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24 May 2019 00:00
Mervyn King warns that business leaders who only pursue profits belong to the previous century. (Photo: Ayanda Maphosa)
A limited liability company is an artificial person that is inanimate and incapacitated. Its capacity is provided by its corporate leaders.
It has no heart, mind, soul or conscience of its own. Whether the company is or is not seen to be a good corporate citizen depends on the conscience of its corporate leaders.
If the corporate leaders are directing the company for the sole purpose of profit, even at a cost to society and the environment, holistically the company is destroying value. During the 20th Century the corporate governance paradigm was a shareholder-centric one. It was believed that the purpose of the company was to increase shareholder wealth, and that the wealth would trickle down to the impoverished at the bottom. The trickle became treacle and stuck at the top.
This led to the effective demise of the financial capital model, where the three criteria of increased profit, share price and dividends were the criteria of success of a company, even if it was at a cost to society and the environment. In consequence, the 20th Century was one of unsustainable developments.
This was established scientifically by 1997 when it was shown through the expedited research from computers that the natural assets of planet earth were being used faster than nature was regenerating them.
Today, the great asset owners and asset managers all endeavour to be responsible investors. That is, to follow the Principles of Responsible Investment laid down by the United Nations and in South Africa, to follow the Code for Responsible Investment.
For a company to be able to raise capital today it has to show that it has a business model and strategy that takes account of how the company makes its money and in doing so its impact on the three critical dimensions for sustainable development, namely the economy, society and the environment. Environmental, social and governance factors have become increasingly important in investment decisions by asset owners and asset managers.
Institutional investors today understand that in order to discharge their duty of care to their ultimate beneficiaries, they have to invest in the equity of a company that has a business model that creates value long term in a sustainable manner.
Having regard to the very changed world in which we live, corporate leaders have to understand that a focus on shareholder gain, even at a cost to society and the environment, is yesterday’s thinking.
Today, large asset owners such as Blackrock have said that they want to know the purpose of the business of the company and whether it has a value creation strategy that is sustainable. This is necessary for them to discharge their duty of care to their ultimate beneficiaries.
Corporate leaders erred in the 20th century by focusing only on profit and forgot about people and planet. Today value is not looked at through a financial lens only but through a value creation lens. The Conscious Companies Awards is an outcome of conscious leadership. As the company has no conscience, whether it is or is not seen to be a conscious corporate citizen depends on the state of mind of its corporate leaders.
The Conscious Companies Awards is a recognition of those leaders who understand that they are the conscience of the company and how they direct the company will determine whether the company is or is not seen to be a good corporate citizen.
They also understand that they have to steer the business of the company in a manner that endeavours to have a positive impact on the three critical dimensions for sustainable development, namely the economy, society and the environment.
Read more from Mervyn King
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