Company legislation should mandate a Global, ESG Management System for Total Stakeholder Value

The Maturity Institute’s OMINDEX® provides a practical solution to the most wicked management problem facing the world

Presumably, the purpose of company law is to ensure that companies behave responsibly? In UK company law, Section 172 of the Companies Act of 2006 is headed ‘Duty to promote the success of the company’ and does its best to spell out the 7 Duties of a Company Director.  What it doesn’t include is any specific reference to the words ‘management system’. There are probably many good reasons why legislation does not want to get embroiled in the profession of management but there is every reason why it should mandate that an explicit and observable management system is a necessary condition to manage any company responsibly. Can a company be legally compliant without one? Currently, the word ‘system’ appears only 4 times in the entire act, without any definition. So let us begin with the Maturity Institute’s own definition of what it considers to be a valid management system “to promote the success of the company” in this new era of ESG.

Any system has to have a clear purpose (e.g. a traffic light system safely controls traffic flow). The purpose of a management system is to ensure that as much value as possible is created from the capital at the company’s disposal (while minimising negative value through risk management). ESG – the consideration of wider and deeper responsibilities for the Environment and Society, plus moral and ethical Governance, demands that the successful fulfilment of this purpose has to be measured more broadly than in terms of profit, or financial returns, to one particular group of stakeholders (e.g. executive pay or shareholder returns). The 2006 Act does mention “employees” and “relationships with suppliers, customers and others” and “the impact of the company’s operations on the community and the environment” but it leaves it to the directors to work out how to reconcile all of these competing and potentially conflicting demands. It is also limited by the fact that it is a piece of national legislation trying to work in a globalised context. We therefore have to ask, is national company legislation no longer fit for purpose? Who is currently drafting the company legislation for a total, global management system?

The Maturity Institute was established in 2012, having set itself the onerous task of producing a global, working model for a ‘Total Organizational Management System’, to deal with all of these complex issues in a coherent and socially cohesive way. We call it the OMINDEX® (the organizational maturity index) method. We ask all companies a set of 32 universal questions about what it means to be a responsible business while producing the best financial and societal returns. As a professional development institution, applying the scientific method to management practice, while building an evidence base of measures of a company’s ‘Total Stakeholder Value’, we want other contenders to submit their own global management solution and welcome collaborators to join our goal of maximising Total Stakeholder Value across the entire planet. This is not our dream, it is already the reality. Many large multinational corporations are already rated on OMINDEX® in terms of the totality of their combined financial and societal value. Company law has some serious catching-up to do.

Our first recommendation therefore, for company lawyers and legislators, is to focus on defining value in restating Section 172 as a duty to “Ensure the company creates as much Total Stakeholder Value as possible”. The so-called ‘triple bottom line’ of people, planet and profit has been turned on its head. As we all witness rapid climate change the planet has to come first, closely followed by the people and the third ‘p’ of profit (measured as revenue less cost) has to be replaced with the Maturity Institute’s holistic definition of a company’s value, as a single, composite measure, OCRQE, combining output, cost, revenue, quality and a double ‘e’ for environmental and external impact, all at the same time. This requires a fundamental shift in corporate governance but does not actually require a change in the law. Maybe these are not ‘legal’ issues at all?

US and UK company law does not start from the Maturity Institute premise of corporate purpose. Indeed, since the 1970s, US and UK company lawyers have wantonly mis-interpreted Friedman’s notion that companies are beholden to their shareholders, as their primary, social responsibility. This in turn has led to simplistic mis-management (e.g. sub-prime mortgage sales) in a relentless pursuit of ever-higher profits and returns. It is the fallout from the ‘Friedman era’, and the unsustainable effect it has had on the planet, that has led to demands, from investors, to re-visit the narrowest definition of profit while pretending that it equates to any stakeholder ‘value’.

Note above the reference to ‘wantonly mis-interpreting’ company law. Even without the advent of ESG thinking, company laws have become an over-complicated, labyrinthine gold mine for lawyers. The US entry on Wikipedia’s global List of legal entity types by country reveals it as the only country (out of 91 entries) showing any sub-categories of company law (it seems to have 8). This begs the question of whether trying to accommodate ESG in such a morass is only going to serve the legal profession rather than us all as stakeholders. It has also given rise to different legal entities such as ‘B corporations’ and ‘Social Enterprises’, which may take their environmental and societal responsibilities more seriously than a straight ‘shareholder primacy’ capitalist corporation. But there is no different definition of their ‘Total Stakeholder Value’ and they still need an effective management system to achieve this common purpose.

The UK Government’s official “legislation” site provides full details of the Companies Act of 2006; consisting of 1300 clauses plus 16 Schedules. If you are a government minister, member of a parliament, responsible chair or CEO, and your professional diligence demands that you read the “Whole Act”, so that you can understand it, you might be quickly discouraged when you see a message pop up, as I did, warning that the “… 200 provisions might take some time to download” followed by “Would you like to continue?”  I opted instead to just scroll down through the entire list of contents; although even this task required me to press ‘Pg Dn’ no less than 75 times. If this is supposed to be a responsible law to protect ordinary people it has a funny way of showing it.

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