There is widespread belief that business has a moral responsibility to serve the needs of society. This view is consistent with current thinking on Corporate Social Responsibility (CSR) which is generally understood to require the voluntary sharing of business profits with the community and the other stakeholders in the firm. These acts of magnanimity are generally seen as means of giving back of what is owed to others. This increasingly popular concept of CSR stands in stark contrast with the notion that business has no social responsibility whatsoever other than to make profits, a position held by Nobel Laureate Milton Friedman of the University of Chicago.
Yet another position, the one taken here, sees the sharing of economic value with the community and all those who contribute to the production process as a means by which to enhance profits and to insure the viability of the firm. Viewed from this perspective, the various forms of CSR, along with their popular derivative, Inclusive Business Models (discussed later in this article), far from being acts of charity or altruism, are in fact strategic initiatives the end-goal of which is to enhance profits over the long haul.
Shareholder wealth maximization reconsidered
If business is to implement socially beneficial initiatives for the purpose of achieving its long-run strategic goals, it has to radically change the manner in which it does business. In particular, it needs to rethink the way it pursues its profit objective.
As an alternative to profit or shareholder wealth maximization as the raison d’être for the business enterprise, we propose to state the function of the business firm in modern society as one of maximizing economic value, and appropriating the economic wealth created among all the groups that contribute to the process of value creation.
By implementing appropriate strategies and putting in place governance mechanisms for creating value for its other stakeholders – its workers, its customers, its suppliers and the community of which it is an integral part – we contend that the residual value that accrues to the owners of the firm (a.k.a. profits) will consequently be maximized.
While we concede that business firms in capitalistic societies have no moral obligation to serve the economic interests of society, we also maintain that sharing the economic value that they produce with the community at large is consistent with their traditional goal of profit maximization.
Corporate sharing of economic value with society is accomplished by pursuing what are described broadly as “bottom-of-the-pyramid” (BOP) strategies, those that are intended to uplift the economic condition of the poorest and least privileged members of society. In practice, BOP strategies are implemented primarily through what are collectively known as Inclusive Business Models (IBMs). These are wide-ranging solutions that provide access to economic opportunities to low-income communities in a manner that will make businesses more viable and sustainable. By incorporating low-income populations in their supply chains, IBMs insure business firms, among other things, a constant pool of well-trained and highly capable workers, constant and reliable supplies of raw materials, and steady increases in sales revenue from poor and largely unserved or under-served customers who may benefit from low-priced versions of their products and services.
By partnering among themselves, with government agencies, multilateral organizations,
NGOs and other institutions in the community, IBMs enable business firms, especially small and medium sized enterprises, to share with other institutions the large investment costs that are needed to develop their markets, to manage their supply chains, and to upgrade their stocks of human capital. In this way, businesses are able to realize their long-run strategic objectives far more effectively than if they acted single handedly – and at the same time enable their institutional partners to similarly achieve their respective social goals. Joint endeavors of this nature obviate what is known as the collective action problem by insuring that they serve the interests of all the institutional participants.
Even more significantly from a developmental perspective, IBMs enable business firms to help achieve the country’s Sustainable Development Goals, notably those relating to poverty alleviation and reducing economic inequality, and doing so in order to achieve their long-run strategic goals and not, as commonly claimed, for the purpose of fulfilling their avowed responsibility to society.
(The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP. The author is a retired U.P. Professor, and until recently was Professorial Lecturer at the U.P. School of Economics. Feedback at <firstname.lastname@example.org> and < email@example.com>. For previous articles, please visit <map.org.ph>)