The corporation in the 21st century
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Welcome to the LSE Events Podcast by the London School of Economics and Political Science. Get ready to hear from some of the most influential international figures in the social sciences. Welcome to the LSE for this hybrid event. My name is Francesco Caselli and I'm a professor at the London School of Economics. I am very pleased to be here to welcome Professor John Kay, both our online audience and our audience here in the Old Theatre today.

John Kay is a fellow of the British Academy and the Royal Society of Edinburgh. He was the founding dean of the Oxford Business School and has held chairs at London Business School and the LSE. He's a winner of the Senior Wincott Award for his financial times columns. And his book, Other People's Money, won the Saltire Prize and was shortlisted for the Orwell Prize for Political Writing.

John will be discussing his new book, The Corporation in the 21st Century. This will be a radical reappraisal of the nature and activities of business, what it is and how it works. John will talk for 50 minutes, roughly, and there will be a Q&A session for about 30 minutes or so.

Once the lecture has ended, John will be outside the theater for the book signing. So this also will be available for purchase. Twitter users, hashtag is #LSEevents. The event is recorded and will be hopefully made available as a podcast. As usual, there will be a chance for you to put your questions to John. For the online audience,

Online audience, you can submit your questions via the Q&A feature at the top left of your screen. And questions will be submitted to myself and I do my best to pick some for John. And please let us know your name and affiliation when you write. And of course those in the theater, I will let you know and we will open the floor for questions. You can raise your hand and I will ask you to provide your name and affiliation before posing your question.

But now I'm delighted to welcome and hand over to John. Thank you very much. Thank you. One of the things about giving talks like this to a variety of audiences after publishing a book is that you have to keep up with the news because you know that questions will be asked based on what was online or in the papers that morning. And that is certainly true of this book itself.

One is the issue which I want to raise this evening, the question of the relationship between business and society is posed in rather extreme form by the antics of Elon Musk and Donald Trump. And I have to say when I bought a Tesla a few years ago,

And indeed a company I was engaged in, I was a director of, was actually one of the probably the largest European investor in early Tesla. I did not expect I would have to answer questions about my politics when I got out of my car. And I certainly did not expect to have to fear that someone would paint slogans or key the side of my car when I parked it.

The relationship between business and society is, in that sense, complicated. And it's been complicated for quite a long time. The pharmaceutical industry has made an extraordinary contribution to the health and welfare of society. That really began in the Second World War. Thanks to penicillin, they advertised, he will come home.

And for a decent number of servicemen, that was actually true. The Second World War was a step change in the pharmaceutical industry. I'll talk a bit more about that later. On the other hand, what we have today in terms of relationship between business and society

is exemplified by what is on the right of this slide. This is a letter from David. It's David Solomon, who is chairman and CEO of Goldman Sachs, of which many of you will have heard, probably the world's premier and certainly best known investment bank. Also in the papers in the last few months has been the final settlement agreement

of the case which Arkansas Teachers Retirement Fund and others brought against Goldman Sachs. I'm surprised how few people are actually familiar with that case. The basis of the case, it was a class action, as I say, by one pension fund with a leading group of others against Goldman Sachs. And the basis of the case

was that Arkansas Teachers Retirement Fund had been misled into investing in Goldman Sachs by the Goldman Sachs ethics statement which says, "A client's interest begins, a client's interests always come first."

You'll see if you read this rather turgid dribble on the right of the screen, that sentiment reinforced in some detail in Solomon's address to people in this business. The interesting thing about that case, you might not find anything interesting about it so far, the interesting thing about that case is that Goldman Sachs defends to it.

The defence was not that the statement, our client's interests always come first, was true, but that it was so obviously untrue that no one could reasonably have invested on the supposition that it was correct. And the attorneys defending Goldman Sachs produced a string of reports from...

finance professors across the US reporting which drew attention to reports in newspapers of conflicts of interests in which Goldman Sachs had not behaved well. And the finance professors explained that these reports had had no impact on the Goldman Sachs share price, indicating that markets didn't take these pretensions seriously.

You might be rather shocked by that defence. You might even think that Goldman Sachs must be much worse than other institutions in this respect. Yet, that turns out not to be the case. There was a Friend of the Court brief produced by the American Chamber of Commerce that explained all companies make statements of this kind.

If the findings of the lower court were to be upheld, I should say it was the Supreme Court that finally did for the case against Holmes. If findings of the lower court were to be upheld, companies would in future make these sorts of statements at their peril. The Chamber of Commerce doesn't seem to consider the possibility

that companies might not make such statements or even that if they did make such statements they might make efforts to ensure that they were true or they might even make more moderate statements of their behaviour which they would actually seek to live up to. What I think this nonsense illustrates more clearly than almost anything I can point to in a minute or two

is the way in which virtue signalling has overtaken genuine concern with business ethics in the behaviour of a great many firms. That's not the only case we have to look at if we are looking for headlines for issues about the relationship between business and society.

This came from, I found it on the BBC news a couple of weeks ago when I was off to give another talk on these kind of themes. It was a protest by a group of vets in the UK. I don't know how many of you use vets or know what has happened to the vet activity in Britain, but vet practices have in large part been taken over by private equity

owners, whose objective in buying them is largely to monetise the accumulated goodwill in these kind of practices. Vets say they're under pressure to bring in more money per pet. Collections of vets explained that they were given targets for the number of treatments they ought to prescribe for the animals under their care.

I suspect I'm not the only person in this room who, if I took my dog, in this case to a vet, I would want the dog to be treated by a vet who cared for the dog rather than a vet who was incentivised to obtain a bonus by applying a large number of treatments.

But that practice of trying to minimise the goodwill from scattered practices has been a feature of a variety of activities of this kind across the UK in recent years. Care homes, estate agents and the like have been subject to the same kind of pressure. What I want to say to you tonight is

is that I think we have to rethink the relationship between business and the society in which it operates. We have a frame of thought, a vocabulary, which dates from ideas about what we called capitalism 200, 250 years ago.

It was, of course, 250 years ago that Adam Smith wrote his famous Wealth of Nations, which many people regard as being the foundation of modern economics.

You might look at this picture and think of Adam Smith, Adam Smith's famous metaphor of the invisible hand. The visible hand is cuddling the pet. The invisible hand is in the pocket of the owner who has brought the animal to the vet.

That wasn't, as a matter of fact, what Smith meant by it, though it's been interpreted in that way by quite a number of people. Then in the 19th century, we had the Industrial Revolution, and Adam Smith talked about economics in terms of exchange and anticipation of the assembly line. You will know that the beginning of The Wealth of Nations is a long description of a pin factory,

It's rather strange because Adam Smith, as far as we know, never went to a pin factory. He says he did, but it's not true. The centre of pin manufacture in Europe at the time was in Normandy and Smith plagiarised his description of the pin factory.

from Diderot's French Encyclopedia at the time which explains that. We'll pass that over for a moment. But whether Smith visited a pin factory or not, he was anticipating one of the key developments of the Industrial Revolution, which was the growth of assembly lines.

And that would be taken stage by stage further in the century, century and a half that followed. So that if we go a century and a half further on, if we'd be meeting in the 1920s instead of the 2020s to talk about business and society, we would almost certainly be looking at

This is Ford's River Rouge plant. It's difficult to state the sheer scale of that River Rouge. You could put Central Park and Hyde Park on site and still have loads of space left over.

This site is huge and you can see it's full of different buildings, each producing parts for Ford's motor car and they were assembled in their totality at Ford's River Rouge. Ford was obsessive about maintaining control of every aspect of the building business. There is even an area of Brazil which is called Flandia.

The reason is that Ford bought it in order to ensure that even the rubber that was used to make the tyres for Ford motor cars was under the control of the Ford Motor Company. That was business as it had become 150 years after Smith. And this was it 50 years later. The beating heart of a modern nation.

Billions of pounds of steel every year. Millions of pounds of glass and aluminum, of rubber and plastic, of copper and lead and zinc alloys. Millions of yards of fabrics, all being cut and stamped and sewn. Components being ready for assembly. All destined to serve the transportation needs of a modern society

that has grown and prospered in large part because of the automobile and what it has allowed people to do. From 20 different fabricating plants they come, from thousands of supplier companies, components of all sizes and shapes, arriving in 26 assembly plants here and in Canada, each part to be assembled together with the next, quickly, efficiently, unparalleled.

until finally there emerges the engineering and manufacturing miracle that is a modern automobile body. One new body every three seconds. 1,200 every working hour by one... You'll notice that this looks very similar to the River Rouge, but there are two quite important differences. One is that the Ford Motor Company, by...

or General Motors rather, was conserved, controlled, was owned, the shares were owned by a disparate group of shareholders. That is, share ownership had become much more widely dispersed. You will also notice that Ford's insistence on controlling everything had been translated into the General Motors facility, which assembled

all the parts that went into the car. There were still very many of them. So General Motors was, to use Elon Musk's or Peter Dunbarrow's phrase, an assembler rather than a manufacturer of automobiles. But that assembly line process was in place. But you will also notice the key similarity

which is the centrality of the plant. And it was the plant, the people who worked in the factory worked, the plant was owned and controlled by people who were relatively well off, and that meant that there was a link from personal wealth to control of business, the link we see in rather different form today in the behaviour of Elon Musk.

But if we were to look at the archetypes of modern business, we would not be looking at the River Rouge. We would be looking at something that is barely a tenth of the size of the River Rouges.

And not only that, while most of what is on the River Rouge plant is an assembly process, most of what is here is actually grass. 80% of the Cupertino site, which is the headquarters of Apple, is grass.

Things have changed fundamentally, the nature of production and the nature of products over the 200 years that followed the Industrial Revolution. What we call capitalism, still called capitalism today, its central features are the physical plant, like something like the Revolver Rouge, is key.

This Cupertino campus doesn't have the same significance for Radcliffe. Ownership of the means of production, ownership of the plant was seen as crucial. Politics was largely dictated in these historic places.

Politics was dictated by the division between labour and capital. There was a left party which basically purported to represent labour and there was a right party which was largely sensitive to the interests of capital. Capital in this sense was key.

There was also a lot of development of the great man theory of business. People like Henry Ford, who had devised and controlled that plant. And location mattered. People went to the River Rouge to build cars. The world we live in now is very different.

And indeed, I wish we would stop talking about capitalism because that implies that capital, in the sense of tangible investments and physical plant, has a centrality to business that it no longer possesses. If you go in an aircraft, you probably think that the airline whose logo is painted on the fuselage owns the plane. It almost certainly doesn't.

The largest owner of civil aircraft in the world is a company called Aircup, which is based in Dublin, and it employs a great many bookkeepers and tax experts, but no pilots. You might think that the people who own the plane own the engines. They almost certainly don't.

When an airline gets a new plane, what it will do will be it will buy engine services for a period, typically 10 years, from an engine manufacturer such as Pratt & Whitney and Rolls-Royce.

That doesn't mean that Rolls-Royce owns the engine. In fact, Rolls-Royce will provide the engine, will make the engine, but it will then pass ownership on to some company like GATX, again, probably not a company you've heard of, but it's the largest owner of railway rolling stock and similar facilities in the world, and so on.

When you pass an Amazon warehouse, you see Amazon painted on the side. You probably think that Amazon, you might think that Amazon owns the warehouse. It almost certainly doesn't. The largest owner of Amazon warehouses is a San Francisco-based company called Prologis. You might think, well, at least the goods inside the warehouse or the fulfillment center

as Apple prefer to call it, that Amazon owns them. It almost certainly doesn't because the way Amazon works is that it is sold and being paid for the goods by you before it is actually paid the supplier. Like many modern retailers, Apple's working capital, its inventories, are actually negative in financial terms.

That's modern business. And capital does not remotely have the role in relation to modern business that it did have in the Industrial Revolution. I prefer to think of capital as a service. Capital is something that modern businesses buy in.

in the way they buy electricity or water or legal services like that. They buy them from companies like Aircap and Prologis, companies which have no interest and no competence in actually running or controlling these businesses. Businesses are controlled by professional managers and these professional managers buy in the range of services which they need in order to do it.

So firstly and centrally, if we're to rethink our view of the relationship between business and society, we need to understand that the essence of a modern firm is its collection of capabilities.

It's not a plant, a location like the River Rouge was in the days of Henry Ford. It's a collection of capabilities. And the assembly of collective intelligence and collective knowledge is actually the key to understanding the way in which modern business works. That's true of products as well. A product, a modern product, is a collection of capabilities.

This is Steve Jobs in 2007 showing off the iPhone. The iPhone is in some ways the signature product of the 20th century corporation. What does the iPhone do? Well, the iPhone does the things that, um, that's the kind of... That's the telephone my grandfather, my grandmother had in the hall, as so many people did.

I'm not quite old enough to have a great-grandfather who had a record player like that, but I know that people did. You may remember the fax machine which transmitted messages only a couple of decades ago. If you have an iPhone, you don't have the same need for an atlas, which you did before. And of course, you actually don't have quite the same need for the library.

You can get my book digital, but I hope you will actually want to have a physical copy. But a lot of people nowadays find that they don't need it. The iPhone in short is a collection of capabilities.

And when people hang around me about degrowth and the like, they do not seem to understand that modern business and modern products are not about more stuff, more resources and the like. The Pfizer COVID vaccine is probably the most valuable product per kilo that I could find in the modern world.

about ten times the value of coal per kilo, for example. Of course, the value of that product or the cost of that product isn't reflected of the scarce resources that go into it, except the scarce resource of the intellectual capabilities of the people who devised that vaccine.

The nature of production in this sense has fundamentally changed. Production has dematerialized and so have products. And that's why if we look at Cupertino, well you can't see anyone there, which is a bit of a problem, but that's what Cupertino looks like inside.

It's a very different world from the world of that industrial revolution. So modern products are the sense themselves, collections of capabilities. There are many other things we need to learn about the way in which businesses change. The great man theory of business, which is still prevalent, but is no effective part in explaining how business develops.

We have smartphones, we have computers in our pockets. Even 30 years ago, no one would have anticipated that. But we don't have it because Steve Jobs was a genius who thought that we could all go around with a computer in our pocket.

We have it as a result of a series of small incremental developments in technology which brought us from where we are 50 years ago to where we are now. If you had known presciently 50 years ago that the information technology revolution would change our everyday world in the way in which it has done, you would of course have bought shares in IBM,

People did. IBM was, for a period, the most valuable company in the world through the 1920s, through the 1980s. People talk nowadays about the Magnificent Seven, the tech companies, which have the largest market capitalization. These tech companies. I went back the other day to look at if I bought the Magnificent Seven in 2000.

what would I be holding? The most valuable company in the world, believe it or not, in 2000 was Cisco, which made and still makes routers for internet access. But it turns out that making routers for internet access was not quite

the key to the entire business. And if you bought Cisco stock in 2000, you could just about sell it for the same price today. It was hardly one of the magnificent six. And if you look at the other magnificent six I took after some top companies, most of them I had no longer heard of.

they've either disappeared or they've been absorbed by some other company. So capital in this sense is no longer the key to modern business. The key to modern business is in fact capabilities and these capabilities are in the minds of individuals.

Okay, so what do we learn if we discard the rhetoric which we inherited from people who wrote aggressively and presciently in the 19th century about the future of capitalism? What do we need to think about in a world in which capital is a service? Well, the other day I was asked to talk about "Is the business of business business again?"

This takes us back to Elon Musk or the organisers thought it took us back to Elon Musk and his and Trump's dismissal of what they regard as woke ideology. In my view, the business of business is business. This statement is widely attributed to Milton Friedman. In fact, Milton Friedman never said anything of the kind. He did write an essay

which was entitled "The Social Responsibility of Business is to Maximize its Profits" and he did not say in that the business of business is business. What the business of business is, is doing the kind of things that we want business to do well. It's making management a professional activity in which the object is to create great businesses.

Let me take two examples. I talked to you a moment ago about what would happen if you went, what happens when you went in an airline. The most likely manufacturer of that aircraft is of course Boeing. And for the second half of the 20th century, Boeing was the world's leading aircraft company and in almost any sense the world's leading aircraft.

one of the world's leading companies. The CEO of Boeing during that period was a man called Bill Allen. And Allen explained his philosophy as a CEO in one simple sentence: "We should eat, breathe and sleep the world of aeronautics."

And Alan's company, or the company of which Alan was CEO, produced in the 1960s the 737 and the 747. The 737 was the dominant short-haul aircraft for, until very recently in fact, and brought low-cost air travel to a whole variety of people who had never imagined anything of that kind before.

The 747 followed it soon after. That was the jumbo jet which made intercontinental air travel a reality for a whole variety of people. That was what the Boeing that Alan had, eat, breathing and sleeping, the world of aeronautics, that was what it did. But that didn't last, for it lasted only till the end of the century.

Boeing became, was America's leading civil aircraft manufacturer. Its rival, principal rival in the US was McDonnell Douglas, which was a weaker company in terms of models. But at the end of the century, Boeing and McDonnell Douglas merged.

Legally, that was a takeover of the weaker McDonnell Douglas by Boeing. Culturally, it was a takeover of Boeing by McDonnell Douglas because McDonnell Douglas was deeply influenced by the shareholder volume movement which had followed from through the 1970s.

Phil Condit, who became CEO of the Merged Company, explained in 2001 when the company put the location of its headquarters up for auction.

municipalities were invited to bid how much would they contribute to persuade Boeing to move it at quarters there. The winner was Chicago and on a dramatic day the board of Boeing arrived at an airfield outside Seattle not knowing where their destination would be but the destination was Chicago.

Condit explained what Boeing had in mind in doing this. When the headquarters is located in proximity to a principal business, as in Seattle, the corporate center is inevitably drawn into day-to-day business operations. Evidently, being drawn into day-to-day business operations is a danger to be avoided by senior executives and the board of companies such as Boeing.

Condit was actually forced out and succeeded by Harry Stonecipher, who was a lifetime McDonnell Douglas executive. And Stonecipher explained his philosophy. When people say I changed the culture of Boeing, that was the intent.

So it's run like a business rather than a great engineering firm. It is a great engineering firm, but people invest in a company because they want to make money. Stone cipher in terms was forced out not for his foolish sentiments, but for personal misconduct, which characterizes a lot of these people.

And he was succeeded by a man called Jim McNerney, who had been, who was a protege of Jack Walsh and Jack Walsh's General Electric. McNerney was the man who was CEO of Boeing for 10 years. And during that period,

Boeing made what we now know to be a key decision, which was instead of trying to build a new short-haul jet to take the plant to rival Airbus' A320, which you're all familiar with, what Boeing did was reconfigure the now 50-year-old 737 to accommodate new, more fuel-efficient airline engines.

These of course were the 737 MAXs, the planes which crashed in 2018 and 2019 and took pretty much the reputation and the share price of Boeing with it. The interesting thing about this story is that the people who built Boeing into a great business

in the 20th century did so and created a great deal of shareholder value in the course of it. Someone who read my book drew my attention to a book by a legendary American football coach which was called "The Score Takes Care of Itself" and the point which emerges from that is if you build a great business

The score takes care of itself. The shareholder of volume is there. That's Boeing, to put it mildly, a unique example. The more striking example for an audience in this country is probably the story of ICI. You will know that for most of the 20th century, ICI was Britain's leading industrial company.

ICI was formed in the 1920s from the merger of a dyestuffs and explosives business. It declared its aspiration. ICI aims to be the world's leading chemical company, serving customers internationally through the innovative and responsible application of chemistry and related science.

through achievement of our aim, we will enhance the wealth and well-being of our shareholders, our employees, our customers and the communities in which we serve and in which we operate. I don't think there's a better exposition than that.

of the stakeholder view of a company which says a corporation serves a variety of constituencies and it achieves greatness by managing a balance between the needs of these different stakeholders. And ICI, in the Universal and Responsible Application of Chemistry and Related Sciences, moved in the 1930s into

petrochemicals and fertilizers and subsequently I showed you penicillin and the pharmaceutical industry there. In the late 1940s ICI made the decision that the future of responsible application of chemistry related sciences was in pharmacology.

So they set up a pharmacology division which actually lasted for, lost money for 20 years until in the 1960s a team at ICI led by the chemist James Black discovered beta blockers which were the first effective drug against hypertension and with that

pharmaceuticals became the profit driver of the company. But in the early 90s the climate had changed and so had ICI's objective, ICI's aims. Our objective, their annual report then said, is to maximise value for our shareholders by focusing on businesses where we have market leadership, technological edge and a

a world competitive cost base. That was the objective and this is what happened. In 2007, what remained of ICI was taken over by the Dutch company Exxon Nobel and ICI no longer exists as an independent entity, although parts of what was formerly that business do. The depressing thing is that this is not a unique story.

In fact, I could tell exactly the same story, but it would be more compressed, of what happened to GEC, Britain's leading industrial electrical company, and in the early 1990s, number two to ICI as Britain's leading industrial company.

ICI, GEC, effectively disappeared at the beginning of the century after proclaiming its devotion to shareholder volume. The school, in that sense, takes care of itself. What business people, great business people do is they build great businesses.

and building great business enables you to create shareholder volume. I talked to James Black, the man who led the team which discovered beta blockers in the 1960s. I talked to him because I wanted to know why he left ICI shortly after making that discovery, which he did. And he went to join another pharma company, SmithKline.

Why did he do that? He said, "Managers at ICI wanted me to go on road shows promoting beta blockers."

But what I wanted to do, said Black, was to be back in my lab discovering similar drugs. And he did indeed. His team at SmithKline came up with another blockbuster drug relevant to stomach ulcers. And Glaxo refocused their research program around a rather similar drug. And that made Glaxo.

which had subsequently acquired SmithKline, a leading pharmaceutical company globally. Black then said to me, "I call it the principle of obliquity." He started by saying, he shook his hands and said, "I told my managers that if they wanted to make money, there were easier ways of doing it than pharmaceutical research. How wrong could I have been?" he said. "I think of it as obliquity.

Complex goals are most often achieved if pursued indirectly. That was what happened to ICI. That prompted me a few years after that to write a book entitled Obliquity. The score takes care of itself and the purpose of business is to create businesses, great businesses, and great businesses will create great shareholder value. Thank you. Thank you very much, John. That was fascinating.

I claim chair privileges to bring in the questions and just want to pick up on this last point and the examples you gave of Boeing and other companies moving from what today I think we may call, broadly speaking, a stakeholder approach to the purpose of the firm to a uniquely shareholder focus on the purpose of the firm.

And I think you're making a very compelling argument that we were much better off in this business themselves and perhaps even their shareholders were better off when the prior approach prevailed. So the obvious question is how do we go back to that? What is the path? How do we encourage businesses to go back to that and how do we affect it?

Well, the first part to that is that we should have events like this and audiences like this, and people should go away having learned the lessons of how business actually operates. The next part will be a governmental part, partly a matter of regulations, but rather more, in my view, a matter of...

politicians using the pulpit which they have to declare what the relationship between business and society really should be. I should say that the story of ICI for me has quite a long history. I first talked about what had happened to ICI and its shared change in mission statement.

at a CBI conference in 1996. That's a time that was somewhat redolent of where we are now because the Labour government hadn't yet been elected, but everyone knew it was about to be elected. And Tony Blair had picked up this word stakeholder and was talking about it. So I was asked to go and talk about what this actually meant.

and I took the two ICI mission statements which you've seen. I will even put them up again for you if I can. That was the stakeholder view and that was the new view. That was the difference and that was the example I took. You'll know that that

There is a postscript to that, quite a long postscript to that, which is that the ICI share price, if you look at my slide of that, it actually cracks the career of Tony Blair pretty well. It reaches its peak in the summer of 1997 and declines steadily thereafter.

So that's a story there. But when I told that story again ten years later in 2006, by which time ICI was on the verge of extinction, I remember getting a pained letter from ICI's Vice President for Corporate Social Responsibility.

The letter said roughly, "We might have screwed up the business, but we did a great job on corporate social responsibility." One of the things that has happened is people think business ethics is about virtue signalling, the kind of nonsense which was in that slide about Goldman Sachs. It's not. Business ethics is about creating great businesses

which meet the needs in the way you've described of a variety of stakeholders. Questions from the audience? Gentlemen there. Hi, I'm interrupting this event to tell you about another awesome LSE podcast that we think you'd enjoy. LSE IQ asks social scientists and other experts to answer one intelligent question. Like, why do people believe in conspiracy theories? Or, can we afford the super-rich?

Come check us out. Just search for LSE IQ wherever you get your podcasts. Now, back to the event. Can you introduce yourself? My name is Dr. Stavros Stavros-Pele. I'm the founder and CEO of the Environment Europe Foundation. The puzzling question, a Danish company called Orsted...

Seemingly, it has done tremendous things. It used to be the largest oil and gas producer. It decarbonized. It's now performing remarkably well with wind turbines in Denmark and so on. And yet, when we look at the share price, it's gone almost the same way as the company you've shown. So my question really is, is the market myopic?

to all those important transformations? Is there something missing? And sort of following from that, do you think that the companies that are very effective in extracting resources, polluting our rivers, polluting our air, damaging our health, should be valued higher or lower in general? Well, I'm not here to give financial advice, so I'm not telling...

anyone want shares to buy. I think the story is, the historic story is pretty clear. Many people who created businesses made a lot of money in the course of doing so. Some people tried to create businesses

If I talk in detail, as I could but shall not bore you with tonight, about the history of microelectronics and the smart computers in our pockets revolution, we have a whole series of firms in that process which are no longer with us or are no longer important.

The business environment in a modern society is what I think of as disciplined pluralism. People are free to do all kinds of things. Some of them will succeed, most of them will fail. That's the way these things are. And in the end...

On balance, a process of natural selection ensures that better businesses will survive and worse businesses will not. And that's the story we've told about ICI, Boeing and Trinidad and Tobago. Question here. I'll try and speak loud now. You can do it. Thank you.

Hello, my name's Amy. Thanks for the great book. I really enjoyed reading it. I have two questions, if that's all right. The first is building on the question from the chair, which was about how do we move forward from this? The response was for politicians to sort of reframe the narrative around the purpose of business, which I totally agree with.

but does that account for the fact that there probably are some bad actors and do we need stronger controls to stop business doing significant harm when that does happen? So do we need more focus on pricing externalities? And maybe I'm not allowed a second question, so feel free not to answer this, but what role, if any, do you see for social enterprises in the future economy? Thanks. Let me take these two to work.

I've no doubt that government should be involved in taxing and regulation, although I think we've overemphasised the extent to which regulatory structures can induce businesses to do the kind of things we want. I would much rather live in a world in which, instead of writing thousands and thousands, hundreds of thousands, in fact, of pages of financial regulations,

We trusted managers to run financial businesses well. And when they didn't do it, they went to jail, as it was once true that managers at failed banks did, but not anymore after 2008. Now, where do social enterprises come in this? I think we need to be careful in all of this. I want people to be building great businesses.

I don't want to make a distinction between nice businesses and nasty businesses. And if you're a nice business, you can sign up as a B Corporation or something, and people who haven't done that can get on with stealing the money. That's not the environment which I want. I want to see a world of professional managers who are devoted to running businesses, be they public or private, well-run.

And that's what people in business should be doing. And people in business who don't do that should not be sitting in the white house with their children on their shoulders.

I want to introduce a question from the online audience. He's asking how you see AI playing a role in disrupting 21st century business, but also in the context of the goals of business and who makes decisions in business. Well, I don't think AI basically affects my statements about the nature of business.

and the nature of the modern corporation. I think if we talked earlier about how people thought in 2000 or how people thought in 1980 about the future of information technology and business, I think the overwhelming tendency was for them to overestimate the short-run impact and underestimate the long-run impact.

and to believe they could understand the short-term impact while they fail to understand the long-run impact. I think that will be true of AI. People are at the moment greatly exaggerating the effect it will have on business in what remains of our lifetimes, but I think it will have a much larger effect over the long run, and I don't know what the nature of that effect is going to be

And I think we will only find out over time. That was true of the Internet. I think it's true of AI as well. This one here in front. Yeah, Bernard Casey. I have to admit to be a one-time student of John Kay, and I probably owe him rather a lot.

I'm going to be one of the people who asks questions because I read the newspaper relatively recently. So I'm going to ask about new governments and what they do, just like we were talking about 1997 and what new governments thought they ought to be doing then.

And I am going to refer to repeated statements which we hear about governments coercing various institutions, particularly pension funds and various saving institutions to invest in British companies or British listed companies.

Do you have a view about the coercion? I suspect we could share our views about that. Are the places which maybe we ought to be investing in and are the places which we ought not to be investing in? Thank you. I've given last year

a talk in which I said that pensions have been the biggest avoidable disaster in British politics in this century. Basically... I'm sorry, you'll have to forgive my cold, if you will. We had a pension system that was working relatively well. And by the early...

early 2010s, it was ensuring that pension, old age, was no longer an important cause of poverty in the UK. That was the result of a widespread extension of defined benefit pension schemes to a high proportion of the population. We screwed that up.

And we screwed that up by a complex mixture of muddled actuaries, inappropriate accounting conventions, and above all, inept regulation. So the idea that government can answer this by finding new regulatory devices is something which I start by being very sceptical of.

I don't want to see government coercion of pension funds. I do want to see more investment, particularly at the growth capital stage of British businesses. But the priority for that...

It's an environment which encourages people to establish growth businesses, which we don't have enough of at the moment. We are actually quite good at venture capital. We are not good at finding the next stages of development of great businesses. And that relates also to one of the themes that I was talking about, which was the

within the businesses which I was talking about, the ICI is a very clear example of that. These were in effect funders of new businesses which ICI did brilliantly in relation to pharmaceuticals. But we now no longer really have corporations that either want to play that role or are capable of doing so. Thank you. That person there in the back. Hello. Yeah.

Thank you so much for the talk, Professor. My name is Shriyansh. I am an LSE graduate and I work as a strategist at one of the London startups. So you understand why the topic really, really intrigued me. And my question is very simple, but I'll give a detailed context to that. My question is what do you exactly mean and how do you exactly define

a good business because he said the purpose of a business should be to create a good business. And the reason why I'm asking this is, earlier on I was doing the pricing for my firm and as a strategist I was posed with the task of deciding the growth strategy for the business. And I started thinking there are always two parts to how the business is usually thinking. There's this core value of providing value to the customer, that there's a demand, you come in there as supplier, you did the supply.

And then there's this profit maximizing intentions of related to pricing, more efficient production chains and things like that. And in the context of that, I'll again repost my question that

What do you mean by creating good businesses? Is it focusing more on the value creation side or is it focusing more on creating these efficient production lines and getting the price right and things like that? Thank you. I'm going to decline to answer that question in the sense that there isn't a definition of what is a good business, but we all know one when we see it.

A good business is one that produces products that people want to buy at prices they're willing to pay. A good business is one that has happy workers who are proud of what it is they're doing. A good business is one that is generating returns for its shareholders. A good business is one that's respected in the communities in which it operates.

This is, in a sense, a kind of Aristotelian virtue ethics approach to ethics and business, but I think is the right and actually the only way of thinking about it. And I'm not going to say, well, it's 23% the happy employees, 41% the satisfied customers, etc.,

You can't do that. The job of the managers is to pursue all these things. And the good manager will discover in the business from time to time, you've done too much of this and too little of that. And managing that kind of balance is the fundamental skill of the great manager. So we are...

We economists are particularly vulnerable to this, searching for metrics which can subsume all the things we would want. There are no such metrics in relation to business. And we can know what's a bad business. It's harder to define a good business, but actually defining a good business is what the good manager seeks to do. And mostly we know whether he or she has done it.

Hello, sir. Thank you for your presentation. My name is Joseph. And same as the last question, I work in the financial services, work at a global investor, so one of those shareholders that were mentioned. So my job for the last five years has been reading through annual reports.

And I don't know if the audience is familiar with this kind of cycle, but I think around 2017 until very recently, we kind of went back to the stakeholder theory, at least from optics of it. So if we read any report from 2021, 2022, meta, diversity, community, DEI, the environment, climate, all of that, and we care about our communities and all of this. And now the pendulum seems to be swinging back. So

I guess my assumption is that we've tried the stakeholder approach again and for some reason it's gone away. So question number one is: Is it so susceptible to political will, political positioning, kind of the zeitgeist, if you will? And the question number two is: If we tried it twice and twice it's gone away,

Probably government is the answer, probably it's not, but what is the way forward if we can't expect bottom-up action from companies or if their own commitments don't really materialize? Thank you. First, I want to emphasize again, and this was the point of my ICI example, that for me the stakeholder story is not about DEI, ESG, CSR, and the like. This has been a story that...

Companies were able to take the view that if we set up an ethics department, they can take care of that side of business and everyone else can get on with making money. And that's not what I mean by business ethics and it's not what I mean by good business. So, as you say, the Business Roundtable is the best example of the reversion to some of the stakeholder roles

some of the stakeholder vocabulary, but the evidence that it has much effect on what business does is actually, I think, quite small. How do we get there? Well, things have gone wrong, I think, because we had a change in culture

that glorified individualism, that emphasized stakeholder value and the like, and that regarded the unaligned pursuit of profit as virtuous. If we can make that change in the last 50 years, we can change it back. Thank you, Professor. I really appreciate your presentation. My name is Zee.

MIT and the research battle there about AI human symbiosis. So what we do with some scenarios like nowadays with AI or digital platform, actually less than 100 people benefit with this kind of big industry. I mean for example… Sorry, could you speak up a bit? Okay.

Nowadays, with this digital platform, I mean, like one scenario, like this kind of big show holder, maybe just less than 100 people, for example, in Microsoft or maybe in Google, could get sustainability, I mean, this kind of a job or profit. It means that 90% of this kind of engineering or maybe like programmers could be replaced by AI.

So another side we could see for their shareholder, I mean all the small shareholders like in the share market cannot really participate on the decision making. So to me that one big digital platform only maybe could be controlled by less than 100 people. So it worked, this worked with all digital company maybe only controlled by 10,000 people.

So that is, I think, it's very critical about, I think, what you said, I mean, very important. From these garments, I mean, the garments of the industry, they go to the social garments. That is now what happens all over the world. So this is a question about if you have any kind of the ideas or comments about this situation. Thank you. In Manchester, there's a mural...

In this is a mural of an earlier John Kay, a much earlier John Kay, being chased by Luddites and climbing out the window to escape the Luddites. The Luddites were perhaps the first group to pick up the issue that modern technology would change the nature of work.

And it did, but it did not eliminate the jobs of people working in the textile industry. In fact, there are probably more today than there were in the past. We are told again and again that the nature of work and work relationship will be changed forever by some technological innovation.

The fact that none of these predictions have been true in the past doesn't mean that none of them ever could be, but it's why I view them with considerable suspicion. I think we leave it at that. It's been a fascinating evening. We thank you, John Kay, again very much for this fascinating conversation.

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