We must change the DNA of capitalism to focus on legacy and not short-term returns

Free markets have delivered enormous good. By encouraging innovation, entrepreneurship and consumer choice, capitalism has enabled millions of people to succeed. I am a firm believer in the opportunities it can provide. But I also believe that the model of short-term, shareholder-driven business is increasingly not serving society. It is becoming outdated and unsustainable - and something has to change.

Take the companies in the FTSE100. Over the past decade, their profits have soared by 49%, while charitable donations are 13% lower in real terms than 10 years ago. Less than 1% of net profit goes to charity.

This is a growing fault line in our economy: businesses that generate vast returns but give little back and do not align with the values a healthy society needs to prosper. Many big businesses are deeply unpopular, and increasingly people question whether capitalism is working as it should. In my new book, Karma Capitalism, published this week, I set out an alternative: purposedriven business.

Imagine a world in which social value, employee and community well-being and long-term legacy are built into the DNA of our companies. Not as some afterthought or marketing exercise but as identity. The key concept I propose is the "PhilCo" - or philanthropy company - where at least 10% of the shares are owned by a charity or foundation.

I know this works because we practise it. My company, the recruitment group Reed, is a PhilCo: 18% owned by the Reed Foundation. We created the match-funding platform Big Give - now the UK's biggest public fundraiser, raising £44.7million in one week last Christmas, and aiming to do even better this year - and every part of our business is informed by our purpose.

Our employees, known as co-members, love the fact they are effectively working one day a week for charity. What became clear while researching the book is that PhilCos perform better - in terms of longevity, culture, employee retention, social impact and, yes, financial performance too.

This isn't some utopian concept either. In Europe - particularly Scandinavia - this model is more prevalent, encouraged in some countries by tax incentives. Some of the world's biggest brands - IKEA, Carlsberg, Lego, Novo Nordisk and Rolex among them - adopt the PhilCo structure. And it works.

In Denmark, just 10% of traditional companies survive to 40 years, but a third of PhilCos do. The PhilCo culture is more fundamental than any tick-box ESG (Environmental, Social and Governance) exercise. Many businesses now tout ESG credentials, devoting hundreds of pages of annual reports to them. But far too often, it's windowdressing.

My view is that ESG has become little more than an exercise in virtue-signalling that does little or nothing to transform how a business works.

A PhilCo, by contrast, is a structural commitment: the charity-owned share means the business must think long-term. What's in it for business? First of all, you attract good people and you retain them.

Customers increasingly want to buy from companies they believe in. Society benefits too: when companies throw off capital to good causes as part of routine governance, the positive impact is obvious. Let me be clear: I'm not arguing that profits don't matter. They do. I am saying that short-term profit should no longer be the only measure of purpose.

When companies survive longer, when staff are more engaged, when the firm's legacy matters - that means more sustainable business, more sustainable capitalism, and ultimately, more profit. Being a PhilCo is not a different way of doing business. It is a different way of being a business. Is the world ready for Karma Capitalism? There will always be some fatcats that resist. It's in their narrow interest to concentrate on short-term reward. Yet I feel a groundswell of support for a new, more inclusive society.

The younger generation wants to turn its back on vulture capitalism and build something better.

As one of Reed's recent graduate recruits bluntly put it to me: "My generation wants to improve on the pretty dire record of the previous one."

In short, we don't need to abandon capitalism, we need to evolve it. Free markets remain vital - but they must serve broader society, embed purpose, and focus on legacy rather than short-term return. So let's change the DNA of capitalism together. I believe our economy, our communities and our future success depend on it.

• James Reed is chairman and CEO of Reed. Karma Capitalism by James Reed is published by Ebury Edge priced £18.99 and out now