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.