In recent times there have been growing calls for businesses to play a greater role in promoting social change. I read recently a public statement issued by the US Business Round-Table made up of 200 major US corporations offering a new definition of corporate purposes.
They amended their two-decade-old statement that unequivocally stated that “corporations exist principally to serve their shareholders”. Their new statement expresses a pledge to shift away from narrow shareholder capitalism that is driven by a single metric of profitability to adopt broader stakeholder capitalism that emphasises greater social purpose and responsibility.
Such a commitment is critical for re-aligning the core purpose of the business with the interests of stakeholders and is a glue that binds the government, business and society.
Large corporates have in recent times lost some credibility due to dodgy business practices, accounting fraud or collusive behaviour to fix prices. Regulation has always been about catching up with perverse forms of innovation that generate negative externalities. There have also been the worst cases. Iconic brands such as KPMG, McKinsey & Co and Bain & Co were recently implicated in ethically questionable practices associated with State Capture in South Africa.
Beyond ethical conduct, there is a positive role that corporates can play in generating social value. Businesses are an integral part of societies within which they exist, and they can have a shaping impact on the social fabric. In the past, we have, for good reasons, placed an intense spotlight on government behaviour, especially policy uncertainty and maladministration that have choked investment. However, we should demand a higher standard from corporates as well. Corporate governance measures such as the King Codes have emphasised how important it is for corporates to respond to broader stakeholder interests.
When corporates are aloof and indifferent, their legitimacy wobbles and they are on the back foot in the face of government and society. This was evident during the global financial crisis of 2008 when the business community, in particular the financial sector, came under fire for greedy behaviour and pursuit of short-term considerations above broader stakeholder interests.
Consequently, public trust in corporate leadership plummeted. In his book, The Third Pillar, economist Raghuram Rajan points out that:
“If the private sector is to be trusted by the community, and if it is to be a reliable check on the state, it does not just have to be well-behaved, it has to be seen to be well behaved.”
When businesses take ethics seriously and they are positively engaged in society, they are in a stronger position to have the ear of government and other key stakeholders. Society expects businesses to be more responsive to social challenges. This is why increasingly Sandton, a symbol of financial power, is a destination of choice for protesters who yearn for corporates to pay attention to deepening social inequalities. The easy way out may be for corporates to wash their hands and leave the social dimensions to government. That will be a false start since it is impossible to do business profitably in a dysfunctional society.
For many years, businesses have conceived of their role in very narrow terms; about making profits and not much else. Conservative economist Milton Friedman once remarked that “there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays in the rules of the game”.
Thankfully, this mindset is changing. The idea of shared value is about building collaborative relationships between government, business and other stakeholders to pursue a legitimate social interest.
There is also growing acknowledgement that for countries to solve their most intractable challenges, collaborative relationships between government, the business sector and other important stakeholders will need to be forged to co-design solutions that work. Failure to work together gives social problems more room to flourish in the future.
Without a doubt, owners and managers have to place a premium on building sustainable businesses, produce high-quality products and services, be innovative, deliver shareholder value and ensure return on equity. While all of this is necessary, it is not sufficient, especially in societies that are going through social and economic strains such as South Africa is. When a critical part of the body suffers a debilitating ailment, the other parts cannot function optimally.
We can agree that the country at present is not where we would like it to be. There is an uncomfortable shaking in our politics, the economy and the social structure. These are expressed in unsteady political leadership, competing demands for limited resources, rising inequalities, and in growing tensions among those at the bottom rungs of the social ladder.
The tone of our political conversations is also laced with anger and tension. In sum, as a country, we suffer a crisis of confidence, something we can reverse through shared value. At the macro-level these challenges are well known and range from growing inequalities and high levels of unemployment, weaknesses in our education system, brain drain and institutional weaknesses in government, and challenges of market failure that is manifest in the high levels of concentration across different product markets.
The only way we are going to build and sustain momentum for positive change is through shared value. It cannot be business as usual both in government and in the corporate sector. The lenses through which we examined socio-economic problems yesterday and the tools we deployed may be inadequate today, since these challenges are also compounded by technological and geopolitical shifts.
It is also important to state what shared value is not. It is certainly not about agreeing on ideology in a narrow sense, and on everything under the sun. It is not about transactional relationships between government and the private sector. It is not about throwing money away just to show the private sector is doing something to contribute to social change.
Crucially, it is genuinely co-designing solutions to the “wicked problems” that confront South Africa, from inequality to promoting an inclusive business to finding points of convergence in supporting economic growth, and much more. It is also about building the next layer of successful businesses, well-trained managers, and skilled employees on a diversified basis.
With the ratcheting up of political rhetoric in the country today, with strong voices pressing for radical economic transformation, government and business should seize the moment to work together. Growing economic strain and deepening inequalities have ripened the conditions for populist nationalism in the US and in parts of Europe. South American countries such as Brazil, Argentina and Mexico have witnessed a stand-off between the government and large corporates.
When the economy is under-performing and the poor in society feel the strain, corporates come under fire. This is because, rightly or wrongly, they are viewed as aloof and indifferent. South Africa need not get to that point. Building shared value could help in generating new solutions to old problems. DM