A good business creates value for shareholders and employees by creating value for customers. But should it also serve a broader social purpose? Should business concern itself with creating value for society?
It’s a longstanding debate. Two lawyers named Adolph Berle and Merrick Dodd argued the opposite sides of the issue in the Harvard Law Review in the early 1930s. David Packard weighed in with this in the ’60s: “A group of people get together and exist as an institution that we call a company… to do something worthwhile – they make a contribution to society.” Milton Friedman countered in The New York Times in 1970, “The social responsibility of business is to increase profits.”
To a significant degree, the debate has hinged on the notion that in order to create social value, a business must forego profits, thus sacrificing its responsibility to shareholders. In the latest Trust Barometer, Edelman finds that 80% of opinion elites agree that “companies need to create shareholder value in a way that benefits society even if that causes a reduction in shareholder value.”
I agree with the 80% that the trade-off is worth making. But what if business actually benefited when its actions also created social value?
Now comes corporate management guru Michael Porter (with colleague Mark Kramer), announcing “the next major transformation of business thinking” in a recent issue of Harvard Business Review. This new way of thinking is called “shared value,” which “involves creating economic value in a way that also creates value for society by addressing its needs and challenges.”
Their view is that companies can enhance their financial success by focusing on creating broader societal value; that the concept of an either/or trade-off between profitability and social value is a false one. Porter argues that it’s in business’s self-interest to make society better: “Addressing societal harms and constraints does not necessarily raise costs for firms, because they can innovate through using new technologies, operating methods, and management approaches – and as a result, increase their productivity and expand their markets.”
This work is consistent with the findings of the Arthur W. Page Society and the Business Roundtable Institute for Corporate Ethics in their 2009 report, The Dynamics of Public Trust in Business – Emerging Opportunities for Leaders, which recommends that companies build trust by “enhancing the core contribution that the firm makes to society.” This trust, in turn, can be converted into economic value.
As Porter says, “Businesses must reconnect company success with social progress. Shared value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success.”
It’s time for more businesses to realize that they have an opportunity and an obligation, not just to “do no harm,” but rather to use the power of their creativity to make the world a better place.
Roger Bolton is Senior Counselor at RBC Strategic Consulting, retired Vice-President of Communications at Aetna, and member of the Josephson Institute’s Board of Governors.