Klaus Schwab writes: The effects of the most devastating financial crisis in decades have begun to fade. But debate about the fundamentals of the global economy is far from over. Indeed, there has been a new wave of heated discussion about whether companies should put profits or the common good first.
Milton Friedman, a leading proponent of the profit-oriented approach to corporate management, famously declared that “the business of business is business.” Indeed, from this standpoint, there is no contradiction between profit maximization and the common good. The pursuit of profit itself is a socially beneficial goal.
A conceptual basis for the opposing perspective, to which I adhere, lies in the Harvard economist Michael Porter’s theory of shared value creation. In fact, my own publications promote the stakeholder concept as the framework for a modern understanding of socially responsible corporate management.
The theoretical debate could continue indefinitely. But, in terms of practical company management, such ideological polarization is not particularly useful. If managers had to choose between fulfilling the expectations of shareholders and meeting their social and ethical responsibilities, their companies would probably collapse.
Instead, successful managers recognize that any company is both an economic and social entity, and thus that no stakeholder can be neglected. As I wrote more than four decades ago, a company, “like an organism…depends on several arteries,” all of which it must nurture if it hopes to survive and grow.
That sounds straightforward. But it can be very difficult when the demands of, say, the company’s shareholders conflict with the interests of its employees, customers, or local communities.
This requires, first and foremost, that the company is profitable. But profitability should not be an end in itself; it is a tool to help managers determine the most effective use of their resources and gauge the company’s competitiveness and vitality. Profitability, growth, and safeguards against existential risks are crucial to strengthening a company’s long-term prospects. But if these three factors constitute a company’s “hard power,” firms also need “soft power”: public trust and acceptance, won by fulfilling a company’s social responsibility.
In short, the real conflict is not between profit maximization and social responsibility, but rather between short- and long-term thinking.
We are emerging from a period when companies, under pressure to meet shareholder expectations, favored profitability and growth, even if it meant taking undue risks and losing public confidence.
Fortunately, companies are increasingly acting with a sense of social responsibility. By working with governments, international organizations, and civil society, companies are addressing major challenges like social integration, and creating the necessary systems to provide education and health care to those who need it most. These companies are implementing the stakeholder concept on a micro and macro level, answering to the demands of their employees, customers, and communities, and thus strengthening their brands.
In doing so, such companies offer a powerful response to the question of what their role in society should be. More important, they are showing the rest of the corporate sector that the business of advancing the common good is a worthy one.
