Business and Society: The biggest contract

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, most established in Anglo-Saxon economies, implies that 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, a rapidly growing, rather fuzzy movement encompassing companies that claim that they already practice the principles of CSR and skeptical advocacy groups arguing that they must go further in mitigating their social impact. As other regions of the world—parts of continental Europe, for example—move toward the Anglo-Saxon shareholder value model, the debate between these points of view has increasingly taken on global significance.

Both perspectives obscure, in different ways, the significance of social issues to business success. They also unhelpfully caricature the contribution of business to social welfare. It is time for CEOs of big companies to recast this debate and recapture the intellectual and moral high ground from their critics. Large companies must build social issues into strategy in a way that reflects their actual business importance. Such companies need to articulate their social contribution and to define their ultimate purpose in a way that is more subtle than “the business of business is business” and less defensive than most current CSR approaches. It can help to view the relationship between big business and society as an implicit social contract—Rousseau adapted to the corporate world, you might say. This contract has obligations, opportunities, and advantages for both sides.

To explain the basis for such an approach, it may help first to pinpoint the limitations of the two current ideological poles. Start with “the business of business is business.” The issue here is not primarily legal: in many countries,  such as Germany, companies have a legal obligation to stakeholders, and even in the United States the legal primacy of shareholders is open to very broad interpretation.

The problem with the “business of business is business” mind-set is rather that it can obscure two important realities. The first is that social issues are not so much tangential to the business of business as fundamental to it. From a defensive point of view, companies that ignore public sentiment make themselves vulnerable to attack. Social pressures can also serve as early indicators of factors essential to corporate profitability: for example, the regulations and public-policy environment in which companies must operate, the appetite of consumers for certain goods above others, and the motivation of employees—and their willingness to be hired in the first place.

Companies that treat social issues as either irritating distractions or simply unjustified vehicles for attacks on business are turning a blind eye to impending forces that have the potential to alter the strategic future in fundamental ways.

Although the effects of social pressures on these forces may not be immediate, that is not a reason for companies to delay preparing for or tackling them. Even from a strict shareholder perspective, most stock market value—typically, more than 80 percent in US and Western European public markets—depends on expectations of corporate cash flows beyond the next three years.