Businesses play a crucial part in almost every aspect of our lives, and they have contributed to or created many of the luxuries and home comforts that we enjoy every day. But what is the purpose of a business? Who (or what) does it aim to create value for? What does this value look like?
Much of this boils down to where a business’ responsibilities lie, which is a hotly debated subject. In this blog, we’ll take a look at the existing view – shareholder primacy – and compare it to an increasingly popular alternative – stakeholder primacy.
This has largely been the business-as-usual approach since the back end of the 20th century. In short, it argues that a business’ exclusive purpose is to create and maximise financial returns for its owners/shareholders, and they “should not be burdened with any responsibility for achieving social goals” (Forbes). Other important stakeholders like employees and customers also benefit, but they have secondary importance. It is suggested that they will all benefit if everyone in the company pursues their own self-interest.
The issues with this approach
There are three important implications of such a viewpoint. Firstly, it encourages a short-term focus, as many shareholders tend to look for quick returns on their investments (Harvard Business Review). Secondly, it means employees have little worth: they are “replaceable and owed nothing but what they earned” (Forbes). Thirdly, it absolves a business of any responsibility for the negative social or environmental impacts of its activities (Forbes). This last point is particularly important. In a world with scarce resources and a finite capacity to absorb waste, short-term self-interest ultimately ends badly for everybody.
This famous problem in economics is called the Tragedy of the Commons, which is summarised in the great TED-Ed explainer video from Nicholas Amendolare. To take the example used in the video, if a group of fishermen overfished a lake with only their short-term self-interest in mind, the fish resources would be rapidly depleted, to the detriment of all fishermen. The issue here is that there has been no consideration for the common good, despite it being collectively advantageous. As Amendolare succinctly puts it, “optimising for the self in the short term isn’t optimal for anyone in the long term.”
While regulation is touted as a solution for this problem, it will not change the core issue that brought us here: that businesses are encouraged to act as though they are not dependent upon and responsible for the communities in which they operate.
A quick glance at some of the most prominent issues in today’s world brings these issues into sharp relief. Whether it’s intensive factory farming, catastrophic oil spills, or IT hardware with planned obsolescence, many major sustainability challenges have profit-maximisation at their root.
The key question that arises, then, is what else should a business focus on, if financial returns alone are insufficient?
Also known as stakeholder capitalism in articles like this one from the Harvard Business Review, this view suggests that corporations have responsibilities to all of their stakeholders, which can be defined as anyone (or anything) that is impacted by or can impact the business’ operations. This broad list often includes shareholders, employees, customers, the community, society as a whole, plus the environment itself.
The core premise here is that all companies and individuals have a responsibility to make positive contributions to their communities. While this may be costly in the short term, they can create significant value for many stakeholders in the long run. This mirrors the mindset we take at Techbuyer. We use our circular-economy business model to help local education institutions save money on IT equipment, donate additional hardware to schools, and engage in a variety of community outreach activities. A great example of the latter is the recent Harrogate Climate Action Festival launch event that we sponsored to encourage local families to learn about and discuss climate change.
What does this perspective mean for business?
Once again, there are some key implications here. First of all, employees become far more important: they are seen as an investment rather than an expendable asset or a cost to be minimised. This means that training, development, and general support are actively encouraged rather than avoided. Secondly, it encourages activities beyond core business areas, such as local community engagement. Thirdly, it requires a much longer-term focus to ensure that immediate financial value is not created at a social or environmental expense.
There can also be some big financial benefits from this. McKinsey research showed that mid-sized USA businesses holding a long-term view outperformed the rest in earnings, revenue, investment, and job growth over a 14-year period. This strong financial importance is absolutely still crucial under this approach: value can only be created for stakeholders if the company remains economically viable.
Is change realistic?
While this may seem fanciful, change is already coming from both legislators and businesses themselves. In Canada, for instance, the 2019 C-97 bill requires directors to act in the best interests of shareholders and other stakeholders (Norton Rose Fulbright). In the same year, 181 USA CEOs in the Business Roundtable echoed this sentiment, issuing a statement saying that each of their businesses had a commitment to deliver value to all of their stakeholders. Back in the UK, Anglian Water Services took similar steps by rewriting its binding Articles of Association to define its purpose as creating benefits for its customers, the region, the communities it serves, and the environment (McKinsey). Even the CEO of the world’s largest investor group, BlackRock, has come out in support. His 2020 annual letter to CEOs stated that sustainability would become the centre pillar of BlackRock’s investment approach.
A major challenge that remains, however, is knowing how to create positive impacts: global sustainability is incredibly complex, so it’s important that businesses are focussing on the right areas. The UN Global Goals provide an actionable framework to get started here. Its 17 goals were created by in a landmark collaboration between governments, NGOs, experts, and businesses themselves. While much of the work to achieve them will come from a nation-level, businesses are also encouraged to choose goals that they can contribute towards. At Techbuyer, for instance, we are working towards three: Responsible Consumption and Production, Quality Education, and Good Health and Wellbeing.
Please note: the views expressed in this blog are those of the contributing individual, and are not necessarily representative of the views of IEMA or any professional institutions with which IEMA is associated.
Posted on 6th October 2021
Written by Jack Nove
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