Milton Friedman famously argued that ‘the social responsibility of business is to increase its profits’, pay taxes and let the government deal with the rest.
In 2011, Michael Porter and Mark Kramer wrote in the Harvard Business Review that business can create economic value while addressing social needs and challenges: ‘shared value is… a new way to achieve economic success.’
We talk to Associate Professor Rae Cooper and Associate Professor Ranjit Voola about the role of business in society.
Sandra Peter Introduction: The question of what is business for has always been an important one and Milton Friedman famously argued that the only social responsibility of business was to make money, then pay taxes and let government deal with the rest. In his 1970 New York Times article he argued that the social responsibility of business is to increase its profits and concluded that maximising profit, while remaining within the law, was the only thing that businesses should do. More recently Michael Porter and Mark Kramer wrote in The Harvard Business Review – six years ago – that shared value is not social responsibility, not philanthropy, or even sustainability, but a new way to achieve economic success. Businesses can create economic value while addressing social needs and challenges. This has come again into discussion a couple of days ago when Qantas said that it will continue to campaign on social issues, including gay marriage, indigenous reconciliation, and gender diversity. They believe that these issues are about the fundamental Australian values of fairness and that they are the national carrier. And in a statement they said that just as they do on economic matters, they will continue to speak up on social issues they think are important.
Introduction: From the University of Sydney Business School, this is Sydney Business Insights, the podcast that explores the future of business.
Sandra: So today we ask, what is the role of business in society? We have here Associate Professor Ranjit Voola and Associate Professor Rae Cooper. So what is the role of business in society?
Ranjit: I think more recently, in the last decade or so, there’s been a huge debate about exactly what that is. And I think there is actually a perfect storm in the context of whether profits is an end, or are profits are a means to an end. And I think there's a consensus building around the fact that businesses have a much broader role to play. And in fact profits are not the end, but a means to a greater end, which is societal wellbeing. And I think there are multiple forces acting on that trend towards societal wellbeing, for example business themselves after the GFC have realised that they're actually losing some legitimacy and they are situated in society, so they have to not just make money but be proactively doing something good. And I think business leaders have actually realised this too. For example if you look at Unilever, their major goal is to do something about children dying of diarrhoea by using soap to wash their hands and that kind of stuff. So I think there are a lot of factors around business itself and the role of business. In fact even the government is suggesting that businesses should be involved in alleviating poverty overseas. So for example if you look at the Australian Government policy on aid recently, the last year or so they've tended to trade for aids, so in other words, incorporating the private sector into aid policies. Although, I should mention that we have been told for the last, I guess 50 years, that the purpose of business is to make profits, so all of a sudden for people to change and think that there is a bigger purpose will take some time.
Sandra: Rae, is business around making profit, or about having a purpose, or about creating value?
Rae: I think it's all of those things actually. I think we'd be mistaken to say that business wasn't about growth. As Ranjit says, I think we've moved to a situation where we're trying to have a broader conceptualisation of the role of business and within that I think there's some interesting conversations about the role of leaders within businesses as well. And I think that goes to looking at the fact that organisations are nested within communities, are nested in economy, are nested in societies, and that there is a broader value to business and a capacity to contribute in positive ways to that context in which they're working. Ranjit sort of touched on that move from the classical kind of approach to a more rounded approach that's a little more lined up with where we are in our society at the moment. And that is sort of looking at the stakeholders in business are not just shareholders. So stakeholders in business at the moment are very clearly a broader range of stakeholders, you know clients, community, staff, and I think this is where we're seeing the generation of some of these issues that might be in the past – and by people who are sort of followers of people that Milton Friedman – would have seen them as being inappropriate issues for business to cover are becoming more and more a part of the mainstream of what business is looking at. And that goes to things such as reconciliation with Aboriginal Torres Strait Islanders, it goes to gender equality at work, and it goes to things like marriage equality, which I see as really important issues for business to lead on.
Sandra: Business seems to be about context and not just the activity of business. Has this changed over time? Has our understanding of the role of business in society changed over time?
Ranjit: Yes I think so. I think there's been a realization, for example, that it is not possible or is not even ethical to make money and to help other people. I think that kind of assumption is being questioned pretty rigorously. So there is more of an awareness that it is actually possible for for-profit businesses to engage in things like any of the 17 UN sustainable development goals, like poverty alleviation and gender equality, not just as some kind of an activity that you should do because you want to look good, but actually an activity that you can actually do whilst making profit. So I think that's a fundamental change, slowly coming in business, where it's not necessarily non-economical to alleviate poverty and those kind of issues.
Rae: Yes I agree Ranjit, and in my own area of research, which looks at workforce and workplace practices, I think we're very much seeing a change, you know, it's not seen as leading practice to exploit staff. And it's also not misaligned, good practices around things such as decent work, diversity and inclusion, are key topics for business leaders at the moment, not because they're kind of nice things to do but because there's a real bottom line impact that we can identify there. So we know that organisations which have good employment practices, which allow their staff to come to work as themselves – to bring their entire self to work – to feel included and to feel valued at work. That's absolutely lined up with great financial returns. There's lots of different studies that have shown that there are impacts on return on investment, return on equity. Share price organisations that are pursuing those kinds of diverse inclusive practices. But also we have really strong links to things such as innovation and cultures of innovation in those contexts. And also looking at staff measures so productivity and engagement kind of issues as well. And I think further interest in looking at you know staff really being the key to driving productivity and driving innovation. I think this will be more and more foregrounded in terms of what our business leaders are going to be pursuing.
Ranjit: Yeah absolutely Rae. And the other economic reasons for companies to engage in social issues is that, by essentially by not engaging in social issues you're basically leaving about 4 billion people out of the 7 billion in the world, you know, you're not actually engaging with them, because the 4 billion people around the world who live on less than five dollars a day, they’re also a market. It is possible to ethically do business with them and at the same time to alleviate issues such as poverty and that those kind of things.
Rae: One thing to add to that, is let's think about what social issues are. So for me that sort of framing kind of puts issues like gender equality or diversity issues more broadly as being outside of organisations or outside of business. But I think that absolutely, you know, even in the Australian context, issues such as marriage equality are not divorced from the organisation there because organisations are made up of individuals who have families and have communities and have interests. Those people make up organisations and for many staff those kinds of issues are absolutely internal to what organisations are doing. And if you see some of the organisations who are taking quite a progressive approach on these, in inverted commas, ‘social issues’, the organisations whose staff are demanding these kinds of changes and see, you know, it’s really important for them to work for an organisation that lines up with their own values.
Sandra: Has this historical shift from a focus on shareholders to focus a on stakeholders been about the changing public expectations around businesses?
Ranjit: Absolutely. If you want to take a very macro approach, in 2015 United Nations ratified the 17 Sustainable goals, and what is very different about that new version of the Sustainable Development Goals, as the previous version which is called the Millennium Development Goals was a very strong focus, these 94 countries that ratified their system was put on for profit businesses. So there are various estimates about how much money it would cost to actually implement things like going for gender equality or reducing poverty or hunger and they range from one point five trillion dollars to four point five trillion dollars a year to actually make that happen by 2030. So I think you know big organisations such as the UN and the government have realised that although they've been at the forefront of trying to do something with the social issues it's really important that they understand that businesses have to be part of that solution, although you know previously they've been seen as part of the problem. I think without the business from a practical financial perspective it's quite difficult to engage with this societal issue. So therefore I think from a macro approach there is pressure to change some public expectations about the role of business.
Rae: Yeah I agree with Ranjit. And I think sustainability is the key and I think we're much more framing legitimate business activity around sustainability. I think consumers, clients, communities are becoming a lot more savvy, more connected, more educated around business activities as well, and I think the very powerful impact that business activity in the social and broader sort of economic arena brand is very, very important and that connected up and enlightened customer base can have a real impact. And so I think that businesses have a mind to that as well. But for me the sustainability is the key.
Ranjit: And also from a more micro approach as the Qantas CEO many other CEOS have realised that they really have to show some leadership in terms of the way forward for business. And I think it also has to do with the economic imperative, not just the moral imperative. So I think there's pressure coming from within organisations too. I think there's been a lot of introspection about what are we actually doing? Of course to have good return on investment and take care of shareholders. But what else can we do?
Sandra: There’s always the question of, are businesses equipped to handle the big social issues, such as the ones we've been discussing?
Ranjit: Yes, I think so. But as my previous comment, I think it will take some time to change certain assumptions. So there's been no assumptions for many years that the purpose of business is to make profits and look up the shareholders, which it should still have. So I think as more people get on board, such as a CEO, and especially I think as Rae was saying before I think consumers previously just expected businesses not to do any harm, but I think that's actually changing to not just to do no harm but to actually proactively do good too. So I think yeah I think slowly as more people see that economic and the moral imperative, I think it is possible.
Rae: Well in terms of whether business is equipped to deal with some of these issues I think we've got to go back and look, what are organisations? What are businesses? And essentially they are organisations made up of humans who have lives which are very different in some circumstances who live in communities contribute to economies and societies. So I think yes they are equipped because they're not machines and are not unmovable, they are organisations which reflect the values of the people who are in them. And I think very importantly reflect the values and the agency of leaders who lead them as well. So I think they can be as equipped as you'd expect human beings to be, and to reflect the expectations that those that context of those people who work for them and lead them.
Ranjit: And also to follow up Sandra Peter not just the consumers, but from anecdotal evidence of my own teaching and the unit on poverty alleviation profitability, I have actually seen a slight change in student's motivations in terms of what kind of companies they want to work for. So I think more and more anecdotal evidence suggests that students, actually, really future business leaders, are looking to work in companies that actually proactively do good to tackle social issues objectively while making profits.
Rae: I think that's a really important point Ranjit. And there is really we refer to as the inverted commas ‘the global war for talent’, and that's about organisations wanting to tap into the best and brightest. And there does seem to be some evidence that the interests of the educated middle class of this emerging group of students who are in universities at the moment, actually have a focus on value, they have a focus on impact, they have a focus on contributing broadly for impact for good within society. So I think this is absolutely going to play a part. The values that organisations project outside, the practices that they have internally, are absolutely going to be part of that approach of business to trying to recruit the best and the brightest to come and work for them.
Sandra: We have a bit of a historical look at this question but we seem to always come back to large businesses. Is there a difference between how large businesses approach this question and what small business is for in society? What is the role of small businesses, and is there a difference?
Ranjit: Small businesses make up most of the businesses in most economies I guess, including Australia. At this stage I think larger firms are actually in the forefront of changing this perception primarily because you know they see the economic value of it I guess. So I think at this stage small business are picking up on these issues but it'll take some time before they follow the larger firms.
Sandra: Let's move a little bit to having a look at the future. Do we see a repositioning of the role of business in society and how will we know this? We've seen quite a few changes in how some companies are approaching the question of what’s their role in society. As recently as last year we've seen a number of German companies have refused to sell razor wire to the Hungarian government that was aiming to complete hands to keep refugees out of the country. And CEOs of wire firms or razor wire firms have claimed that Hungary's misusing their products have refused to sell millions of dollars’ worth of product. Are we seeing a change for the future?
Ranjit: Yes we are and I think talking about profits still works in this context. Unilever have shown actually that the product lines that actually are doing some social good are actually sometimes doing even better than the product lines that are not. So there is increasing evidence that you can actually make at least equal money or more money from actually engaging in social issues, so I think it is possible.
Rae: And for me, going back again to my own research area, and thinking through what we know about the future of work and how jobs are emerging and what the changes are in the labour force, we know that many more jobs particularly in economies like ours are going to be created in knowledge work and that's where we absolutely can see a link in terms of the practices that organisations adopt internally, but also how that pushes out to society. It’s going to be a really critical part of both attracting, retaining, and engaging staff. And that's so well established to be connected up with sustainability with performance, with productivity, with innovation. So I think this is not only quite a thing but it's a thing that's only going to amplify in the future of work.
Sandra: And indeed we've seen companies like infancies who over the past few years have used technology to build communities across their workforce of over 50000 people to talk about the future and what the company can do in its communities. Do we see a different role for technology in this context, which is becoming increasingly complex and more dynamic, but also at the same time a lot more uncertain?
Rae: Absolutely. I think technology's both enabling and also in some ways speeding up some of these processes and some of these connections. So, absolutely, I guess is the only answer I'll give you there Sandra Peter.
Ranjit: One of the amazing parts about this four billion people who are less than five hours a day is that they tend to leapfrog technology. So for example if you go to Africa India they don't have landlines, but they are experts in using mobile phones. And I think a lot of companies have picked up on this. For example there are about 2.5 billion people who don't have bank accounts so therefore a company called M-Pesa just put the mobile phone as a bank where they can do transactions. So therefore I think you don’t have to go very high tech, just very innovative use of technology can make a huge difference on how you tackle this kind of issues. The other change that I see going forward is that I think a lot of companies from developed countries are actually going to learn a lot from doing business with the poor and those kind of areas because there is a very interesting kind of thought process called Jugaad Innovation or Frugal Innovation where you do more for less. So for example in a place in India this innovator/entrepreneur came up with an idea for a refrigerator made out of clay which keeps food cool for three or four days and the primary reason for that was because there isn't any electricity. So therefore what companies are doing is they actually while doing business in these poorer countries they're learning new strategies and they are in fact using it back in their country. So I think as companies learn more about dealing with social issues they're going to use the same kind of strategies in developed countries.
Sandra: Who is responsible for having or for driving the conversation around the role of business? Is this a theoretical conversation we need to be having, is this the responsibility of academics, or is this the responsibility of businesses? And indeed we've seen companies like Patagonia coming out and speaking up against things like consumerism, where even though the fundamental role of businesses obviously provide goods and services that people need or want and to create value, Patagonia clothing company has taken out an ad on Black Friday in The New York Times a few years ago saying: don't buy our jacket, recycle your old one, give it to charity, sell it on eBay and only if you really need it buy a new jacket. And their CEO has never taken the company public so it can restrict its growth. But they think it was 3 or 4 per cent a year. Who is responsible for having the conversation around the role of business?
Rae: We often look to business leaders I suppose to be primarily responsible for that. You know from time to time governments to be primarily responsible for that from time to time. Governments have something to say about that sometimes more or less to say. But I think increasingly we're looking at internal stakeholders of organisations such as staff and leaders of organisations. But I think you started your question with is there a role for academics in this and I think absolutely there is in terms of our research in the framing of these issues: understanding how business approaches these really complex questions in the context of quite significant change in terms of our research work. But I think there's also really significant issues that we need to take on board here in terms of our educational role. So I think about our students in program at the moment, of which there very many at the University of Sydney Business School, who are currently grappling with issues around the future of business. And I think our role really is to expose them to have experiences to understand that this is quite a complex issue and it's a period of changing thinking about the purpose of business, its role in society, and the way that it drives value. So I think at that educational level we've got some real thinking to do about how we engage with our students who are our future leaders of businesses and how they frame their own contribution. Think about what they want to achieve in their own careers and how they seek to lead as they leave us from university and go into the workforce.
Ranjit: I totally agree with you. I talked about it being a perfect storm: various things happening at the same time which are then channelled into changing the future and the purpose of business. It’s not a common knowledge that you know, we should just change the purpose of business. We need to look at it historically and historically any idea that's been there for many years it takes many years to change that and questioning assumptions is not an easy thing. But I can see evidence, to answer your question, that actually almost every part of society is playing a part in changing the purpose of business. As Rae was saying, you know students and academics are doing their bit. So is the government, the national government, the United Nations, the consumers who buy the products, as well as business leaders. So I think this is the time to take that opportunity to actually harness all these forces together to change the purpose of business.
Sandra: And to open up a conversation as we've discussed today not only is the context that business operating thing is more uncertain and more complex also more dynamic, but organisations themselves are grappling with how to best address this. And we've seen banks that have done the most good. They have cured most blindness, but have also struggled with greed with short term profit maximization, with recurring financial crises, rising inequality, and reduced social mobility. So the question of what is the role of business in society and are what businesses for a question that remains very much open.
Rae: I think absolutely it's a question that is open and I think the answer will evolve very much over time. I guess the one thing that I would say is that going back to that point I made earlier. Organisations are made up of human beings who have choices to make about the way that businesses operate. And because of that I think this will remain an open question and it's a very exciting question to try to address.
Ranjit: Yes I agree with Rae. And I think it's up to some of us who are proponents of the argument that business should have a bigger role in society to make the case much stronger, both from economic perspective, and a moral imperative. I mean from my own perspective, I really believe that the future leaders and future businesses are those that answer this particular question. Where does my passion meet the world's greatest needs, but with a profit?
Sandra: Very much looking forward to continuing this conversation. And thank you for talking to us today.
Ranjit: Thank you Sandra Peter. And Rae.
Rae: Thanks Sandra Peter. Thanks to you too Ranjit.
Sandra: Thank you both.
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