Being inclusive–and profitable!
One of the greatest anomalies of our time is the ever-widening gap in income and wealth between the very rich and privileged few in most societies, and the masses at the bottom of the social pyramid who are forever mired in abject poverty. Equally worrisome is the fact that while the richest countries in the world are growing even more prosperous, the poorest ones remain in dire economic straits.
This yawning disparity in the economic fortunes of people across the globe in the face of phenomenal growth, along with the unequal access to economic opportunities, are ranked by business leaders at the recent annual meetings of the World Economic Forum as among the greatest risks to the global economy today.
Oxfam, an international organization of NGOs focused on the alleviation of global poverty, has shown that the world’s richest 1 percent now have more wealth than the rest of the world’s population combined. It also noted that the world’s richest eight individuals own more wealth than half of the world’s population (close to $500 billion, by my rough calculation).
Looking at our own backyard, I noted in an earlier piece that the yearly increases in wealth of the 40 richest families in the Philippines have accounted for nearly all of the increases in GDP in recent years.
Equally telling is Time magazine’s observation that “…between 2005 and 2014, the real incomes of over 60 percent of the world’s population were flat or falling. If current economic trends continue, two-thirds of the world’s individuals will be on track to be poorer than their parents.”
No matter at how one looks at these gruesome facts, non-inclusive growth at its current scale cannot be sustained indefinitely.
Many factors have contributed to the increasing disparity in income and wealth between the rich and the poor. Among them are the following:
Ineffectual government agencies and institutions for their failure to address the changing needs of their constituencies
Corruption in public office
Political dynamics in modernizing societies in which traditional politicians hold on to power by keeping their constituencies in perpetual economic bondage
Anti-poor tax laws
For all these contributory factors, however, business has only itself mainly to blame for the prevailing economic inequalities and inequities. By being totally absorbed in pursuing the economic interests of their owners to the exclusion of everyone else, businesses have been remiss in their role of creating economic value for society, and appropriating the wealth they generate among all individuals who contribute to the process of value creation.
Wealth maximization
By convention, the goal of corporate strategy in the modern economy is the maximization of shareholder value, or, putting it in another way, the maximization of corporate profit. The single-minded pursuit of shareholder wealth invariably leads to the following undesirable trade-offs:
Value is created for the owners of capital at the expense of the economic interest of all other stakeholders in the firm and the rest of society;
Focus on immediate financial results at the price of the long-term viability of the enterprise; and
Financial benefits accrue to the corporation at the cost to society in terms of non-accountability of both stockholders and their hired managers for the harmful outcomes of their choices.
As an alternative to profit maximization, we propose to state the goal of the firm as one of creating economic value for society, and appropriating the economic wealth created among all the groups that contribute to the process of value creation. By implementing appropriate strategies and governance mechanisms for creating value for its other stakeholders—its workers, its customers, its suppliers and the community of which it is an integral part— we hypothesize that the residual value that accrues to the firm (aka profits) will be maximized.
We contend that this roundabout way of seeking profits will redound to the economic benefits of all of the firm’s constituencies, not the least of whom are its owners.
To make business truly serve its modern role in serving the needs of society, it should go beyond stakeholders and pursue what are known as “bottom of the pyramid” strategies, those intended to uplift the economic condition of the poorest and least privileged members of society. This goal is achieved through the implementation of what are known as inclusive business models (IBM), solutions that provide access to economic opportunities to low-income communities in a manner that will make businesses more viable and sustainable.
IBMs are implemented by incorporating low-income populations in the firms’ supply chains to insure, among other things, a continuous source of well-trained and highly capable workers, constant and reliable supplies of raw materials, and steady increases in sales revenue from poor customers who benefit from low-priced versions of their products and services. In this way, the long-run viability (i.e., profitability) of the business is assured.
Over the past several years, business has been playing an increasing role in poverty alleviation. These initiatives are usually considered as part of the firms’ corporate social responsibility and are assumed to entail sacrifices in profits in exchange for their impact on society. Our position here is that IBMs have a potential positive impact on the firm’s long-term profitability.
We conclude this piece by way of an illustration.
Merck & Co., long an iconic name in Big Pharma, has recently teamed up with the Bill and Melinda Gates Foundation and the African Comprehensive Aids Partnership (ACHAP) to fight HIV/AIDS in Bostwana where 27 percent of the population has been suffering from this scourge.
Here’s how the company explained its participation in this collaborative project: “In the long run, healthy people boost economic development which creates robust markets…”
Apparently, what is good for society is good for business.
