Creating shared value

The business gnomes of Makati are most likely still subscribed to the thinking that “the social responsibility of business is to increase its profits.” That was popularized back in the early ’70s by Chicago School economist Milton Friedman.

Well, we are finding out now that isn’t quite the way to go. Many have even attributed today’s populist revolutions to this way of thinking. Companies generate more and more profits often at the expense of people, including their own employees.

Over the holidays, I had been reading the book “Winners Take All” by Anand Giridharadas, a columnist of the New York Times. He wrote about Michael Porter’s new perspective on the issue. Porter, a Harvard Business School professor, is acknowledged as the founder of modern corporate strategy.

Porter wrote in an essay in the Harvard Business Review that “the capitalist system is under seige.” Let me cite snippets of Porter’s views as reported in the book just to whet the appetite of readers to get the book and read the material in full. It should be required reading for top level management of Philippine corporations.

Business is being “criticized as a major cause of social, environmental and economic problems.” Companies were “widely thought to be prospering at the expense of their communities.”

And who was to blame? “A big part of the problem lies with companies themselves... for having an outdated, narrow approach to value creation.” Companies have become too focused on “optimizing short-term financial performance.”

Again and again, companies that employed droves of brilliant people and had high-priced outside advisers were making decisions that ignored “the well being of their customers, the depletion of natural resources vital to their businesses, the viability of suppliers, and the economic distress of the communities in which they produce and sell.”

Porter had become interested in inequality after the Great Recession, specially after seeing some data on how well many American businesses and individuals had survived it, and how badly the average citizen and worker had done by comparison.

He said, “We started thinking hard about, what are we doing at Harvard Business School? What are we teaching here? Somehow we’ve missed a big piece of the equation.”

The book observed that “those questions led him to his idea of “shared value” – that there were new ways of thinking about business goals and practices that would improve big companies’ relationship with their communities.”

Porter wants to think in terms of what should, rather than what’s not. The book observed that “Porter’s ideas on the ‘not’ seemed of greater import, because if it was obvious to millions outside of MarketWorld that the business protocols of the last generation had caused so many of the problems the world now confronted, it was, willfully, one suspects, not yet obvious to many within it. Perhaps, hearing it from Michael Porter would undercut the plausibility of their denial.”

Porter spoke of how companies over the last generation had pursued a vision of globalization in which they owed nothing to any community... You analyzed the data, and then you went where the opportunity was; it didn’t matter if that chase severed you from your own community and your obligations to it...

“Do each of your activities where it can be best done, wherever that may be... Porter suggested that it had disrupted an older pattern of companies behaving with a sense of citizenship.”

Porter’s second area of criticism regarded “optimization”... and this, Porter said, had made it easier to mistreat workers and ignore questions about one’s effects on the larger system...”

The new ethic of optimization was to Porter initially positive. “We have learned to run businesses more productively, and how to operate supply chains,  and how to better deploy technology, and how to be smarter about procurement and pruchasing.”

But, as “this slack run out,” life grew harder for many workers. “We ended up making business more productive, which allowed wage increases for many... but also, without even realizing it, started building a disconnect between the business and their average employees.”

“Somehow in being efficient and being clever and being productive, people thought they had the license to just stop thinking about the human beings and well being of everybody else in the system.”

“We turn many of these people into commodities... so a lot of the labor practices, a lot of this idea that you should have contract workers and not have to pay benefits – all this stuff was just too clever and everybody sort of justified it in terms of, ‘Oh, we’re being productive and we’re kind of maximizing our returns, and that’s somehow our job.”

Porter: “I think we somehow – again, in the pursuit of efficiency, and financial-market sophistication, and modeling and so forth – we found ways to make money, but it’s somehow detached from what capitalism ultimately at its core is all about, which is about the real economy. The investing aspect of business had come to dominate those other aspects of it involving building things. serving people, solving problems.”

Well, it is a new year and it is a good suggestion for all those planning sessions to include a talk or two on the real social responsibility of business in our world right here in the Philippines. We have an economy with a lot of potentials to include a large working age population, but we cannot think of all these people merely in terms of market.

Social unrest may not be obvious to many of the business gnomes in Makati, but rest assured it is there and expressing itself in the kind of political populism that’s unsustainable for all of us. The crisis of the water companies is a product of this negative environment.

The Makati CEO who once emhasized to me the importance of looking after his fiduciary responsibility to his shareholders will have to expand his scope of vision or end up in jail for whatever reason that a populist president has threatened to use.

These are difficult times and it won’t start to get better without tough soul searching with the end of realizing what our shared values are that will produce a society ready to work together for the common good.

Boo Chanco’s e-mail address is [email protected]. Follow him on Twitter @boochanco