Purpose and profit

27th March 2019

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Nick Clack

David Logan asks what the role of private companies is in modern society

Private companies and multinationals have been around since the beginning of recorded history, but it wasn't until the founding of the charter companies, such as the Dutch, French and British East India companies, in the early 17th century that our modern understanding of multinational business came about.

People forget that it was not the British state that conquered India, but the British East India Company, a business that came to operate as a state and even had its own army and navy. It has been accused of all kinds of bribery, corruption and human rights abuses, and was only relieved of its power in India in the 1860s.

Around the world, the activities of multinationals were intimately connected with colonialism and exploitation. In the West, the appalling conditions in the factories of businesses that grew up with the industrial revolution were enough for Karl Marx and his collaborators to condemn the capitalist system as inherently unjust and exploitative. Marx argued that capitalism must be overthrown by force where necessary and replaced by a social system without any form of private enterprise. This was an idea that triumphed in the Russian Revolution of 1917 and subsequently held great sway over the world. The period following the Second World War was predicated on growing the power of the state and eliminating or reducing the presence of private firms. China, for example, turned communist in 1949, and countries as diverse as India and Sweden became staunchly socialist and very controlling of private enterprise and international trade. This lasted until the collapse of the Berlin Wall in 1989.

During the past 30 years we have lived through a remarkable transformation of human society. The communist ideal that society can be organised with no or minimal private enterprise has all but died, only surviving in places such as North Korea and Cuba. Private for-profit firms are back in huge numbers around the world, and multinationals again have an open global economy in which to operate.

Three-sector society

With the collapse of communism and the retreat of socialist ideology, a new and increasingly common social system has begun to emerge around the world, based on three formal sectors: government; for-profit; and non-profit. These all operate within the context of an informal sector. This development has been led by a revitalised for-profit sector, which is the major player in many societies today (as Figure 1, left, shows). The state or public sector remains important, but the private for-profit sector and a rapidly growing non-profit sector have emerged to complement it in post-communist countries and other societies.

Figure 1 does not show the number of people working in the non-profit and informal sectors because it is very difficult to obtain data on a comparable basis across all four sectors, but generally employment in the non-profit sector is small – only about 8% of employment in developed countries such as the US, and 2%-4% in countries where the model is less developed. In China, private companies now have established status, but the non-profit sector is yet to be legally recognised; non-profit institutions such as Buddhist Global Relief exist in China because they provide services that people need.

The informal sector is especially significant in the least developed countries. In Africa, for example, it is estimated that about 80% of the population is working and subsisting in the informal sector – but its role is not measured on a consistent basis with the formal sectors.

The decline of state power in the economy started in the late 1970s, when Deng Xiaoping became leader of the Chinese Communist Party and introduced what he called 'capitalism with Chinese characteristics'. At that time, 100% of the people of China worked for the state; today it is about 22% of the population, as Figure 1 shows. The large majority of Chinese employees now work for various types of private companies.

This model of society was not unknown in the West, and was normal in the US throughout its development as a country. However, it was revitalised in the early 1980s by prime minister Margaret Thatcher in the UK; she cut taxes and moved many industries and companies, including British Airways, British Steel and British Gas, out of the government sector and into the for-profit sector. Likewise, in the US, president Ronald Reagan confronted trade union power and cut taxes. These changes were controversial, and debate about the relative size and roles of the three formal sectors continues across the globe – but a modern civilised society needs all three of the formal sectors, and needs them to work together.

“Private companies are not just economic entities. They are corporate citizens of our global world“

Rights and responsibilities

It is clear that private business is back as a major player in society and international relations. Consequently, the question must be asked: “What is the role of these private firms in shaping the future of society as a whole?“ There is plenty of evidence for their contribution to society as commercial enterprises, providing goods and services in the marketplace – but what about their role in helping society face the big issues of our day, particularly when so many of their commercial activities are themselves controversial?

It is in this context that the debate about good corporate citizenship has a special and urgent meaning. Private companies are the agents of the market. They have agency and freedom to make commercial decisions that have significant economic, social and environmental consequences – who to hire, who to fire, where to locate production facilities, where to source all sorts of inputs, and how much to pay employees, executives, shareholders and owners. These decisions and many more have profound consequences for society. Private companies (and state-owned ones) are not just economic entities. They are corporate citizens of our global world, with immense power and influence – not just in terms of their own activities, but also as part of the social whole. What is their responsibility for the wider challenges that humanity faces?

Like ordinary individual citizens, who have the right to vote but the responsibility to pay their taxes, companies have rights, responsibilities and aspirations. They have the right to advertise, but need to do so responsibly; they have the right to close plants and move production from the West to China, but what responsibility do they have to help workers and communities left behind? The future is uncertain and fraught with economic, social and environmental difficulties, and we cannot continue with 'capitalism as usual'. Capitalism has shown it can be more socially inclusive than the Marxists thought, but it clearly cannot pay the environmental price of its success.

Private firms of all sizes need to develop a proactive view of their role as citizens. It is no good just offering commercial excellence in the marketplace. Customers, consumers, employees and society at large want to know where companies stand on the big issues of our day. Some big British firms, such as Diageo, Unilever, Vodafone and GSK, have seen the future and started to respond with initiatives and programmes – often in conjunction with non-profits and governments, both at home and abroad. They want to play an active part in addressing important issues such as water scarcity, sustainable fish and palm oil, access to communications, and pharmaceuticals.

They are helped in this emerging understanding of the importance of modern corporate citizenship by the fact that the world has begun, through the UN and other means, to articulate some global ethical standards to guide behaviour – for example in the Universal Declaration of Human Rights, and more recently the Sustainability Development Goals.

Around the globe, humanity has called private firms back to do what they do well; providing cheap goods and services through the marketplace. But we also want these private firms to step up as good citizens and partners in helping the world face the many challenges of the future.

David Logan has vast experience on the frontline of CSR work. He is author of Corporate Citizenship (Panoma Press).

Image credit: Shutterstock


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