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Business and society The biggest contract Ian Davis May 26th 2005 The Economist
THE great, long-running debate about business's role in society is currently caught between two contrasting, and tired, ideological positions.
On one side of the current debate are those who argue that (to borrow Milton Friedman's phrase) the "business of business is business". This belief is most established in Anglo-Saxon economies. On this view, social issues are peripheral to the challenges of corporate management. The sole legitimate purpose of business is to create shareholder value.
On the other side are the proponents of "Corporate Social Responsibility" (CSR), a rapidly growing, rather fuzzy movement encompassing both companies which claim already to practise CSR and sceptical campaign groups arguing they need to go further in mitigating their social impacts.
Large companies need to build social issues into strategy in a way which reflects their actual business importance. They need to articulate business's social contribution and define its ultimate purpose in a way that has more subtlety than "the business of business is business" worldview and is less defensive than most current CSR approaches.
Examples abound of the long-term business impact of social issues. These are growing fast. In the pharmaceuticals sector, a storm of social pressures over the last decade-stemming from issues such as public perceptions of excessive prices charged for HIV drugs in developing countries, for example-are now translating into a general (and sometimes seemingly indiscriminate) toughening in the regulatory environment. In the food and restaurant sector, meanwhile, the long-escalating debate about obesity is now resulting in calls for further controls on the marketing of unhealthy foods. In the case of big financial institutions, concerns over conflicts of interest and mis-selling of products have recently led to changes in core business practices and industry structure. For some big retailers, public and planning resistance to new stores is constraining growth opportunities. And all this is to say nothing of how social and political pressures have reshaped and redefined the tobacco industry, say, or the oil and mining industries over the decades.
In all such cases, billions of dollars of shareholder value have been put at stake as the result of social issues that ultimately feed into fundamental drivers of corporate performance. In many instances, a "business of business is business" outlook has blinded companies to outcomes (or shifts in their implicit "social contract") which often could have been anticipated.
Just as important, these outcomes have posed not just risks to companies, but also have generated value-creation opportunities. In the case of the pharmaceuticals sector, for example, in the growing market for generic (ie, non-patent-protected) drugs; in the case of fast-food restaurants, in providing healthier meals; and in the case of the energy industry, in meeting fast-growing demand (as well as regulatory pressure) for cleaner fuels such as natural gas. Social pressures often indicate the existence of unmet social needs or consumer preferences. Businesses can gain advantage by spotting and supplying these before their competitors.
It is neither sufficient nor wise to say that it is up to governments to set laws, and for companies simply to operate within these rules. Nor is it enough, even if it is often valid, to point out that many criticisms of businesses are unmerited, or that those throwing the mud ought also to examine their own practices and social responsibility. Irrespective of whether the criticisms are valid or not, their cumulative effect can shape the strategic context for companies. It is imperative for business to seek to lead rather than react to these debates...
In the limitations of both CSR and of the "business of business is business" thinking lie the outlines of a new approach for business (as relevant for Chinese, Indian and German companies as for American and British businesses). Three main strands stand out.
The first is a helpfully simple prescription. Businesses need to introduce explicit processes to make sure that social issues and emerging social forces are discussed at the highest levels as part of overall strategic planning..
The second and third strands both relate to the idea that there is an implicit contract between big business and society, or indeed between whole economic sectors and society-the contract that is the subject of this article...there are two sides to a contract-and business must acknowledge that in return for the ability to function it is subject to rules and constraints...
What might this mean specifically? There is no shortage of big social issues today that directly affect many big businesses and that require new debate. These include: ensuring aid and trade regimes successfully promote the development of Africa and other poor regions (the economic lift-off of such regions would present a major potential boon to global markets as well as international security); promoting a more sophisticated and sensitive approach from both companies and governments to balancing the societal risks and rewards from new technologies; spearheading dialogue on the health-care and pension challenges in many developed countries; and supporting efforts to resolve regional conflicts.
...Public receptiveness to active business leadership on issues such as these may be a lot better than some might be inclined to think. Despite the poor image and bad press of big business in recent times, polls suggest that people retain a belief in the ability of business to provide a positive contribution to society.
More than two centuries ago, Rousseau's social contract helped to seed the idea among political leaders that they must serve the public good, lest their own legitimacy be threatened. The CEOs of today's big corporations should take the opportunity to restate and reinforce their own social contracts in order to help secure, for the long term, the invested billions of their shareholders.
Ian Davis is worldwide managing director of McKinsey & Company