Paying it forward–using the company’s profits

There is widespread belief that business has a moral responsibility to serve the needs of society. This view is consistent with the current thinking on Corporate Social Responsibility (CSR), which is generally understood to require the voluntary sharing of business profits with the community and the other stakeholders in the firm. These acts of magnanimity are generally seen as a means of giving back what is owed to others. This increasingly popular concept of CSR stands in stark contrast with the notion that business has no social responsibility whatsoever other than to make profits, a position held by Nobel Laureate Milton Friedman of the University of Chicago.

Yet another position sees the sharing of economic value with the community and all those who contribute to the production process as a means by which to enhance profits and to ensure the viability of the firm.  Viewed from this perspective, the various forms of CSR are far from being acts of charity or altruism, but are in fact strategic initiatives with the end-goal of enhancing profits over the long haul.

Profit-centric

If business is to implement socially beneficial initiatives for the purpose of achieving its long-term strategic goals, it has to radically change the manner in which it does business. In particular, it needs to rethink the way it pursues its profit objective.

As an alternative to profit or shareholder wealth maximization as the raison d’être for the business enterprise, we propose to state the function of the business firm in modern society as one of maximizing economic value, and appropriating the economic wealth among the groups that contribute to the process of value creation.

By implementing appropriate strategies and putting in place governance mechanisms for creating value for its other stakeholders.—its workers, its customers, its suppliers and the community where it is an integral part.—we contend that the residual value that accrues to the owners of the firm (a.k.a. profits) will consequently be maximized.

While we concede that business firms in capitalistic societies have no moral obligation to serve the economic interests of society, we also maintain that sharing the economic value that they produce with the community at large is consistent with their traditional goal of profit maximization.

Corporate sharing of economic value with society is accomplished by pursuing what are described broadly as “bottom-of-the-pyramid” (BOP) strategies, those that are intended to uplift the economic condition of the poorest and least privileged members of society.

In practice, BOP strategies are implemented primarily through what are collectively known as Inclusive Business Models (IBMs). These are wide-ranging solutions that provide economic opportunities to low-income communities in a manner that will make businesses more viable and sustainable. By incorporating low-income populations in their supply chains, IBMs assure business firms, among other things, a constant pool of well-trained and highly capable workers, constant and reliable supply of raw materials and steady increases in sales revenue from poor and largely unserved or underserved customers who may benefit from low-priced versions of their products and services.

Collaborative inclusivity

By partnering with government agencies, multilateral organizations, NGOs and other institutions in the community, IBMs enable business firms, especially small and medium sized enterprises, to share with other institutions the large investment costs needed to develop their markets, to manage their supply chains and to upgrade their human capital. This way, businesses are able to realize their long-run strategic objectives far more effectively than if they acted single handedly.

From a developmental perspective, IBMs also enable business firms to achieve the country’s Sustainable Development Goals, notably those relating to poverty alleviation and reducing economic inequality.