When businesses maximise profits society pays: just look at the fate of Bury to find the evidence

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As the FT reports this morning:

Bury has been expelled from the Football League and local rival Bolton Wanderers potentially faces the same fate within days, as financial troubles at two of English football’s oldest clubs led to “one of the darkest days” in the history of the national game.

The English Football League, the body that runs three professional divisions below the Premier League, set a deadline of 5pm on Tuesday for the two teams based in England’s North West to secure new ownership or sufficient funds to continue operating.

After a takeover deal for Bury collapsed hours before the deadline, and despite other last-minute acquisition offers being submitted to the club, the EFL’s board said on Tuesday night that it had ended the club’s participation in the league. The 125-year-old club becomes the first to be expelled since Maidstone in 1992.

I have a passing interest in football. I've supported Ipswich Town since I was a boy, having grown up there at the time that they were very good. And I did go to a couple of league matches last season. The interest isn't entirely cursory. In that case I have concern for the Bury supporters, and the people of Bury itself, who will feel that this is a shattering blow. It is: it will be hard for the town to adjust to this, as it will also be if Bolton follow in their path as looks to be possible.

Then I noticed an article in the FT by Geoffrey Owen, who is the head of industrial policy  at Policy Exchange, by far the Tory's favourite think tank. He argued, as part of a debate on whether or not US companies were right to decide that profit maximisation is not now their sole priority. that:

When businesses concern themselves directly and predominantly with profits, they are not showing excessive regard for owners as distinct from stakeholders. Nor are they slighting other worthy objectives or allowing greed to govern its actions. Prioritising profits means focusing on the most obvious value to society. The idea that a company’s main contribution to society comes from other aspects of its activities not directly related to profitability derives from a fundamental misunderstanding of what business does.

I accept he added a few minor caveats, but they were minor and he himself dismissed them, saying:

It would be a serious mistake to assume that the contribution that a business directly makes to the welfare of society is largely independent of its profitability. It is equally wrong to conclude that society has conferred on businesses certain privileges in return for which they must do good works that are not related to profitability.

How wrong can you be? If you follow that logic you end up with Bury.

And you end up with schools run as revenue maximising institutions that can use force to restrain pupils and expel them more readily.

The idea that business and society are unrelated because the micro view of personal gain is all that matters becomes the prevailing narrative and the result is, of course, cost to society.

I have created the Corporate Accountability Network to challenge this view. As I argue there:

The Corporate Accountability Network thinks that every company, wherever it is incorporated, and whatever its size has six groups of stakeholders, all of whom are at risk as a result of its existence. These six groups are:

1. All those who provide capital to the company

This group does include the company’s shareholders. It also includes those who provide it with loan capital as well as banks, hire purchase, factoring and leasing companies and those who provide credit card facilities.

2. Those who trade with the company.

Most obviously this group includes those who sell to the company who are at risk that they may not be paid if, as is commonplace, those goods or services are supplied on trade credit terms with payment required after delivery. The group does, however, also include customers. They too can be creditors of the company, either because of deposits paid or because of guarantees offered which the company has an obligation to fulfil. All those who trade with a company have a right to know the risk that they face from doing so.

3. Employees of the company.

Very obviously employees are at risk for unpaid wages as very few employees are paid in advance. As a result this risk affects almost every employee of every company except on the day that they are paid. But there are also other risks. Some pay is deferred, for example. Bonuses fall into this category. And there are also pension obligations to consider. All companies have a duty to account to their employees as a result.

4. Regulators

Regulators can lose as a result of the existence of limited companies. Some companies may be formed so that those setting them up can avoid their obligations to society as imposed by regulators, knowing that they will have either no or very limited personal risk arising as a result. And regulators are also at risk because when they find fault the chance exists that any penalty can be evaded by a limited company simply ceasing to trade. In this way regulators suffer an even greater loss, which is to their overall credibility as enforcers of the law.

5. Tax authorities

Tax authorities are at risk from the existence of all companies. Some of this might be mitigated if the tax rates due by companies were the same as those owing by individuals undertaking similar transactions. This, however, is rarely the case, with the bias being in favour of companies. That means that many companies are specifically created to avoid tax. That gives a tax authority a very good reason to be interested in them.

In addition, the ability of companies to cease trading leaving tax liabilities owing without any possibility of recourse to the owners of the company, who may have gained from this outcome, means that limited liability companies are always a threat to the revenues of tax authorities. And that is before the ability of some to manipulate limited companies to mitigate their tax liabilities e.g. by relocating profit to locations where little or no profit is payable, is taken into account.

All these factors make tax authorities stakeholders who face a high degree of risk from the activities of limited companies.

6. Civil society

Civil society in all its many forms, may suffer a loss from the existence of a company. That company may pollute the atmosphere. It may corrupt the political environment. It could disrupt communities by its divisive activities. It may discriminate. It could promote activities that undermine communities. It may sell harmful products. And it might not disclose any of these activities when they occur, leaving a legacy that persists long after it has ceased to exist, with its owners taking their profits long before the consequences of the actions that gave rise to them were appreciated. These are very real, and to the company, unaccountable costs which civil society needs information to appraise.

All of these groups matter to any company. And, I argue, there is a duty to them all.

Bury reminds us that the cost to society is big when that is forgotten.

Tory education policy does the same thing.

And that's why this is a debate that has to be won.