Unearth strategies to repurpose businesses for societal good.
We’re undoubtedly in the midst of a crisis. Our planet’s health is deteriorating at an alarming pace, and social inequality has reached staggering heights. It’s clear that business practices have significantly contributed to this emergency. The underlying principles guiding corporations have led to severe environmental damage, community disruptions, and skewed economic policies.
However, it wasn’t always like this. Corporations are not inherently selfish – they possess immense potential to create a positive impact that extends beyond their shareholders. All we need is a paradigm shift in our approach.
This Summary charts the evolution of the corporate model from being community-centric to triggering wide-reaching, destructive effects. It then outlines strategies to reformulate business ideologies, repositioning corporations as instruments for socio-economic welfare while still catering to shareholders’ interests.
A call for a fresh business perspective.
Each year, thousands of aspiring company directors embark on the next phase of their careers – earning their MBA. During the initial semester, they study the Friedman doctrine, coined after the American economist and statistician Milton Friedman. Over five decades ago, Friedman’s book, Capitalism and Freedom, proposed a theory that has since shaped business education, defined corporate conduct, and impacted government policies worldwide.
The doctrine posits that a business’s sole social responsibility is to maximize profits, abiding by the law. This notion, taught to the corporate leaders of tomorrow, states that each decision should aim to increase shareholder profits. This idea has become so deeply embedded that it is perceived as a fundamental law – as unalterable and inherent as gravity itself.
There’s no denying that adhering to the Friedman doctrine has yielded considerable benefits. It’s helped corporate shareholders amass substantial wealth, thereby stimulating the economy. In the process, their businesses have generated jobs, and supplied housing, food, entertainment, and services that contribute to our overall well-being.
Yet, this same doctrine has inflicted tremendous harm. It continues to exploit natural resources, damage our planet, and exacerbate inequality and deprivation. Corporate reporting rarely takes these adverse impacts into account. As per the Friedman doctrine, the focus lies on financial and material assets – the ones that generate revenue.
Even though corporations consider themselves accountable only to shareholders, their decisions impact the broader community and ecosystems. Therefore, they should be answerable to these communities and the environment. To accomplish this, the corporate world needs to substitute its outdated ideology with a new one – one that redefines corporations and their societal role.
Imagine a world where, as part of their daily operations, businesses aim to do good along with ensuring shareholder profits. It might seem far-fetched, but remember, we humans conceived and implemented the Friedman doctrine. So, why can’t we develop a new model that capitalizes on the benefits while minimizing the drawbacks?
Corporations have the power to effect significant positive change in the world. They just need to reconceptualize their definition of “success.” But before we delve into potential solutions, let’s first examine how we ended up here.
The Corporate Disconnect from Community: A Missed Opportunity
Originating from ancient Roman times, the concept of contractually binding individuals for business purposes has evolved drastically. Tracing back the corporate history isn’t just a trip down memory lane; it can actually unveil why corporations have somewhat lost their inherent capacity for societal good.
Once upon a time, economic exchanges occurred in the market square or in the form of different tradespeople creating something tangible, like a building. That same spirit of business is encapsulated today in corporations, although with a lot more formalities and analytics.
Previously, corporations served as an instrument of regents and their parliaments to further national interests. With the advent of freedom of incorporation, families could start their own enterprises. The assumption was that these family-led businesses would continually generate wealth and job opportunities for the local community. Even when corporations spread beyond national borders, they were largely family-controlled, like Cadbury or Barclays.
Enter the era of external investors. Suddenly, traditional business families had to share their reign. Corporations now had co-owners whose primary interest was a handsome return on investment, without a generational commitment to the company.
The long-term consequence? Local business branches were closed and moved to cheaper labor markets to maximize profit and company value. Sweatshops were exploited by Western corporations to minimize product costs, and banks amped up profits through financial products that didn’t always serve the community’s long-term interests. This economic model amplified wealth disparities while degrading the environment.
A crucial element lost in this transition is the commitment to community. Today, corporations often overlook their role as part of a diverse ecosystem consisting of owners, families, managers, employees, suppliers, customers, and the community. The corporations of yore fostered long-term objectives benefiting numerous stakeholders. The current scenario, unfortunately, doesn’t reflect that.
However, the silver lining is that corporations still possess the potential to make a difference. Their capacity to commit to stakeholders beyond shareholders is what can shape them into forces of societal good. But how can we bring about this transformation?
Repurposing Corporations through Strategic Governance
Friedman’s doctrine has contributed to a misconceived notion among company directors: corporations exist to earn money. But that’s a diversion from the actual purpose.
A corporation is designed to solve a community problem. Be it manufacturing washing machines, providing faster internet, or facilitating travel, the goal isn’t profits for shareholders but serving a purpose. Profits should ideally be an outcome, not the purpose.
In several countries, corporate law mandates companies to have a normative purpose – a commitment to societal good beyond their immediate interests, such as environment protection or community education programs. However, shareholder pressure often relegates these intentions to mere symbolic gestures, rendering the normative purpose ineffective in morphing corporations into societal benefactors. Herein lies the significance of governance.
Conventional corporate governance is synonymous with protecting shareholder interests. But companies deemed as following best practice corporate governance ironically faltered in times of crisis, like the dotcom bubble burst or the Global Financial Crisis.
The takeaway is straightforward: corporate governance should support the company’s purpose rather than boosting shareholder value. Governance mechanisms, like board structure, member appointments, and risk management, should enable the delivery of the company’s true purpose, not shareholder profits.
Alongside, corporations must broaden their view of customers to include all those impacted by their activities, not just the direct consumers. This expanded perspective fosters growth and innovation, enhancing the corporation’s resilience during economic downturns.
Restoring a corporation’s alignment with its genuine purpose demands visionary leadership. It requires someone whom both shareholders and employees trust to implement this change and articulate its merits. This transformation, though challenging, manifests business innovation at its best and ensures the company’s longevity.
Though research exploring the link between societal good and business health is still budding, early indications suggest that socially responsible business practices yield benefits. High returns, low risks, and reduced costs are often tied to corporate social responsibility, eco-efficiency, and customer satisfaction. And these results can make all stakeholders, not just shareholders, happier.
Developing Holistic Performance Metrics
Evaluating a corporation’s performance traditionally focuses on financial and material assets. However, a crucial part of the business remains unaccounted for in these metrics: natural, social, and human resources. These three forms of capital are integral to any business’s survival but are glaringly absent when calculating profits, presenting a flawed picture of both flourishing and struggling businesses.
For an accurate performance evaluation, corporations must factor in all forms of capital. Maintenance or replacement costs for natural, social, and human capital should be considered while calculating net profits. Similarly, investments in these resources, such as staff education or community well-being initiatives, must be recorded.
Without this comprehensive view, corporations risk making major decisions based on incomplete information. Moreover, this could inflate profits, leading to improper distribution to shareholders and inefficient resource allocation. Worse yet, it could inform national and international economic policies, perpetuating harm to communities, economies, and the environment.
So, what’s the remedy?
Firstly, corporations need to acknowledge the erosion of natural, social, and human capital as liabilities. For instance, if a business has an annual income of $100 million but causes $30 million worth of environmental damage, the income should be adjusted to $70 million.
Secondly, expenditures on preserving natural, social, and human resources should be classified as assets. Therefore, if a business spends $40,000 on maintaining river health, its natural assets should correspondingly increase by $40,000.
It’s imperative that all businesses, landowners, and nations rectify the damage they inflict on communities and the environment during their operations. Restoration costs should be included in financial records to accurately represent profits, liabilities, and assets. After all, the party causing the damage should be the one compensating for it – not the victims or future generations.
Evolving Business Through Legislation
Despite the plethora of industries and services they offer, all corporations share a common trait: their existence is hinged on corporate law, the lifeblood that gives them form. By that very nature, it’s clear that the law can be a powerful force in shaping corporate operations – and, by extension, the lives of everyone who interacts with these entities.
Corporate law outlines the regulations by which a company is born, structured, and managed. This is the conventional wisdom, at least, that our bright-eyed MBA aspirants absorb and are likely to employ.
Yet, what most stakeholders gloss over is the inherent power of the law to foster collaboration, enabling disparate entities to coalesce and yield outcomes otherwise unattainable – much like in ancient Rome. This bonding is reinforced through contracts, ownerships, and governance constructs.
Additionally, numerous companies uphold corporate commitments – these are proclamations reflecting company ethos around nonfinancial aspects such as sustainability and inclusivity. However, these commitments, while brimming with noble intentions, are fraught with issues. They lack legal enforcement, measurement metrics, responsibility allocation, and penalty clauses for non-compliance, thereby often failing to make a significant impact.
This sparks critical contemplation. Shouldn’t corporations be legally obligated to support and amplify social, environmental, and human capital in tandem with financial ones, to create an environment where everyone prospers? Shouldn’t they be mandated to abstain from actions that deplete these assets, similar to how shareholders expect directors to avoid devaluing financial assets? And, should corporations be legally compelled to rectify their transgressions against nonfinancial assets?
Existing legislation can be categorized into three forms that aid the fulfillment of corporate commitments: enabling, empowering, and enforcing. What if we introduced three more: mandating, restraining, and restoring?
A comprehensive framework of this nature would address the interests of shareholders, stakeholders, the community surrounding the corporation, and the environment. It would also empower directors to find a balance between their obligations to shareholders and the corporation itself. This way, shareholders can savor their profits while the corporation adheres to its true purpose – introducing innovative solutions to societal problems in a manner that is universally beneficial.
Conclusions
The corporation, over the centuries, has morphed from an entity uniting individuals for a distinct business objective into an entity obsessed with generating shareholder wealth, often to the detriment of others and our planet.
However, as products of society, corporations have the potential to metamorphose into powerful agents of transformation and support, all the while serving shareholders. By adopting robust corporate commitment, re-envisioning asset management, and reshaping corporate responsibility, we can usher in a healthier, wealthier future at a global level.
