Capitalism and Social Good Can Co-Exist
Business models are adapting to include more than just monetary profit as a part of the bottom line. Effective leaders are needed to lead the charge in considering the needs of all stakeholders — including communities, employees, suppliers, customers, and shareholders.
As a young capitalist, I learned that maximizing financial returns was a constant I could rely upon. The goal was straightforward.
Well, that constant just changed.
A debate has intensified this fall over whether businesses should produce results beyond the bottom line. The Business Roundtable, a respected collection of major American businesses, modernized their Statement on the Purpose of a Corporation to say: “If companies fail to recognize that the success of our system is dependent on inclusive long-term growth, many will raise legitimate questions about the role of large employers in our society.”
The statement reinforces the organization’s strong commitment to a free-market system, noting that businesses “[P]lay a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide health care; generate and deliver energy; and offer financial, communications and other services that underpin economic growth.”
Yet the organization goes on to emphasize that businesses now “share a fundamental commitment” to all stakeholders – customers, employees, suppliers, communities, and shareholders.
Not long after the Business Roundtable came forward, the chairman of the U.S. Chamber of Commerce offered his own proposal. He suggested that companies put a premium on creating good-paying jobs along with making a profit.
Serving stakeholders makes for good business
Making a commitment to a market economy necessitates embracing change. Defining the role of the corporation to serve not only shareholders, but all stakeholders, is a meaningful, appropriate expression. In fact, there is nothing to fear in these changes – the bottom line is well served by broadening the aperture on how success is measured.
Employees are both an input and an output for a healthy business. In addition to great productivity, employee sentiment is a real component of corporate success, especially in a virtual full-employment economy witnessing a changing workforce. Employers don’t have the luxury of disregarding the opinions and feelings of their workforce.
Solving for the highest level of employment is not enough, however. If it were, we could issue spoons instead of shovels to do our digging. Fulfilling, productive work is as qualitative as it is quantitative.
Making a commitment to a market economy necessitates embracing change. Defining the role of the corporation to serve not only shareholders, but all stakeholders, is a meaningful, appropriate expression.
Market competition demands this kind of approach since today’s consumers consider more than just price when deciding where to shop for a product or service. In many instances, consumers understand the values they are patronizing when they make a purchase decision.
Similarly, companies compete for vendors in a world where supply channels are finely tuned. This heightened level of competition even requires private-sector organizations to consider what matters to the workers at their suppliers.
For example, the employees at Wayfair, an internet furniture marketplace, recently protested the company’s fulfilling an order for a vendor whom the federal government had selected to provide supplies to immigrant detention facilities. Neither Wayfair nor the government contractor was responsible for the federal policy in question, but the vendor’s employees protested. Likewise, Google and Amazon employees have balked at their employers' bidding on government contracts. In each case, their employers listened and modified their behavior.
In response to recent mass shootings, Walmart exercised leadership by taking significant steps on the issue of gun control. The company will stop selling ammunition for handguns and some rifle types as well as terminate the selling of handguns in Alaska (the only state where Walmart sold handguns). The social stance was more important than the profit opportunity for these products.
Of course, those who are anchored to the past will be confused. For years, competition for markets while markets themselves changed demanded that management navigate through uncertainty. The focus was targeted on one common denominator — maximizing return to shareholders. That singular aim helped point everyone in the same direction with an output that could be clearly quantified and measured. Those that could, won. Those that couldn’t, failed.
So now, how can leaders square the long-term profit goals with achieving qualitative goals at the same time? Managing for an optimal bottom line is hard enough. Adding non-monetary considerations into the equation may seem impossible.
Thankfully, many of the Business Roundtable’s pronouncements can be aligned with building a durable bottom line. A happy and healthy workforce is a productive workforce. Measures to serve employees’ health, wellness, and professional development, as well as creating a rewarding corporate culture, help attract and retain the best talent. In return, great talent creates great results.
Contributing to the communities in which businesses operate also makes good sense. It is important that employees feel good about the community in which they live, work, and play. In a world where an anonymous review on Glassdoor can change attitudes toward a company, senior managers need to appreciate that feedback about their organization’s reputation can come from anywhere.
In short, a company’s “brand equity” touches employees, vendors, and the communities in which it operates. Aligning these goals is consistent with improving the bottom line.
The bottom line still matters
But we cannot forget that the bottom line remains critical. Without financial success, investors would cease to risk capital and innovation would grind to a halt. We have seen that in industries that lose their way. Leaders need to ensure that ample consideration is given to all stakeholders, but not to the point of blunting the sharp edge provided by the need to produce a competitive return on invested capital. This is where strong leadership comes into play.
Making trade-offs is inevitable. Knowing what to trade off against is not always obvious. Altering a business plan is serious, but it often is inevitable. Apple used to be known for desktop computers, not as a consumer device and entertainment conglomerate. We know how that pivot worked out.
Companies need the freedom to adapt when markets change. Imagine what IBM would look like today if it had clung to the mainframe computer manufacturing business model out of fear of damaging suppliers or its factory workers. Companies like Eastman Kodak that did not adapt ended up shadows of their former selves, ultimately hurting the employees, the vendors, and the community in the long run.
Financial failure, while not ever a desire, is an outcome that always needs to be considered. Former Intel CEO Andy Grove was famous for pointing out that “only the paranoid survive.”
That fear of failure drives business to respond to the market and innovate. It is the essential ingredient in the “creative destruction” equation. When failure does happen, the responses are predictable — limit losses, learn from the failure, adjust course, reinvent, and move forward.
This formula has made the U.S. economic machine the envy of the world and translated into remarkable gains in many countries around the world. Capitalism, while not perfect, has produced innovation beyond belief and these developments have lifted over a billion from the clutches of poverty worldwide.
Capitalism, while not perfect, has produced innovation beyond belief and these developments have lifted over a billion from the clutches of poverty worldwide.
Managing change is about leadership
Much of the answer to this latest change depends upon the effectiveness of business leadership. Clinging to a short-term business model that is in the process of becoming antiquated is bad for everyone. Similarly, communities need to appreciate the benefits of the creative destruction process and create a culture of acceptance for that eventuality. By embracing the fact that failure may happen, employees, suppliers, and the entire home community can help businesses adapt and thrive.
By focusing on long-term goals, and communicating them clearly and often, leaders can ensure that all stakeholders pull in the same direction. Rather than fight the urge to innovate, those stakeholders can become partners in the innovation, adapting alongside the company. In fact, they may see change coming first. Leadership should deputize their entire network of stakeholders as a resource in both devising and executing corporate strategy. They are important partners for the long-term.
Viewed in this light, all stakeholders are important partners for the long-term, which is where effective leaders keep their focus. Playing for short-term survival is not a winning strategy for anyone.