Responsible Capitalism ? UK Government Stresses Need For 'Social Value' in Procurement

In the wake of the collapse of Carillion plc, the UK government has launched a package of new measures designed to promote " a healthy marketplace of companies bidding for government contracts." A new emphasis has been placed on 'social value', an important development ahead of a July announcement on revisions to the UK corporate governance code for both listed businesses and large private businesses.

"I can announce today that we will extend the requirements of the Social Value Act in central government to ensure all major procurements explicitly evaluate social value where appropriate, rather than just ‘consider’ it",  David Lidington, the Chancellor of the Duchy of Lancaster and Minister for the Cabinet office, is expected to say in a speech at the Reform think-tank in central London.

“By doing so, we will ensure that contracts are awarded on the basis of more than just value for money - but a company’s values too, so that their actions in society are rightly recognised and rewarded" he will say.

His speech will reinforce this Conservative government’s commitment to the private and voluntary sector delivery of public services. “ Mr Lidington is also expected to say that the UK "needs to build a diverse, vibrant marketplace of different suppliers - which take into account wider social values, as well as cost."

Prime MInister Theresa May's government says it is taking new measures to extend the requirements of the 2013 Social Value Act to level the playing field for mutuals, co-operatives and social enterprises bidding to win government contracts.

Some £200 billion ($ 265BN, €227.4BN) is spent every year in the UK on private companies providing public services. Now the government says it will use its purchasing power  to challenge its major suppliers to do better on equality and diversity.

"If we are to build a fairer society, in which the public has greater trust in businesses not just to make a profit, but also to play a responsible role in society, then we must use the power of the public sector to lead the way" “Mr Lidington is expected to say.

“We will now develop proposals for government’s biggest suppliers to publish data and provide action plans for how they plan to address key social issues and disparities - such as ethnic minority representation, gender pay, and what they are doing to tackle the scourge of modern slavery" he is expected to add.

In response to Mr Lidington's anticipated remarks, Matthew Fell, CBI Chief UK Policy Director said: “The collapse of Carillion was a warning of the dangers of short-termism in public contracts. It’s therefore important industry and government learn the right lessons, putting their partnerships on a more sustainable footing to protect public service delivery and people’s jobs."

With public services and infrastructure under growing pressure, said Mr Fell, it is vital for the government to draw investment and innovation from "a healthy, competitive and dynamic marketplace of suppliers of all sizes."

Businesses will welcome a change of focus to long-term value rather than short-term costs in procurement, he added, and also "its intention to reduce complexity and cost involved in bidding to allow more SMEs to compete for work.”

This development in the UK will be exciting for anyone for anyone who believes there is a growing need to pay attention to the "social value" of business in a bid to restore trust between business and society. It is a trust that has evaporated with alarming speed since the financial crisis of 2008. Over the last five years the 'social contract' between business and society has increasingly been described as 'broken' and it is the critical glue of trust that is missing.

More than four years ago (May 2014) the Governor of the Bank of England, Mark Carney, made a memorable speech in which he said that inclusive capitalism was “fundamentally about delivering a basic social contract comprised of relative equality of outcomes; equality of opportunity; and fairness across generations” and that social contract was breaking down.

To maintain the balance of “an inclusive social contract” he said, “it is necessary to recognise the importance of values and beliefs in economic life. Economic and political philosophers from Adam Smith (1759) to Hayek (1960) have long recognised that beliefs are part of inherited social capital, which provides the social framework for the free market.”

Prosperity, Mr Carney said, “requires not just investment in economic capital, but investment in social capital”. By extension, investment in social capital helps to generate social value.

There is an added urgency in 2018 to Mr Carney's observation, both because of the economic impact of rapid technological transformation and the nature of new business models created by disruption and sustained by consumer demand. They are fundamentally changing both the faces and the aspirations of younger workers, as well as their level of engagement with the place in which they work.

At the heart of any attempt at responsible capitalism lies a need to respect the demands and ramifications of rapid societal change. It is that change that is also currently shaking up the UK audit market, with an embattled regulator, the Financial Reporting Council (FRC), now stressing the need for those in the profession to 'do the right thing' in the "public interest."

"We believe in an economy that works for everyone - what you might call a 'responsible capitalism' - where true fairness means everyone playing by the same rules as each other, and where businesses recognise the duties and obligations they have to wider society" Mr Lidington is expected to say at the Reform Club today.

In the recent past, institutional investors have been encouraged to step up to their role and engage with businesses on matters of corporate governance including board composition, diversity and climate risk. They have played an important part in the last five years in setting corporate direction, or at least preventing it from straying too far off track - and in exploring the parameters of their own individual commitments to stewardship.

It was the OECD that best defined the 'social capital' mentioned by Mr Carney as: "networks together with shared norms, values and understandings that facilitate co-operation within or among groups."

These are the networks in society that can renegotiate the dialogue between business and society, and redraw that contract, and we should expect to hear more from them in reaction to today's comments from the UK government.

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