Will Hutton on social purpose water companies

Will Hutton is a political economist, author and journalist. He is an Associate of the London School of Economics and Political Science and co-Chair of The Purposeful Company. He is also President of the Academy of Social Sciences and host of its podcast The We Society. Alastair Chisholm sat down with him to find out if a purpose-driven corporate governance approach could help recover public confidence in water companies.

Will Hutton has been consistently outspoken about at least one water company in particular (Thames Water), his past warnings prescient given its current predicament. The fallout from widespread sewage spills, over-indebted companies, dividend payments, opaque ownership structures and more has resulted in growing campaigner, public and political outrage at the way in which water companies are run and regulated.  

This has been evident through A Fresh Water Future’s engagement of both the public and practitioners. The sentiment that water companies can no longer be allowed to be run as Thames Water and some others have been in the past is almost universal.

Water privatisation seems as unpopular now as it ever has been. But sentiment is mixed on where to go next to rebuild some modicum of trust in a sector intrinsically linked to social and environmental health, and inextricably fundamental to life.

In principle, the idea of renationalisation is popular among both practitioners and the public. But. Professionals are mindful of pre-privatisation investment starvation and a doubt that the necessary investment would be bankrolled by the Treasury in any future government given the plethora of competing pressures.

And to an extent the public – in England at least – seems to accept that privatised utility companies are the way it’s done nowadays. They just want them to put society’s needs – and those of the environment – before those of shareholders.

Of course, other models are available. The clear favourite among the practitioner community is the private but not-for-profit, Dwr Cymru Welsh Water approach.

Profit is reinvested in the company and its assets. There are no shareholders and if modest dividends are ever paid, they go back to the customer.

But, importantly, Welsh Water isn’t a top performer compared with some of the privatised companies, either environmentally or based on the price of its water. It just feels like a less-objectionable middle ground betwixt public and private ownership.

Yet there’s widespread uncertainty about how a wholesale transition to a public or private-but-not-for-profit model might be made (although plenty are doing the intellectual gymnastics required to try to figure it out). And there doesn’t appear – at least at the time of writing – to be the political appetite for such radical change.

So, if we can’t change the model, is it possible to harness social and environmental purpose effectively in privately owned monopoly utility companies instead? Hutton thinks so.

“They understand they have a social licence to operate. They understand the claims of stakeholders on them and they accept those claims. It’s a very different mindset.”

Common good capitalism?

Tighter regulation is clearly the first step in getting to grips with unsatisfactory performance and a succession of secretaries of state have directed Ofwat and the Environment Agency to wield existing and new powers more concertedly. Over recent years, Ofwat has also pushed public purpose to a degree, through its public value principles.  

“In fairness to water companies and Ofwat, the industry is more aware of public purpose than it was, say, five years ago,” Hutton says.

He points to some of the larger recent fines levied at companies and suggests the notion that penalties are widely baked-in as costs within company business plans is shifting under the glare of the campaigner, media and regulatory spotlights.

But can social purpose be formalised within private companies such as these and can that be translated into meaningful change in culture and practice? Wouldn’t it just be seen as greenwashing?

Hutton is convinced that purposeful companies do behave differently – and better. He makes the case for businesses in the round but says, “The need [to be purpose-led] is more acute in monopolistic, regulated utilities that are providing the wherewithal of life. That has to be their social purpose; it has to come before profit.”

Various initiatives have been set up to advocate for and advance purposeful business. The Purposeful Company has been around since 2015 and sees itself as part of an ecosystem of like-minded organisations.

B Lab’s B Corp label is perhaps the most widely recognised approach internationally and has evolved into a more directed, three-pronged approach of late. This incorporates purpose within an organisation’s articles of association, reporting on it systematically and integrating it into how trade-offs with all stakeholders are managed.

“For companies providing services that are crucial to our lives, escaping accountability is not on.”

Statement of purpose

Hutton believes that working purpose into articles of association – as Anglian Water did a few years ago – is the best way to do it. But recognising the demand for rapid action, he says that the quicker way is for Ofwat to make the requirement a condition of water companies’ licence to operate.

This process could involve the regulator co-defining the specific-purpose statement, picking up aspects of companies’ local geographic, climatic and social context, set beneath a common, headline purpose.

Another component on which Hutton is very clear is that water companies should have at least 25 per cent of their equity traded on the public markets. This, he says, creates a level playing field for standards of transparency and accountability, which are generally considered to be better for companies that are publicly listed.

This is one reason why he’s a self-proclaimed “fan of the PLC” and has concerns about the motivations behind private ownership and its lower transparency requirements. “For companies providing services that are crucial to our lives, escaping accountability is not on,” he asserts.

Looking back to privatisation, Hutton says that there was probably an assumption that companies would all be publicly listed and that there were insufficient safeguards to stop owners such as Macquarie coming in and saddling companies with crippling levels of debt.

“The need [to be purpose-led] is more acute in monopolistic, regulated utilities that are providing the wherewithal of life. That has to be their social purpose; it has to come before profit.”

Culture change

Hutton is at pains to stress that the corporate cultures in different water companies vary considerably. “You only have to spend a day in one and a day in another to see it’s like night and day,” he says. But he warns that it takes time to embed a purpose-led culture and turn around those where the need is greatest, particularly when it comes to big utilities that employ thousands of people.

Hutton explains that purpose should run across your values: how you do your HR, your marketing; that you’ll reflect customer challenge group positions in your decision making; that you’ll recognise trade unions and involve employees in your strategic decision-making. You need a leadership team that believes in it and shareholders who back it.

That all takes time to embed – and for those functions and stakeholders to see the evidence of change and buy into it. “Then you see a very different value set, ethos and general sense of the company when you go in and walk the floor,” Hutton says.

However, there seems to be a lot that needs to be taken on trust initially and there’s precious little of that in the water industry at the moment. What about assurance and verification? How might that be delivered in a convincing way?

Hutton posits a number of strands, the fine detail of which might need further development. First, give consumers a genuine voice through customer challenge groups – expanded from their current form to work at the company level, but coordinated nationally and linked to Ofwat.

Second, involve employees, through unions, in strategic decision-making. He acknowledges that there’s potentially a confidence-building exercise to be done there with some audiences.

But, he argues, empowering stakeholders who are in some way close to water companies (customers, employees) can build appreciation that the road to a healthy environment and a resilient water system isn’t necessarily a quick or simple one. At the same time, those stakeholders will hold the companies to account.

Hutton asserts that what flows from purpose is a suite of regulatable metrics: investment, gearing ratios, strategy on net zero, social tariffs, environmental commitments, pricing, service standards and so on.

Of course, these then have to be purposefully regulated – open-book regulation instead of the current system under which some companies have gamed the regulator. So there are clearly big implications for the regulator, too – although Hutton notes that Ofwat has been moving in this direction.  

There are clearly layers to reassuring a deeply sceptical public on water, from tougher regulation to embedding social purpose through articles of association or licence conditions, from empowering customers, employees and other stakeholders to be both scrutineers and advocates, and putting in place the right ownership structures and rules on listing on public markets to ensure that there’s a level playing field around transparency.

All of that sounds like progress. As Hutton says, purpose-led companies do behave differently. “They understand they have a social licence to operate,” he says. “They understand the claims of stakeholders on them and they accept those claims. It’s a very different mindset.”