Redefining Capitalism

Government and civil society have long fashioned policy decisions around a supposed trade-off between social and/or environmental progress and economic profitability.

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The result is a catastrophic divide between business and society.


In 1970, economist Milton Friedman instigated an obstinate quest for short-term profits when he declared the sole responsibility of business is to maximize shareholder value.

The insinuation of such an assertion is that anything other than shareholder value maximization lies outside the scope of business. Friedman contended that companies have zero social responsibility to society.

This dogma propelled an intense pressure on stock price performance and short-term profitability – an approach that pervaded management thinking for decades.

Resulting debate has led to an increasing awareness and implementation of corporate social responsibility (CSR). Yet, by and large, CSR subsists on the periphery of a corporation’s fundamental business objectives. It is an extra. It is a short-term marketing ploy. It is the effort taken with left-over profits.

In a 2011 publication in Harvard Business Review, Michael E. Porter, Professor of Strategy at Harvard Business School, and Mark R. Kramer, Senior Fellow at the Harvard Kennedy School, asserted the necessity of shared value creation.

“The solution lies in the principle of shared value, which involves creating economic value in a way that also creates value for society by addressing its needs and challenges. 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.”


Can Shared Value Redefine Capitalism?

Porter and Kramer would assert yes.

“Perhaps most important of all, learning how to create shared value is our best chance to legitimize business again.”

Historically, business has been blamed for generating profit at the expense of society, rather than creating profit that benefits humanity. The fact of the matter is that business and society are interdependent.

How can companies simultaneously create economic and social progress?

The million dollar question.

The concept of shared value can only be achieved with the recognition that markets are impacted by both economic and social issues.

Moreover, social plights can detract from profitability.

Pursuit of profitability and social impact need not be mutually exclusive.

While a company’s primary responsibility may be to its shareholders, it is of utmost importance to understand that producing social good need not increase costs.

As told by Michael Porter and Mark Kramer:

“Companies can create economic value by creating societal value. There are three distinct ways to do this: by reconceiving products and markets, redefining productivity in the value chain, and building supportive industry clusters at the company’s locations. Each of these is part of the virtuous circle of shared value; improving value in one area gives rise to opportunities in the others. 

The concept of shared value resets the boundaries of capitalism. 

Not all profit is equal. Profits involving a social purpose represent a higher form of capitalism- one that will enable society to advance more rapidly while allowing companies to grow even more. The result is a positive cycle of company and community prosperity, which leads to profits that endure.”

It must be noted that even if companies successfully embrace the notion of shared value, and CSR drifts from margin to core, government exists as a potential hurdle. In order for shared value to truly play its course, regulatory bodies must eradicate vital obstacles.

We have discussed the concept of externalities in great detail, as most sustainable reporting is voluntary and thus negative externalities can often remain hidden. This is an issue that must be reformed. Companies are not mandated to internalize the negative externalities they are imposing on the planet. Yet, this is easier said than done. What cost should be imposed on a company for destroying the planet for future generations?

Policy makers must facilitate shared value, rather than regulate against it.

The time for a redefinition of capitalism is now, as societal and environmental issues not only persist, but augment.

Social problems have long been ceded to government and non-profit organizations.

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A wise portfolio manager once told me, “business has a duty to society, but only for the problems they create.”

Yet, this attitude is faulty.

If each corporation believed it was solely responsible for specific problems self-created, innovation would be drastically stunted. Shared value could never be achieved.

Successful pursuit of shared value rests on the strength of the moral obligation of decision-makers. Successful pursuit of shared value rests on a novel mindset on behalf of thought leaders, business executives, educators, and regulators.

Echoing the renowned words of Former U.S. President Abraham Lincoln: We cannot escape the responsibility of tomorrow by evading it today.

6 thoughts on “Redefining Capitalism

  1. Where does the line exist? How many problems can corporations tackle at the same time? Focus is important.

    I agree that when one sees a problem, then it is the individuals responsibility to fix that problem, despite the responsibility for creation …. but I am concerned about conflicting responsibilities and priorities of shareholders – the true owners of corporations. How can a corporation prioritize its responsibilities?

    Like

    • I understand exactly where you are coming from Chad. Certainly, a company has a duty to shareholders and therefore the shareholders must remain a top priority. However, the concept of shared value is not about prioritization, nor redistribution of wealth, but rather about expanding the pool of existing wealth.

      Social and/or environmental progress and economic success can be – should be – simultaneously achieved.

      Thanks for reading!

      Like

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