Matthew Lesh is the Head of Public Policy at the Institute of Economic Affairs and a Fellow of the Adam Smith Institute.
Unilever is a righteous organisation. It celebrates LGBT+ Pride, takes “urgent” action to address the “climate crisis” and refuses to supply Ben & Jerry’s ice cream in the West Bank. CEO Alan Jope declared a few years ago that “every Unilever brand will be a brand with purpose”.
The company’s latest purpose is sacking 1,500 staff. This comes after an embarrassing failed £50 billion bid for a division of GlaxoSmithKline, underperformance compared to rivals, and criticism that the conglomerate is distracted and lacks strategic direction.
“Unilever seems to be labouring under the weight of a management which is obsessed with publicly displaying sustainability credentials at the expense of focusing on the fundamentals of the business,” warns Terry Smith, the founder of Fundsmith, a top-10 shareholder in Unilever. “A company which feels it has to define the purpose of Hellmann’s mayonnaise has in our view clearly lost the plot.”
So much for the golden child of “stakeholder capitalism” – the notion that businesses should focus less on profit for shareholders and more on environmental, social and governance (ESG) issues. This trendy idea has become even more prominent over the last few years, driven by those seeking to exploit the crisis for their pre-existing political ends.
We can perhaps call this Disaster Corporatism: opportunistic demands to redefine the role of the state and businesses. This is epitomised by the World Economic Forum’s Great Reset. The WEF not only wants corporates to be more involved in the affairs of state, in respect to ESG, but is also demanding the state becomes more involved in the affairs of business through industrial and innovation policy. Big state and big business working together for the good for humanity – or at least their version of it.
I argue in my new report, Capitalism After Covid, that Disaster Corporatism is a recipe for economic ruin that learns the wrong lessons from the Covid-19 crisis.
To start, governments bear substantial responsibility for allowing the virus to spread, from China’s early cover-up to Public Health England stymieing the expansion of diagnostic testing. Governments introduced lockdowns, that even if necessary at points were full of arbitrary, unnecessary and damaging measures.
We are now facing a lockdown-induced supply chain crisis and damaging inflation after expansionary monetary policy from central banks – the same central bankers that have been talking ad nauseam to talk about climate change financial risks and diversity and inclusion but seem to have dropped the ball on their central responsibility to keep price rises low.
Even if economic support measures and advanced vaccine orders were valuable, it hardly seems like we should be giving an A+ scorecard to governments for successful handling of the pandemic or demanding they intervene even more.
On the flipside, it is similarly absurd to use the crisis to suggest businesses should no longer focus on profit. Businesses which achieved immense profits by delivering their services, be it Amazon, Netflix or Moderna and Pfizer, ensured we were fed, entertained and saved millions of lives with vaccines.
In this respect, shareholder and stakeholder capitalism are somewhat a false dichotomy. Profit is socially responsible. A business that returns a profit to its shareholders can provide quality and value-for-money products to its customers, pay wages to its workers, procure from its suppliers, and pay taxes to fund public services. The entire point of the free market system is these mutually beneficial arrangements, with everyone acting in their interest, that make us all better off.
Diminishing profit helps nobody. Executives who pursue ESG goals are often just corruptly using their shareholder’s money for self-aggrandisement. The actual owners of companies – including our pension savings and institutional savers – expect a decent return, not solving racial inequality and climate change. A focus on “purpose” other than profit can, as the Unilever case demonstrates, result in those with a real stake being left worse off.
The oft-repeated justification for “woke capitalism” is that customers are demanding “purpose” driven companies. But this flies in the face of polling which suggests delivering a quality products and customer service is the top priority. It also misses the increasing role of regulators and legislation that is heaping pressure onto companies to consider non-financial issues – such as Financial Conduct Authority consulting on setting targets for women and ethnic minorities on boards despite admitting that there is “inconclusive” evidence that it improves outcomes.
“Woke” politics from the boardroom is also unlikely to prove successful on its own terms. Corporate branding exercises cannot make China reduce emissions or end racism. The inevitable failure to deliver on lofty goals risks making everyone unhappy. The political left complains companies are hypocritical and acting purely for public relations. While the political right gets annoyed about companies pursuing objectives with which they disagree.
The even deeper problem is what all this self-flagellation about profit does to our successful market system. Executives who diminish the importance of profit are sending a message to society that the business of business is immoral. In doing so they are undermining the case for market economies, the foundation for their enterprises and the source of our broader prosperity.
Businesses and governments should return to their traditional competencies, be it creating quality products and delivering profit to shareholders or protecting public order and delivering basic services. They should not seek to be everything to everyone, and in the process let us all down.