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The role of companies in society

On 7 April 2016, the ECCT jointly hosted a Special Lunch with German Institute Taipei on the topic "Reflections on the role of companies in society and the education of the next generation of leaders". The event featured a presentation by guest speaker Dr Franz H Heukamp, Professor of Managerial Decision Sciences, IESE Business School, University of Navarre. The speaker discussed the role that companies play in society, the responsibilities they have and ways in which they can contribute to the good of society. He also reflected on the attitudes of the so-called millennial generation (those born after 1980) on questions of corporate social responsibility.

Since the global financial crisis of 2007-2008 there has been a great deal of debate about the role of companies in society. Based on recent research, there is a growing skepticism of the motivations and intentions of companies, especially large corporations. According to a Gallup study released in 2013, around 70% of people believe that companies have too much influence, up from around 50% in 2001.

While companies in the computer, internet and restaurant industries are viewed relatively favourably, most people have a very dim view of companies in the financial services, education, pharmaceutical and healthcare sectors. There is a great deal of mistrust of banks for their role in the financial crisis. According to Gallup, back in 1979, around 60% of people had a great deal or quite a lot of confidence in banks. This percentage had dropped to just 26% in 2013 while 28% had very little or no confidence in banks and only 45% had some confidence. In 1999, 10% of people had hardly any confidence in people running Wall Street. This percentage had risen to 48% by 2013.

The level of distrust in the financial industry has been fanned by the media and entertainment industry through movies like The Big Short, which gives a damning account of the financial industry's responsibility for the financial crisis. The rise in popularity of anti-establishment politicians, particularly US Democratic Presidential Candidate Bernie Sanders, shows that opposition to business as usual is gaining momentum. Although Heukamp does not expect Sanders to win the Democratic Party's nomination to run for president, he believes that many of his views are no longer held just by a minority fringe. They are becoming mainstream, which means that they have to be addressed by the final candidates and whoever eventually gets elected president.

Until fairly recently, the prevailing view of the business world was the one championed by economist Milton Friedman that business should focus only on business, or shareholder returns. Anything else would dilute the core objective of the company, which is to make money. In stark contrast to this view is the one espoused by William George, former Chairman and CEO of Medtronic. According to George, customers should be a company's primary focus, followed by employees. Shareholders come third. The reasoning behind this view is that if customers and employees are properly taken care of, profits (and the concerns of shareholders) will follow naturally. Other CEO's such as Jeff Immelt from General Electric emphasise that employees want to work for a great company, by which he means a company that does great things and makes a difference, which brings a clear moral purpose to a company.

Nowadays, no global company would deny the importance of corporate social responsibility (CSR) issues. Most large companies fall somewhere between the extremes proposed by Friedman and George, although there is debate as to what CSR activities are appropriate.

A corporate tradition that has come under fire is quarterly reporting of financial results. While financial reports make it easy for analysts to rate and compare performance, the obsessive focus on quarterly results often causes perverse consequences that appear, in the short term, to be beneficial for the company, but may be damaging in the long term. For example, if a bank lowers standards in order to issue more mortgages, it may boost profits in the short term, but result in a much higher default ratio and losses in the long term. Moreover, making large investments in research and development or infrastructure or equipment hurts short term performance but could produce substantial profits later. There are therefore a growing number of calls to abandon or at least stop focusing on quarterly reporting.

On the question of how millennials view the role of companies, according to research conducted by Deloitte, millennials lean much closer to George than Friedman and believe that companies should be ethical and society-focused. Millennials therefore appear to hold companies to higher ethical standards than previous generations.

In Heukamp's view, companies that have already embraced and are committed to George's priorities, probably don't need to do much more.

In the Q&A session he made the point that the rise in awareness about income disparity, and ethical business practices are no longer fringe issues. They are becoming mainstream. If companies do not pay fair wages or engage in other unethical practices, they are likely to be the targets of future legislation. It is therefore in a company's best interests to pre-empt this and get their house in order first, rather than wait for politicians to force them to act.