Is profit still the only social responsibility of business?
Asit K. Biswas and Cecilia Tortajada
Policy Forum | October 18, 2016
Many major multi-national companies are putting sustainability at a key aspect of their businesses, but more needs to be done, Asit K Biswas and Cecilia Tortajada write.
In 1970, the eminent economist and Nobel Prize winner Milton Friedman wrote, “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
More than four decades later, few would argue with Friedman that one of the main objectives of businesses is to make profits for its shareholders, but profits alone are no longer enough. Societal expectations of businesses have undergone major transformation, along with the views of many businesses leaders. Businesses in the second decade of the 21st century are expected to create values concurrently for their shareholders, consumers, employees and communities in the areas they operate as well as for the society as a whole. This is what a major multinational like Nestlé calls creating shared value. Another major multinational, Unilever, has stated categorically that its “clear purposes are to make sustainable living a commonplace” which is the best long-term way to grow its businesses.
A quick analysis of the current views of major multinational companies (MNCs) indicate that the overwhelming majority of what could be termed as forward-looking and “enlightened companies” currently hold somewhat similar views as Nestlé and Unilever. Equally, a significant percentage of their shareholders and stakeholders are quite comfortable with the paradigm shift.
This, of course, does not mean that every MNC has embraced this philosophy completely. For example, most companies still compensate their senior executives handsomely, and almost exclusively, on the basis of shareholder returns. Very seldom are their societal contributions considered when remuneration packages are decided.
There are signs that mindsets of business executives are changing. For example, Nestlé has not listed its shares in New York Stock Exchange because one of its requirements is quarterly projections. The view is that it leads to short-termism and not long-term investments.
Unilever has gone a step further. Its CEO, Paul Polman, has said candidly that the company would like long-term investors. If investors do not like its long-term business view which emphasises the new value creation model, he would respect them as human beings, but they should not put their “money into our company.”
In spite of, or because of, taking this high-road, according to the latest figures from Financial Times, Unilever’s returns on assets is 9.88 per cent, on equity 33.16 per cent and investments 16.62 per cent. This is a very creditable performance.
Nestlé returns are also good: on assets 6.59 per cent, equity 14.68 per cent, and on investments 9.41 per cent. This shows that the companies that are well run and have a social conscience can simultaneously create values for their shareholders as well as for the society as a whole.
Taking a long-term view is essential. Take some major MNCs. Procter & Gamble started life in 1837, Nestlé in 1857, Coca-Cola in 1886 and Unilever in the 1880s. All these 130+ year companies plan to stay around for the next century and longer. In order to do so, they must continue to create value for their investors and the society as a whole. There are no other short cuts or options.
With changing mindsets, business models and societal expectations, most major MNCs are now producing annual sustainability reports. Good and reliable sustainability reports help investors, regulators and NGOs, and should also increase transparency, credibility and reputation. Having analysed such reports for major companies, there is no question they are headed in the right direction. However, they still have a long way to go.
There are many problems that such reports have to overcome. First is the target audience. They seem to be written for everybody and nobody at the same time! Very few people, except probably for those who rank sustainability of companies and perhaps some regulators, read these reports. These reports are basically failing to connect with, or inform, an ever-increasing group of shareholders, most of whom have very specific interests. They are often heavy on pictures (weight too!) and graphics, but short on specifics. If they are to be read and to be made use of, information needs to be targeted to specific interest groups and disseminated accordingly. This will require a determined effort but the results will have perceptible impacts.
Take for example water. If one analyses the sustainability reports in this sector, unquestionably companies like Nestlé, Unilever, Procter & Gamble and Coca Cola have made significant reductions in water use per unit of product manufactured and wastewater generated over the past decade. Typically we see MNCs treating their wastewaters and then reusing them, making staff conscious of the value of water, and using latest technology and better management practices to make water use increasingly efficient. These are undoubtedly very positive developments.
However, at best, current sustainability reports provide information on their performance on a national basis and not by locations, from where water is being extracted and used and wastewater is discharged. Water is always managed locally. Thus, nation-wide data are of very limited use either to local stakeholders or water managers.
Equally, the reports rarely consider risks posed to local communities whose water demands for various uses are increasing. The companies and local communities use the same water sources. During years of severe droughts, communities often resent that industries are using their sources of water but they do not have enough. Thus, several MNCs had to cease operations during drought years in India and California. This is becoming an increasing risk.
Companies also need to explain how they calculate water risks. Mere mention of it in general is meaningless. How they are measuring, estimating and reporting water risks, since methodologies available for their assessments are rudimentary? Also, very few companies report how they integrate water in their operation and management practices.
A major user of water is the supply chain of companies, especially for products that are water-intensive to produce. There is very little collaboration or information at present with their suppliers in terms of water uses, extent of wastewater treatments and variety of other water-related factors. Most sustainability reports treat these issues only anecdotally.
Equally, details of stakeholders’ engagement in water-related issues are basically unreported or under-reported.
Irrespective of these shortcomings, it is now a fact that some business leaders have now become so involved in water-related issues that if one is asked to identify the most effective and dynamic water ambassadors of the world, the list will probably be headed by Peter Brabeck, Chairman of the Board of Nestlé, rather than an academic or someone from the public sector.
An important conclusion of our studies of MNCs and sustainability is to what extent companies are now also playing the traditional roles of NGOs and governments. We now see several major MNCs proactively seek out problems with relation to many social and environmental issues like human right violations, use of child and indentured labour and biodiversity losses in their supply chains. They are also doing many development activities which are in the domain of the governments, like building schools, toilets for girls, supply of clean water and establishing libraries in schools, arranging extension and veterinary services for farmers, providing health and nutrition information to their consumers and contributing to women’s empowerment.
Enlightened MNCs are steadily enlarging their societal footprints by complementing the activities which traditionally have been in the domains of NGOs and/or governments. We expect to see increasingly more involvement of businesses in such areas.
If Friedman was alive today, he would probably agree with the current paradigm where businesses not only make profits for their shareholders but also concurrently play increasing important roles in terms of value creation for the entire society.
Asit K. Biswas is the Distinguished Visiting Professor, Lee Kuan Yew School of Public Policy. National University of Singapore, Singapore. Cecilia Tortajada is a senior research fellow at the Institute of Water Policy, Lee Kuan Yew School of Public Policy, National University of Singapore.