Redesigning l'21st Century Enterprise

How to redesign the company of the 21st century?

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This is one of the government's major projects for 2018. The PACTE law (action plan for the growth and transformation of companies) intends to implement a thorough reform of the company. The main objectives are ambitious: to rethink the purpose of the company, to change its social model, with ultimately the project to "make companies grow by better associating employees with their results". The economics professor Hugues Poissonnier gives us the keys to thinking about this major debate.
 
L’he year 2018 opens with a major debate for companies, and undoubtedly for society as a whole. Prompted by the government, it concerns nothing more and nothing less than the purpose of the company, and precedes a possible change in its corporate purpose in the spring as part of the PACTE law (Action Plan for Business Growth and Transformation).

The place of the company in society: an old debate

The articles 1832 and 1833 of the civil code, which form the basis of the definition of a company, could be modified in order to restore the place of stakeholders in the broad sense (employees, customers, suppliers, local authorities, etc.), which are today clearly ignored by the texts. As currently drafted, the articles mentioned clearly make the partners (or shareholders) the final recipients of the value created by the company.

Basically, these articles of the Civil Code are a good reflection of the confidence placed in the concept of "invisible hand" developed a few decades before they were written by Adam Smith (1776). The latter, postulating that the best way to contribute to the general interest is to be concerned first and foremost with one's own particular or personal interest, justifies focusing the mission of companies solely on the value brought to owners or shareholders.

In spite of regular questioning, such a vision remained relatively consensual and little contested until the 1929 crisis, which, among other things, had the effect of lastingly shaking the belief that the market always provides the best solution to the most diverse problems.

Post-war, a more accommodating capitalism

The capitalism that developed after the war was intended to be much more conciliatory and inclusive of the expectations of stakeholders, who were not yet named as such but already included employees, customers, suppliers, the community, etc. Michel Aglietta (one of the founders of the "school of regulation" in France) described this capitalism, which is based on collective bargaining and, therefore, on the recognition of the diversity of stakeholder expectations, as follows "contract capitalism".

During the 1970s and 1980s, the crisis called into question the validity of a model that failed to protect against the emergence of new imbalances. The ("trickle-down theory" which explains that the redistribution of wealth must be carried out "from above" (in other words, by favouring profits, the benefits of the latter will benefit everyone, thanks to the investments that will be made and the employment that will result) lays the foundations of the famous "social economy". "Schmidt's Theorem.".

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Chancellor Helmut Schmidt's slogan "Today's profits are tomorrow's investments and tomorrow's jobs." has become a debated economic theorem. 

 

The emergence of stakeholders

The formula of the former West German Chancellor will be challenged by the stakeholder theory developed in the United States in the 1990s by Edward Freeman. This theory postulates that a company's profit is only the result of a process based on the cooperation of stakeholders. It is therefore not philanthropy, but rather a logic of economic rationality that justifies the attention paid here to the satisfaction of stakeholders, the only guarantee of their commitment and the development of their essential contribution to the company.

More recently, the vision we are developing within the GEM Mindfulness, Well-being and Economic Peace Chair is to consider that the purpose of the company is in fact twofold: to create wealth and to contribute to the common good by strengthening the social fabric in a sustainable and respectful manner of the human dignity and nature. The company, thus positioned at the heart of the city, wants to be a positive player in its environment, contributing in particular to peace, in line with the role attributed by Montesquieu to "soft trade": reducing the incentives for violence between economic players who have become dependent and partners.

Changes in vision, changes in practices

The question of who receives the value created by companies is therefore not a new one. It goes far beyond the legal framework, since a study of company practices over the past century reveals a succession of managerial modes, which often develop with a more or less significant delay in relation to the theories mentioned above. These changes in practices testify to the ability of the various stakeholders to make their voices heard and assert their interests.

From this point of view, the evolution of performance management tools is particularly revealing. The first management control tools developed in the 1920s in the United States were clearly financial (notably the ROI or return on investment) and reflect the owners' desire to control the decisions of newly promoted salaried managers. In the 1980s, value was clearly created for customers and expressed much more in terms of value for money than in terms of profitability. The 1990s saw the "return of the shareholder" (the title of an work by Sophie L'Hélias published in 1997): the emergence of players with considerable weight puts shareholders in a position to impose their expectations (the main indicator becoming theEVA or economic value added).

Rebalancing Relationships

Today, although shareholders are often the most vocal of stakeholders, sustainability seems to be becoming more and more important every day as a complementary objective in the face of environmental issues (global warming, pollution, depletion of resources) as well as the acceleration of economic cycles, which are reducing the average lifespan of companies. The Balanced Scorecard or the Performance Prism are clearly steering tools that reflect this ambition to reconcile the expectations of the most diverse stakeholders.

This glance in the rear-view mirror also shows that some companies have been able to derive their success and sustainability from their ability to never give in to the managerial modes described above in order to succeed in preserving the interests of all their stakeholders (those that Antoine Frérot, CEO of Veolia, now calls "critical friends"). They have sometimes sacrificed a little potential profitability to achieve greater resilience and proven sustainability.

Difficulties in extending the corporate purpose of companies

The company's expanded corporate purpose was one of the proposals in the manifesto. for a positive economy led by Jacques Attali in 2012. It was based on the recognition of the relevance of stakeholder theory. Indeed, such a vision provides a strong incentive to broaden the definition of the company's corporate purpose for the sake of pure economic relevance. Although the relevance of the way in which the company's impact on society and the environment is viewed is widely accepted, including by the Medef, the latter, through its Chairman Pierre Gataz, is hostile to any change in the civil code that would open up the possibility of numerous legal recourses that are difficult for companies to manage. The campaign currently being led by employers' organisations (Medef, Afep and Ansa) against the changes mentioned in particular to Article 1833 of the Civil Code should have a strong influence on the decision that will be taken in a few weeks' time, and which is already beginning to take shape.

The middle way, probable choice

A less restrictive solution, supported by employers' organisations, would be to create a new form of enterprise, the "mission-based" or "public benefit" enterprise, inspired by the American "public benefit corporations". The aim would be to include a social, scientific or environmental mission in the company's articles of association to complement the pursuit of profit. This would enable companies that so wish to take better account of the general interest, which appears clearly and unambiguously as one of their missions. Of course, some, out of philanthropy or calculation, do not hesitate to do so now, but the fact of writing it down would make them more legitimate and less open to attack when faced with the reproaches of certain shareholders.

In this respect, it must be stressed how caricatured it is to consider that results and profitability are the only expectations of shareholders. Many shareholders incorporate criteria of responsibility and positive impact on society to discriminate against companies that will receive their investments. A recent OCG surveyA survey of 250 major investors revealed that 88 % of them believe that managers focus too much on the short term...

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If the debates remain open, and may even intensify in the coming weeks, there is a good chance that between immobility and controversial ambition the middle way will eventually prevail. All the more so as it is now on a roll thanks to the support of recognised and committed players, including Antoine Frérot, CEO of Veolia, and Emmanuel Faber, CEO of Danone. In this case, the results obtained in terms of changing harmful behaviors would be much weaker than those initially envisaged by the unions and the government. The debate on the role of the company in society would, however, be only slightly postponed, and would probably be considerably strengthened.

Hugues PoissonnierProfessor of Economics and Management, Director of Research at IRIMA, Member of the Mindfulness Chair, Well-being at Work and Economic Peace, Grenoble École de Management (GEM)

The original text of this article was published on The Conversationeditorial partner of UP' Magazine

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