Weighing Profit and Responsibility

About 10 years ago it occurred to me that one might be able to build a business around the notion of helping to solve some of the world’s most pressing problems. It seemed to me that business, with its vast resources of both human and financial capital and its immense impact on the global community, not only had a responsibility to embrace the challenge of making the world a better place, but could in fact profit from it. It just made tremendous sense. But I was not able to imagine how to go about making it happen.

Over the last two to three years, some of the biggest minds in business have had the same thoughts, and have given them a name. Michael Porter calls it “shared value”. Gary Hamel calls it a “moral renaissance”. Umair Haque calls it “The New Capitalist Manifesto”.

What do these writers, professors and practitioners have in common? They share – and have shared with the wider world – a realization that big business as it has been practiced over the last 30 years is morally bankrupt. They agree that ‘growth at any cost’ ignores the social and environmental impact business has had, and as such is unsustainable. They can also see that companies, as Michael Porter asserts, are now widely perceived to be prospering at the expense of the broader community.

These issues have been brought to the foreground by the financial crisis of the last five years; fuelled, as Gary Hamel claims, by “unprincipled CEOs who have seemed hell-bent on setting new records for egocentric irresponsibility.” Is this mindset anything new? According to Hamel, it is. In a recent interview, he explained that “if you go back and dig into the history of capitalism, whether it is Adam Smith or Alexis de Tocqueville, people understood that you couldn’t have free markets without a solid ethical foundation. Without that, capitalism degenerates into selfinterest. Without that, you will soon find a snarl of regulation emerging as government tries to protect citizens from capitalism’s more egregious excesses.”

The self-interest Hamel refers to also leads to CEOs acting with impunity in relation to the communities where they are active, which could ultimately lead to capitalism destroying itself from within, or to a rigidly regulatory state which, in its zeal to protect the citizens who voted it into power, over-regulates business to the point where the very dynamism and purpose of capitalism is completely squashed. In either case, capitalism as we have come to know it is likely headed for a very steep cliff. Michael Porter sees this self-interest as a manifestation of the very narrow view of value creation that has been developing over the last 30 years or so. Big business has operated as if in a bubble where short-term financial gain is prioritized over customer needs and the broader influences that determine longer-term success. “How else,” Porter asks, “could companies overlook the well-being of their customers, the depletion of natural resources vital to their businesses, the viability of key suppliers, or the economic distress of the communities in which they produce and sell? How else could companies think that simply shifting activities to locations with ever lower wages was a sustainable ‘solution’ to competitive challenges?”

Umair Haque, director of the Havas Media Lab, a think tank in New York City, calls the kind of value created in these conditions “thin” value, precisely because of its myopic focus on shareholder gains at the expense of all other inputs, whether human, societal or environmental. In his first book, The New Capitalist Manifesto: Building a Disruptively Better Business, Haque calls for a new economic order, but not of the hammer and sickle variety. He calls for a version of capitalism which creates “meaningful brands” that make a tangibly positive impact on peoples’ lives, whether physically, financially, or environmentally. No need for pitchforks and Molotov cocktails.

In recent research conducted by the Havas Media Lab, most respondents said they wouldn’t care if 80% of the brands out there right now were to disappear tomorrow. According to Haque, it’s because, traditionally, brands have been indifferent to customers. Their primary concern has been to deliver financial value to their shareholders. To serve that goal they have been engaged in what GM research head Charles Kettering called in the 1920s, “the organized creation of dissatisfaction”. Well, if dissatisfaction is the desired outcome, Kettering’s dream has come true.

Except it’s not the products people are dissatisfied with, but the brands and companies that have created them at the people’s expense. The greed and financial obsession of companies cited by these thinkers has partly been the result of a business discourse focused on competitive advantage. Indeed, Michael Porter made himself famous by writing what has essentially become the bible of competitiveness, and his new focus on ‘shared value’ doesn’t exactly abandon the theme, but reframes it. Ever the pragmatist, he points out that business needs a successful community, not only to provide a market for its products but also to provide the public assets, policies and infrastructures that support healthy business growth. Conversely, a community needs businesses to provide jobs and wealth creation opportunities for its citizens. Somehow, business has forgotten about this, partly helped by influential thinkers like Milton Friedman, who argued that business is a self-contained operating beyond the purview of wider society and therefore not accountable for it. Ironically, as Gary Hamel points out, far from distancing companies from society, this ideological rejection of social responsibility has given big companies even more control and influence over our lives than ever before. You would have to be living under a rock not to see the devastating effects of this influence over the last five years.

Thanks to the web, we are also living at a time when consumers have much more visibility into the unsavory practices of big business, and are able to call companies out on their bad behavior almost immediately. Fifteen years ago none of us would have known about the employee suicides at Foxconn or the child labor employed by other offshore suppliers to North American businesses. Now we know about it as soon as it happens, and even though it may be happening halfway across the world, we are ever more conscious of it. The smaller the planet becomes, the more empathetic we become, and the more critical we become of corporate malfeasance. The scales are beginning to tip in favor of greater transparency and accountability.

So what can businesses do to restore the balance? All the writers cited here would agree that it starts with a redefinition of value creation, one that considers not only the financial value created for shareholders, but also the social value created for the communities in which a business operates and in which its products and services are bought and sold. It would include what Umair Haque refers to as “thick” value: value that is defined by the long-term return it creates in the way of employment opportunities, social and environmental health, and balanced, sustainable prosperity. It would consider ways for businesses to reduce the costs they create but up until now have not had to bear – such as pollution and resource depletion. It requires a new approach to business model generation, one which includes an examination of the impact our decisions have on both the social and environmental assets that we all share.

This is value that cannot be created by government policy restrictions designed to curtail business from harmful practices. It requires nothing less than a reshaping of capitalism’s relationship to society. As Michael Porter points out, markets are defined by societal needs, not just economic ones. Shared value argues that companies can create economic value by creating societal value. Let’s face it, if someone came to you with a way of turning polluted water into healthy, potable water, would you not invest in it? Think about not only the revenue that would result from applying that kind of technology globally, but also the innovation and productivity it would unlock in all those places where access to clean water is severely challenged.

There’s no need to consider social and environmental good as the enemy of profitability. Meeting society’s greatest unmet needs – health, housing, education, nutrition – is an untapped well of future prosperity. Let’s hope business participates in the dialogue started by Porter, Haque and Hamel and rediscovers its role as an engine of not just financial but also social and environmental prosperity.

This article appears in MISC Winter 2014, The Balance Issue

the author

Will Novosedlik

Will Novosedlik is AVP, head of growth partnerships at Idea Couture. See his full bio here.