What is business good for?
Simon Kingston, Emily Meneer
Ethical Boardroom published a bylined article by Russell Reynolds Associates' Simon Kingston and Emily Meneer titled, "What is business good for?" The piece discusses why board directors need to think harder about creating social value. The article is excerpted below.
Larry Fink, chief executive of $6.3 trillion asset manager BlackRock, made headlines in mid-January with his open letter, warning CEOs to focus on the social purposes of their companies to ensure long-term value.
"To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers and the communities in which they operate," Fink wrote. "Without a sense of purpose, no company, either public or private, can achieve its full potential."
While Fink is certainly the most prominent and mainstream voice to highlight the need for companies to assess the full scope of their impact on societies in which they operate, he is by no means the first. In fact, our understanding of the role of business relative to society and our beliefs about how and what business should therefore contribute has evolved through several incarnations over the years.
In its earliest stages, expectations for corporate citizenship were limited to philanthropic activity: companies made contributions that were unrelated to their core business and required little action beyond writing a cheque to the nearest opera house. By the early 2000s, companies had begun to see the value of aligning their philanthropic activity with their core business and started to draw on the skills and expertise of their employees to make more meaningful contributions, through volunteering, for instance.
Following the 2008 financial crash, the focus of corporate responsibility turned towards harm reduction and risk mitigation, with companies seeking to reduce carbon emissions and waste in the supply chain and improve employee safety. Spurred in part by shareholder initiatives, these efforts led to a new class of non-financial corporate disclosure: 99 of the FTSE100 companies now report their carbon usage and 70 have publicised carbon reduction targets as of 2016, according to a recent report from UK consultancy Carbon Clear. Similarly, 82 per cent of the Fortune 500 now issue a corporate social responsibility or sustainability report, according to the Governance & Accountability Institute.
The latest conceptualisation of corporate responsibility has emerged within the last few years and looks beyond simple harm reduction towards the positive effects, or 'social value', a business can create. Social value in this sense takes many forms, ranging from the reformulation of ingredients to create healthier foods for children, to partnerships with civil society to expand sales and distribution of hygiene products to remote areas of the developing world, or to programmes to promote a diverse and inclusive workforce. In this paradigm, companies are expected to consider the financial and non-financial impacts of their business on all stakeholders and to hold an equal seat at the table alongside government and civil society in addressing major societal challenges. Moreover, recent studies by the Boston Consulting Group and others have shown that companies that take this broad lens on societal impact significantly reduce risk and open up valuable new opportunities in the form of new markets, customers and products.
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