material capital. To achieve this, as Chapter 7 will argue, company law should be reformulated to require corporations to articulate their purposes, to redefine the fiduciary responsibility of boards of directors to the delivery of their stated purposes, to produce accounts that measure their performance in relation to them, and to implement incentive arrangements that reflect their success in delivering them. The directors should thereby be accountable not simply to their owners but more generally to those in whose interests the corporation is being run.
It is hardly a revolution—capitalism not only survives, it flourishes, but its effect will be profound. It is a private contractual solution to the provision of corporate commitment that does not rely on either public ownership or public law and has a close parallel in existing corporate law. One of the most innovative developments of the last ten years has been the emergence of the benefit corporation in the United States. It has swept across more than thirty states in the United States, most significantly in Delaware. The benefit corporation is a company that has a stated public purpose alongside its commercial objectives. These are enshrined in its charter or its articles of association. What gives it teeth is that the board of directors has a fiduciary responsibility to uphold those public purposes and if they fail to do so then shareholders can seek injunctive relief to prevent them abusing the corporation’s purposes.
Where it is potentially particularly powerful is in relation to the commanding heights of the economy—our banks, utilities (such as energy, telecoms, transport, and water companies), systemically important institutions, health service providers, and corporations with significant market power. At the moment we have just one instrument for aligning their interests with those of society and the public they are supposed to serve—regulation. But as commercial organizations whose primary purpose is to make money for their shareholders, their interests are diametrically opposed to those of the regulators who act as custodians of the public interest. As a consequence, they do whatever they can to avoid regulation and seek to turn regulation to a competitive advantage that deters entry of new firms.
That is why regulation has been such a failure. But convert banks and utilities into benefit corporations and make their licence conditions part of their public purpose then the fiduciary duty of the directors is no longer to avoid regulation to the benefit of their members but to promote their regulatory requirements as part of their corporate charters. Of course not all corporations will be enlightened in the purposes that they adopt and we should impose minimum standards across all firms in terms of bribery, corruption, human rights, market manipulation, market abuse, and environmental obligations. We should not tolerate social legislation put in place at the beginning of the nineteenth century to protect workers in the form of, for example, the Factory Acts in Britain, being systematically circumvented by transnational corporations contracting-out supply and employment to parts of the world that do not have such social legislation. The minimum standards should apply to the payment of living wages and safe and sanitary factory conditions at all stages in the supply chain and production process in every part of the world.
But we can do much better than that, as the founders of the industrial foundations have done. For various reasons they have chosen not to hand their companies on to their heirs, perhaps because they do not have them, trust them, or like them. The reason why this is a defining moment in the life of the firm is because it is at this point that entrepreneurs have achieved their commercial vision and accumulated their financial fortune. Their attention then turns to their legacy, and the industrial foundation model offers them the means of perpetuating it in a form in which not only their names but also their aspirations are preserved.
The John Lewis Partnership is such an organization. It is governed by a constitution based on an irrevocable ‘settlement in trust’ that establishes that the company should be run for the benefit of its employees in perpetuity. But British common law has an aversion to limitations on transfer of property and at the time of this settlement restricted it to twenty-one years after the death of someone living when it was adopted. In this case the relevant person was the current monarch Queen Elizabeth II. So at her funeral, Britain may not only lament the passing of its dear monarch but also the prospect of the demise twenty-one years later of another great British institution—the John Lewis Partnership.
And what will happen when Sergei Brin and Larry Page in Google and Mark Zuckerberg in Facebook have passed their sell-by date and passed into their solid coffin state? Who will then ensure that their corporate visions will be upheld? What this points to is a new form of philanthropy. Currently it can be characterized as engaging in rape and pillage while accumulating as much wealth as possible and then giving it away as an act of penitence in the form of a charity or foundation. That is the history of the robber barons of the past—the Carnegies, Mellons, Rockefellers, and Vanderbilts. This has two drawbacks—first the creation of wealth involves substantial social damage in the process and second the wealth that is accumulated is not as productively employed as it might be. Reinvest it instead in productive enlightened corporations, and wealth creation is aligned with and assists in wealth disbursement. The social injustice of staggering inequalities of wealth is thereby converted into sources of protection of the most vulnerable through making successful entrepreneurs into enlightened corporate reformers.
But how can we convince the mass of existing unregulated rather than new or regulated firms to adopt more enlightened policies? If the only interest of their owners is in financial gain then the purpose of these corporations will remain firmly on financial performance. Pension funds, hedge funds, and sovereign funds will engage in active long-term sustainable governance only if they believe it to be in the interest of their beneficiaries—their pensioners, investors, and citizens—but not otherwise. Enlightened self-interest might encourage a move in this direction as evidence mounts of the superior financial performance of engaged, long-term sustainable investment, but we cannot afford to wait on this.
And we do not have to. The book will detail how a combination of corporate ownership, governance, accounting, laws, and regulation can spearhead the emergence of a new breed of enlightened commercially successful businesses. It will show how these can promote corporate purposes that yield human, social, and environmental as well as private benefits. It will demonstrate how these can enhance the trustworthiness of companies and turn them into vehicles for creating commitments we can trust. In other words, it will establish how we can move to the seventh age of the corporation—as the trusted corporation.
We have lost trust in corporations to look after our interests as customers, employees, communities, and nations. We have lost trust in them to pay people at the bottom of organizations properly in relation to those at the top, to pay their fair share of taxes, to look after the environment, to provide meaningful work, to avoid slave labour, and to employ people in safe and sanitary conditions in their supply chains.
Restoring trust in corporations is one of the most important issues of our age. Economists regard trust as a way of lubricating the wheels of economies by reducing the costs of transacting. But in a world of incomplete, unenforceable, and infeasible contracts, the significance of trust is much more than that. It is the essence of our survival as citizens and communities in a world of intense uncertainty where we rely on others not only to keep to their word but also to have deep empathy and interest in our well-being.
The corporation today is inhumane. It is inhumane because we have taken humans and humanity out of it and replaced them with anonymous markets and shareholders over whom we have no control. Stephen Hawking has warned of the consequence of removing humans from control of artificial intelligence and making us no longer masters of our own minds. We have already done that in the corporation by allowing markets not man to become masters of our mindful corporations.
Underlying this is the fact that we have systematically eradicated the humanities from the study of economics and business. That was not the original foundation of the Enlightenment in emphasizing rationality over religion. Adam Smith was careful to balance the importance that he attached to markets in the Wealth of Nations13 with morality in The Theory of Moral Sentiments.14 But that balance has been lost in the subsequent 250 years in emphasizing economic efficiency over ethics. We need to correct that as a matter of urgency and put humanity and the humanities back into business.
Restoring trust in corporations is urgent because without it our economic systems will continue to collapse, our financial systems to fail, and our environment to degrade. With it we can achieve greater levels of social well-being and economic prosperity than has been possible to date because ultimately a trusted corporation is a commercially successful corporation and the competitiveness of nations depends on the trustworthiness of their corporations.