Challenging the role of corporations in society

How can we build a sustainable economic future for our enterprises? What do we mean by "corporate responsibility"? And what is the role of companies in society?

These are important questions that as CEO of ANZ and as a business leader of 35 years experience I have had to ask - and answer.

Companies need to focus on long-term growth and sustainability and avoid the pressure to overproduce today at the expense of tomorrow. There is fundamentally no inconsistency between the pursuit of this and our responsibility to our broader stakeholders, as therein sits part of our long-term competitive advantage.

The three main challenges facing companies today are:

• Staying alive
• Producing value for shareholders, and
• Building an enterprise that will not only survive, but also succeed over the longer term.

Why this emphasis on the longer term?

Of the top 20 companies in Australia by market capitalisation in 1980, only 5 are on that list today. That means only 25 per cent of those who started the race were sustainable in that form. This is not just an Australian phenomenon. In the United Kingdom, the FSTE 100 index of leading British companies started in 1984. When the index celebrated its 20th anniversary last year, only 23 of the original 100 remained - a 23 per cent sustainability level - similar to Australia's experience. In the United States, the S&P 500 index began in 1957. Forty-five years later, just 74 of the original 500 companies remained in the top 500 - or 15 per cent.

The reality is that few corporations survive as thriving entities over the medium term. They become less important, collapse, or end up as part of another entity. Some view this as the strength of the market economy operating naturally, where the strong survive and grow and eat the weak or discard their carcasses. Companies stuck in their ways decline, and new hungry, innovative and vibrant companies take their place.

There is nothing fundamentally wrong about eating or being eaten… providing it was an enjoyable meal. For those being eaten, if they were failing, they did not deserve to survive. That's a cheap meal. If they were tasty and worth significantly more to someone else than themselves, then fair enough. That's an expensive meal, rich and more difficult to digest.

For those doing the eating, the question is: what happens afterwards? In most cases expensive meals prove to be difficult to digest and fail to deliver value. The conventional wisdom is that over 80 per cent of acquisitions or mergers fail to deliver value and would have been better left undone.

Although the world has grown substantially over the past 50 years, survival in the developed world is generally tougher than it was then. Economic growth in the OECD has declined from 5.1 per cent in the 1960s to 2.5 per cent in the 1990s - a decline of well over half a per cent each decade. This means that companies have to fight harder for each dollar of profit, and the pressures on management have never been greater. And thus the current pre-occupation of the share markets with short-term performance, where investors prefer the certainty of results today to the prospect of higher but possibly riskier results tomorrow.

The institutionalisation of money, together with regular fund performance benchmarking, has refocused shareholders towards shorter-term returns. The current pressure causes companies to strive for superior short-term results, with the consequence that, instead of focusing on investing for tomorrow, they focus on harvesting today. This is in sharp contrast with the purpose of companies, which is essentially to produce acceptable returns for shareholders over the medium term. Many investors have become more concerned about a potential decline in short-term productivity rather than an opportunity to invest, as we at ANZ have, in customer service and expansion into growth areas.

The winners, over time, will not be those who maximise short-term results but those who invest wisely to produce superior returns tomorrow. But in order to survive until tomorrow companies nevertheless need to produce reasonable results today, while they pursue their longer-run ambitions. Accommodating both perspectives radically changes the agenda of companies because the things that contribute to today's results are not necessarily those that will build the long-term competitive advantage of the company necessary for long-term success.

There exists a balance between short and long-term returns. We cannot produce growth and return unless we invest in the capacity to produce that return. It is inevitable therefore that we must dilute current profits if we desire future prosperity. Since the future is uncertain, investment in the future must involve the taking of risk, and the risk-taking requires capital. Risk means the returns may vary from market expectations - the riskier the investment, the greater the potential variance from expectations, and the more capital required.

To renew ourselves as corporations and offset the erosion of advantage, we need to invest in those things that extend our competitive advantage and the sustainability of returns. Competitive advantage is about longer-term uniqueness - about being different and more capable than our competitors. Building our competitive advantage demands investment, which also dilutes our short-term returns.

Accordingly, a focus on maximising short-term returns cannot be a solid philosophy for managing our companies. Doing so would inevitably subdue investment, and would accelerate the long-term demise of the company. The right balance is to focus on producing longer-term shareholder value while satisfying the short-term desires of the market by producing reasonable short-term returns.

We don't need to look back more than a few years to see examples of companies that have not found this balance. In Australia we have seen James Hardie, which in recent years was one of Australia's best-regarded companies, suffer reputational damage, product boycotts and a loss of shareholder value as a result of its handling of asbestos issues. This is a situation where the wrong actions in the eyes of the community and government led to a dislocation of the company. In the US, we have seen market darlings like Enron fail for false accounting, and overstatement of profits. One of the Big Four accounting firms, Arthur Anderson, failed because of poor governance.

These serve to highlight the importance of intangibles as well as hard advantages and on meeting the expectations of the government and the community, not simply the short-term needs of shareholders. For a company to be successful and stand the test of time, there must be a responsibility beyond that to shareholders.
 
A broader focus on the responsibilities of corporations to all stakeholders - customers, staff, community, government, as well as shareholders - is not inconsistent with sustainable long-term results for shareholders, as it requires directors and management to focus on the right things for the long run.

It is well understood that those who provide superior service and added value to customers generally become the most successful. It is also conventional wisdom that companies with market leadership generally produce the highest long-term shareholder returns. There is therefore real merit in the philosophy of "putting our customers first" and putting this into practice requires real commitment to this agenda.

Many forget that it is people who serve customers, create new ideas and who make companies great. Arguably its people invest more in a company than its shareholders. They put their futures in its hands and spend their waking hours making it successful. How people feel about working in the organisation and how passionate and engaged they are in its agenda, is what makes the difference between good and great companies. Our people innovate and produce results, and we in turn provide them with opportunity and development. Investing in leadership and management is also fundamental, as superior leadership is the scarcest resource in business today.

Turning to government and regulatory stakeholders: companies need to operate on a sound fiduciary basis and this is a two-way street. A question of balance, again. Governments have a parallel responsibility to provide the right political, social and economic environment for companies to grow and succeed, to advance education so that there is enough talent to fuel our future, and to govern and regulate effectively without imposing an unreasonable burden on companies. The current attitude that more regulation is the solution has affected the balance and we experience it daily - media and investor scrutiny, increased disclosure and transparency requirements. Just because some companies get into trouble with regulators, it doesn't mean everyone else is likely to do so. Just because some companies go bust, it doesn't mean the system is broken. The failure of weak companies is a normal part of the market operating effectively but unfortunately the response tends to be overreaction and proscription, and it is time to lighten up and focus on the rules that really matter.

An example: in 1990, ANZ's Annual Report contained 33 pages, whereas our 2004 Annual Report covered two volumes and was 238 pages.

Finally, the community as stakeholder - the issue of corporate social responsibility. Companies are not islands that exist separate from the communities within which they operate. Today, based on country GDPs and the value added of large corporations it has been claimed that in 2000, 51 of the world's 100 largest economic entities were corporations, not countries. When companies falter or disappear there are significant social consequences. One of the reasons for a company's long-term success and continued success is the skill with which it engages and invests in the community. How the community feels about a company really matters. Reputation takes years to build but only seconds to destroy. It matters because when the community speaks, governments listen and this can not only affect the amount of regulation and the cost of compliance. It also matters because the community is our current and future customer base.

The way we have managed and led our companies in the past is not the right way, given the lack of sustainability and humanity of our companies. I believe we are now firmly in a new age where spirituality, humanity and community will matter much more.

A company is not simply a financial construction of land, labour and capital. It is much more than this. A vibrant company is a synergistic space and we need to think of advancing not a company but a community. This means a very different agenda for companies going forward.