The growing trend for business leaders to embrace solving social problems and behaving more responsibly is unmistakable. It is commendable, and I applaud it.
But it also reminds me of the old quip that Columbus didn’t discover America because it was already there. The notion that businesses operate in a bubble where they can pick and choose their responsibilities — where they can pretend their own microeconomic reality that operates independently of macroeconomics, public health, and environmental sustainability — defies both common sense and reality. The increasingly obvious impact of climate change is just one piece of hard-to-ignore evidence. Fortunately, organizations such as The B Team, Conscious Capitalism, The Center for Higher Ambition Leadership, and The Shared Value Initiative are documenting the increasing number of companies that realize this and are altering their practices accordingly.
The idea of the “social enterprise” has also gained popularity. These are organizations, both for-profit and nonprofit, that seek to fulfill an explicit social mission along increasing financial returns. In some cases, these involve new governance models such as “benefit corporations” and “low-profit, limited liability” status that fill the gap between traditional for-profit and nonprofit structures. Hip eyeglass retailer Warby Parker and outdoor outfitter Patagonia are both B corps. Sounds simple, right? It’s not: There are some widely held assumptions embedded in the discussion of social responsibility that I would like to challenge:
1. Having a business adopt a social mission is special or different. This is a fallacy. Businesses are social entities: They employ people, operate in communities, and consume natural resources (even if the business is just a solo entrepreneur breathing air and drinking coffee). The status of “corporation” is socially constructed and conferred (notwithstanding the U.S Supreme Court’s ruling that corporations are, in some way, people). Both the good and bad effects that businesses cause are part of the world we share.
In his new book, The Mission-Driven Venture, Marc Lane quotes the founder of India’s Tata company as saying that “in a free enterprise, the community is not just another stakeholder in business but is in fact the very purpose of its existence.” This echoes a sentiment attributed to Peter Drucker that profits are to business as breathing is to life: necessary for its survival but not its purpose. Every business leader should be concerned about making a positive difference for society.
2. Shareholders have a special status among the constellation of stakeholders. No. This is a myth that has been enthusiastically advanced by those who invest in companies ever since economist Milton Friedman wrote in 1970 that the sole purpose of business is to earn a profit. At the core of Friedman’s argument is his assertion that only people can have responsibilities to society and that corporations are not people. Back to the Supreme Court decision: As corporations have been deemed to have some of the rights of people, do they not now have the human responsibilities that Friedman dismissed? More fundamentally, economists tend to exclude variables such as environmental impact or hold them constant when constructing theoretical models (this is my undergrad degree in economics talking). That’s convenient for the blackboard but doesn’t often hold up in the real world. Steve Denning has written repeatedly and eloquently on the supremacy of shareholder value maximization as “the dumbest idea in the world.”
Shareholders should expect a fair return, but not at the expense of other stakeholders. Why? The ability of any business to create long-term economic value is dependent on the input of a range of stakeholders: Investors aside, without customers, suppliers, workers, and communities in which to operate, no business would be viable for long. Those stakeholders should be fully considered and respected. Witness, for example, the awakening of Walmart and other retailers to the need to pay something above the federal minimum wage to workers in order to drive the kind of loyalty, pride, and engagement that keeps customers buying. Profit arises from interdependencies among stakeholders.
3. All share owners are the same. This is also wrong, deriving from a time (Friedman’s heyday, in 1970) when most investors held their shares for months, years, or even decades. Those are shareholders. There are some of those around today, including many institutional investors. A company’s leaders should get to know these people and develop enduring, transparent, and trust-based relationships with them.
For better or worse, however, some share owners are simply share traders: people and firms who don’t care much about the company, its management, or its mission. They do not even care whether the share price goes up or down so long as their bet is on the right side of the move. Share traders obsess over short-term returns and their alignment with forecasts; shareholders look at short-term results in the context of long-term performance. Share traders are a fact of life but should be given little concern by business executives as they consider strategy and social impact.
An increasing percentage of market activity today is driven by share traders.
4. Simply applying capitalist business practices to the world’s most intractable social problems will solve them. This is the misguided cheerleading call of many social enterprise enthusiasts: Unleash a few smart MBAs and they’ll untangle the mess in no time. The truth, however — and this is a big however — is that although business can play an important role and those MBAs have much to contribute, the problems of poverty, hunger, violence, climate, and the like are systemic. They require integrated wisdom, expertise, energy, and effort across public, private, and nonprofit sectors. Further, capitalist enterprises have caused a fair bit of the social strife that social enterprises now look to remedy. Humility on the part of all would be a good thing.
Perhaps the most encouraging aspect of the social enterprise movement is that the integration of mission and profit is emerging in the thinking and practice of many businesses. People in each sector have much to teach and learn from one another. If you want to learn more about how to start, run, or invest in a social enterprise, Lane’s book is a thorough field guide. I’d like us to begin to hold all businesses and their leaders to a higher standard: Let’s insist that they be conscious capitalists pursuing a higher ambition to create value shared by all of their stakeholders — in other words, more like the best example of the people the Supreme Court has judged them to be.