Would social purpose water companies drive better outcomes for people and the environment? 

Could a purpose-driven corporate governance approach help recover public confidence in water companies? CIWEM Director of Policy Alastair Chisholm sat down with author, journalist, and political economist Will Hutton to find out more.

Will Hutton is a British journalist and writes a regular column for The Observer, co-chairs the Purposeful Company, and is the president-designate of the Academy of Social Sciences. He is also the chair of the advisory board of the UK National Youth Corps.

Hutton has been consistently outspoken about at least one water company in particular, his past warnings prescient given the its current predicament. The fallout of 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 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 cannot any longer be allowed to be run as Thames 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. On principle, the idea of renationalisation is popular amongst both practitioners and the public.

But. Professionals are mindful of pre-privatisation investment starvation and a doubt 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 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 shareholders.

Of course other models are available. The clear favourite amongst 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 any modest dividends ever paid go back to the customer. But importantly Welsh Water is neither a top performer either environmentally or price of its water compared with some of the privatised companies.It just feels a less objectionable and toxic middle ground betwixt public and private ownership.

Yet there is widespread uncertainty over how a transition might be made, wholesale, to such a model (though plenty are doing the intellectual gymnastics trying to figure this out). And there doesn’t appear – at least at the time of writing – to be the political appetite for such radical change.

So, is it possible to harness social and environmental purpose effectively in privately owned monopoly utility companies? Hutton thinks so.

Common good capitalism?

Tighter regulation is clearly the first step in getting to grips with unsavoury performance and a succession of Secretaries of State have directed Ofwat and the Environment Agency to wield existing and new powers more concertedly. Ofwat has pushed public purpose to a degree over recent years too 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 with the glare of the campaigner, media and regulatory spotlight.

But can social purpose be formalised within private companies like these and can that be made to translate through into meaningful change in culture and practice? Wouldn’t it just be seen as greenwash?

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”

There are various initiatives set up to advocate 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 in an organisation’s articles of association, reporting on it systematically, and integrating it into how trade-offs with all stakeholders are managed.

Statement of purpose

Hutton believes 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 fast action he says the quicker way is for the regulator (Ofwat) to make the requirement a condition of water companies’ license to operate.

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

Another component Hutton is very clear on, 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, generally considered to be better for those publicly listed.

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

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

Culture-change

He is at pains to stress that 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”. But he warns it takes time to embed a purpose-led culture and turn around those where the need is greatest. Particularly in big utilities employing thousands of people.

Hutton explains 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 who believe 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.”

There seems to be a lot to be taken on trust initially though. 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: Firstly, 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 into Ofwat.

Secondly, involve employees through unions in strategic decision-making. He acknowledges 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 resilient water system isn’t necessarily a quick or simple one. At the same time, they 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 – though Hutton notes 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 condition. From empowering customers, employees and other stakeholders to be both scrutineer and advocate. And putting in place the right ownership structures and rules on listing on public market to ensure that level playing field around transparency.

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

Alastair Chisholm is CIWEM’s Director of Policy.

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.

This story is published in the Spring 2024 issue of The Environment magazine.