In a market-based economy with private property and freedom of contract, companies perform the economic function of producing goods and services for sale. The need to produce for consumption by people other than those involved in production results from specialisation and the division of labour, which improves productivity but creates mutual dependence in production and exchange.

A society arising from the division of labour poses significant organisational problems when it comes to coordination and motivation. To solve these problems, private companies perform overlapping technological, organisational and governance functions, which are both distinct from those of the market-based price system and from those of coercive state authority. In the traditional division of responsibilities between market (price system), company (organisation) and state (power), the state’s role is to defend the public interest, dictate laws and regulations, collect taxes and transfer income. The need for a state as a form of collective action arises precisely from the theoretical and empirical understanding of the market’s inability to reconcile private interest with social welfare (so-called market failures).

Attributing a social function to companies beyond their economic function means assigning them a responsibility to the common good normally reserved for the state (hence the term corporate social responsibility, or CSR).

Private companies and public interest

Movements which favour the direct involvement of private companies in the pursuit of social objectives are emerging at a time of increasing global awareness of the failures of the market economy: environmental degradation, growing inequality and exclusion, and, in recent years, stagnating productivity. The market economy – the system of production and exchange that feeds back into the global division of labour – is ultimately held responsible for these outcomes which are widely regarded as unsatisfactory. According to the established division of responsibilities, however, the failure actually lies with the state for not properly exercising its monopoly of power to fulfil its duty to preserve the natural environment, redistribute income and wealth, and foster competition that promotes innovation and material progress.

Proposals to attribute to companies – entities that arise from and operate in accordance with private interests – a direct responsibility for achieving general interest objectives should be assessed alongside other alternatives for their comparative efficiency and effectiveness. One such alternative should be reforming and strengthening the regulatory capacity of states. Indeed, the limitations of supranational organisations like the United Nations to coordinate national legislation across the globe – legislation that protects the environment, basic human rights, public policies supporting education and the accumulation of human capital vital for technical progress – were already evident when the movement for corporate social responsibility began at the turn of the current century.

As the economy globalises and companies increase their international operations, some are exporting their polluting activities and undignified labour conditions to other countries. These receiving countries do little to curb such activities, which would be illegal in the countries of origin. The UN has found itself powerless to fulfil its foundational objectives of defending natural heritage and protecting rights. At the same time, negative externalities are increasingly becoming global and national governments are increasingly proving to be ineffective.

In light of the difficulties the UN faced in facilitating cooperation between countries, UN Secretary-General Kofi Annan (1997 to 2006) asked companies to voluntarily act in a socially responsible manner, respect human rights and limit environmental damage beyond what is required by the laws of the countries in which they do business (Annan intelligently framed social responsibility as a way for companies to defend themselves against accusations of abuse and corruption from international organisations and civil society).

For more than 25 years now, companies have, to a more or less cosmetic extent, engaged in actions that transcend immediate profit motives.

This initially took the form of corporate social responsibility, which required little more than declarations of compliance with initiatives of the UN and other international organisations. Companies then began publicising the environmental, social and governance (ESG) impacts of their business activities, both internally and externally. Finally, companies began having themselves certified as B Corporations or similar corporate forms which imply a statutory commitment to a social purpose on equal footing with private profit.

The collective results achieved through these measures have not been satisfactory. While it could be argued that results would have been even worse without CSR and ESG, the truth is that, over the last 25 years, environmental degradation and inequality have continued to worsen. The damage done by climate change, due to externalities that were not adequately internalised in the past, is already fully visible. Meanwhile, technological advances have created new social problems (lack of privacy, markets dominated by a few companies that concentrate a great deal of economic and political power). It is one thing if we believe that states have done everything in their power to defend the common good; it is another thing entirely to realise that states have neglected their functions in the expectation that companies, of their own free will or under pressure from the market, would solve humanity’s greatest problems.

Many of the proposed initiatives for change and groundbreaking reform start from a recognition of the limitations of nation states to act in cooperation. Instead, these reforms seek to turn companies/legal entities into the implementing arms of public objectives and policies. For example, Professor Colin Mayer of Oxford University, in collaboration with the British Academy, proposes that corporate law be changed to require that all commercial companies, particularly limited companies, incorporate a social purpose into their articles of association. This social purpose would form part of directors’ fiduciary duties and legally empower them to make decisions that reduce the economic value of their company’s assets when losses are more than outweighed by the benefit to society as a whole. Under current law, shareholders are free to decide whether to become certified as a B Corporation or whether to include a corporate purpose in their articles of association. Under Mayer’s reform, doing business through a public limited company would require by law that the company be incorporated with a social purpose in its articles of association.

A second major initiative in the same vein is the so-called due diligence directive currently being drafted by the European Parliament, which builds on similar directives such as those on disclosure of non-financial information. If approved, the due diligence directive would oblige EU-based companies of a certain size and operating within certain sectors to assess compliance with international standards on human rights protection and environmental damage by customers and suppliers along the value chain, whether they operate inside or outside the EU. While there is some debate as to what companies should do if they identify non-compliance, there will be explicit and implicit pressures to break off business relations with non-compliant companies or make continued business relations conditional on behavioural changes.

Reforming limited liability companies is relatively easy as they are the product of rules and laws that can be changed by legislators. Reforms should help to ensure that, at least in Europe, more companies commit themselves to a social purpose of some kind. However, contributions by the private sector will not be sufficient to achieve the ambitious collective goals that are currently being sought, particularly if initiatives are limited to EU-based companies. Improving and strengthening the actions taken by nation states, as well as international cooperation between them, will be essential to ensuring that they take the lead in transformational processes. A regression towards nationalism and trade exclusively between ‘friendly’ countries threatens progress towards a more sustainable, prosperous and inclusive world, as it means recognising the failure of states to cooperate in solving humanity’s problems.