The moral obligations of business

Historically, the relationship between business interests and the community has been awkward. Connecting with community has often been viewed as a charitable thing to do and not necessarily core to ‘real’ business.

There is a natural tension between the profit motive and social impact. However, when we consider that companies sit within the broader community and that the relationship is one of inter-dependence rather than independence, then there is a strong case for putting social strategies high on the corporate agenda.

The real question is: how can it be done in a way that aligns the objectives of shareholders with the needs of community?

Milton Friedman, the 1976 Nobel Prize-winning economist, took a stance against the idea that companies had social responsibility, arguing that they should focus on maximising profit within the ‘rules of the game’. Two decades later, Peter F Drucker, affirmed that profit was the primary motive for business, but not the only motive. He asserted that business has responsibilities to the communities it touches in the same way that a school has responsibilities that go beyond the primary goal of educational performance.

While most companies are equipped to deal with a changing business environment, there is a stark difference between organic change and that stemming from heavy-handed regulation. To act blatantly against community interests increases the risk that the ‘rules of the game’ are reformed for business, rather than reformed by business.

Where we tend to struggle is when we have to balance issues of economic growth, jobs and political interests with activities that impose significant, longer-term costs on community. The tobacco industry was a case in point, where the ‘rubber band’ between the two interests was stretched far enough to invoke a harsh regulatory response.

The stoush between the vested interests of the gaming industry and legislators is a flash point that highlights the tension between gaming profits and the social cost of gambling addiction. It is a complex issue and one the gaming industry would prefer to have avoided; it may be asking itself if it could have pro-actively managed a better outcome.

For business, it is a commercial issue that has moral dimensions. Likewise, emitting carbon is not so much the "greatest moral issue of our time”; it is the business issue of our time.

However, let’s not fall into the trap of associating social strategies solely with risk – they come into their own when considered in terms of opportunity. They provide an avenue for creating competitive advantage.

Customers increasingly care about how and where their goods are made. Institutional investors are becoming more interested, active and influential in how companies manage social issues. Employees, especially those we classify as ‘knowledge workers’, are increasingly looking for social purpose when assessing prospective employers.

Michael Porter, the guru of competitive strategy, has written about Nestle, Marriott, Microsoft and others who address real business issues with social strategies. In the case of Microsoft, its business growth was being constrained by a shortage of skilled IT workers in the US, which it sought to address through partnering with the peak body representing community colleges. It funded a five-year program that saw its own employee volunteers work with colleges to improve education consistency, quality and standards. Microsoft addressed a real business issue with social support.

As management thinking continues to evolve, we are entering what many call a ‘third wave’ in the way that companies and communities interact. Corporate philanthropy was the first wave. A range of measures including strategic philanthropy and community investment formed the second wave – which is often grouped under the banner of corporate social responsibility.

The third wave is one that sees an integrated approach - where business partners with community for mutual benefit; where financial benefit cohabits with positive social impact. The strategic importance and commercial nature of integrated partnerships provides a strong foundation and one that is better suited to survive management change and internal spending reviews. When properly aligned, the relationship becomes self-reinforcing.

With this in mind, some businesses have begun the process of reviewing the breadth and depth of their social activities. We are likely to see a trend towards fewer, but more intensely-focused, partnerships with the non-profit sector as a result.

The moral obligation of business is not separate from the profit-maximisation objective - they go hand in hand and, if harnessed, can produce powerful outcomes. The reward for those who get it right lies in the competitive advantage and enduring business value that is created. It is, primarily, a business proposition.

Phil Preston is a former investment professional who practices thought leadership in the field of social innovation.

    More from Business Spectator


    Please login or register to post comments

    Comments Policy »
    True. Phil, we long discussed this matter before (See What are the moral obligations of your business?, May 2).
    A fresh philosophy and a new doctrine are needed the most to evaluate the upcoming investments profitability. The profit goes beyond its conventional and simple meaning. Society needs would be a new market force. But a question runs through my mind: How can we practically integrate a social profit in the prevailing financial questions?
    My university ran an intensely aware commerce, economics, law and accounting degree in the mid-70’s and as I am aware, through and into the 2000s (See The moral obligations of business, May 2).
    Amongst the Harvard Business School MBA case studies we ploughed through in our undergrad degree, our professors threw in a lot to do with the social responsibility of big business. As one grows up and becomes more aware of one's surroundings, one realises that those organisations who think profit is one-sided are completely wrong. Even those companies who think that 'strategic philanthropy and community investment under the banner of corporate social responsibility' are one-off events, or worse still, a means to divert community attention from what they are really doing (such as environmental rape and pillage, or hitting various parts of the community in the way the Woolworths/Coles juggernaut does into small business capital and income streams), think again. That one-eyed profit you are suggesting costs the community in other areas.
    It's not that I am suggesting profit and business is for a bunch of weaklings, but consider being a shareholder, who thinks one's shares are worth X, but your investment portfolio is based on unsustainable income streams.
    We have big 'bubbles' in the community. People can and do communicate. Anyone who thinks the community does not source its information from a wide range of sources, and do not communicate with one another, is ignorant and or wrong. The community punishes corporates who believe they have the God given right to do what they want to.
    Limited liability is a safety net conceded by society to investors and directors, sparing them the risk of losing their homes to pay debts of a failed business (See The moral obligations of business, May 2). It recognises that by supporting risks, great benefits to society can come from attracting entrepreneurs to initiate and develop businesses.
    With the freedom that society thereby concedes them, businesses have a responsibility to act with justice and a social conscience. This does not mandate a particular, one-size-fits-all action in relation to any given issue such as stewardship of the environment, but certainly that they assess social impacts of their actions. Getting both the social contract and the business contracts right is the constant challenge, and doubly rewarding.
    Well put, Phil (See The moral obligations of business, May 2). I guess the ultimate manifestation of what you are arguing is full integration – that is, putting social purpose at the centre of business strategy.
    In this way the business can organise around a social outcome, as argued by Collins in Good to Great. Of course, there would still need to be a fair return for capital risk but this would flow from delivering the social purpose rather than being the central reason for being.
    Shades of: "It's a business to do pleasure with you!" (See The moral obligations of business, May 2.)
    Any immanent profitability, should it ever be perceived to obtain for even a fleeting moment, is entirely subjective, commensurate with "Wits" g_el'asticised stretch of his wh_im'agination.
    A business intent on not working towards an 'acceptable' level of social responsibility, or without an easily recognised transparency, if it has social inclination, runs the risk of being dubbed with an eponym just like that of Captain Charles Cunningham Boycott who 'landed' himself right in it... all by himself! The 'Laws of Compensation' have ever stood the test of time just as 'Nature abhors a vacuum'.
    Moral obligations? No moral support! (See The moral obligations of business, May 2.)
    As owner of several companies over the last 40 years, I've seen that moral support by many companies in our communities is invariably a one way street – mostly take and not much give. For example, the phone runs hot at Pacific Brands, with people calling for support to the local footy club or the local bush fire brigade or funds and donations for the kids' park down the street. It happens all the time. In return, the last thing they would think of is buying 'Bonds' brand underpants when they need a pair in moral recognition of their support. It's a two-way street.