Front Cover

Transforming Capitalism from within:

a Relational Approach to the Purpose, Performance, and Assessment of Companies

by

Jonathan Rushworth and Michael Schluter

Research Report No 1

This report is written to start a conversation about the transforming power of strong stakeholder relationships. These can not only improve the long-term performance and sustainability of companies but also address the crisis of public condence in corporate values. Join the conversation on our website at www. relationshipsglobal.net

Relationships Global, October 2011 Relationships Global is a company limited by guarantee registered in England and Wales (no. 6982128). Registered ofce: 3 Hooper Street, Cambridge, CB1 2NZ www.relationshipsglobal.net

This research has been undertaken in close collaboration with Relationships Foundation which initiated this project in 2003.

www.relationshipsfoundation.org

About the Authors

Jonathan Rushworth was a partner with a major City of London law rm for 26 years, specialising in company and nance law. He retired from practice in 2007 and is Chairman of Relationships Global.

Dr Michael Schluter CBE is an economist, author, and social entrepreneur. He worked as an economist with the World Bank and a Research Fellow for the International Food Policy Research Institute. He founded the Jubilee Centre, Relationships Foundation and Concordis International. He is now Chief Executive of Relationships Global.

Sometimes it takes an earthquake to make us realise the need for new building methods. The thinking and discussions which have led to this publication began well before the recent turmoil in the nancial markets and wider economy, but those events heavily underline the need for it. They bear out much of the reports analysis. Its proposal for the development and recognition of relational companies is revolutionary but is founded upon essentially simple and well tried principles. There has never been a more important time for recognising them or a greater need for giving them practical application in commercial and public life. Sir Roger Toulson, Lord Justice of Appeal

The authors wish to record their grateful thanks to Marilyn Collins for her skill, patience and forbearance in working with both authors on this report. She has given invaluable help in acting as coordinator of the project and in preparing the report. The authors would also like to thank Jonathan Tame and Barry Cooper (motivateddesign. co.uk) for their help in the design and publishing of this document.

Foreword
which has survived both the nancial crisis and last years General Election.

I was delighted to give the introductory address at the seminar at University College London on 10th November 2010, when the Relational Business Charter was launched in the UK. I am equally pleased to write the foreword to this paper on the Charter and to welcome the debate it will provoke, as a contribution to the current discussion the Government has initiated on corporate governance. Look at the fair-trade movement, which started in Britain when a few people running church bookstalls started to sell fair-trade products on the side. It wasnt an auspicious start. But today, every supermarket in the land is proud to stock fair-trade produce. My local branch of Sainsburys recently told me how important fair trade is in drawing customers into the store.

Background to the Relational Business Charter

The Charter is rooted in the work of Michael Schluter, and of the Relationships Foundation he has established over the past twenty years and in the conviction that the wellbeing of an organisation is crucially dependent on the wellbeing of the relationships within it. The perspective derived from that conviction has led now to a substantial body of analysis and reection in political economics and management theory, to which this Charter is the latest addition. Or look at socially responsible investment. I introduced a regulation as pensions minister ten years ago which provided a powerful catalyst for pension funds to adopt social responsibility policies. The civil servant who did the work on it told me that he went from one adviser to another in the City who told him that what Ministers wanted to do was illegal, and contrary to the duciary duty of pension fund trustees. On the point of giving up, he came across the Methodist Churchs Central Board of Finance. They told him they had been doing it successfully for twenty years! And now we have the ten principles of the Relational Business Charter too, applying a different set of values to big challenges that all of us face, and formulating as a result fresh responses and new ideas. The Charter is an example, and I welcome it, and the ideas that lie behind it. And I welcome the way in which the inuence of the Relationships Foundation has been spreading around

Rt. Hon Stephen Timms MP, Shadow Minister for Employment

The starting point for this work was Christian faith. People sometimes observe that the churches or perhaps even the Judaeo-Christian tradition dont make much impact in Britain any more. I dont agree. It seems to me that observation is simply untrue of modern Britain. Look, for example, at the impact of Jubilee 2000 and Make Poverty History in changing Government policy on overseas aid, and in building a powerful political consensus about achieving the UN target of aid as a proportion of GDP

the world from its base in Cambridge since its foundation in the early 1990s, with sister initiatives now in place in Hong Kong, Malaysia, Singapore, the USA, Australia and South Africa. This is now being developed further by Michael Schluters not-for-prot company, Relationships Global.

Wider social responsibility

The nal, tenth, principle of the Charter is that obligations to wider society are fullled. Its right to highlight the importance of corporate social responsibility, in the entire way an organisation is run rather than simply in isolated CSR projects, and that the company pays the tax that is due from it.

The new corporate governance code in South Africa explicitly requires companies to review relationships with all their stakeholders. And that is what this Charter is seeking to enable. Corporates are under intense scrutiny for very good reasons and governments are under pressure to change corporate behaviour. There are things governments can do, but the tools available regulation, taxation cant always deliver a good outcome. That is why alternative approaches like this Charter can be very attractive.

Responsibility to employees

I wanted to comment on a couple of the points which the Charter argues should be examined in determining whether a business should be considered a Relational business.

Principle 6 of the Charter says: The dignity of all employees is respected by minimising remuneration differentials within the business. The Church Investors Group published last March a Guide for Christian Investors on the Ethics of Executive Remuneration. It points out that current levels of executive pay in the UK are strikingly high and that the pay of FTSE 100 Chief Executives is on average over 100 times that of average salaries in these companies. There have been reports of large further rises in the past year. The Guide points out that this is a far higher differential than in the 1970s. It concludes that investors should be even more vigilant about levels of pay at the bottom of an organisation than those at the top. It recommends that the ratio between the pay of the top executive and the lowest 10% of employees should be identied and over time set on a downward trajectory. In the opinion of the authors, it says, it would be difcult to justify a ratio in excess of 75. It points out that, in Tesco plc, the ratio is 526. This Charter suggests that 20 would be about right.

Thats important internationally as well as within the UK. Christian Aid estimates that developing countries lose more in avoided and evaded tax than they gain in overseas aid. They advocate that companies should publish annually their prot in each country where they operate, and the tax they pay there. There has been good progress on an international accounting standard for this country-by-country reporting among extractive companies, and I was able to persuade OECD to work on a guideline on country-by-country reporting to be added to its authoritative good practice guidelines for multinational enterprises. So I warmly welcome this initiative. I congratulate those who have put such an enormous amount of work into it, and I look forward enthusiastically to following the debate which I hope it will kick off. This Foreword is based on the introductory address given by the Rt. Hon Stephen Timms MP at a seminar at University College London on 10th November 2010 for the launch of the Relational Business Charter.

Principle 3 of the Charter highlights the value of employee share ownership. At a reception at the House of Commons recently, we marked the tenth anniversary of the implementation of the all-employee Share Incentive Plan and the Enterprise Management Incentive for which I was responsible and which were announced in the Budget in May 2000. I think its right to value and promote employee share ownership. There are two million people in employee share ownership plans in the UK today. By linking employee rewards to the value of the business, it improves employee motivation and so boosts the business, and it boosts fairness as well. Its a good example, in my view, of how the ideas in the Charter are good for long-term business success as well as for justice and fairness.

It has been interesting and heartening to see the success of the Living Wage campaign led by London Citizensa coalition of churches, mosques, trade union branches and community groups. The campaign is for a higher minimum wage, above the statutory minimum, applied by a business to its own employees and demanded also of its suppliers. Barclays says that adoption of the living wage has improved retention among its cleaning staff from 35 per cent to 85 per cent, and thereby paid for itself.

Table of Contents
1. Introduction 2. The Structure and Operation of the LLC

Preface: The Relational Worldview

1 5
4. The Relational Business Charter

11
5. The Relational Ratings Agency

3. A Relational Approach to Company Reform

21 31
Notes

47
Appendices and Summary of Charter

6. The Relational Business Forum

51 54

59

Preface: The Relational Worldview

Yet if the gross national product measures all of this, there is much that it does not include. It measures neither the health of our children, the quality of their education, nor the joy of their play. It measures neither the beauty of our poetry, nor the strength of our marriages. It pays no heed to the intelligence of our public debate, nor the integrity of our public ofcials. It measures neither our wisdom nor our learning, neither our wit, nor our courage, neither our compassion nor our devotion to country. It measures everything in short, except that which makes life worth living, and it can tell us everything about our country except those things that make us proud to be a part of it.

Robert Kennedy, US Senator; Kansas city, 1968.

The Relational lens

of our marriages, the integrity of our politicians and inclusion of the disadvantaged. In the same way, poverty should be dened not just as a nancial condition, but primarily in relational terms, reecting an absence of relational support from relatives, friends and local community. This is as measurable as nancial poverty.

Relational goals for organisations

The goals of organisations look different when viewed through a relational lens. For example, is a schools task primarily to convey information, to enable pupils to pass exams, for the personal development of the individual pupil? Or is the purpose of education to help the nation achieve its economic goals, to achieve given levels of

economic growth? A Relational approach would suggest the goals of a school should be more about fostering the relational commitment of a child to family, colleagues and community. As well as fostering commitment, a school needs to teach, formally and by example, relational skills which enable the child to translate theory into practice. In a Christian context, this includes teaching the fear of God, which is the beginning of wisdom, as the Proverb puts it. The same Relational perspective can be applied to the goals of the health system,2 and the criminal justice system. 3 How, then, does the Relational approach apply to company structure? As with a school or hospital, it impacts primarily on the goals of the organisation.

The relational lens, or worldview, is a different way of seeing things. 1 It is possible to see the world through a number of different lenses for example, a nancial lens, a spatial lens, an environmental lens or a relational lens. Take the construction of the British Airways corporate headquarters near Heathrow. It can be considered from a nancial perspective, for example in terms of the capital costs of its construction or its annual running costs. Or secondly, it could be analysed from an environmental perspective, for example in terms of the extent to which it contributes to global warming through carbon emissions. Thirdly, it could be looked at for its overall size and dimensions, and its location relative to other buildings would provide a spatial perspective. Fourthly, questions could be raised about its relational impact. For example, those who drive to work there and park underground, and then have to cross a central atrium with caf facilities on the way to their ofces. This was designed to facilitate meetings and conversations between staff across the business and impacts in multiple ways on ofce relationships.

At a national level, a Relational worldview impacts on how we dene the goals of national life. As a nation, is our primary objective growth of GDP, with its associated advantages of high levels of employment, better health facilities and improved housing? Or is development about something more than growth of wealth and income? A Relational approach would want to include some measures of relational categories such as quality of inter-racial and inter-ethnic relationships, the strength

Rather than a company taking account almost exclusively of the interests of one stakeholder, the shareholder, a Relational approach would have regard to the interests of each of the three primary stakeholders shareholders, management and employees. All three groups should see themselves as in some sense partners in the enterprise. The Relational Business Charter explains many of the further steps required to translate the Relational goals of a business into the way a business is run on a day-to-day basis. These pressures on relationships are undermining social sustainability (as well as indirectly undermining environmental sustainability). Relationships Global and Relationships Foundation, which together commissioned this research report, believe that widespread changes are needed to the goals, structures and working practices in many institutions across society if the deterioration of trust between people is to be reversed. This report seeks to address reform in just one part albeit a very signicant part of public life.

relationships between stakeholders, and increases the relational distance between business decisionmakers and local communities.

Pressures on relationships across society

Note: relational or Relational?

In this report, the word relational is used in two different ways. When it is purely descriptive, to distinguish a relational from an environmental perspective, for example, it is written with a small r. However, when the word is used with some normative content, to describe how the authors believe relationships should be structured or prioritised, it is given a capital R. We hope readers will not nd this irritating, but helpful in recognising where a new social paradigm is being proposed.

The R Factor, published in 1993, explores the reasons why relationships in Western societies today are under so much pressure.4 There are a wide variety of reasons, including: long working hours and pressure of the workplace changes in communication technology enabling regular contact with a greater and more scattered network of contacts increased levels of mobility breaking up long- term relationships in extended families and local communities increased levels of personal debt which put household relationships especially under strain growth of large cities, leading to long commuting times, high-rise architecture and other factors which contribute to anonymity changes in norms governing sexual behaviour and decline in religious belief, which both contribute to undermining access to intimacy corporate giantism, which generally weakens

1. Introduction

It is generally acknowledged that the structure and operation of listed companies, including banks and other nancial institutions, have in many respects failed the society they were intended to serve. The various parties who rely on companies for their livelihood and wellbeing, in particular shareholders, directors and employees, tend to focus on their own limited interests with no real connection or relationship within and between each stakeholder group.

An alternative approach is proposed in this report, which addresses many of the current issues of concern and is based on a solution

which focuses on the relationships between all stakeholders. It puts relationships at the heart of a company and its operations by means of a Relational Business Charter, and proposes a mechanism for assessing the quality of relationships in listed companies.

A new approach is needed

objective, but nancial objectives should be seen as serving Relational goals. This shift in understanding the purpose of a company means that the company ceases to be an agglomeration of individual goals, often in competition with one another, which somehow through the hidden hand of the market miraculously in Adam Smith style produces an optimum outcome. Rather, the stakeholders in a company get to know each other and become, in a limited sense at least, a community, characterised like all communities by conversation, a shared story, mutual respect, an alignment of interests and a common direction. The Relational Business Charter presents an opportunity to examine the goals as well as the structure of business enterprise and discover a fresh purpose for the economic system. We hope that those who read this report will catch a vision for the Relational company, and play their part in helping society to embrace this new approach to corporate governance.

The world of nance and business is in a state of uncertainty. The stability of the global nancial system can no longer be taken for granted. At the same time, publicly acceptable standards of corporate behaviour, including self-restraint on remuneration levels of senior executives, a long-term view by shareholders not just focusing on nancial return, and long-term commitment by companies to their employees and their suppliers, are not being met. It is by no means self-evident that current standards are in the public interest, nor that the economic system as we now experience it is sustainable.

In the UK, the response to the recent crisis has been to introduce short-term measures, and consider longerterm changes, to the legal and regulatory framework governing banks and other companies. Short-term measures have included restrictions on short-selling of bank shares (which were subsequently removed), in an attempt to limit the manipulation of the share market, and a tax on bonus payments made to bank employees.

Rather than seeking solutions to this systemic instability in the political sphere, through changes in the role and power of governments or nancial regulators, or in scal measures which change the level and incidence of taxation, this research report proposes a solution which lies in the structure and conduct of stakeholder relationships. We have summarised these changes in what we have called a Relational Business Charter, which has developed from a paper we wrote three years ago called The Relational Company.5

Responses to the recent nancial crisis

The need for a Copernican revolution6

Long-term measures introduced or under discussion include additional taxes on bank prots, higher capital requirements for nancial institutions, greater regulation of the securities markets and hedge funds, as well as increased powers for regulators to monitor and intervene in nancial markets. A Stewardship Code announced last year encourages institutional shareholders to take greater responsibility for engagement with companies in which they invest. The Government has recently announced a review into corporate governance and short-termism, including shareholder engagement and responsibility, corporate incentives and pay, and the economic impact of takeovers. Discussions continue over whether banks should be required to split their lending and investment bank businesses into independent companies. This is an attempt to distance the risk of a failure of the seemingly less stable investment business from bringing down the more stable lending bank business.

While each of the 10 principles of the Charter is signicant individually, the heart of our proposition is that a Copernican revolution is needed as the basis for corporate enterprise. Our current way of looking at the world needs to be turned on its head. No longer should stakeholder relationships be seen as serving a nancial

The global nancial crisis of 2008 has raised signicant questions not only about the morality and sustainability of some aspects of the global nancial system but also, in some respects, about Capitalism itself. It followed a series of similar but smaller crises over the previous two decades, which occurred despite a considerable increase in regulation being put in place over the period. However, the regulation addressed the symptoms of each crisis rather than addressing its deeper causes.

Causes of the nancial crisis

These and other initiatives address, in a somewhat piecemeal way, certain of the issues which led to or were the effect of the recent liquidity crisis and recession.

However, they do not address the underlying causes which will not be remedied simply by adding to the legal and regulatory framework, and imposing additional taxes. The debate over the causes has in many respects been limited to trying to establish where the blame should lie for events which have had such a severe impact on the lives of so many people. Should bankers be blamed, or over-optimistic valuation of toxic assets, or inadequate and unenforced regulation, or should politicians shoulder responsibility for being led astray by the charms of the seemingly unending expansion of the economy and the apparent stability and success of the banks?

work, weekend work requirements and the time they have for holidays) have a direct impact on their families. This aspect may well not be taken into account by the employing company. Suppliers are seldom regarded as long-term partners with the company. They are often treated unfairly, with delays in payment well beyond the contractually agreed timeframe. This can lead to cash ow problems for the suppliers which threaten their business. Customers are also frustrated by lack of proper and helpful treatment, particularly when negotiating relatively small issues with banks and utility companies. Overall, the structure which has developed for the operation and management of companies has not engendered any feeling of condence and trust with stakeholders and society generally. There is little encouragement for those who rely on the company for their livelihood and wellbeing to see themselves as working as part of a community with the goal of longterm business sustainability and increased protability for the benet of all.

generally limited to a continuing demand for immediate and increasing short-term nancial returns. Shareholders in many listed companies are a disparate group, which includes individuals with direct shareholdings and those who invest through intermediaries, investment institutions acting on their own behalf or investing capital for others (which may include pension funds or individuals), hedge funds and sovereign wealth funds. Some will be long-term investors, while others will trade their shares if there is a short-term nancial advantage to do so. Takeovers of listed companies, for example, are dictated by the price of the offer by the acquiring company, with selling shareholders unconcerned for the future of the business and the impact on employees, suppliers, customers and others. The only alignment of interest between these shareholder groups is the desire for a nancial return, in the form of dividend payments and an increase in the capital value of their shares.

There has been little discussion about the way in which companies and the equity markets have developed and how this may have been awed, in that companies no longer serve society as originally intended. The structure and operation of companies have led the various parties which rely on them for their livelihood and wellbeing, in particular shareholders, directors, employees, suppliers and customers, to work in their own limited interests with little real contact or relationship within and between each stakeholder group. The concept of the company being run in the interests of all stakeholders and for the benet of society has been lost, even though achieving this objective should over time lead to a more sustainable business and greater protability. Directors frequently have an expectation of high nancial rewards for themselves, often based on achieving certain prot or share price targets, justied by their running the company primarily to generate value for shareholders. Employees can easily be regarded as an expendable asset, rather than being properly recognised and appreciated for their contribution to the operation and development of the business. It is not surprising that this can lead to employees having a lack of commitment to their employing company and little enthusiasm or feeling of fullment in their work. They often do not consider they are treated with proper respect or understanding, and their views and ideas are not taken into account. Decisions about employees (for instance, their hours of

A new approach to social reporting

Stakeholder interests

Shareholders have little interest in the underlying business and operations of a company and take no responsibility for the actions of the directors. Their involvement is

Concern over the role of companies in society and their frequent lack of a sense of responsibility for the environment is recognised in the UK and many other countries by the widespread interest in an integrated triple bottom line approach to reporting. Thus, companies report not only their nancial results but also on their recognition of environmental responsibility, as well as

difculties may lie. No new framework has been suggested which, by addressing the underlying causes, might bring all stakeholders together to work for the greater success and protability of the enterprise.

their social commitment to helping the local community and society generally. However, the weakness with current social reporting, which attempts to show that companies comply with corporate social responsibility standards, is that it amounts only to disclosure that the company is doing good for the local community and society at a general level. It does not mean that the company is helping to sustain the wellbeing of specic stakeholders such as that of employees, suppliers, and customers. Nor does it consider the knock-on effects of its policies for the families of employees, and the local communities of which they form a part. There is an urgent need to help to support and sustain these failing social institutions. Arguably, concern for family and community should take precedence over concern for the environment, because it is in stable and rooted families and communities that people learn to value the environment where they live, and so learn the importance of the environment globally.

Relational analysis

others, is now the subject of debate. The approach has failed to heed the social cost in terms of levels of debt and personal and family breakdown. The question is whether its pursuit by business over several decades with its focus on nancial return for shareholders, who accept no responsibility on their part for the actions of the directors and what happens in the company, has really been the best way to maximise economic growth and wealth creation. Companies have been driven in a narrow commercial and nancially oriented way in their dealings with stakeholders, in particular employees, suppliers and customers, but also the local community and society generally. We suggest in this report that a Relational approach to company structure and operations can assist not only in encouraging long-term economic growth and long-term protability, but in promoting social harmony, a highly motivated workforce, good relationships with suppliers and customers, and personal wellbeing and happiness for those who rely on companies for their livelihood, as well as the local community in which the company operates.

In this research report, an alternative approach is proposed to the way in which companies are structured and operate, and the way in which they report how their operations are conducted. This approach rests on a Relational analysis of the events that occurred leading up to the 2008 crisis, and sets out Relational solutions based on changes to the limited liability companys purpose and operating practices. This Relational analysis contrasts two alternatives. The rst is an approach which focuses exclusively on the interests and rights of individuals, and the pursuit of personal materialistic gain. The second is a Relational approach in which wellbeing, happiness and success are promoted by recognising that relationships with others and with society generally are the key to personal satisfaction and success. Society has allowed the desire for money and wealth to be at the centre of its existence. We are driven by the desire for material success, rather than focusing on relationships within our immediate family and broader society, and ensuring that money is our servant. An approach which focuses on the interests of the individual emphasises that everyone has a right to have what contributes to their personal gain. The culture of materialism, with its pervasive promotion of personal pleasure to the detriment of concern for the wellbeing of

A Relational Business Charter

This report starts by considering the development of the limited liability company and the lack of shareholder involvement and responsibility, and explains the weaknesses and instability in this structure from a Relational perspective. The report then considers the key elements governing relationships between the major stakeholders in a corporate environment and explains how

Compliance by companies with corporate social responsibility tends to focus on contributions in money and time to local people and projects. There needs to be a new approach to social reporting and corporate responsibility based not just on satisfying individual rights and a general contribution to society, but on building and protecting specic relationships between stakeholders, and supporting families and social relationships more widely. Little attempt seems to have been made to address the structural and operational aspects in the way companies are run and how their relationships with stakeholders are conducted, in order to understand where many of the causes of the current

doing so, should be of interest in particular to existing and potential investors in the company, employees and those thinking of joining the company, suppliers and other third parties dealing with it, and the local community where the company operates. It is likely also to be of interest to analysts reporting on the operations of a company when there is recognition of the benets of the Relational approach.

The report sets out further detail of the assessment process and how it will be carried out and also details of the role of the Relational Business Forum. Appendix 1 sets out the principles of the Charter and the questions to be addressed as part of the assessment process. Appendix 2 sets out the ten principles of the Charter and Appendix 3 sets out acknowledgements.

a Relational approach can be applied to how a company operates. The way in which adoption of this approach can give the company a competitive advantage, leading to greater stability, success and protability, is described. This is followed by a description and explanation of the ten principles of a practical Relational Business Charter. This Charter addresses the recognised aws in the structure and operation of companies by introducing Relational Thinking (as explained in chapter 3) into the way in which companies are owned and managed, with a focus on the interests of all stakeholders, including society as a whole. As part of this, there is a recognition that shareholders who take responsibility for their status as members and owners of companies shares are entitled to a proper income and capital return.

A Relational Kite-mark

A Relational Ratings Agency A Relational Business Forum

Another way of marking an assessment, which is under consideration, is that the achievement of a certain level of compliance with the Charter would be awarded by a Relational tick or kite-mark. This would indicate to interested parties that the company meets a good portion of the indicators to show that it operates on the basis of Relational principles.

The level of a companys compliance with the Charter would be assessed by a Relational Ratings Agency, an independent body. A preliminary assessment would be prepared, based on information published by the company. The draft assessment would be sent to the company for comment. The assessment would be supplemented by any additional information the company is prepared to publish. Companies compliance with the Charter would be marked on the basis of A+ for complete or near-complete compliance, and A, A-, B+, B, B-, C+, C or C-, or even F if the company scores 10 points or less out of a maximum of 100 points.

The adoption by companies of the Relational Business Charter does not purport to provide a solution for all the problems which led to the current crisis or have arisen as a consequence of it. However, we believe the Relational approach, which recognises that constructive and understanding relationships between all those involved in the operations and management of a company and those relying on it for their wellbeing, will address a number of the underlying causes of the weakness of the current company structure and nancial system.7 The adoption of the principles of the Charter and a Relational approach will have positive benets for all stakeholders and wider society. Such companies will be more stable, their business will be more sustainable and successful, and corporate performance and protability will increase over time.

The information as to the level of compliance of a company operating on a Relational basis, and its commitment to

Companies which undergo the process of assessment, or which are interested in doing so, and potential shareholders in the company, would be encouraged to join a Relational Business Forum which would provide training and research for all those interested in adopting Relational Thinking as a new business approach. This would enable those who run companies, as well as shareholders, to understand more fully and appreciate the value of working closer in a Relational manner with all stakeholders, in a way which would increase long-term protability and lead to a recognition by the company that relationships should be at the core of its operations.

The next chapter explains how the development of the company structure and the share investment markets have led to shareholders and other stakeholders who rely on companies for nancial return, livelihoods and wellbeing competing for their own interests. It suggests that a new approach is needed for the management and operations of companies so that they can be more of a community working for the benet of all stakeholders and society generally.

2. The Structure and Operation of the Limited Liability Company

The development of the limited liability company and the share trading markets have contributed to holders of shares in listed companies regarding their holdings largely as commodities to be traded at will. They seek short-term and ever-increasing nancial return and take little or no responsibility for the way their decisions impact on the operation of a company, and the lives and wellbeing of employees, suppliers, customers, the local community, and how the company serves society generally. Ever-increasing legal and regulatory requirements imposed on directors who run companies stie entrepreneurial spirit and cannot replace the responsibility shareholders should accept. This chapter analyses these issues and suggests that an approach focussed on the relationships between the stakeholders relying on a company for their wellbeing would result in companies operating as Relational communities in a sustainable and protable way, rather than as vehicles within which all parties compete for short-term nancial gain.

11

Who takes responsibility?

shareholders have, in nearly all cases, no liability for the companys debts and obligations. The former are called unlimited liability companies and the latter are limited liability companies. Shareholders in unlimited liability companies have responsibility for a companys liabilities and so, if it fails and its creditors are not paid in full, the shareholders must contribute sufcient funds to the company to ensure all its liabilities are met.9 That is the equivalent of an individual running a business which fails and then having to meet its liabilities.

Responsibilities of directors

In many respects, the limited liability company was a brilliant invention. As a legal entity, it owns its assets, can develop and operate a business, and buy and sell goods and services. It can take on liabilities, in the form of contractual obligations and debt, and can sue and be sued in its own name. The company structure, as a contained business vehicle within which a business can develop and thrive, has provided the framework for businesses such as those involved in the exploration and extraction of minerals, the development of life-saving drugs and banks which lend to keep businesses operating. It forms a trading base, and a resource for economic growth and the creation of wealth, dealing with suppliers for the provision of raw materials and services, and customers for nished products. Companies have provided employment and careers for millions. Through pension payments for retired employees, companies indirectly support former employees after retirement, relieving the state of at least some of the cost of retirement pensions.

Responsibilities of shareholders
By contrast, the only loss the shareholders suffer in a limited liability company, if it fails, is the amount subscribed for their shares or the sum paid for them if they were bought from another shareholder, as well as the loss of any future dividend payments. All liabilities of the company remain with the company as a legal entity, and the shareholders who own the companys shares usually need make no additional contribution to the loss incurred by its creditors, whether the creditors are its employees, suppliers of goods, banks or others who have made loans to sustain its operation. Virtually all commercial companies operating in the UK are structured in this way, as limited liability companies. The structure that enabled shareholders to have no liability for their companys debts (which was introduced into English law some 150 years ago) encouraged investment by those seeking to provide nance for a manufacturing, trading or service business, and wishing to achieve a nancial return without being involved in, or having any responsibility for, its day-to-day operations.

The company is an inanimate object, a legal entity, and therefore needs to have an owner or owners who have ultimate responsibility for how it is used. In law, these owners are shareholders who provide capital for the start-up, development and expansion of the company.8 A signicant part, or occasionally all, of a companys capital is provided by funds subscribed to the company by its shareholders. So far as the interests of shareholders are concerned, there are two types of company: those where shareholders have full liability for the companys debts and obligations if it were to fail, and those where

The company as a legal entity cannot, of course, run itself. It cannot make decisions or judgements or have any moral standards by itself; these must be provided by human directing minds. If the shareholders do not wish to be involved in its day-to-day activities nor have any responsibility for the business, as is usually the case with listed companies, the management and operation of the business is delegated by the shareholders to directors. Directors have wide powers to run the operations of the company, with an obligation to refer a limited number of matters to shareholders for their approval. An example of such matters would be an increase in the share capital of the company or a change to its constitution. In addition, for companies listed on the London Stock Exchange, regulations require consent from shareholders for signicant asset or business acquisitions or disposals. Although appointed by the shareholders in newly formed companies, in practice new directors in listed companies are appointed by the existing directors. They are subject to reappointment on a regular basis at shareholders meetings but in the UK the passing of shareholder resolutions to effect this has tended to be a formality. There is, however, a growing trend for shareholders to scrutinise more closely such reappointments, with the threat of litigation or pressure from activist shareholders. The benets of the structure whereby the assets and liabilities of the company remain with the legal entity, whilst ownership or membership of the entity itself can change as the body of shareholders changes, emphasises

12

the removal of any element of ownership involvement or responsibility by the shareholders for what happens to the assets and liabilities forming the business owned by the company. The company and its underlying operations, with responsibility for the welfare of employees and its dealings with suppliers, customers, nance providers and the local community, is run by the directors who may have little or no ownership interest in the company itself, whilst having responsibility for the way in which the business is handled and for the decisions they take. Whilst the company structure provides continuity of ownership of its assets and business under the stewardship of the directors, and some shareholders may hold their shares as a long-term investment, shareholders generally only hold their shares so long as they are satised with their nancial return. Shares can be traded regularly by institutions and by individuals, or as part of a complex

They have no liability for the debts and other obligations of the company, as explained above. The shareholders only real interest is, therefore, to achieve a nancial return. The practice of buying and selling shares in private deals or on a trading exchange has led to shares in listed companies being regarded as a commodity to be traded at will, frequently with no long-term interest as an investment.

investment instrument with no direct ownership interest in the shares themselves.12 Further, regular dealing in the companys shares leads to anonymity of shareholders, as they comprise a constantly changing body so far as directors and other shareholders are concerned, and there is little communication among shareholders to discuss the companys affairs. The separation of the ownership of companies from any direct long-term interest or responsibility for their operation, or for holding the directors to account as stewards of the business, means that shareholders have many of the rights of ownership without any of the responsibilities of ownership. Although directors are technically accountable to shareholders, the shareholders have no responsibility for the actions of the directors or

Owner-managed companies, and many family-owned companies, are of course managed and owned by their shareholders or representatives of them. The interests of the shareholders and the directors are, therefore, closely aligned; they may even be the same people. Where they are the same people, the issues outlined in this paper about lack of shareholder involvement and responsibility do not generally apply to them, and certainly not for the same reasons.10

Lack of shareholder involvement and responsibility

The concept of shareholding has over the years increasingly become regarded as merely a nancial investment, in particular after the introduction of trading exchanges which provide a regulated market for shares in listed companies to be bought and sold. In listed companies, there is no involvement by shareholders in the management of the company. Indeed, such involvement has to be restricted, due to the risk of shareholders taking on the duties of directors, or as shadow directors.11

13

for the consequences of the companys operations on employees, suppliers, customers and others relying on the company for their wellbeing.

Box 1. The Stewardship Code 2010

Certain aspects of shareholder responsibility were addressed in Sir David Walkers Review of corporate governance in UK banks and other nancial investment entities, dated 26 November 2009. In particular, the review proposed an independently-monitored stewardship code, which could be adopted by institutional investors in listed companies. This led to the publication of the Stewardship Code by the Financial Reporting Council in July 2010. Its aim is stated to be to enhance the quality of engagement between institutional investors and companies, to help to improve long-term returns to shareholders and the efcient exercise of governance responsibility. Its seven principles include requirements concerning their policy on how they discharge their stewardship responsibilities (although, interestingly, the term stewardship is not dened in the Code), monitoring companies in which they invest and, in certain circumstances, increasing their involvement, and liaising with other investors. The limitations on the effectiveness of the Code have been well rehearsed. It only applies to institutional investors, in particular to rms who manage assets on behalf of institutional shareholders, such as pension funds, insurance companies, investment trusts and other collective investment vehicles. It is difcult to see how the provisions of the Code will apply to investors who are resident or otherwise managed outside the UK, when over 40 per cent of listed company shares are owned by non-UK investors. Further, it does not address the question of long-term sustainable investment or the lack of any link between capital providers (for instance investors whose funds are invested by institutions) and companies. Compliance with the requirements of the Code will not necessarily lead to shareholders taking a long-term view of an investment, nor consider the interests of other stakeholders. For a discussion about the stewardship responsibility of shareholders, see The Notion of Stewardship from a Company Law Perspective: Re-dened and Re-assessed in Light of the Recent Financial Crisis?, by Dr Arad Reisberg, Reader in Corporate and Financial Law and Vice-Dean for Research, Faculty of Laws, University College London; Director, UCL Centre for Commercial Law, published in the Journal of Financial Crime, volume 18, number 2, 2011, pp. 126-147.

Reward without responsibility

There is an increasing recognition that one of the issues to be addressed in respect of limited liability companies is whether shareholders should be entitled to limit their involvement to seeking a nancial return (in the form of dividend and capital appreciation) with no risk of loss or liability beyond the loss of their investment, and no responsibility for the actions of the directors in their management and operation of the companys activities. The debate in the U.K. so far has been largely limited to encouraging companies to have a closer dialogue with their institutional investors, but without any interest or involvement by the shareholders in the way in which the company is operated, and in particular no responsibility for its relationships with stakeholders more widely (see Box 1). One of the constraints in the exercise by shareholders of their rights is the time, expertise and cost involved. They simply may not have the expertise to become involved in understanding the business in order to take greater responsibility in their capacity as shareholders. There is also concern that any cost incurred by institutional shareholders in becoming more involved in company decision-making will be deducted from the return paid to capital providers. Another constraint is that the instructions they receive from those whose funds they manage are likely to be demands for greater nancial returns, with no mention of a more involved stewardship role.

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The relational distance between individuals as capital providers and the company in which their capital is invested to help the running and development of the business has been accentuated over many years by the way in which the capital of individuals is invested and managed. An individual who wishes to invest directly in a listed company, for instance, may do so directly by subscribing for new shares (if available) or buying shares on an exchange, often through an adviser. The individual will then own the shares, receive reports from the company and be entitled to attend the annual general meeting and other meetings of shareholders. The individual will in such circumstances have a direct relationship with the company and its directors. This enables him to engage with the directors, if he wishes, to gain a greater understanding of the business and the effect of its operations on other stakeholders, although individual shareholders in companies rarely do this. These examples assume that the investment is in the holding of shares in a listed company. As mentioned above, there may be no real direct investment, because the investment is through a derivative product which does not involve the ownership of a share but nevertheless reects the increase or decrease in the traded value of a share. This model reduces even further any concept of a relationship between the investor and the company or its directors.

interests of the individual capital provider may well not be aligned with the fund manager investing his or her capital. For example, the individual may be concerned as to the welfare of the employees of the company invested in, whereas the fund managers only concern has to be to achieve an income and capital return for the body of investors in the relevant fund. The individual will have no contact with the company, nor any say in how the directors run its business and its impact on stakeholders and society generally.

It will be seen from this gure that the individual as capital provider may take advice from an independent nancial adviser, a bank or other adviser. The funds may be invested in a variety of ways, for instance cash on deposit or bonds, and some may be placed with a fund or investment manager, for investment in shares (equity) in listed companies.14 Funds may be invested directly in particular companies or in a variety of funds each with its own manager. If separate funds are chosen, they may focus on companies in a particular sector or geographic region. These investments may be bought and sold on a regular basis, depending on nancial performance. It will be clear from this description that the capital provider whose funds are invested will have no say in investment decisions nor have any understanding or knowledge of which companies the funds are invested in.

Who really owns a companys shares? The capital supply chain

The typical supply chain for the capital of an individual investing funds in a listed companys shares through a fund manager is illustrated in Figure 1 below:

Alternatively, an individual may make a contribution to a pension scheme (together with contributions made by the employing company to the scheme on the individuals behalf) which is held in a pension fund, for which the trustee of the scheme is responsible. The fund is likely to be invested through a fund manager into a variety of investments, including equities through managed funds as described above. The structure would look similar to the diagram set out below, but with a contribution of

Figure 1. The capital supply chain for equity in listed companies

The proportion of listed company shares owned by individuals who are UK investors has fallen from 54 per cent in 1963 to 12.8 per cent in 2006 and to 10.2 per cent in 2008.13 Many individuals now invest through intermediaries. This may be as part of an investment portfolio managed by a fund manager or through the interest an individual has in a pension scheme. An individual may, for instance, have his or her funds invested by an independent nancial adviser in funds managed by a fund manager who decides which companies to invest in and will trade in those shares depending on the nancial return received. The Capital Provider (individual whose capital is to be invested)

Independent Financial Adviser or Bank or other adviser

Fund Manager (manages investments in companies)

Different funds (separately managed)

Listed Companies in which the capital providers capital is invested

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funds not only from the employee (the capital provider) but also a contribution from the employing company.

interest in the shares, who provide the investment capital, and the company, its directors and operations.

Relational distance between investors and companies

of accounts and an Annual General Meeting provide formal opportunities for the directors to present to shareholders the nancial results and a limited view of current prospects. The formal question and answer session permitted at an Annual General Meeting gives shareholders, particularly individual shareholders, little opportunity to understand the business, how its operations are conducted, the welfare of its employees, its impact on those relying on it for their livelihood and wellbeing, and how it is serving the common good.

The concept of shareholders investing in a listed company (either as individuals or through a fund manager) is slightly misleading in that, unless the funds are subscribed to the company through a public or private offering15 or to existing shareholders by a rights issue,16 investors gain their interest by buying shares from other shareholders through a trading exchange. Although the investor will therefore own shares in the company which originally issued the shares, the funds of the buying shareholder will not have been paid to the company but to the former shareholder from whom the shares were purchased. Directors in listed companies have no say as to who buys the companys shares and therefore do not know who owns its shares at any time (subject to certain rights under statute to make enquiries for such information).

Individuals as shareholders and institutions trading in shares on behalf of individuals (for instance, the managers of a pension fund) have, therefore, become divorced from the operations of the company. Whilst directors are running a company to manufacture products or carry out services, providing employment and goods and services which may benet society, this is within the constraints of the demands of shareholders whose interest is generally limited to seeking a short-term, consistent and increasing nancial return. The divide between shareholders with a purely nancial interest and no responsibility, and directors as management, is in part the cause of current concern over the operation and impact of companies on third parties. These concerns have long been analysed by academics, economists and other commentators: shareholders who, as a body, own public companies do not control them and, conversely, those who control them, the directors, do not have a signicant, or any, ownership interest in them.18

Directors remuneration and company debt

Some individuals holding shares may take some interest in the companys operations, in particular in smaller listed or private17 companies. However, institutions holding and trading shares as part of managed funds on behalf of individuals, through pension funds or investment funds, have no interest in or responsibility for the companys operations, other than for the maintenance and increase in a nancial return on behalf of the capital providers. The structure involving the management of funds on behalf of individuals, therefore, creates a barrier, or Relational distance, between those with the ultimate benecial

The gulf between ownership and control

The gulf between ownership and control is further accentuated by the nature of stock exchange dealing rules with their concerns about condentiality and equality of treatment of shareholders, so that directors are restrained in the amount of information they can give to shareholders. There is concern that little real open dialogue is possible between shareholders and directors about the company and its operations. A set

If they wished to do so, shareholders could ensure that the constitution of the company gave them some powers over the actions of the directors. In practice, however, shareholders exercise little restraint on the exercise by directors of the powers delegated to them by the shareholders to manage the business, for instance with regard to the levels of pay of the senior executives and the level of borrowings by the company. Recent concern has been expressed over signicant remuneration packages linked to what is regarded by the directors as the success of the company, which is frequently seen as a share price increase directly benetting shareholders. This can lead to the directors managing the business so as to achieve as much short-term increase in the share price as possible, with little regard to long-term development of the business or the interests of employees and others relying on the company for their livelihoods. Success of a company should not be measured simply by a short-term increase in the share price, nor by the level of dividend payment.

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With regard to the level of debt incurred by companies, there has been scant regard by shareholders for the impact of increasing levels of companies borrowings on other stakeholders, for example employees, suppliers and customers, and the local community, in particular about the risk of the collapse of the company due to over-indebtedness. Shareholders can control the level of borrowing by insisting that any increase is approved in general meeting. However, the level of borrowing tends to be left entirely to the discretion of the directors, although they are likely to be restrained to some extent by banks which lend to the company. Issues related to the level of debt taken by companies are explored in chapter 4.

they will frequently resort to selling their shares, rather than engaging in discussions with the company. This increases the perception that the holding of shares in a company is often no more than a short-term nancial betting exercise.

Regulations versus relationships

Replacement of personal relationship by impersonal rules as the basis of accountability can make compliance feel like a burden and diminish motivation. The requirement on directors to comply with these externally-imposed requirements can easily lead to loss of efciency, a counter-entrepreneurial culture (as compliance with the requirements can become stiing) and signicant costs, in both time and direct monetary terms. However, the benets gained with regard to directors being properly held to account, are doubtful. Further, compliance can be undertaken in a limited technical and mechanistic way; the requirement may be met with a narrow box ticking mentality in as minimal a way as possible, rather than taking an approach which looks at the real purpose of the requirement and addresses how best to comply. Many of these requirements are focused on disclosure about directors actions, with the hope that increased transparency may lead to changes in behaviour. New thinking is required to overcome this well-meaning but inevitably rather limited and inexible rules-based approach.

The legal and regulatory requirements for the promotion of good corporate governance, for instance by encouraging the role of non-executives and committees of the board, as provided in the UK Corporate Governance Code,20 do not address the heart of the issue. The real issue is how a company is managed and how it develops its relationships with its shareholders, employees and other stakeholders, for the benet of all who have a nancial or other interest in the operations of the company, including wider society. The Government (Department for Business, Innovation and Skills) has announced a review into corporate governance and economic short- termism.21 It is hoped that the opportunity will be taken to address some of the underlying concerns outlined in this report.

As shareholders have no particular interest or involvement in the manner in which the business is operated and because, therefore, they exercise no control over the actions of the directors nor hold them to account for the way they run the business, the Government and regulatory authorities have had to take on this role as best they can. Thus, the actions of directors have increasingly become subject to legal and regulatory requirements.19 These requirements are imposed by third parties, and not directly by the shareholders who have the ownership rights and the nancial interest in the company. These impersonal rules replace the relationship which shareholders should have with the directors and the company, and the responsibility which they should exercise to hold the directors accountable.

Voice versus exit

Difculties of effectively regulating companies

Over recent years there has been growing recognition of health and safety and environmental issues in the operation of companies. To a certain extent, these aspects have been enshrined in legislation which is binding on companies. Directors must, for example, avoid or limit the negative environmental impact of the companys operations.22 In addition, there is recognition of the desire for companies to be seen to be good corporate citizens,

If shareholders are dissatised with the way the company is run, they tend not to exercise the powers they have to challenge the board, which can be costly, time-consuming, adversarial and often ineffective. In addition, it is often difcult for shareholders to work together and a shareholder may be reluctant to pursue steps against the board when all the other shareholders will share the benet of what is achieved but without contributing to the costs. If shareholders are dissatised

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which is reected in corporate social responsibility practice.23

may further the interests of those relying on it for their wellbeing.

A call to create social as well as nancial capital

There is increasing acknowledgement of the damaging effect of the lack of involvement and responsibility of shareholders on the impact of a companys operations, and the way in which they are managed, on employees, suppliers and customers, the community and society generally. At the same time, there is growing awareness of the importance of social sustainability and the need for business organisations to contribute to building social cohesion not just by adopting corporate social responsibility principles, but by the very structure of their organisations. To put it another way, there is a growing focus on social capital as well as nancial capital growth in business.24 The ethical basis for apportioning risk and remuneration between the different stakeholder groups who provide capital, labour, resources and other services to companies is the subject of public debate. There is a recognised tension between seeking prot and economic efciency in the short term and yet protecting long-term relationships in society. The quality and pattern of the relationships between all stakeholders relying on the company for their wellbeing, whether shareholders, employees, suppliers, customers, nanciers or the local community, is not being properly addressed by current corporate governance rules. The regulations and codes which are in force, and those proposed, tend to accept

that various stakeholder groups have different interests, rather than promoting a better understanding within and between such groups which is the key to greater business success and long-term sustainability and protability.

There are, however, shortcomings in the specication of corporate social responsibility. For instance, there is no way to compare the compliance by one company with that of others, and there are varying and conicting standards as to what level of responsibility is to be achieved. Further, the rules-based approach does not encourage real dialogue between all stakeholder groups, with a view to promoting a Relational understanding within and between these groups for the furtherance of a successful business. The business acts more as a crucible for the resolution of competing interests than as a Relational community.

Concerns of lower income countries

Concerns with the current structure and operation of companies apply particularly in the UK, but many are also relevant in other countries. There is disquiet in many low-income countries as to the true motives of those who play a key role in international commercial transactions which affect national and regional life, arising from the size as well as the opaque ownership structure of Western-controlled public companies. It is envisaged that many of the proposals set out in this paper will be attractive in countries in Africa, Asia and Latin America, where social capital and national interest are higher on the agenda than in North America and Western Europe. The next chapter considers how the analysis of relationships, based on the Relational Proximity framework model, can be applied to companies and relationships with stakeholders. It explains how the goal of proximity or closeness in relationships in a business context can lead to long-term company sustainability and protability.

Although there is some recognition by directors of their companys obligations towards those with whom they carry on business, such as employees, and general obligations to handle ethical issues, the environment, human rights and social issues, there can be a conict when trying to establish which of these take priority over others. Further, it is not easy to establish how they t into the context of the primary duty of the directors to create value for shareholders. As mentioned earlier, an investment manager, as a shareholder representing the interests of capital providers, will demand increasing dividend payments and capital growth from the company to meet what are perceived as the requirements of those for whom investments are managed, i.e. the capital providers, rather than taking any particular interest in corporate social responsibility and ethical issues, and whether the company is operating in a way which

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19

3. A Relational Approach to Company Reform

Analysis of stakeholder relationships in a company context by the application of the Relational Proximity framework will lead to an understanding as to how the relationships can be improved and lead to greater sustainability and long-term protability of the company. This chapter explains the Relational approach and the ve domains of Relational Proximity. It demonstrates how the framework can be applied to improve the quality of relationships within and between stakeholder groups to achieve the goal of competitive advantage.

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Why a Relational approach?

competitive advantage depends primarily on quality of relationships with clients/customers and other stakeholders. It is possible to see the company as a matrix of relationships. Each of the stakeholder groups has, in theory, a relationship with each of the others. However, even a quick analysis of such a matrix, in particular in listed companies, shows that there are gaps in the matrix, most notably in the weak, and often absent, relationship between shareholders and management, as discussed in the previous chapter, and the generally non-existent relationship between shareholders and employees. The ticks in the matrix below show where there is expected to be a relationship, based on direct dialogue, contact through a third party or some other form of connection. Where ticks are in brackets there is generally a weak or supercial relationship. Where there is no tick, there is generally little or no contact and no relationship. As can be seen from this simplied table, investors and directors have some contact (but often rather limited, Investors Investors Directors Managers & Employees Suppliers Customers () Directors ()

as indicated by the brackets), but there is none required (and generally none in practice) between, for instance, investors and managers, or between investors and employees. There is certainly likely to be little or no contact between investors and the companys suppliers and customers. Further, there is generally little contact among shareholders. Each group identied in the table, therefore, tends to operate in its own interests. Investors look for a nancial return; directors run the business to achieve their own remuneration and provide a return for shareholders; employees work for their salary but are often not properly brought into business discussions and therefore feel lack of appreciation for their commitment. Suppliers and customers look to their own interests in selling or buying goods or services to or from the company, in particular the nancial benet to be gained. There is, therefore, little incentive given to the parties to have any relationship with each other, to seek to understand the interests of others, or to work for the furtherance of the overall business of the company or for the common good.

Figure 2. The company as a matrix of relationships, showing who has regular contact with whom Managers & Employees Suppliers Customers

A number of the most signicant concerns outlined above about the structure and management of companies can be addressed through the adoption by listed and private companies of the Relational Business Charter described in detail in chapter 4 of this report. This approach is based on the Relational theory set out in the books and papers of the Relationships Foundation and Relationships Global.25 Human wellbeing is not to be assessed by levels of wealth or subjective happiness, however that is measured; it is in large part about quality of personal relationships. Wellbeing and relationships are inseparable concepts.26 Relationships are generally thought about primarily in terms of home and family, i.e. personal relationships, but of course relationships that inuence wellbeing include functional relationships, in particular those at work and in business where so many people spend a large portion of their time. The legal structure of companies needs to be examined in terms of its effect on relationships between and among the various stakeholder groups, including shareholders, directors, employees, suppliers, customers, the local community and regulators, as well as between the stakeholders and wider society. So what are the principles and values which should be applied by a Relational company to its structure and operations?

( ) ( )

()

()

Key elements in a Relational approach to company purpose and structure

The rst step in a Relational approach is to see business organisations and activity from a Relational perspective. This includes, for example, recognising that sustainable

indicates regular contact; () indicates infrequent contact; an empty box indicates little or no contact.

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Reordering company goals

Figure 3. Five Objectives of Business Relationships Domains of relationship Greater communication story/time knowledge power purpose Source: The Relational Manager, Michael Schluter & David Lee, Lion Hudson, 2009 commonality parity breadth of relationship continuity directness Objectives for business relationships

capital providers and the nancial intermediaries, and between the nancial intermediaries and different groups of shareholders, and between the shareholders and directors, is painfully obvious in most companies, with only limited opportunity for dialogue even at annual meetings. Proper and open discussions at face- to-face meetings, although time-consuming, are likely to lead to a greater understanding between the parties and resolution of difculties, rather than the impersonal use of emails or other means of electronic communication.

The domain of story, or time

Reordering a company to reect Relational values requires that the goals of a company be re-dened. Rather than simply maximising shareholder value, i.e. focusing entirely on the relationship between directors and shareholders, a Relational approach would consider the impact of company decisions on both the primary stakeholders, who are management, employees (and their families) and shareholders, and secondary stakeholders for whom their relationship with the company in question is contingent upon some other corporate or personal connection. This latter group would generally include customers, suppliers, banking and other nancial institutions and local communities where the company operates. In an understanding of the company where the wellbeing of the primary stakeholders is the dominant concern, the relationships of shareholders, management and employees with each other, as well as with the secondary stakeholders, should be the focus of management thinking.

The domain of communication

The Relational Proximity framework

An analysis of relationships among stakeholders, in a Relational model, takes place in terms of the ve domains of relationship. These are communication, story (or time), knowledge, power and purpose. To build each of the relationships among the stakeholders to achieve Relational Proximity, so that the parties know one another and work together effectively towards shared goals, the aim must be to pursue objectives in each of the ve Relational domains shown in the table below.

How do these Relational objectives apply in a business context? A few examples must sufce. Taking communication rst, as far as possible the aim should be for stakeholders to meet or talk directly, rather than through a third party, and wherever possible this should involve face-to-face meetings, rather than using the internet or other electronic means. In a company context, the most radical change we are suggesting is that there should be direct face-to-face communication between the capital providers and those with responsibility to use that capital in the company, in particular the directors and senior management. To make direct communication possible, there should be as little use as possible of nancial intermediaries, for instance pension trustees and investment fund managers investing on behalf of those with the underlying benecial interest. At present, the lack of face-to-face communication between the original

The second domain of relationship is story or time. To achieve effective relationships between the interested parties in a company, it is vital to seek as much continuity as possible in the relationships among them. There are good reasons for this. Understanding the background both to the person with whom dialogue is taking place, and to the issues under discussion, will lead to continuity in dealings, and a commitment to the relationship with the personalities involved. This continuity is not generally found among the various stakeholder groups in companies. Shareholders often have a rather brief relationship with the company, in particular because dealings in shares often take place on a frequent basis. There are few opportunities for discussion between individuals who have the benecial interest in the shares and the directors and other management. Regular ongoing dialogue develops a closer rapport, as both parties build on knowledge and understanding achieved at previous meetings. A conversation between a director and individual shareholder at each AGM is likely to

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build on the condence and trust each feels about the other, and a respect for the interests of each other.

The domain of information, or knowledge

terms of a contract, or the timing of payment for goods or services. The weaker party, by the same token, may be reluctant to share information or be fully committed to the success of the enterprise. The key is that these relationships should be open, transparent and honest, without one party seeking a commercial or nancial advantage over the other.

A third factor required for effective relationships in the Relational Proximity model is breadth of knowledge about individuals involved. This knowledge is likely to include the employment background of employees, character traits, special interests and an understanding of any relevant health issues. A knowledge of their families can also provide a helpful perspective. All this information can contribute to a greater understanding of employees motivation and how they approach their work. Establishing this knowledge helps management use opportunities resulting from previous work experience or special interests, as well as appreciating any particular health and personal problems the employee may be having to cope with. To the extent that managers share their background with their team, they too may expect to be treated with greater empathy and respect.

The domain of goals, or purpose

The domain of power

The fth factor required for effective commitment to a relationship, and for development of trust, is the sharing of goals and values. Shared purpose involves an alignment of goals and values. There needs to be an understanding of a companys statement of values, which should reect what those involved with the company really believe and value.28 This commonality in beliefs, values and objectives within and between companies leads to a greater sense of working together for the common good, and a greater desire to achieve success for the enterprise, for the benet of all parties. As shown in the table above, the benet of using this analytical framework is not only to ensure that communication is enhanced and that there is a sense of momentum in each of the key relationships, but also to ensure transparency, trust, participation, understanding and synergy between the different stakeholder groups. The Relational approach also takes into account the relationship between companies and wider society. Again, there are primary and secondary concerns. The primary concern is for the direct relationships of

Short-term holdings of shares, however, means that there is little or no element of responsibility taken by shareholders with regard to either the underlying business of the company or for the welfare of the employees and others who rely on the company for their livelihoods. In listed companies, executives can be in place for as little as two years27 and therefore have little feeling of commitment towards those working in the company, or the shareholders. From the directors point of view, this can lead to a short-term approach with regard to employee and shareholder interests. Even institutional investors often have little or no long- term memory of the company and its operations, which is rooted in past knowledge, and their commitment to other stakeholders is therefore weak. This leads to there being little sense of accountability, and even less loyalty, in the minds of either shareholders or directors. This can be contrasted with a family-run business, where several generations of the same family will often own and operate the company. In many respects family members may regard themselves as holding the company in trust for future generations. They are less likely to be driven by a desire to achieve short-term prots, but look to long- term value. In addition, they are likely to have greater respect for employee relations, seek long-term employee relationships, and have commitment to the locality in which the company operates. The fourth factor in any relationship is power. Power takes many forms. For instance, there is nancial power, information power, reputational power, and executive power. Although different people within the company, and organisations dealing with the company, may in economic or nancial terms have greater power than others, the goal should be parity, so that people will be treated fairly, with mutual respect and understanding, and with a fair sharing of risk and reward. If there is a considerable difference in levels of power between the parties, there will be a temptation by one party to take advantage of the other, for instance in negotiations over

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stakeholder groups, such as those between managers and employees. The secondary or indirect impact of a companys decisions affects, for example, local communities where those providing retail and other services depend on the employment generated by a company, and the wider public who are inuenced by the values embedded in company advertising, operating standards and other issues, such as its acceptance that it must meet appropriate tax liabilities.

anyone wishing to know. However, for shareholders transparency is a major issue because often the identity of shareholders is hidden behind the names of other companies or trusts. In addition, managed funds may well be registered in jurisdictions from which the information is not readily available. Once stakeholders are identied in personal terms, there is the need for companies to facilitate, and indeed promote, face-to-face dialogue among these stakeholders.

towards this objective is to encourage shareholders to maintain a long-term investment in the company rather than there being constant trading in their shares. It also requires that the management of companies recognise that the support of long-term relationships of employees with their families means that companies have an obligation to protect the time employees are able to spend outside the life of the company.

The approach of the Relational Business Charter

This dialogue requires organisation of national, regional and sometimes local meetings on a regular basis so that there is the opportunity for primary stakeholders to meet one another, together with secondary stakeholders such as suppliers and customers, subject to obvious concerns to protect market share and intellectual property. The problem over direct communication between capital providers and the company, its directors and employees is accentuated by individuals as capital providers entrusting their funds to investment managers who have the direct relationship with the company (if any). The consequence is that the capital provider has no relationship at all with the company, its directors or other stakeholders and therefore no opportunity to take an interest in, or to inuence, the affairs of the company. (ii) Continuity over time. To deepen Relational understanding among stakeholders inside and outside the company requires greater commitment to continuity of relationship. One important step

Some preliminary explanation as to how the principles of Relational Proximity are built into the Relational Business Charter is required, before setting out the ten principles of the Charter itself. In the paragraphs below, changes in company structure and practice are explored using the ve dimensions of Relational Proximity explained above.

(i) Directness of communication. A company adopting the Relational Business Charter will seek to ensure there is face-to-face dialogue amongst and between the primary and secondary stakeholder groups. This requires rst that dealings between each of the stakeholder groups should take place between named individuals. So the names of individual shareholders and capital providers should be disclosed, rather than investments being held in the names of nominees or investment managers. This is not a problem for management or employees as their names are generally accessible to the public, for

(iii) Breadth of relationship (or multiplexity). To achieve a broader knowledge of other stakeholders, a rst step is for company managers to seek a greater knowledge and understanding of the background, family and interests of employees. This can be achieved by a manager nding out more about the employees work background and personal achievements. This helps to ensure that the concerns of employees can be addressed effectively. Further, condence between employer and employee as a result of greater understanding and support will lead to employees showing a greater commitment and interest in the company and its development. (iv) Parity of power or inuence. Effective relationships in a business context require parity, i.e. mutual respect, as well as perceived fairness in relationships among stakeholders, as discussed above. Particular issues in the present corporate environment include the huge differentials in levels of pay between those in the most senior and the most junior positions in companies. In addition, there is frequently a lack of parity in the relationship between large companies

25

and their suppliers, especially small suppliers, where large companies may take advantage of their large market share to pay suppliers late and cause immense harm to the cash ow of small companies.

companies promote values in their working practices and in their advertising which will have long-term benecial effects on the life of the wider community. For example, the effect of advertising slogans like taking the waiting out of wanting to promote consumer credit and debt may have a devastating impact on the lives of children in low-income and vulnerable families, especially where there has been less than adequate training in the handling of consumer debt.

it has the potential to gain sustainable advantage over its competitors and, as a result, to succeed commercially. Maintaining strong relationships with suppliers, customers, employees or the wider community should not be a burden for companies, resulting in a loss of value for their shareholders. Rather, when carried out constructively and effectively, such an approach will have far-reaching benets for businesses and shareholders alike, including the generation of higher shareholder returns. Companies that consistently address the interests of all their major stakeholders are those that tend to have fewer problems with labour relations, rebellious shareholders and community disapproval. Over time, these are the companies that will deliver sustained, superior shareholder returns. Strong stakeholder relations should help avert signicant corporate failures with their profound negative implications for employees and their families, customers, suppliers and other creditors, and of course the companies themselves.

(v) Commonality of goals and values. The primary means by which it is possible to ensure an alignment of goals among the stakeholders of a company is through a statement of intent to do so in its constitution. To ensure social sustainability, it should be a stated goal of companies to pursue long-term and mutually benecial relationships with its most signicant stakeholders. This helps to ensure that the company contributes to the Relational values and social sustainability of society as a whole.

The overall goal of Relational Proximity

The relationship between companies and wider society, to be benecial, also requires an alignment of goals between the company and the locality where it is based. This means that the company will need to seek stability in its long-term policies to ensure continuity of employment and income for those who depend upon it.

The overall impact of the ve factors described above is to create Relational Proximity or a closeness of relationship between stakeholders. This is the antithesis of Relational distance. Relational Proximity is the secret of creating trust between companies and their customers, suppliers, employees and other stakeholders. Trust in turn is the key to successful business performance, and also creates the capacity to be exible and responsive to change in terms of the companys internal structure when markets are volatile and technology is evolving rapidly. It is a high prize. The benets of competitive advantage and long-term sustainability and protability, which can be achieved by the adoption of a Relational approach, are explained in the following paragraphs.

A major factor which leads to instability of companies is excessive borrowing, leading to high debt-to-equity ratios. In a period of recession, high interest payments often lead to companies failing, or requiring reorganisation or restructuring, with loss of employment for management and employees at a time when it is most difcult to nd another job.

The Relational approach and competitive advantage29

When a company applies the Relational Proximity model successfully through stakeholder relationships,

The fundamental truth, that a Relational approach is good for business, is founded in accepted management theory and borne out in company performance. This is because the key to achieving superior long-term nancial performance is the development of sustainable competitive advantage,30 which in turn depends largely on the quality of key stakeholder relationships. The causal link between strong stakeholder relationships and long-term corporate performance is shown in Figure 4. As the term suggests, sustainable competitive advantage

A sense of social responsibility also requires that

26

Figure 4. The impact of business relationships on competitive advantage and business outcomes

Key Relationship Examples R&D Core R&D team Inter-department External partners Senior management Faster innovation

results when a company develops attributes that allow it to outperform its competitors over an extended period of time. This kind of advantage can be developed in one or more of the key processes within a business (illustrated in Figure 4). In the area of research and development, advantage is typically realised through faster, more relevant innovation. In the core operations of manufacturing or service delivery, sustaining a low cost position while maintaining desired quality standards is key. Much of marketing and sales activity is devoted to achieving sustained prices that are beyond those realised by a companys competitors, which must be underpinned by brand strength and company reputation. Sources of Competitive Advantage Business Outcomes Core Operations Ops management Key suppliers Labour relations Lower cost position Marketing & Sales Customers Media Government Shareholders Stronger brand, reputation Sustainable Competitive Advantage

Long-term Shareholder Value Creation

All of these potential sources of competitive advantage speedy and relevant innovation, low relative cost, and strong brand and reputation stand or fall on the quality of relationships amongst key players within and outside the business. In fact, achieving lasting advantage in any of these core business processes typically does not rely on the quality of one or two relationships, but rather on developing and maintaining a complex array of relationships within and outside the company. This is not a new insight but a truth that has been acknowledged by corporate leaders for decades. The short-term approach of modern-day shareholders, who demand quick returns on their investments before switching from one business to the next, places an often unwelcome burden on todays CEOs. In a real sense, senior managers hands are tied so they are not free to act in the long-term interest of the organisations they lead.

A case study: pharmaceutical companies

An example of the central importance of strong stakeholder relationships to business success is the crucial research and development process in the global pharmaceutical industry. As competitors seek to discover new chemical entities (NCEs) to form the basis of revolutionary drugs, they will work hand-in-hand with research partners in university departments and independent research institutions. Due to the large number of R&D teams at work within any one company and the small number of products that ultimately will be introduced commercially, successful pharmaceutical companies must carefully manage relationships within their R&D departments so as to maintain morale. This challenge has been accentuated through the intense period of mergers across the industry over the last 20 years.

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companies to know their customers, to understand their preferences and tastes and then to maintain credibility in the delivery of their products and services). All are steeped in relationships. Ultimately, as in the example above, it is through the quality of relationships that companies will succeed or fail.

Once a new medical compound has been identied, a whole new range of relationships must be managed. These include relationships across corporate departments and geographies. The R&D department must deal closely with its companys marketing and manufacturing departments as they work to determine the potential feasibility and acceptance of new drugs. Typically, the range of external parties will include government departments (for example, in the areas of public health, ethics and pharmaceutical funding), academics (for example, epidemiologists so as to understand disease prevalence, biochemists and medical specialists for in vitro and in vivo testing), independent research organisations (clinical trials), and prescribing doctors (to understand established and potential treatment pathways). To a large extent, this management of relationships must be replicated in each national market in which a pharmaceutical company wishes to sell its potential new products, thereby multiplying the complexity of the Relational challenge.

Wider social benets of strong stakeholder relationships

Beyond the realm of individual company performance, the strength of relationships between stakeholders in the business world has far-reaching implications for society as a whole. First, this is because in capitalist economies the success of corporations (and other closely linked commercial entities) provides directly or indirectly the livelihood of the majority of the population. Secondly, it is because, in aggregate, business performance determines national economic performance. The sustainable competitive advantage of a countrys corporate sector, dependent on key stakeholder relationships, determines the relative competitive advantage of the country in which it operates. Although governments can seek to adopt policies that tilt the playing eld in favour of their nations commercial interests, domestic business must deliver over the long term, in order for the national economy to prosper. The analysis and application of the Relational Proximity framework explained in this chapter are applied in a practical manner by challenging companies to comply with the Relational Business Charter. The reasons for and details of the Charter are explored in the next chapter.

Global pharmaceutical companies recognise the need to develop and embed within their global organisations the capability to manage this complex array of relationships. By so doing, they develop sustainable momentum in the race to market new medical treatments that can mean the difference between corporate success and failure.

Similar examples abound to demonstrate the crucial importance of relationships in sustaining a low cost position (consider the extreme negative impact of the breakdown in trust that characterises labour strikes) and in achieving a strong brand and reputation (the need for

28

29

4. The Relational Business Charter

The Relational Business Charter sets out ten principles which in a practical way provide a framework to indicate whether companies are being managed and operated in a Relational manner in the interests of all stakeholders. This chapter explains why compliance with the Charter is benecial and sets out each principle of the Charter with an analysis of its content.

The issues addressed by the Charter include the Relational ethos and approach of the company, dialogue between and amongst stakeholder groups, long-term and responsible holding of shares, respect and fair dealing for employees, suppliers and customers, and

proper regard for the local community and society generally.

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Why a Relational Business Charter?

over a number of years would, therefore, be likely to be achieved by companies committed to the process. Companies which achieve a high rating from the Agency, and others which are committed to achieve Relational status, together with shareholders in such companies, would be invited to join a Relational Business Forum. The Forum would provide a platform for dialogue between its members to consider in detail how companies can operate in a Relational manner. Further details of the Forum are set out in chapter 6 of this report.

Benets of compliance with the Charter

Companies complying with the Charter should be attractive to those relying on them for investment, employment, or other reasons, because they offer:

Having demonstrated in the previous chapter the benet of healthy relationships for long-term company performance, for fairness in relationships between major stakeholder groups, and more generally for building social capital, the issue to be addressed is how to encourage companies to take on this additional agenda. There is widespread consensus around triple bottom line reporting, where nancial, environmental and social sustainability are all assessed, but as yet there is no agreed framework for assessing the third of this triple test the social reporting. This report proposes that social sustainability is assessed using Relational analysis. To give social sustainability clear denition and goals, against which companies can assess themselves and be assessed by third parties, what is needed is a set of principles covering each of the major stakeholder groups, taken both separately and together. The Charter is such a set of principles: to make them manageable and memorable, they are summarised in just ten statements which, we believe, address the major concerns arising from the Relational analysis set out in the preceding chapters of this report.

which are explained in the next chapter of this report. The Agency would be set up as an independent body and would assess a companys compliance with the Charter, initially by studying published information, in particular its annual report and accounts. The company would be sent a draft assessment based on answers to a series of questions which give an indication as to compliance with the principles of the Charter. The company would be asked to comment and expand on the information which the Agency has found through published information. Any comments given by the company would be taken into account by the Agency to complete the assessment. The Agency would publish an indication of the level of compliance with the Charters requirements, based on A+ for complete or near-complete compliance, ranging down to C-, or even F if the company scores 10 points or less out of a maximum of 100 points, depending on how the company is judged to have complied. Further details of the Agency and the assessment process are set out respectively in chapter 5 and Appendix 1 of this report.

For investors, reduced risk and volatility, and lower

How companies would be rated

risk of insolvency, because investors are assured of relatively low debt-to-equity ratios, as well as higher levels of protability resulting from the attention given to developing relationships with customers, suppliers, employees and other stakeholders. In addition, it is expected that a company complying with the Charter and adopting a Relational ethos in its operations and practice will become more protable than other companies, and operate on a more sustainable basis, as explained in chapter 3 of this report.

The ten principles of the Charter are set out in this chapter, with analysis and discussion added to explain what the requirements are and how their adoption will help a company to operate in a Relational manner. The level of adoption of these requirements would be measured by a Relational Ratings Agency, details of

Companies adopting the Charters requirements would be expected to comply not only with the letter but also with the spirit of the Charter. However, clearly most companies especially larger listed companies would not be able to comply immediately and fully with the ten principles of the Charter listed below. Therefore, some provision will be necessary to allow for these companies to give a public statement of their intent to conform to most of the principles in the Charter within a given period, for example 5 years, if they are to be allowed to join the Relational Business Forum, discussed below. An increasing level of success in compliance with the Charter

For employees, a route to increasing engagement and

motivation because levels of pay and pay differentials

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are transparent and kept within limits, and greater concern is shown for employees having adequate and regular time off to be with their families.

For investors and customers, the opportunity to meet

other stakeholders and be more involved in company affairs, resulting in greater exchange of ideas and higher levels of commitment.

For company management, the potential for increased

motivation and innovation from employees, suppliers and customers, resulting from higher levels of engagement.

For directors, the possibility of less bureaucracy in

the long term, as investors are able to take greater responsibility for corporate governance, and the opportunity for shareholders more easily to hold directors to account.

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The ten principles of the Charter

the company in its constitution, shareholders will accept greater responsibility to ensure that the directors seek to achieve Relational goals and to hold them to account if they fail to meet these objectives.

A company would be recognised for the purposes of the Charter as having a Relational ethos and operating in a Relational manner, if it has the following characteristics:

Amendment of the companys constitution

The Relational objective would be included in the constitutional document of the company, as part of its objects, and will therefore need to be adopted by special resolution of shareholders. The objective would be set out along the following lines: Shareholders in the company recognise relationship-building as the key means to develop a sustainable and successful business with a view not only to making a signicant return for investors, but also encouraging generous treatment for all employees and promoting the long-term interests of other stakeholders, including wider society. In furtherance of this objective, as far as is practicable, the directors would be expected to consider the impact on all stakeholder relationships of company decision-making.

1. The company includes a Relational business objective in its constitution, and demonstrates commitment to implement it, providing appropriate training to investors, directors and employees.

several matters when carrying out their duty to promote the success of the company for the benet of its members as a whole. These matters include the interests of the companys employees, the need to foster the companys business relationship with suppliers, customers and others, and the impact of the companys operations on the community and the environment. The interests of most stakeholders are, therefore, relevant to the directors when carrying out their duties, although the requirement only to have regard to these matters presumably does not mean they need to be particularly inuential in the decision-making process.32 Compliance with the Charter would be measured by the level of adoption of the Relational business objective. Thus the adoption of the above wording, or similar wording, as a statement by directors in the companys annual report will achieve a certain number of points under the assessment process, whereas its adoption as part of the companys constitution would achieve the full number of points in respect of this part of the Charter.

Shareholders would be expected to approve a change in the relevant part of the companys constitution, which is generally its object clause, to reect a move towards relationship-building as the focus of developing a successful and protable business. Initially, this may be reected in a statement of objectives in the chairmans statement or directors report, as part of its annual report and accounts. The Relational goal to be achieved is a protable and sustainable business for the benet of all stakeholders, including wider society.

Consistency with the Companies Act 2006

The adoption of such an objective is consistent with the requirement of the Companies Act 2006, in that the directors must act in a way which they consider in good faith would be most likely to promote the success of the company for the benet of the members as a whole.31 Success by companies operating with a Relational objective would be measured by their response to the requirements of this objective. In any event, the provisions of the Companies Act require directors to have regard to

Training for stakeholders

Companies will be expected to establish their own training for shareholders, directors and relevant employees in respect of carrying out the objectives of the company, the general management and operation of the business of the company and its dealings with stakeholders in a Relational manner. Shareholders, who would be invited to training sessions, would in particular include those who have a benecial interest in the shares of the company (the capital providers), for instance individuals whose

The Relational success of the business would be recognised if the chief purpose for the existence of the company is to provide a service to its customer or client group and to make a product or provide a service to the highest standard possible. Within a Relational understanding, the nancial return is not the end or goal for which the company exists, but a means to build and sustain relationships with shareholders, employees and other stakeholders. By adopting a Relational objective for

34

funds are invested through an investment manager, if they can establish in which companies their funds are invested. New shareholders might particularly benet from learning about the responsibilities and closer involvement with the company which owning shares can entail. Part of the purpose of the training programme for employees is to encourage the greater involvement of employees in understanding and engaging in the business of the company and to engender a culture of appreciation for their contribution to the business. This aspect is explored further later in this chapter. The training will include matters such as the founding principles and characteristics of Relational Companies.33

one of these meetings being the formal Annual General Meeting), together with customers, suppliers, banks and representatives of the local community invited to at least one such meeting each year. Certain stakeholders, for instance customers and suppliers, may be asked to different meetings to preserve condentiality where necessary and respect other commercial sensitivities. In the case of very big companies, large stakeholder groups such as employees, shareholders or customers will need to be represented at the meetings by democratically-elected representatives. This will require formal procedures to be established for the election process.

Benets of shareholders attending in person

So far as an assessment of a companys compliance with this principle of the Charter is concerned, compliance with the training requirement would be measured by any statement in the companys report and accounts with regard to the proportion of those in different stakeholder groups receiving training in the companys Relational objectives. Further inquiries to the company directly should reveal details of the objectives and relevant training.

which do not occur now. For instance, shareholders would meet employees of the company, as well as the directors, on a regular basis. This should give the shareholders an understanding of any concerns of the employees regarding their working hours, pay levels, or other aspects of the companys operations. If there were, for example, a proposal by the directors to make some employees redundant, a meeting between shareholders and employees as part of the quarterly business meetings would give shareholders an indication of the pressure which may be imposed on remaining employees through the extra workload which they would be expected to carry. Overall, attendance at such meetings by a signicant number of shareholders would give comfort and encouragement to employees that shareholders are not simply absentee landlords and that their concerns are being heard. The quarterly meetings could be held in different locations, depending on where the companys operations are situated and where shareholders are resident. Thus, they could be held in different cities, where the companys main operations are situated, on a rotating basis. If the company (or a group of companies) operates in a number of countries, quarterly meetings could also be held in each country where there are major group operations. This would enable shareholders in those countries to attend these meetings.

2. Dialogue is promoted among all signicant stakeholder groups, through regular face-to-face meetings and, where that is not possible, through regular on-line communication.

Shareholders would be encouraged to attend such meetings in person, for example by the company making a donation to charity in respect of each person attending. If shareholders cannot attend, proxy submissions would of course be permitted, but giving the right to vote to the chairman of the company, which is normal on proxy forms, is not a substitute for attending a meeting and having a discussion with the directors face to face. The opportunity to meet other shareholders is also lost. Such meetings and dialogue would promote loyalty and trust between shareholders, directors, managers, employees, suppliers and other stakeholders. In addition, they would provide an important learning opportunity for the directors to hear from engaged stakeholders, as well as a chance for the directors to communicate to stakeholders the companys potential, any problems and its priorities. The meetings would have a number of advantages

Content and conduct of quarterly meetings

At quarterly meetings, the board would present to shareholders attending (as well as all employees, creditors, customers, civic leaders and other stakeholders who are

Shareholders in the company and employees will be invited to quarterly meetings of the company (with

35

Use of the internet

with all shareholders and other stakeholders. The discussions which such meetings would encourage and the sense of openness and trust engendered should help to resolve informally in a constructive way matters which might otherwise lead to confrontation. Shareholders unable to attend a meeting would be given the option to hear (and possibly see) the proceedings via a protected website link.

With regard to dialogue with employees, engendering a culture of care and interest in the wellbeing of employees and their families, and promoting their greater interest and involvement in the company, is likely to lead to their feeling appreciated and more committed to the company. Listening to their views should be encouraged. Policies should be in place to recognise and reward innovative ideas, and there should be incentives for employees who help to develop the business through their ideas.

entitled to attend) a description of the operations of the company for the previous quarter and for the year to date. This should include a description of the development and performance of the underlying business and the prospects for its future development and performance. It would also include an analysis of relevant issues in the relationship with the employees, creditors, suppliers, customers and other stakeholders, how the company has promoted the long-term strength of the local community, how it has protected the quality of the environment, and the impact of the company on society generally. Further, the board would explain its strategy for achieving the purposes of the company and any signicant risks and uncertainties facing the company and what the boards approach is to them. The directors would encourage a discussion of all these issues with those present at the meeting and would seek a continuing dialogue with stakeholders on these matters, as appropriate. It is expected that companies would report by email to stakeholders who cannot attend such meetings, or provide access by a website, with a summary of the discussion at each meeting. It is also expected that the company would set up an on-line facility, such as a forum, whereby shareholders can communicate with each other on company matters.

3. There is direct and transparent (named) ownership of a signicant proportion of the shares by individuals (or family trusts).

Working towards quarterly meetings

Some companies, in particular large listed companies, may nd the idea of holding such regular meetings difcult, as there will be signicant cost and administrative considerations. If this is the case, it is expected that they will work towards increasing the number of meetings and, meanwhile, encourage shareholders to have electronic attendance at meetings by video, telephone link or some other method of communication. Companies which do not comply with the requirement for quarterly meetings will receive some recognition in an assessment for the level of dialogue they have with shareholders, for instance if they have arrangements for electronic meetings and a record of regular contact and dialogue

Part of each meeting would comprise formal business, but otherwise meetings could be held in smaller seminarstyle sessions, with different directors (including nonexecutives) addressing specic aspects of the companys business, and shareholders and others having a choice as to which sub-group to attend. The meetings could be held during the evening if this is thought to be more attractive to shareholders and others and would encourage them to attend. Examples of these smaller seminars might be to analyse and discuss accounts with the nance director, a discussion on the working hours and pay policy with the HR director and the broad direction of the company and its governance with the chief executive.

As explained in chapter 2, there is concern about the Relational distance between the capital providers whose funds are invested in shares in a company by investment managers and the companys management and other stakeholders. The shares may be held, for example, as part of an investment portfolio or a pension scheme. It is important to promote as far as possible direct and transparent ownership of shares by individuals and family groups in order to encourage direct contact between and amongst all benecial owners, the company and other stakeholders. Companies should, therefore, under this principle of the Charter, take steps to ensure that at least 25 per cent of their equity is held by named individuals or family trusts who take a long-term interest in the company. This can be achieved in a number of ways, such as by arranging for a broker to take the shares of a selling institution and place them with individual clients.

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In addition, share schemes to help to build ownership of shares by its employees can be encouraged. This helps to give employees a greater interest and involvement in, and commitment to, the company and its business.

Promoting local ownership of shares

involvement and responsibility by shareholders, is that their shares should be held as a long-term investment, whether the company is listed or private. To incentivise this long-term commitment, shareholders could agree by resolution that, for example, additional shares be issued to those shareholders who have held their shares for a minimum of three years. Further incentive shares could be issued for multiples of three-year holdings.34 At present, in particular with listed companies, shareholders often sell their shares if they are dissatised with the operation of the company and the performance of the directors, rather than taking responsible action to hold the directors to account and to address their shortcomings.

more effective in encouraging involvement and the taking of responsibility by shareholders, rather than the alternative of depriving them of the right to vote until their shares are held for a certain period. A class of nonvoting shares would give the impression that such shares can be regarded purely as a nancial investment; by removing the right to vote on company matters, any sense of involvement and responsibility is undermined.35

Incentivising long-term share ownership

Incentives in the form of the award of additional shares for long-term holdings are likely, in our view, to be

Further, it is expected, ideally, that a growing proportion of shareholders will live close to the main base of the company, if the company operates from one principal geographic location. This arrangement should encourage communication among shareholders, and between them and the directors and other stakeholders, not only at company meetings but on a more frequent and less formal basis. Shareholders living locally would be encouraged to visit the companys ofce or factory premises and to have regular dialogue with employees (without of course any disclosure of price-sensitive information which for listed companies would require a disclosure to the market). An understanding of the business and practices of the company and its impact on the community would be instructive, in particular for locally resident shareholders, and is likely to increase shareholders long-term commitment to its protability. It may also lead to investors being a source of technical innovation for the company, or assisting the company with marketing connections.

There could be other ways to encourage and show appreciation for long-term holdings of shares by giving shareholders special recognition, for instance an invitation to visit the companys premises and to have lunch with directors and employees from time to time. Other incentives could also be introduced, perhaps by a reduction in the price of the companys products or by naming long-term holders of shares in the companys report and accounts.

4. A high proportion of the shares are owned on a long-term basis.

signicant

aspect

of

Relational

commitment,

37

An additional incentive to encourage participation by shareholders could be to give individual and family- trust shareholders of over three years standing the right to appoint a non-executive director to the board of the company. This right could be exercised by simple majority vote of those shareholders meeting the long- term holding criteria. Such a director would, of course, have duties to the company as is the case with the other directors, but would have a particular role to report to, and discuss issues with, this group of shareholders.

hours). There is much evidence of long working hours, and work during unsocial hours, having an adverse effect on physical and mental health.36 All these aspects have a direct impact on the families of employees, in particular as the employee will not always be present to share the bringing up of the children.

This would include providing employees with free regular health checks and making available guidance for personal issues such as stress at work, illness, marriage problems and childcare. The company would be expected to have policies going beyond statutory requirements for redundancy and dismissal of employees, and policies addressing short time and overtime requirements. This would also apply in areas of policy concerning nondiscrimination on grounds of age, gender and sexual orientation.

5. There is evidence of management having respect for the interests of employees.

Working hours

The promotion of understanding and commitment between management and employees could be expected to lead to lower numbers of working days lost through strikes, sickness and absenteeism; in addition, staff turnover is likely to fall. These indicators could also be used for assessment of a companys performance in regard to this aspect of the Charter.

6. The dignity of all employees is respected by minimising remuneration differentials within the business. Pay differentials: are they justied?

It is expected that companies complying with the Charters requirements will seek to minimise long working hours, unsocial hours and weekend work wherever possible. In order to help relationships between an employee and his or her family and enable them to be involved with their local community, all employees should be guaranteed at least one weekend day off each week and a maximum 48- hour working week averaged over a 13-week period, as in the EU Working Time Directive. Policies should also be put in place to ensure that employees are encouraged to take all their holiday entitlement, which should be at least three weeks. This should be protected by employers for relaxation so that employees should be encouraged not to communicate with their ofce during their holiday, for instance, and not to take their BlackBerry or personal computer with them. These aspects may be difcult to measure in an assessment of the companys compliance with the requirements of the Charter, but are included here to indicate the Relational approach that companies should seek to achieve.

The relationship between companies and employees is central to the Relational operation of a company. This must be recognised to meet Charter requirements. Long working hours make it difcult for families to spend time together, whether eating, playing, reading, or teaching, and hard for employees to nd time for sport and social activities. Forty per cent of families in the UK with dependent children have at least one parent who regularly works at the weekend, and 1.3 million parents with dependent children work regularly on both Saturdays and Sundays. Further, 40 per cent of UK establishments require their employees to work regularly on Saturday (compared with the EU-21 average of 25 per cent) and 27 per cent require employees to work regularly on Sunday (compared with the EU-21 average of 15 per cent). The UK has one of the longest working weeks for men in the EU: 41.4 hours (compared with the EU average of 39.5

Other personnel policies

The company should have personnel policies, which are put into effect sympathetically, to show respect for each employee and his or her own individual circumstances.

The differential in company pay arrangements between the highest and lowest paid employee grows ever wider, frequently with multi-million pound awards to senior executives and little or no corresponding increase in pay to low-level employees. The argument has been that the market dictates the remuneration levels of the best performing executives so that, in order to remain

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competitive in attracting appropriate people to run a company, a competitive remuneration package is required.

given that they are appointed by the directors and their fees are paid by the company on the instructions of the senior executives on whose remuneration they are asked to advise.

Transparency issues
Although the terms of incentive packages are disclosed in a listed companys report and accounts, there is concern about lack of transparency or understanding as to how the incentive levels are established. Shareholders have little say in setting the necessary target levels and publicity is frequently given to situations where executives seem to be rewarded for a companys poor performance, especially when a severance payment is made to a director of a company whose performance is considered inadequate or even disastrous.38

Incentive packages which lead to high remuneration levels in the form of cash bonuses and awards of shares, subject to achieving what are considered to be appropriate success targets, are presented as the most appropriate way to encourage executives to give the company the highest commitment and levels of skill. If the cost to the shareholders of receiving enhanced returns on their shares (in the form of dividend payments and increased capital value) is the payment of signicant bonuses to senior management then, so the argument goes, this is a price worth paying. However, some of the incentives have little to do with the specic companys performance itself but, for instance, depend on the level of its share price which will be affected at least partly by the state of the market generally, the sector in which the company operates, or the overall condition of the economy. In addition, an incentive based on short-term share price gain can lead to the directors managing the company with a view to gaining immediate protability rather than looking to the longer-term development of the company.37

Another concern about levels of remuneration is the growing differential between executives and other employees.39 If, for instance, senior executives are paid more than 100 times the amount paid to lower-paid employees, which is not unusual, this can be seen as suggesting that the lower-paid employees have a worth to the business of less than one per cent of the highest-paid employee. Is it fair that the contribution to the business of the lower-paid employees is regarded as so insignicant as to be valued in this way? Questions then arise about human worth and dignity when it is suggested that one person has a value in the workplace of less than one per cent of another, especially when the low-paid employee may have a stressful and demanding job, such as at the checkout in a food supermarket.

Concern has also been expressed about the method of agreeing the level of remuneration for senior executives. For listed companies, this is generally established by a committee of directors. Such committees only comprise non-executive directors, but they have to work with the executive directors whose salaries and incentives they establish. Further, even if consultants are asked to advise, there are questions about their independence,

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Wider Relational consequences Box 2. Valuation of share options in remuneration packages

These pay differentials have wider Relational consequences outside the workplace in undermining social cohesion within and between communities, as the more highly paid will live in different locations, use different means of transport and different shops, and go to different countries and locations for their holidays. Higher rates of remuneration and incentives are certainly justied to reward the greater responsibility and experience, longer working hours and often longer training of those in senior management, but should also have regard to the often less interesting and more physically demanding nature of lower-paid jobs.

As stated, the value for the purposes of the assessment as to compliance with the Charters requirements would be the share price on the relevant trading market at the time of the exercise of options by a director minus the option exercise price. This would give an indication of the immediate value of the benet to the director, who will receive a number of shares with a value in the market, for which the previously set option exercise price will have been paid. The director would generally only exercise the option if the share price is higher than the option exercise price at the time the option entitlement can be exercised.

Proposal for a maximum pay differential

This is one way to calculate the benet of the option granted to the employee, and can be calculated from a companys report and accounts. A more established way, which cannot be calculated from material published by the relevant company, involves a calculation of value at the time of grant of the option. This method involves the intrinsic value and the time value and, by its nature, gives rise to a great deal of uncertainty. The intrinsic value (which cannot be less than zero) is the difference between the share value and the option exercise price. If, as would be normal, the exercise price is higher than the current share price, the intrinsic value is zero, although the option may have time value. The time value is calculated as the present value of the expected different value of the share on exercise of the option and the option exercise price. This must take into account a number of factors, including the expected increase in the value of the shares between grant and exercise, level of interest rates and possible decrease in the value of shares if additional shares are issued. Some fairly complicated methods to establish this value have been developed.

Given the likelihood that higher-paid employees will work signicantly longer hours than the lowest paid, and will pay a higher rate of tax, we would propose a maximum gross pay differential of 20:1 between the highest and lowest paid,40 which is likely to equate to an approximate net pay differential of 10:1, on a per hour worked basis.41 The Royal Navy, for example, has had a de facto differential of 8.42 The amounts taken into account to calculate these pay differentials in a business context should include not only normal pay and bonuses but other parts of a remuneration package, for instance pension contributions, life policy premiums and the use of a vehicle.

Calculating the level of pay differentials

If directors or senior employees have been granted options to buy shares at a later date at a xed price, their value for calculating a directors remuneration package would only be taken into account in the year an assessment is carried out if an option to buy shares is exercised by the director in that year. The relevant number of shares over which the option is exercised would be issued to the director. The value would be the market price of the shares at the date of exercise of the option less the price paid by the director when he exercised the option

(see Box 2). However, to encourage parity of treatment between all employees, any rights to shares or the grant of share options would be given to all employees on the same proportional differential basis which applies to remuneration (before bonus) within the company. Dividends paid to directors and employees, in their capacity as shareholders, would not be regarded as remuneration for the purposes of applying this principle. In addition, the remuneration package of each director for the forthcoming year would have to be approved by

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shareholders each year at the Annual General Meeting. This would encourage shareholders, whose capital is being applied by the company to pay the directors, to take an interest in, and accept greater responsibility for, levels of remuneration of those to whom they have entrusted the management of the company on their behalf.

Delayed payment will, of course, reduce the cost of the purchasing companys bank borrowing, which will be especially helpful when it may be at the limit of its overdraft or other facilities.

discussions with them. There should be, for example, policies for the handling of the award of contracts, the negotiation of fair terms and the method by which contracts are varied or terminated. It is expected that termination of a supply contract will generally occur after a generous period of notice and, where appropriate, the offer of reasonable compensation for loss to the supplier. All dealings between the company and its suppliers should be transparent, just and fair, even if the company is much larger and stronger than the other party. Further, a company should give active support to its suppliers to develop and protect their business, for instance help to improve the quality of their products and, where practical, help with new technology.

Why delayed payment is a key issue for suppliers

For the purpose of an assessment of a companys compliance with the Charter, the pay differential would be calculated by taking the remuneration of the highest paid director, as disclosed in the companys report and accounts (unless the accounts disclose remuneration for a higher paid employee who is not a director, in which case the remuneration of that employee would provide the base of the calculation), and comparing this with a notional minimum wage gure. This latter gure will be based on the assumption that there are employees who are paid as little as the minimum wage. The assessment would be based on the proximity to the recommended differential remuneration level. Companies which wish to adopt Charter requirements but whose remuneration practices mean that this differential requirement is not met will be expected to move towards such a differential, probably by both increasing lower levels of pay and reducing higher levels of pay.

Payment terms

So far as the supplier is concerned, however, delayed payment can have disastrous consequences on its business. It will often be relying on the cash being paid promptly for the supply of its goods or services to nance its business. In particular in recessionary times, smaller suppliers can go out of business if they are not paid in a timely fashion by large company customers. They are not generally in a position to try to enforce payment or seek interest due on outstanding monies, given the cost of litigation and also the risk that future orders will be jeopardised. There have been moves to try to ensure that companies meet their contractual commitments by making payments for supplies of goods and services on time, but it is widely recognised that this is an area where many companies fail to meet their contractual obligations.44 A positive relationship between a company and its suppliers can easily be prejudiced by lack of trust resulting from delayed payment practices.

7. Suppliers are treated fairly and with respect, paid promptly, and given support to develop their businesses.

Payment in seven days

As a general rule, however, we can see no good reason why today, in the electronic age, a supplier should not

Companies will be expected to show proper respect and understanding for suppliers to the company in all their dealings and regard them as having equality in

The issue of payment terms is perhaps the litmus test of how companies treat their suppliers. Companies buy and sell goods or services on terms which normally include a requirement for the company to pay and be paid within a certain specied time period. These time periods are not always clear, as terms and conditions can be provided by both parties to a contract, and conicting terms sometimes are not resolved before delivery begins. However, even when the terms are clear, some companies frequently do not pay within the specied period in breach of the contractual terms, or the customer may insist on a unilateral extension of the payment period, whether or not this is permitted in the contract.43 This has the effect of the supplier of goods becoming a provider of credit, in the same way as a bank, but without the supplier receiving any interest or compensation for late payment.

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be paid within 7 days of the receipt of the goods and the invoice. A company would also be expected to understand the nancial difculties of suppliers and, in appropriate cases, agree to pay an invoice early if the supplier is thought to have cash ow problems. Companies should, at the very least, pay their suppliers on the contractually agreed date.

relationships in the communities in which they operate, across racial, religious and ethnic boundaries. This would include assisting and encouraging employees to become involved in community activities. In particular, companies would take the long-term interests of the community into account by seeking to ensure job stability and environmental sustainability.

9. The risk of company nancial instability is minimised to protect the company and its stakeholders. The problem of too much debt

terms should be considered fair by both partners, so that large companies do not take unfair advantage of their size and market power in dealings with smaller customers. In cases of dispute, the complaint resolution procedure needs to be clear and accessible, including who to contact rst and the appropriate point of contact if the dispute escalates. Where equipment is involved, a further key issue is time to repair (TTR), as well as the number of times a company has to send somebody out to do repairs. Contracts with business customers should be terminable on terms which give the customer time to nd an alternative supplier. As quality of product and service will generally determine how quickly a company is paid, debtor days (i.e. the average number of days it takes customers to pay bills) is likely to be a good measure of a companys relationships with its customers.

The practice of permitting a lengthy period to pay invoices presumably developed from the requirement to give appropriate time for the administrative process of approving invoices and authorising and arranging payment. However, with modern computer programs and bank transfer systems, there should be a move towards the payment for goods and services within much shorter periods from date of delivery of goods and services. This would reduce the costs of the supplier and place the responsibility to pay promptly where it should lie, with the person who has received the goods or services. Delayed payment in effect allows the company receiving the goods to use those goods to supplement its own capital.

Special retail customer issues

8. Customers and the local community are treated fairly and their concerns are respected.

Business and retail customers

Retail customers should be entitled to receive proper and helpful treatment by the company which supplies them with goods or services, in particular in respect of issues over quality or payment. Thus, for instance, utility companies are expected to have an integrated, multichannel programme (IMP) in place to handle billing and other questions so that customers can reach the company in the way they choose. This is also of relevance for nancial services companies, especially banks, and retail companies.

Relationships that companies have with both business and retail customers should respect the customers interests. In regard to business customers, payment

The community as customers

Companies would take active steps to develop

Another aspect of the growth of companies in the UK and other countries is the concern over the debt burden they take on. This arises not only out of a desire by the directors to develop the business to drive further returns for shareholders, but frequently such expansion involves acquiring other companies or businesses even when large amounts of debt are required to fund the purchase. Research has shown that, in any event, mergers and acquisitions do not generally enhance shareholder value.45 Shareholders are generally prepared for directors to operate the company with signicant amounts of debt, as the rewards for shareholders can be signicant in the short term as a result of successfully expanding a business, whilst the downside risk to shareholders is limited to the amount of capital they have invested in the company should the business fail. Further, some shareholders may encourage directors to arrange for the company to borrow money in order to fund a purchase

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of the companys shares in the market, which has the effect of increasing the share price for the benet of shareholders.

Debt nance can be too easily available

Indeed, in some situations, banks and other lenders take control over a companys operations, especially if debt is not at properly sustainable levels. The company will be subject to covenants in respect of its operations and other requirements and, if the company has nancial difculties, it is likely that a nancial restructuring will lead to much of the bank debt being converted into equity. The effect will be signicant dilution of the shareholders interests in the company, sometimes to a level as low as one per cent.46

Debt, in the form of bank loans, bonds or other borrowing, has until recently been readily available for companies of all sizes on benecial terms, with perhaps too much condence in the ability of the company to generate sufcient prots to service the debt, in the form of payment of interest and principal on maturity. As mentioned above, expansion which is funded by new debt may well be in the interests of the shareholders as it may result in a short-term increase in share price. It may also be in the interests of the directors, especially if they hold shares, as a short-term increase in prots may ensue which then adds to the remuneration of directors if this is tied to levels of protability.

The example of Krafts takeover of Cadbury

This is the balance sheet test. To allow for unexpected uctuations in the amount of debt, the ratio would be tested on each quarter date and reported on at quarterly meetings of shareholders and other stakeholders. Further, any increase in the amount of debt permitted by the company within this ratio would have to be approved by a resolution of shareholders. Some borrowing is always likely to be required due to the difculty of raising sufcient equity to cover cash ow uctuations, but it is expected that all indebtedness would be included within the ratio, for instance debt due to trade creditors and amounts due under nance leases.47

Consequences of high debt levels

A recent example of signicant levels of debt being taken on by a company arises from the takeover by Kraft of Cadbury. It is reported that Kraft was to borrow nearly $10 billion of new debt to help to fund the acquisition. This will be a long-term burden on the newly enlarged Kraft group which would include Cadbury. Kraft will inevitably be required to reduce its costs, which may include job losses and factory closures at Cadbury and could cause longer-term nancial instability, given the extra debt which has to be serviced out of prots.

Calculating an appropriate debt-to-equity ratio

There are several tests which could be applied to assess the low debt requirement. Either a debt-to-equity or interest cover ratio might be appropriate. We would expect that for most companies the amount of debt could be limited to a level no greater than the amount of the paid-up share capital and reserves of the company.

To encourage sustainability, expansion by acquisition and investment in the business should generally be funded from prots generated by the operations of the company or from issuing additional shares, rather than from borrowings, so that the risk is more widely shared. There may need to be some limited exceptions to the debt-to-equity ratio not exceeding 1:1, such as banks and property investment companies.48 In making an assessment as to a companys compliance with the Relational Business Charter, the Relational Ratings Agency will take into account the nature of the business of the company, in order to decide whether the company should in exceptional cases justify a higher level of debt than that envisaged by the Charter requirement. Another test to indicate that a company is operating within an expected sustainable level of debt is that the ratio between prot and interest is a high multiple. Thus, for instance, prot after costs but before tax would be expected to be at least four times the amount of interest

Recessionary pressures, however, often lead to a drop in income for the company and thus a shortfall in cash available to service the debt. In these circumstances, cash ow may come under pressure at a time when further loans may be difcult to obtain. This situation can lead to uncomfortable renancings and possible insolvency, with disastrous consequences for employees and other stakeholders. The build-up of substantial debt by a company will generally lead to it becoming less stable, and vulnerable to recessionary pressures or other events outside the control of the directors.

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payable on debt incurred by the company. This is the cash ow test.

It is expected that one or both of these tests can be established from a companys report and accounts for an initial assessment. Further details can be given by the company if it wishes to do so, in order to ensure any calculation is fully accurate and takes account of any special circumstances faced by the company in its sector. An assessment of compliance with the Charter will measure the proportion of a companys prot which it pays in tax on the basis of a three-year rolling average, to reduce the effects of extreme variation in any particular year.

legal framework which allows it to exist and operate. If a company benets from this support and earns prots, but fails to pay tax on those prots before a dividend is paid to shareholders, it becomes a free-rider; the loss of revenue has to be made up by others to support these state institutions and infrastructure.

10. Obligations to wider society are fullled. Corporate social responsibility

To meet these obligations, a company would be expected to comply with standards of business behaviour expected by the wider public. Standards of conduct would, therefore, be required in order for the company to be regarded as a good corporate citizen. This would include the following areas of concern: Companies are expected to be committed to CSR policies and practice for the assistance of employees and the local and wider community. An assessment will measure the proportion of net prot which is paid for CSR projects. It is recognised that companies have different approaches as to what is regarded as a CSR project, but the proportion of prots committed to CSR is expected to be two per cent or more, as an indication that the company recognises its social obligations towards the communities from which it takes its personnel and makes its livelihood. An explanation of the proposed Relational Ratings Agency and how it operates to assess companies against the Relational Business Charter is set out in the next chapter.

Tax

Tax would be expected to be paid in any particular country in respect of the prots of the business of the company earned in that country.49 A return of part of the prots of the company as a contribution to the infrastructure and national institutions of the country in which the company operates should be regarded as primarily a moral obligation rather than fullment of a legal obligation. The company uses the infrastructure provided by the state (including roads, the transport system and the protection of the police), employees who are educated by the state, and the political and

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5. The Relational Ratings Agency

Assessments of companies compliance with the ten principles of the Relational Business Charter will be carried out by an independent Relational Ratings Agency. This chapter explains the structure and operation of the Agency and how assessments will be carried out and reported.

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Why a Relational Ratings Agency?

would be in answer to specic questions raised to assess compliance with the principles of the Charter. Points would be awarded based on the level of compliance with each principle. The assessment questionnaire setting out the ten principles of the Charter and the specic questions is set out in Appendix 1 to this report. After the information has been collected in answer to the questions, the assessment would be passed to more senior managers who would give preliminary points and an overall score. This preliminary assessment would be sent to the company, inviting the company to correct information set out in the answers to the questions and to add further information, in order to provide more accurate and fuller answers to the questions, in particular where information had not been available. Any additional information provided would be taken into account in the nal assessment, which would be approved by a panel of senior and respected people who would be paid a fee to do so by the Agency.

Scoring a company against the Charter

Where there is a range of points which could be awarded, the Relational Ratings Agency has the discretion to decide how many points could be awarded to reect the extent of compliance with the various requirements, based on: a) published and other available information, b) disclosures by the company as to why particular aspects may be difcult to comply with, given the nature of the business of the company, its market and other factors, and c) any plans proposed by the company to align with the Charters requirements in the future. The assessment methodology also allows any relevant information which may be available, but does not directly address the specic issues mentioned in the assessment questionnaire, to be taken into account.

Ratings of companies already take place to assess credit worthiness and compliance with environmental standards. They are intended to provide particular interest groups, such as investors, employees and environmental campaigners, as well as the general public, with an objective evaluation of the performance of the company against specied criteria. Thus, it is entirely appropriate to evaluate a companys performance against a set of Relational criteria such as those set out in the Relational Business Charter, which establish quality of relationships. Of course, there is always the danger of companies following the letter rather than the spirit of the Charter, but most would agree that setting Relational standards, and then assessing companies against those standards, incentivises management, employees and other stakeholders to focus attention on the issues required to satisfy those standards and the benets of doing so. And that adds up to more healthy relationships.

How a Relational rating would be carried out

The assessment award might be made between A+ and C-, and even F if the company scores 10 points or less out of a maximum of 100 points. The intention is then for the Agency to publish the rating on its website. Alternatively, companies achieving a certain grade could be given a Relational tick or a kite-mark. This would give a public indication that the company operates to a certain level in a Relational manner with regard to its business and its compliance with the Charters requirements.

The Relational Ratings Agency would carry out an assessment as to the extent to which a company is complying with the requirements of the Charter. An initial assessment would be made based on published information for listed and private companies, in particular the annual report and accounts and any public announcements made by the company.50 The collecting of the information and the analysis would be carried out either by employees of the Agency or third parties contracted to do so. The information gathered

The company would be expected to publish the additional information which it supplies to the Agency. In making an assessment, the Agency would take into account disclosures by a company as to why particular aspects may be difcult to comply with, given the nature of the business of the company, its market and other factors. The Agency would also take into account any plans proposed by the company to align with the Charters requirements in the future.

Frequency of assessment
The assessment process would be repeated every two to three years to incentivise companies to implement policies which would improve their rating, and their

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compliance with the Charter. In addition, this should encourage companies to publicise more information to demonstrate that they are operating in a Relational manner. If a company wishes to have an additional assessment as it considers that it is now operating on a more Relational basis, it could apply to the Agency for such an assessment to be made, based on published information. Further, companies in respect of which an assessment has not been made could apply to the Agency for an assessment.

Funding the agency

A Relational Ratings Agency will be set up in each country where companies are to be assessed as to their compliance with the requirements of the Charter. In order to have credibility, the Agency must have, and be seen to have, independence of ownership, operation and funding. There will be concern if, for instance, it is funded by the companies whose operations are assessed. This would give the appearance of a possible conict of interest. Consideration is being given as to how the funding requirements will be met but it is likely that, at least after an initial period, investors and analysts who rely on the Agencys reports will make a subscription which will pay for the Agencys costs and other overheads.

Details of the Relational Business Forum, its membership and benets are explained in the following chapter.

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6. The Relational Business Forum

The Relational Business Forum will be established to provide a medium for companies which rate highly in compliance with the Relational Business Charter, or aspire to do so, to liaise with other companies with similar commitment. This chapter considers the purposes of the Forum, the benets of membership and how it will help companies to further a Relational ethos in their manner of operation, in the interests of all stakeholders.

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Membership and purpose of the Relational Business Forum

In addition to providing a greater understanding of the requirements of the Charter and how it should operate in practice, members of the Forum would receive training in Relational Thinking as applied to the operations of companies, including ways to build stronger relationships with stakeholders.52 Shareholders will require education in how companies operate relationally, and the duties and responsibilities of shareholders with regard to the operation of a Relational business. Other Relational skills would also be taught, including listening skills, dialogue skills, mentoring and conict resolution. The Forum would help to arrange conferences, seminars and workshops, carry out research and publish material to explain and develop Relational best practice in the business world.

Companies which achieve a high rating from the Relational Ratings Agency, and companies which are committed to achieve rating status and to operate in a Relational manner, will be encouraged to join a Relational Business Forum. In addition, shareholders in such companies, and individuals or fund management groups who are considering investing in companies complying with the Charters requirements, would also be invited to join. Membership would require payment of a fee which, as the number of members increased, would fund the operation of the Forum. The Forum would provide a platform for dialogue between its members to discuss, develop and promote a greater understanding of Relational Thinking51 and its benets in a business context, and to share Relational best practice, for the benet of companies and the business community generally.

The approach to the operations and management of companies will complement good corporate governance rules, by encouraging the development of relationships between stakeholders and adoption of Relational Thinking to be the focal point for the development of the approach to business, which will lead to more successful and protable companies. It would become central to all aspects of a companys decision-making and operating processes, not merely a set of rules which require a mechanistic box-ticking compliance formula.

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Notes
whose directions or instructions the directors of the company are accustomed to act: Section 251 Companies Act 2006. 12 Dealings may take place, for instance, in equity derivatives, such as contracts for difference. 13 See the Ofce for National Statistics website: www.statistics. gov.uk/pdfdir/share0//0.pdf. The same set of statistics reports that investors outside the UK owned 41.5 per cent of UK shares listed on the UK Stock Exchange, an increase from 40 per cent at the end of 2006. 14 Listed companies are public companies at least part of whose shares are listed (i.e. registered) and traded on a recognised stock exchange. in some respects, to receive dividends and capital payments. The assets of the company are of course not owned in any way by the shareholders. Although shareholders are sometimes regarded as stewards of the company, they have no legal responsibility to the company or to society generally in respect of their shares. So they have some of the rights of owners, but not the responsibilities of owners. They thus have little or no responsibility to anyone but themselves. They should probably best be regarded as members of a company, with certain attributes of the status of owners. 9 Unlimited liability companies are sometimes used in structures set up to mitigate tax liability.

1 See Michael Schluter and David Lee, The R Factor, Hodder and Stoughton, London, 1993.

2 See Geoff Meads and John Ashcroft, Relationships in the NHS,

Royal Society of Medicine Press, London, 2000.

3 See Nicola Baker and Jonathan Burnside, Relational Justice: Repairing the Breach, Waterside Press, Winchester, 1993.

4 Michael Schluter and David Lee, op. cit.

5 Jonathan Rushworth and Michael Schluter, The Relational Company, launched at University College London, Department of Laws, June 2008 and published on the Relationships Global website: www.relationshipsglobal.net/Web/OnlineStore/ Product.aspx?ID=6&RedirectUrl=~/Web/Search/Default. aspx?Search=the Relational company

6 Copernicus was a Polish scientist who published a revolutionary book in 1543 arguing that, surprisingly, the sun does not rotate around the earth but rather the earth orbits the sun in our solar system.

7 Other underlying causes which contributed to the crisis in the

15 Shares in companies can be offered for subscription by the company in a number of ways. They may be offered, for example, privately to particular potential investors or, if they are to be listed on a stock exchange, they may be offered to the public by way of initial public offering on the basis of a prospectus document, which contains information about the company, its nances and its market. 16 The expression rights issue is normally used when a listed company wishes to raise additional share capital and offers new shares to existing shareholders. The shares are usually offered at a price which is lower than the current market price of the companys existing shares, which provides an incentive for existing shareholders to take up their rights and subscribe their entitlement to shares. To the extent that the offer of new shares is not taken up by existing shareholders, they may be offered to other investors or may be taken up by institutions who have underwritten the risk of the shares not being subscribed. 17 The shares of private companies are not listed or made available for sale to the public. 18 See, for instance, Adolf Berle and Gardiner Means, The Modern Corporation and Private Property, 1932.

banks, and instability and lack of trust in companies generally, include: (a) the growth in debt nance, whereas an emphasis on equity nance gives rise to more sustainable growth and greater stability; (b) the absence of adequate locality-focused nancial institutions to engage the local population in the wealth creation process; and (c) the need to ensure that banks are small enough that they can be allowed to fail, without the risk of systemic failure to the nancial system.

8 There has been much legal analysis as to the ownership status

10 The employee-owned company model is recognised as encouraging the involvement and commitment of employees working in a company which they own and rewarding them for the success of the company through prots, not to outside shareholders but to employees. The structure of such companies usually involves the shares being held in trust for the body of employees from time to time. Lack of outside investors can, however, lead to there being lack of access to new equity capital and therefore greater reliance on debt nance. John Lewis Partnership and Ove Arup are two of many examples of structures where share capital is held on trust for employees. A number of groups have addressed the benets of employee ownership of shares in a company. See, for instance: (a) Share Value. How employee ownership is changing the face of business, by the All Party Parliamentary Group on Employee Ownership, May 2008; (b) Publications by the Employee Ownership Association (www.employeeownership.co.uk/); (c) Workers enjoy the fruits of their labour, article in The Guardian, 20th August 2007; and (d) comments on employee- owned companies, in Tomorrows Owners, Stewardship of Tomorrows Company, October 2008. 11 Shareholders who take on the role of directors or direct the board in its decision-making process may be regarded by law as taking on the responsibility of directors. A shadow director in relation to a company is dened as a person in accordance with

of shareholders in companies. Shareholders of course own their shares and can therefore buy and sell and otherwise deal with them as with any asset. They have certain rights in respect of ownership in the company, for instance a right to vote on certain matters, in particular the appointment and dismissal of directors, a right to have the accounts laid before them and,

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19 The basic legal duties of directors were contained in common

23 Corporate social responsibility has been dened in many ways, for example by Lord Holme and Richard Watts, in the World Business Council for Sustainable Developments publication Making Good Business Sense as the continuing commitment by business to behave ethically and to contribute to economic development while improving the quality of life of the work force and their families as well as of the local community and society at large. 24 See Jones, I.W., Pollitt, M. and Bek, D. (2006), Multinationals in their Communities: a Social Capital Approach to Corporate Citizenship Projects, London; and Ibarra, H. and Hunter, M. (2007), How leaders create and use networks, Harvard Business Review, January 2007. 25 Examples of these publications are two books, The R Factor and The Relational Manager, by Michael Schluter and David Lee; and two reports: The Triple Test by Michael Trend and others, and Working Time and Family Wellbeing by Clare Lyonette and Michael Clark. See www.relationshipsfoundation.org and www.relationshipsglobal.net. 26 John Ashcroft and Phil Caroe, Thriving lives: which way for well-being?, Relationships Foundation, 2007. 27 It was reported by Russell Reynolds that the average tenure of a FTSE 100 chief executive fell 20 per cent between 2002 and 2007, to 4.6 years. One in ve FTSE 100 chief executives left their job in 2007. 28 This can be contrasted with cases such as Enron, where worthy sounding statements published by the company as to its values and standards were not reected in the manner in which the company was operated. 29 The following paragraphs have been contributed by Paul Shepanski of Relationships Forum (Australia). 30 Porter, M.E. (1985) Competitive Advantage, Free Press, New York, 1985. 31 This is set out in Section 172(1) of the Companies Act 2006. The section also provides that where the purposes of the company consist of or include purposes other than for the benet of its

law and certain provisions were set out in successive Companies Acts. These provisions are now contained in the Companies Act 2006. For listed companies, certain legal and regulatory requirements are set out in provisions such as the Listing Rules, the UK Corporate Governance Code, and the Disclosure and Transparency Rules. Disclosure of particular activities of the company is required in its annual report, as part of its business review (including information about social and community issues), and in its corporate social responsibility statement.

20 The UK Corporate Governance Code (renamed recently from its previous title as the Combined Code on Corporate Governance) sets out standards of good practice, addressed in particular to UK listed companies, in respect of board composition, remuneration, accountability and audit, and relationships with shareholders. It focuses on board and director governance issues and, in certain respects, relationships with shareholders, but contains no requirement for the promotion of relationships with other stakeholders. See note 32 for comments on this and on corporate governance requirements in South Africa.

members, the provision has effect as if the reference to promoting the success of the company for the benet of its members were to achieving those purposes. In a debate in the House of Lords when the Companies Bill was discussed, Lord Goldsmith, the then Attorney-General, referred to success meaning what the members collectively want the company to achieve. He said that usually for a company it will be a long-term increase in value, but that he could imagine commercial companies that would have a different objective as to their success. Companies operating with a Relational objective should t well within these requirements.

21 The review commenced on 25th October 2010 and addressed

32 There is no express requirement for the interests of stakeholders to be addressed by directors under the requirements of the UK Corporate Governance Code, save for the interests of shareholders. However, the Panel on Takeovers and Mergers proposed to amend the Takeover Code to clarify that the Code does not limit the factors that an offeree company board may take into account in giving its opinion on an offer. The board is therefore not required by the Code to consider the offer price as the determining factor when deciding whether it should recommend a bid. Other factors including, presumably, those set out in the research report with regard to the interests of certain stakeholders can therefore be taken into account, if they are thought to be relevant. See Code Committee Review of certain aspects of the regulation of takeover bids, 21st October 2010. This change has now been made by a note to Rule 25.2 of the Code. Corporate governance requirements in South Africa under the King Code of Governance Principles for South Africa 2009 (known as King III) include requirements governing stakeholder relationships and a recognition of their importance. 33 As set out in the paper entitled The Relational Company: Exploring a New Business Vehicle referred to above, The Relational Manager (Lion Hudson, 2009), and other publications by Relationships Foundation and Relationships Global. 34 Incentives to individuals could take many forms, but there are issues around treating all categories of shareholders equally under the listing rules.

a number of issues, for instance what drives market short- termism, do boards set out their long-term objectives sufciently clearly, how can shareholders be encouraged to become more engaged in the companys future and issues about directors remuneration. The Green Paper published in April 2011 by the European Commission on the European Union corporate governance framework seeks views on a variety of corporate governance issues. It also addresses matters such as the lack of appropriate shareholder interest in holding nancial institutions management accountable; this contributes to poor management accountability and may have facilitated excessive risk taking. It suggests that shareholders are prepared for risks to be taken (including high levels of debt), as rewards could be considerable with losses limited to their share capital with any further losses borne by creditors.

22 Remediation action is required for causing or knowingly permitting contamination, pursuant to the provisions of the Environmental Protection Act 1990, as amended.

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35 This approach might also lead to the company being required to set up a separate listing for the non-voting shares. Other ideas to encourage long-term shareholding, for instance by increasing dividends after a period of three years, might also lead to there being two classes of shares and a requirement for separate listings. 41 Whole Foods Market, a US company, has a ratio between the highest cash compensation and average employee cash compensation to address what they call internal equity. Interestingly, 20 years ago this ratio was 8:1 and now it is 19:1. The company reports that the restriction has not led to the loss of any executive who the company wanted to retain: Harvard Business Review, How to Fix Executive Pay, 17th June 2009. 42 Neal Lawson, An Idea Whose Time Has Come, 3rd February 2010, Social Europe Journal: www.social-europe.eu/2010/02/ an-idea-whose-time-has-come? 43 Following the nancial crisis in October 2008, Alliance Boots was reported to have asked UK suppliers to wait for up to 105 days for payment, extending the previous period of 45 days. They also requested a 2.5 per cent settlement fee to obtain payment. Tesco reportedly asked non-food suppliers to expect payment in 60 rather than 30 days. Further discussion on this topic can be found on the Ethical Corporation website. Under the Late Payment of Commercial Debts (Interest) Act, suppliers can charge late payers interest on outstanding debts, but it is doubtful if this right is much exercised. 44 Some companies have agreed to comply with the Prompt Payment Code devised by the Institute of Credit Management on behalf of the Department for Business, Innovation and Skills.

40 David Cameron before the General Election in May 2010 suggested a maximum pay differential of 20:1 in the public sector. This was the same pay differential ratio which was applied by John Pierpont Morgan, founder of JP Morgan, in the 19th century. He was concerned that increasing this differential would affect morale and productivity.

includes a reference to considering whether boards consider sufciently carefully the long-term implications of takeover bids. The consultation paper published on 25th October 2010 contains a number of issues of concern as to the long-term benets of takeovers. 46 See, for instance, the restructuring of the capital of Marconi plc, where the shareholders were left with 0.5 per cent of the share capital. 47 A nance lease includes an arrangement whereby a bank purchases manufacturing machinery and leases it to the manufacturing company in exchange for rent. The bank would obtain tax relief for purchasing the machinery, and part of this would be shared with the company in the form of reduced rental payments.

36 See, for example, Clare Lyonette and Michael Clark, Working

Time and Family Wellbeing, Relationships Foundation, Cambridge, 2009; and Paul Shepanski and Michael Diamond, An Unexpected Tragedy, Relationships Forum, Sydney, March 2007.

37 Concerns about shareholder responsibility and directors remuneration have been raised by Lord Myners, for instance, in speeches to the British Bankers Association on 30th June 2009 and to the Worshipful Company of International Bankers on 21st October 2009.

38 During the 2011 AGM season, a signicant number of shareholders in several major companies voted against remuneration reports (or abstained from voting), for instance HSBC, Ladbroke, Reckitt Benckiser, Alliance Trust, Lloyds and William Hill. These are cases where the level of remuneration was challenged formally at an AGM. There may well be other cases where prior consultation with shareholders led to an agreed reduction, which would avoid the unattractive consequences of the directors proposals being rejected in a formal meeting and reported in the press.

39 The Directors Pay Report published by Income Data Services

48 Banks will expect to have signicant borrowings as part of their businesses, as they borrow funds in order to lend to business and private customers. Certain banks are, in any event, subject to very specic capital adequacy requirements, the latest of which (called Basel III) were published in December 2010 by the Basel Committee on Bank Supervision. Property development and investment companies may maintain that they require signicant funds to purchase commercial property, in order to construct new buildings or redevelop existing buildings. In such cases, the company should own assets which match in value the outstanding debt of the company. It may well be that the banks which fund the companys operations will take security over such properties. 49 The National Audit Ofce reported that in respect of the 2005/2006 nancial year nearly one-third of the UKs 700 biggest companies paid no corporation tax. A further 30 per cent paid less than 10m each in tax. Fifty of the 700 biggest companies paid two-thirds of the overall tax raised by corporation tax: Telegraph, 2nd September 2007. 50 Other information published by a company, such as would be contained in its website, will not be taken into account as it lacks permanency and can be changed at any time by the company. It would then not be possible to look back at the previous text on which reliance might have been placed.

states that the total earnings of directors of FTSE 100 companies rose by an average of 55 per cent during the past year. Across the top 350 companies, the average increase for directors was 45 per cent. The FTSE 100 index for the same period rose in value by 14.5 per cent. The average level of increase in pay, including bonus, across the entire working population for this period was 1.5 per cent. Chief executives total earnings were about 150 times the average employee earnings, whereas in 1994 this difference was 47 times. See The Times 29th October 2010. The High Pay Commission published an interim report in May 2011, and pointed out that the average salary for workers compared to CEOs of FTSE 100 companies was a multiple of 145 and projected to 2020 would be 214 times.

45 While merger and acquisition activities may boost the short-term income of some shareholders, they seldom improve shareholder value over the long run. When any shareholder value is created, it is likely to go not to the acquirer but to the selling shareholder. Much analysis has been carried out on this topic: see, for instance, Do Mergers and Acquisitions Pay, a Survey of Evidence for the Decision-maker by Robert Brunner, University of Virginia (October 2001). The Governments review into corporate governance and economic short-termism

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51 Relational Thinking can be dened as the application of Judaeo-Christian Relational principles to economic and social issues for the organisation and conduct of healthy human relationships in public and private life. Reference should also be made to the eight values for personal and social wellbeing that are the foundation for sustainable relationships within families and communities, and within and between organisations: see Relationships Foundation website www. relationshipsfoundation.org.

52 Certain aspects of Relational Thinking as applied to business

operations are described in The Relational Manager by Michael Schluter and David Lee, published by Lion Hudson, 2009.

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Appendices
Information Required a) Are Relational values towards any or all stakeholder groups included in its constitution, as part of its objects clause, or in its annual report and accounts or other published information? b) Do any or all of the investors, directors and employees receive training in these values? How frequently does such training take place and what proportion of the companys various stakeholder groups are involved? c) Is there any other information about Relational values or training?

Appendix 1: Relational Ratings Agency:

Assessment for Compliance with the Relational Business Charter

Charter Principle

1. The company includes a Relational business objective in its constitution, and demonstrates commitment to implement it, providing appropriate training to investors, directors and employees

2. Dialogue is promoted among all signicant stakeholder groups through regular a) How many face-to-face meetings are held each year for any or all major face-to-face meetings and, where that is not possible, through on-line communication stakeholder groups or their chosen representatives? What proportion of stakeholders attend the regular meetings? b) - Are meetings held at different locations to facilitate attendance from the largest possible number of stakeholders? - What proportion of stakeholders do not attend meetings personally, but use electronic means or engage regularly with the company through the internet or in other ways? - Does the company facilitate meetings of stakeholders with individual directors, such as break-out groups for interested persons at the companys AGM and quarterly meetings? - Are incentives given to stakeholders to attend meetings and become involved with company affairs? - Are reports of stakeholder meetings sent to stakeholders who cannot attend? c) Is there any other information on stakeholder meetings? a) What proportion of shares are owned by named individuals (or named family trusts)?

3.There is direct and transparent (named) ownership of a signicant proportion of the shares by individuals (or family trusts)

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b) Does the company encourage ownership of shares by employees through incentive schemes or other means? c) Is local ownership of shares encouraged? d) Is there any other information about share ownership by individuals or family trusts? a) What proportion of the companys shares have been held for at least three years? b) Does the company seek to encourage investors to hold shares for at least three years, through incentives or other means? c) Is there any other information about ownership of shares on a long-term basis? a) What proportion of working days are lost through strikes and absenteeism? b) What proportion of employees who were there at the beginning of the year were still with the company at the end of the year? c) What proportion of employees have one regular weekend day off each week? d) What proportion of employees work 48 hours or less each week (averaged over 13 weeks)? e) Is there any other information which demonstrates managements respect for the interests of employees?1 a) What is the maximum pay differential within the company? b) - Are share incentive schemes in the company offered to all employees, proportionately to remuneration? - Are similar pension arrangements and other benets (e.g. health schemes, expenses allowances) available for both high and low-income employees? - Is the same level of bonus, proportional to remuneration, offered to directors and employees? c) Is there any other information about differentials in remuneration?

4. A high proportion of the shares are owned on a long-term basis

5. There is evidence of management having respect for the interests of employees

6. The dignity of all employees is respected by minimising remuneration differentials within the business

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7. Suppliers are treated fairly and with respect, paid promptly, and given support to develop their businesses

a) What is the average number of days taken to pay suppliers? b) Does the company always pay on the contracted date and avoid extending the period in which it has undertaken to pay suppliers? c) Is there evidence that the company gives active support to its suppliers to develop their business (e.g. to improve quality and share their technology)? d) Is there any other information about the relationship with suppliers? a) Business customers: - Length of payment period offered to customers - Number of debtor days before the company is paid by customers. b) Retail customers: - Number of complaints received as a percentage of customers/product sales - Clarity of complaint resolution procedures c) Does the company actively seek to develop relationships across racial, religious and ethnic boundaries in the local communities where it is based? d) Does the company take into account the long-term interests of the local community (e.g., job stability and environmental sustainability)? e) Is there any other information about the companys treatment of customers and/ or local communities? a) What is the debt-to-equity ratio (balance sheet test)? b) What is the prot-to-interest cover ratio (cash ow test)? c) Is there any other information about nancial stability?2 a) In regard to a companys UK operations, what proportion of the companys gross prot is paid in tax?3 b) What proportion of net prot is the company spending on CSR? c) Is there any other information about the relationship with wider society?

8. Customers and the local community are treated fairly and their concerns are respected

9. The risk of company nancial instability is minimised to protect the company and its stakeholders

10. Obligations to wider society are fullled

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Footnotes:

1. Relevant information would include

a) the proportion of employees working no more than 20 per cent of their working hours outside normal working hours (i.e. 8am6pm), b) the proportion of employees who are able to work exible hours, c) the proportion of employees who take at least three weeks holiday each year, d) the extent to which employees are protected from email and other contact during their holidays, and e) employer policies towards illness, stress, marriage problems, child care and other issues faced by staff.

Flexible working (in the UK) means working part- time, exitime, annualised hours, compressed hours, staggered hours, job sharing and home working. Some employees, including those who care for children under 16, or those caring for an adult, have a statutory right (in the UK) to request a exible working pattern. The employer is legally required to consider this request seriously and only reject it if there are good business reasons for doing so. Other employees can also request exible working, but they do not have a statutory right to do so. See the Directgov website for more information: www.direct.gov.uk/en/Employment/ Employees/Flexibleworking/DG_10029491 3. Currently the top rate of corporation tax in the UK is 28 per cent for large companies and 21 per cent for small companies (www.hmrc.gov.uk/rates/ corp.htm). The Relational audit team will need to take account of legitimate reasons for relatively low levels of tax paid where these result from use of various tax incentives by the government to encourage particular types of investment.

2.

Relevant information would include whether any increase in the amount of debt a company incurs has to be approved by shareholders.

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Appendix 2: The Ten Principles of the Relational Business Charter

1. The company includes a Relational business objective in its constitution, and demonstrates commitment to implement it, providing appropriate training to investors, directors and employees

2. Dialogue is promoted among all signicant stakeholder groups, through regular face-to-face meetings and, where that is not possible, through on-line communication

3. There is direct and transparent (named) ownership of a signicant proportion of the shares by individuals (or family trusts)

4. A high proportion of the shares are owned on a long-term basis

5. There is evidence of management having respect for the interests of employees

6. The dignity of all employees is respected by minimising remuneration differentials within the business

7. Suppliers are treated fairly and with respect, paid promptly, and given support to develop their businesses

8. Customers and the local community are treated fairly and their concerns are respected

9. The risk of company nancial instability is minimised to protect the company and its stakeholders

10. Obligations to wider society are fullled

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Appendix 3: List of Acknowledgements

of Laws, University College London (UCL) and Director, UCL Centre for Commercial Law Ofcer of CDC Group plc, a non-executive director of GKN plc and Chair of the Sustainability Committee of the ICAEW; formerly a senior executive with Unilever plc and a partner with KPMG LLP

Shonaid Jemmett-Page, currently Chief Operating Joanna Rushworth, former Strategy Consultant The Revd Dr Adam Scott, Fellow, University of

Elijah Low, Director, Strategic Relationships

Consulting, Malaysia

St Andrews, School of Management; Member of UK Competition Appeal Tribunal; formerly senior manager and adviser at BT

Paul Mills, senior economist, Monetary and Capital

Markets, IMF; formerly team leader, Financial Stability and Regulatory Policy, UK Treasury

Richard Teather, Senior Lecturer in Tax Law at

Bournemouth University

We are indebted to the following who have taken an interest in, and contributed to, our development of the Relational Business Charter and the practical process of assessment of company performance against the Charters criteria. In some cases they have commented on earlier drafts of this paper, but we take sole responsibility for its contents. We are enormously grateful to them all for their support and encouragement.

Stephen Beer, Senior Fund Manager, Central William Norris, theological student; formerly a
Barrister and previously a Senior Partner at Allen & Overy LLP

Sir Roger Toulson, Lord Justice of Appeal, Royal

Courts of Justice

Finance Board of the Methodist Church

Simon Blake, Corporate Finance Partner, Price David Parish, chair of Business Studies Group,
London Institute of Contemporary Christianity and formerly a senior planning manager at British Airways

Bailey LLP

Mark Campanale, Advisor, Halloran Philanthropies;

formerly Head of SRI Business Development at Henderson Global Investors and a founding Director of UKSIF, the UK Social Investment Forum Telecommunications Conferencing

Tim Passingham, vice-president EMEA, British James Perry, Director, Cook Trading Ltd and CEO
Panahpur Charitable Trust

John Ellis, Secretary for Team Operations at the

Methodist Church; formerly Head of Department at the Financial Services Authority and Business Ethics Adviser to the Governor of the Bank of England

Richard Godden, Corporate Partner and former

Tony Powell, Deputy Chair of the Faculty of

Global Head of Client Sectors, Linklaters LLP

Scott Gray, Head of Fund Management at Kleinwort

Benson

Finance and Management of the Institute of Chartered Accountants for England and Wales, and formerly an audit and consulting partner at KPMG LLP

Catherine Hammond, formerly a Senior Manager at

Dr Arad Reisberg, Reader in Corporate and

Financial Law and Vice-Dean for Research, Faculty

Analysys Mason

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Photo credits

All photos used were sourced from istockphoto.com with the exception of: Foreword Jonathan Tame Opposite page 1 Chris Kirchhoff, MediaClubSouthAfrica.com Page 2 courtesy of Flickr user Mary Keogh Page 10 Graeme Williams, MediaClubSouthAfrica.com Page 13 courtesy of Flickr user UK in Italy Page 19 Sasol, MediaClubSouthAfrica.com Page 30 courtesy of Tenzone Targets Page 37 Rodger Bosch, MediaClubSouthAfrica.com Page 39 Jonathan Tame Page 45 Volkswagen South Africa, MediaClubSouthAfrica.com Page 46 courtesy of Flickr user Ben Fitzgerald-OConnor Page 57 Sasol, MediaClubSouthAfrica.com Page 58 courtesy of Flickr user Slettvet Page 62 Chris Kirchhoff, MediaClubSouthAfrica.com

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British companies have sometimes been accused of concentrating too much on short-term results at the expense of long-term goals. A Relational Business Charter along the lines proposed in this report could transform our business culture. Not only would Britain be a fairer society; the quality of life would improve for millions of people.

This report is a thoroughly researched, thoughtprovoking read. Every business would benet by looking at their organisation thorough the relational lens and then taking action to improve weak relationships and leverage strong ones. This would be the case even if it is not practical or possible for a business to adopt wholesale some of the suggested structures or practices. Shonaid Jemmet-Page, Chief Operating Ofcer, CDC Group plc

The unifying issue underlying many of the current debates about corporate behaviour is relationships. This report takes that concept as its starting point; it offers a way of breaking out of the increasingly sterile current debates, by adopting a new approach to the evaluation and development of responsible business. I hope that it provokes both debate and change. Richard Godden, Partner, Linklaters LLP

Jeremy Lefroy, MP

Price: 10