Almost 15 years ago, just after my co-author and I published The Knowledge Management Fieldbook, we were discussing what came next. I remember having seen a book on corporate citizenship from our publisher and declaring, “This is what’s coming.” The idea that corporations had an obligation to create more than pure economic value for shareholders was something that we had skirted in our book’s discussion of the wealth-creating aims of knowledge management. We referenced models that included customer and social capital along with organizational and human capital as the mechanisms by which knowledge ultimately created value or generated wealth, but we did not suggest that the purpose of employing this capital was ultimately aimed at anything beyond generating value measured narrowly in financial terms. The idea that a corporation was obligated to not only generate economic wealth but also positive impact was outside the scope of what knowledge management practitioners and theorists were discussing at the time.
There is still a great deal of debate about the obligation of capitalists to deliver positive impact beyond profits or returns to shareholders, although clearly the conversation is shifting in favor of what might be called enlightened capitalism. Conscious capitalism is what John Mackey of Whole Foods calls his expanded theory of the purpose of the corporation. Michael Porter has given the name Shared Value to what essentially is the same thing. In the investment world, sustainability, responsible or impact investing and various other terms of art urge institutional investors to take a long view, factoring in the very real social and environmental impacts of investing in companies that might make money in the short term but do real harm in the long term, ultimately exacting a harsh economic penalty. The proliferation of Corporate Responsibility or Corporate Social Responsibility (CSR) positions in companies is further evidence of this shift. It is not just a Developed World phenomenon. For example, in India legislation passed in 2012 requiring larger companies to allocate 2% of profits to CSR, a requirement that cannot be met by simply donating to a charity, became effective this year.
Younger generations, the Millennials, appear to care about the social and environmental impact of corporations. Perhaps this is because the proverbial can which has been kicked down the road looks like it has come to the end of the road on their watch. Even my less than politically aware 17-year-old remarked recently that while she liked paying less at the pump as a result of falling gas prices, she understood that lower prices at the pump only put off the inevitable need to find other sources of energy that are less harmful to the environment. She is distressed about continuing efforts to exploit fossil fuels and follows news about fracking.
While this all seems new, I’m now old enough to know that whenever I think something is entirely new, it most likely is not. It is very rare in human history to find events that completely lack precedent. While there are undoubtedly some new aspects to these discussions about the obligations of capitalists, upon reflection, it seems as if they mark a return to a view of the corporation that was interrupted for several generations and is currently experiencing a course correction.
The expectation that the rich should share some of their bounty with the less fortunate has been around a long time – think of religious and monarchic systems. In more contemporary times, business engaging in philanthropy was an established practice as early as the late 1800s. At that time, while businesses were still primarily small and local, philanthropic activities were similarly local and small-scale (1). Business owners were the rich people in town, benefactors who helped their neighbors. But by 1929, the largest 200 corporations in the United States owned half of the nation’s corporate wealth (2). These businesses were very large, larger than the economies of some countries at the time. And, they were no longer local. How they operated had an enormous impact on the nation’s economy. As a result, the nature of business philanthropy started to acquire overtones of social responsibility, something required as opposed to elective. That is certainly true today when 37 of the world’s 100 largest economies are corporations (3).
It appears that the corporate world can no longer dodge the negative externalities that are a by-product of its core activities as it has for almost 50 years. The past 50 years have been the equivalent of a tax holiday – the kind consumers get at the start of a school year when sales tax is suspended for a week so we can buy school supplies and clothing. But the corporate holiday from negative externalities is quickly coming to an end. It appears to have been an aberration, a misjudgment. Many trace the misstep back to Milton Friedman and the Chicago School of thinking that he epitomized.
The catalyst for this blog post was a really terrific white paper that I urge you to read by James Montier, “The World’s Dumbest Idea”(4). I’m not alone in having my thinking jogged by the piece. Just do a Google search and you’ll get over 180,000 results – many of which, like mine, are essays or columns that are responses to the paper. Since you can read the entirely readable paper yourself, I will not repeat it here other than to note the key points that got me thinking.
- Focusing on all stakeholders – not just shareholders – delivers a consistently better return to shareholders over the long term. Doing the opposite is bad business.
- Aligning executive compensation with the interests of shareholders has amplified the interests of shareholders to the exclusion of other stakeholders. This has been a major contributor to less than stellar business results over the long term.
- Over time, “this [exclusive focus on shareholders] led to a switch in the modus operandi [of corporations] from ‘retain and reinvest’ during the era of managerialism to ‘downsize and distribute’ under SVM [Shareholder Value Maximization].”
Montier goes on to cite a rat’s nest of pernicious effects that have come from not explicitly factoring in the needs of customers, employees, communities and vendors into the equation of running a successful business. All of them bad. Given the work I do with corporations, I was particularly struck by the fact that the focus on SVM and its negative orientation to long term investments has had a direct impact on innovation – why even bother with innovation except as window-dressing if most CEOs are only around for 6 years on average? Innovation is hugely risky, has a long pay-off period and is a drain on short term financial results. The other thought that popped into my head when reading Montier’s white paper was whether the rapid ascent of social enterprise is a remedial reaction to corporations having lost their way. We’ve had roughly two generations of corporate leadership that has, for the most part, embraced the view that a corporation’s only business is to maximize returns to its shareholders. Everything else is somebody else’s concern.
Finally, I had a really bad moment when I realized that having received my MBA from Wharton in 1985, I was part of this wayward generation of corporate managers and leaders. My business education was based on a false, unquestioned assumption about the purpose of corporations and capitalism. I, of course, was taught at what might be considered the pinnacle of Milton Friedman’s dominance in business circles. Being a complete neophyte to the world of big business upon entering Wharton in 1983, I pretty much took it for granted that what I was learning there was based on a solid foundation. Even though I considered myself a critical thinker, it never occurred to me to question the general theory of the purpose of the corporation. So, I simply absorbed the dogma of my time and brought it along with me as I entered the business world. It’s only been in the past five years that I’ve begun to seriously reconsider the purpose of corporations and how the work I do in innovation can help them achieve sustainable growth, a concept that re-integrates longer term consideration into growth strategies.
As we head into the new year, the shift towards a greater emphasis on corporate responsibility continues to gain momentum. Rather than being a burden, I believe it will uncover new growth opportunities for corporations that will have much greater staying power. As new generations of leaders take over, these ideas will become business-as-usual. It’s up to the current generation of corporate leaders, my fellow wayward MBAs, to accelerate the process by laying the foundation today. Time for prodigal capitalists to come home.
(1) Corporate Social Responsibility and Related Terms, sourced on 12/12/14 at: http://www.sagepub.com/upm-data/41167_1.pdf
(2) Sourced on 12/6/14 at: http://www.gilderlehrman.org/history-by-era/essays/progressive-era-new-era-1900-1929
(3) Sourced on 12/8/14 at: http://makewealthhistory.org/2014/02/03/the-corporations-bigger-than-nations/
(4) “The World’s Dumbest Idea,” James Montier, GMO, sourced on 12/12/14 at: http://www.gmo.com/America/ to find link to white paper