The social purpose of business

By Martin Vogel

Cadbury’s packing room at Bournville

Since the start of 2011, I’ve been noticing increasingly common references to the social purpose of business – an idea which, until recently, many would have regarded as an oxymoron.

The first sighting was a Harvard Business Review cover article by Michael Porter and Mark Kramer called Creating Social Value. This argues that capitalism is facing a crisis of legitimacy which can be overcome only if businesses put aside the notion that there is an inherent trade-off between profitability and attention to social needs.

After that, references came grouped together like buses. Matthew Taylor referred to Porter and Kramer in a blog post he wrote on the contribution businesses could make to David Cameron’s Big Society (they have potential to deploy their brands and their product development on encouraging socially desirable behavioural change).

Last month, the Governor of the Bank of England, Mervyn King, contrasted the behaviour of banks with the moral purpose of manufacturing firms:

Such firms pay far lower rewards than financial services but have “an incredibly successful record. They care deeply about their workforce, about their customers and, above all, are proud of their products”. With the banks, it’s different: “There isn’t that sense of longer-term relationships…” Since the Big Bang in the late 1980s, Mr King goes on, too many in financial services have thought “if it’s possible to make money out of gullible or unsuspecting customers, particularly institutional customers, that is perfectly acceptable”. Good businesses “keep a clear vision of who their customers are, and are run by people who don’t think they should simply maximise profits next week”. But in the past 25 years, banks have increasingly “taken bets with other people’s money”.

The Chief Executive of GlaxoSmithKline, Andrew Witty, has also spoken of the importance of companies being rooted in their societies:

I don’t buy that you can be this mid-Atlantic floating entity with no allegiance to anybody except the lowest tax rate… We have given a lot to Britain, but Britain has given a lot to this company. The company wouldn’t exist without the work of British people, without the contribution of British universities, without the support of the British government.

The core of Porter and Kramer’s idea of shared value is that contributing to society can be a source of competitive advantage and profitability for corporations. I was struck as much by the provenance of the argument as the fact of it, since Michael Porter is one of the most renowned of strategy gurus – the propagator of concepts such as the value chain and the five forces model of competitiveness. As you might expect, then, he and Kramer emphatically distance themselves from approaches to social impact which bolt on “doing good” to a firm’s activities:

A good example of this difference in perspective is the fair trade movement in purchasing. Fair trade aims to increase the proportion of revenue that goes to poor farmers by paying them higher prices for the same crops. Though this may be a noble sentiment, fair trade is mostly about redistribution rather than expanding the overall amount of value created. A shared value perspective, instead, focuses on improving growing techniques and strengthening the local cluster of supporting suppliers and other institutions in order to increase farmers’ efficiency, yields, product quality, and sustainability. This leads to a bigger pie of revenue and profits that benefits both farmers and the companies that buy from them. Early studies of cocoa farmers in the Côte d’Ivoire, for instance, suggest that while fair trade can increase farmers’ incomes by 10% to 20%, shared value investments can raise their incomes by more than 300%.

Porter and Kramer outline three broad approaches to shared value: developing businesses around products and services that meet society’s needs; tackling the value chain to reduce the environmental impact of operations and optimise the welfare of employees; and developing the social and infrastructural fabric around firms to encourage the emergence of economic clusters like the IT industry in Silicon Valley.

Only the first of these strikes me as a new contribution. There has always been a social dimension to business. As a 2002 article from The Economist points out, not only do companies operate under the state-granted priviliege of limited liability, they also tend to recognise their long-term interest in supporting the welfare of their employees. The firm of Cadbury’s, which was founded by Quakers and created the model town of Bournville, is typical says The Economist of an Anglo-Saxon tradition of capitalism which has “often willingly taken on social obligations without the prompting of government.” Substantiating this claim, The Economist goes on:

Nor has corporate social responsibility been the preserve only of a few do-gooders inspired by religion. The notorious “robber barons” built much of America’s educational and health infrastructure. Company towns, such as Pullman, were constructed, the argument being that well-housed, well-educated workers would be more productive than their feckless, slum-dwelling contemporaries.

Companies introduced pensions and health-care benefits long before governments told them to do so. Procter & Gamble pioneered disability and retirement pensions (in 1915), the eight-hour day (in 1918) and, most important of all, guaranteed work for at least 48 weeks a year (in the 1920s). Henry Ford became a cult figure by paying his workers $5 an hour—twice the market rate. Henry Heinz paid for education in citizenship for his employees, and Tom Watson’s IBM gave its workers everything from subsidised education to country-club membership.

Critics tend to dismiss all this as window-dressing. But Richard Tedlow, an historian at Harvard Business School, argues that they confuse the habits of capital markets with those of companies. Capital markets may be ruthless in pursuing short-term results. Corporations, he says, have always tended to be more long-termist.

It was the free-market era ushered in by Margaret Thatcher and Ronald Reagan in the 1980s that put more of a focus on the shareholder interest pure and simple. But recent crises – stretching from the Enron scandal to the banking collapses – have brought to the fore again the mutual interdependence between shareholders’ interests and those of wider society.

It was an article by Geoff Mulgan at the weekend which crystallised for me why it is the first part of Porter and Kramer’s thesis – the potential to create economic value by meeting social needs – that is most timely and relevant. Mulgan describes how the Victorian tradition of technical innovation by lone pioneers was industrialised through the 20th century by companies who created markets for mass-produced goods. He believes we are now reaching the end of this long era in which capitalism flourished through meeting material needs:

Wealth remains preferable to poverty and the queues for the iPad2 show the continuing appeal of new things, as do the forecasts that by mid-century the roads of India and China will, between them, be making room for 800 million cars.

Yet for all the impact of technology on everything from cutting carbon emissions (through the use of smart grids or hybrid cars) to organising demonstrations (like UK Uncut) it is no longer so obvious that the innovations that matter most are innovations in things.

Mulgan argues that there is a need and an opportunity for enterprises to apply their capacity for innovation to meeting social needs:

If you ask which sectors will dominate the economy of 10 or 20 years’ time the answer is not cars or steel or ships, let alone agriculture. Instead, the industries of “wellness” look most likely to prosper. Health is already a dominant sector in most societies and the one most guaranteed to grow.

Business has been slow to grasp this shift but there are some good examples of business engagement in social innovation. One such is M-Pesa, which uses mobile phones in east Africa to provide an entirely new banking system for poor people, without the costs of a branch network. This is a classic social innovation that meets needs and promotes happiness, but is being run as a commercial operation.

This is spot-on. The reason why Porter and Kramer are right to argue that businesses, if they do, should stop seeing a trade-off between profitability and societal benefit is because there are diminishing returns in their focussing on the production of things. The commoditisation of material goods and the abundance of choice that now faces consumers mean that addressing social needs is the next area of competitive advantage. As Abraham Maslow might have recognised, companies have done such a good job of taking care of people’s lower level material needs that its the higher level social needs that now present the best opportunities for profits.

The old debate about the social responsibility of companies for employee welfare or sustainability in the value chain concerns how companies do business. The new discussion about the social purpose of companies concerns what businesses they are in. The opportunity exists for businesses to create economic value for business owners by applying corporate ingenuity to social problems that governments and communities find it hard to address.