Sometimes, though all too infrequently, you come across a line of thinking that is so unfamiliar yet makes so much sense it takes your breath away. This is one. (And that’s why it’s a long post…grab a cuppa and get ready to do some thinking).
I’ve been blogging about the moral imperative that corporations have to behave in a way that eliminates environmental harm and delivers social benefits, as well as the marketing potential of elevating themselves above their competition by their actions and not just empty marketing (empty marketing example – Australia’s National Australia Bank claiming they ‘take less, give more’; action example – Canada’s Mountain Equipment Co-op publishing the details of all their suppliers’ factories).
In other words the need to broaden their focus beyond just the monetary enrichment of executives and shareholders and the need to understand how profit actually short-delivers on so much – trust, happiness, equality, inspiration, passion, health, society, a sense of meaning… and fails to account for so many real costs – damage to the environment, communities, society, or human achievement itself.
An example: the Australian mining industry’s recent successful lobbying against a mining super-profits tax which, only in the event of huge profits, would have assisted the government to manage the problems of the ‘two-speed’ economy (anyone exposed to resources doign great, everyone else struggling badly), would have freed up infrastructure spending and would heve helped Australia emerge from the GFC in even better shape than it has – ie with a broad-based healthy economy, rather than the very patchy one. Shortly after the industry spent $22m on a campaign to successfully killed the super profits tax, and in doing so bring about a change in Prime Minister, BHP posted it’s best result ever, a half yearly profit of $10.6 billion…doubling its previous result. AS a result, the heat is back on the sector, with a recent poll indicating 60% public support for the tax, reversing the earlier sentiment.
How unproductive, what a magnificent opportunity missed for this incredibly successful (ie profitable) industry to contribute actively to the future health the country on whose support it depends in order to exploit its resources.
Old businesses to lose new customers?
No wonder some commentators suggest we need to redefine what success actually means (for both corporations and individuals), warning that businesses for being stuck in rapacious old paradigms that will eventually see their newly empowered customers simply turn their backs on them, probably however too late to prevent them doing untold damage in their death throes. It’s what Hosni Mubarak just learned the hard way: that in a hyperconnected world, the people formerly known as “consumers,” “employees,” “investors,” and “subjects” have rarely been more powerful — and more unpredictable, critical, or exacting. Over the years, we’ve seen plenty of successful consumer boycotts and campaigns from the boycott of South African products during the apartheid era to the sweatshop labor campaign targeting sports brands like Nike.
This was all brought into stark relief in a critique of corporate values posted recently in the Harvard Business review. I’m not a full subscriber but there’s free access to the first section of the article as well as the insightful comments. The authors have some credentials: Michael E. Porter a Professor at Harvard University, frequent contributor to Harvard Business Review and six-time McKinsey Award winner teamed with Mark R. Kramer his co-founder in a global social impact consulting firm. Kramer is also a senior fellow of the CSR initiative at Harvard’s Kennedy School of Government.
Together they have written a brilliant economic rethink which led me to a fascinating research journey.
Corporations losing the support of their constituents
First let’s focus on the image problem faced by corporations; 85% of Americans think that they have too much power. Probably a greater percentage than than the former opposition in Egypt!
On the back of Enron and co, corporations are under fire, having lost the confidence of the general public and even being accused of psychopathic behaviour in the film The Corporation i.e. callous disregard for the feelings of other people, the incapacity to maintain human relationships, reckless disregard for the safety of others, deceitfulness (continual lying to deceive for profit), the incapacity to experience guilt, and the failure to conform to social norms and respect for the law. The review aggregator Rotten Tomatoes reported that 91% of critics gave the film positive reviews, based on 104 reviews.
In August 2007, the annual conference of the Academy of Management, the world’s leading association of management scholars, was titled “Doing Well by Doing Good”. The title reflected a growing concern among management scholars that the established corporate governance model, with all the recent years’ excesses and scandals, was not sustainable…. and then the GFC hit. The capitalists almost killed the goose and although they have been bailed out, propped up and permitted to creak on, they have lost the trust of governments and people. Another GFC would be catastrophic.
A big part of the problem lies with companies themselves, which remain trapped in an outdated and narrow approach to value creation ie pursuing short-term financial performance while missing the most important customer needs and ignoring the broader influences that determine their longer-term success. This is the only explanation for their tendency to overlook the well-being of their customers (banks and Australia Post closing branches, call centre automation designed to discourage personally contact etc), the depletion of natural resources vital to their businesses (eg the fishing industry) , the viability of key suppliers (the auto industry), or the economic distress of the communities in which they produce and sell (Walmart)?
The problem must be addressed with a global viewpoint. More than 40% of the worlds cocoa supply comes from the Ivory Coast. The U.S. State Department estimates that there are 109,000 child laborers working in hazardous conditions on cocoa Farms. Save the Children Canada reported that 15,000 children between 9 and 12 years old had been tricked or sold into slavery on West African cocoa farms many for just $30 each. Nestle is the target of a lawsuit filed by the International Labor Rights Fund because Nestle is the third largest buyer of cocoa from the Ivory Coast.
And the problem must be addressed structurally with an emphasis on location and community. A hundred years ago most businesses were locally owned. Owners reaped the returns of their investments in the form of dividends as well as in improvements in the comfort and prosperity of the communities in which they lived. Demanding greater dividends at the expense of the wellbeing of the community was against the owners’ self-interest. Today, thanks to global financial markets, ownership is divorced from community membership. While in many ways this has allowed funding to be allocated more efficiently, it has also lead to completely sub-optimal allocations in the way companies allocate returns between dividends and community wellbeing.
The narrow dominant conception of capitalism has prevented business from harnessing its full potential to meet society’s broader challenges of for meeting human needs, improving efficiency, creating jobs, and building societal health and wealth.
Shared value for a shared future
If companies are to regain their value to society and the broad support of their constituents, they need to grasp the concept of shared value, which involves creating economic value in a way that also creates value for society by addressing its needs and challenges. This means reconnecting company success with social progress. This isn’t about social responsibility, philanthropy, or even sustainability programs on the margin of what companies do, but carving out a new central strategic approach to lasting success.
Realizing shared value will require leaders and managers to develop a far deeper appreciation of the benefits of societal needs, a greater understanding of the true bases of company productivity, and the ability to collaborate across profit/nonprofit boundaries. And government must learn how to regulate in ways that enable shared value rather than work against it.
Businesses acting as businesses, not as charitable donors, are the most powerful force for addressing the pressing issues we face; society’s needs are large and growing, while customers, employees, and a new generation of young people are asking business to step up. We need business to apply itself to the concept of shared value to develop it to the same level of cohesion of ‘shareholder value’ or ‘competitive advantage.’
This will drive the next wave of innovation and productivity growth in the global economy. It will also reshape capitalism and its relationship to society, re-framing the idea that to providing societal benefits—such as safety or hiring the disabled—imposes constraints and costs on the corporation. Until now corporations have largely been allowed to exclude social and environmental considerations from their economic thinking. Right now Sydney is, at great cost and controversy, addressing old polluted industrial sites so that they can be opened to housing development. The push towards a carbon tax is a step in this direction. Emissions is an example where firms create social costs that they do not have to bear. The taxes, force firms to “internalize” these costs. It’s a rearguard action but it will force emitters to build their environmental costs into the company accounts moving forward.
The unbalanced ledger – unrecognized & unaudited costs
Companies are also unwilling to recognize that social harms or weaknesses frequently create internal costs for firms—such as wasted energy or raw materials, costly accidents, big clean-ups, big legal defences and the need for remedial training to compensate for inadequacies in education. And there are widespread consumer boycotts, which are becoming a more common response to corporate wrongdoing.
Can the pure profit motive be understood to be as constraining as forced wealth redistribution? Can the centrality of sustainability transplace the mantra of growth? Can corporations REALLY think and act any differently? History could be read as proving that business only believes something is wrong when it gets caught. It will be an evolution in increments but there are signs and pioneers around. Wal-Mart pioneered a ground-breaking Sustainability Index. Pepsi’s aiming for water-neutrality. Unilever is working to make micronutrient-enriched food that helps end global malnutrition. Nike’s shooting not just to manufacture shoes — but to remanufacture them. They’re just a small smattering of a larger movement: a cadre of radical innovators taking the first tiny steps to healing our imbalanced economy by living and breathing real costs and real benefits. Ironically, new markets offer the opportunity to improve our model. Global companies need to secure their future growth from developing economies, vast untapped markets. But you can’t profit off those who have nothing, you have to create viable economies. And creating viable economies means contributing to the social well-being of those people. The companies entering these markets need to contribute to funding health care, education, training, and infrastructure in order to develop markets. It’s worth looking to China for ideas about this approach to business-building through society building (NB apalling human rights and environmental record both noted).
What kind of capitalism do we want?
Given that humans provide both the consumption and the labour that business needs, what irony there is in the fact that the first CEOs to put human interests and the centre of their business activities will be true revolutionaries.
Slavery, feudalism, fascism and communism all failed. That leaves capitalism. Overall, capitalism has succeeded in making safe and secure for much of humanity. But we shouldn’t forget that millions of people around the world have been dismissed by capitalism as relatively unimportant, mostly left to die from deprivation rather than the outright execution exercised by the other systems mentioned above. However in the end, for the victims, the result is identical.
I’ll leave the final word to the brilliant blogger and ‘advisor to revolutionaries’, Umair Haque author of The New Capitalist Manifesto:
“yesterday’s institutions can’t deliver the goods — literally, the basic stuff of economic welfare…I don’t care about your “strategy,” “business model,” “campaign,” “product,” or “deliverables” (sorry). All that stuff is focused on outputs. What matters to people, in contrast, are outcomes: did this bring a tiny slice of health, wealth, joy, inspiration, connection, intellect, imagination, organization, education, elevation into my life, that lasted, multiplied, and mattered to me — or was its final result merely to make me just a bit fatter, wearier, unhealthier, disconnected, dumber, duller? What I care about is whether you can change the world, radically for the better — whether you can attain deep significance, and matter in human terms. Why? Because the world needs, wants, is crying out for changing — and if you can’t change the world, a rival who can is going to make your latest, greater so-called blockbuster look mediocre, the people formerly known as customers are going to tune you out, communities are probably going to self-organize against you
Industrial-age advantage was about understating costs or overstating benefits slightly harder and faster than the next guy. But in a tiny, fragile, crowded world, yesterday’s paths to advantage might just be sources of disadvantage”.
- Boris Loukanov: Could Creativity Reinvent the Capitalism? Michael Porter and Shared Value Concept (borisloukanov.com)
- Capitalism’s Mea Culpa; Humanism’s Opportunity? – Bronwyn Fryer Harvard Business Review (serve4impact.com)
- A new social contract between brands and consumers (simonmainwaring.com)
- The Capitalist’s Paradox – Umair Haque – Harvard Business Review (serve4impact.com)