RELATIONAL BUSINESS OVERVIEW
Applying the principles of Relational Thinking to the corporate world would transform the way in which companies operate and their impact on society.
- Short-termism. Quarterly reporting and pressure to maximise shareholder wealth drives the push for consistently increasing dividends and continued growth in capital value. This short-term approach can stifle long-term planning and funding of research and development and hinder long-term growth.
- Excessive remuneration. Lack of engagement by shareholders has been one reason for the growth of the so-called ‘bonus culture’ and the excessive remuneration of directors loosely based on the financial success of the company. Investors have been protesting this year against the high remuneration packages of directors in a significant number of large corporations, including Barclays, AstraZeneca, HSBC, BP, Tesco and Royal Mail.
- Employee treatment. Employees are often subject to demanding terms of employment, work long hours feeling under pressure and stress, paid the minimum wage (and not the living wage) and significant numbers are restricted in the hours they work by zero hours contracts.
- Debt. High levels of debt can cause concern for the stability of a company. If there is a downturn in the market in which it operates or there are problems in its business, its income may not be sufficient to service its debt and a refinancing may be required or formal insolvency proceedings commenced.
- Tax. Multinational groups paying little or no tax on profits earned in a particular country, often by sheltering tax liability through other companies and in other countries, has generated widespread concern and condemnation from Government, the media and the public generally.
Relational Distance between providers and users of capital
Given the structure of companies and the development of the share trading markets, many capital providers, who usually invest in companies through intermediaries, have little or no knowledge of where their funds are invested, and no knowledge or interest in the operations of the company and its impact on other stakeholders. Shareholders as a body have an ownership interest in the company and they benefit financially from it, yet they take no responsibility for its operation and impact on society, and they rarely hold the directors to account.
The impact on director motivation
The directors who manage a quoted company on behalf of the shareholders are driven by what they believe is the requirement of shareholders to produce short-term and ever increasing profits, dividend payments and capital growth. Achieving this can lead to employees being paid less than a living wage while working long hours under pressure and stress with little encouragement or incentive, suppliers not being treated fairly, for instance not being paid on time, lack of proper and personal handling of complaints by customers, and multi-nationals paying little or no tax in the country where profits are earned.
The wider consequences
Further, ever increasing pay differentials between the highest and lowest paid in companies show scant respect or appreciation for the hard work and commitment of the lower paid. It is no surprise that many companies on which we rely for day to day living are held in low esteem by society.
It is possible to change from a narrow financially-driven shareholder focus towards a broader social capital approach, which embraces the interests of all stakeholders.
Build relational companies
A relational company is one where the interests of all those who have a stake or interest in the company are put at the heart of the decision-making, management and operations of the company. These stakeholders include those who rely on the success of the company as an investment, a job and career, a livelihood (as a supplier), a customer (who buys goods or services), the local community where the company operates, and society more generally. If the interests of stakeholders are aligned with the company so the business is run with a sense of a community of interest for the benefit of all stakeholders, it should become more competitive, productive, stable, sustainable and successful.
Measure stakeholder relationships
Although the value of stakeholder relationships is increasingly recognised, there has been no effective way to measure the quality of those relationships nor how to introduce the relational ethos in a practical way into company decision-making and operations. However, companies can now test the quality of their relationships with particular stakeholders by carrying out an assessment based on the Relational Proximity Framework.
The Relational Business Charter
Further, to establish the extent to which a company operates with a relational ethos, an independent review of its published information can show how it measures up to the ten principles of a Relational Business Charter. These principles provide a benchmark for a relational approach and address matters such as the extent of dialogue with stakeholders, encouraging long-term holdings of shares, recognition of the value of and rewarding of all employees, fair treatment of suppliers and customers and responsibility to the local community and society generally.
The level of compliance with the relational approach as set out in the Charter is a metric that could be published after consultation with the company. Developing the Relational Business Charter in this way would enable investors to compare companies in the same sector of operations. It would be possible to establish a relational investment fund for investors who wish to invest in companies operating with a relational ethos.
The virtuous circle
Companies which embrace and promote the interests of all stakeholder groups rather than focus on the short-term requirements of shareholders will be likely to attract investors, employees, suppliers and customers and lead to the restoration of trust and confidence of society at large in the corporate world. They also lead the way in championing a relational approach to business – in which companies are seen to have a far wider significance and responsibility than they currently have.
Transforming Capitalism from Within: a Relational Approach to the Purpose, Performance, and Assessment of Companies
Transforming Capitalism from Within: A Relational Approach to Company Management and Operations
By Jonathan Rushworth and Dr Arad Reisberg. Re-published with kind permission of Chase Cambria (Company) Limited as this article first appeared in International Corporate Rescue Volume 11, issue 4.
The International Integrated Reporting Council (IIRC), December 2013, p17
“An integrated report should provide insight into the nature and quality of the organization’s relationships with its key stakeholders, including how and to what extent the organization understands, takes into account and responds to their legitimate needs and interests. This Guiding Principle reflects the importance of relationships with key stakeholders because (…) value is not created by or within an organization alone, but is created through relationships with others.”