Recent major shifts in the global economic and geo-political landscapes, exacerbated by the COVID-19 pandemic and now, the Ukraine war, have brought into sharp focus the social responsibility of business. Many thought leaders, including elements of the business community itself, are advocating that businesses should focus less on the creation of wealth for their owners and play a more active role in serving the material needs of the community.
The title of this essay implies that there is an inherent conflict between profit-seeking behavior and social responsibility. Many management scholars and business practitioners believe that firms cannot be both profitable and benevolent at the same time.
I hold a somewhat different view.
The profit-maximization doctrine is at the core of classical and neoclassical economics. Moreover, the lure of profit has been the main driving force behind the entrepreneurial spirit that made capitalism the world’s dominant economic system.
By long-standing tradition, business firms seek to maximize short-run profits for their owners, or in the case of public corporations, to maximize shareholder wealth.
Profits are normally realized by extracting economic value from the firms’ other stakeholders—their customers, workers, suppliers and the rest of the community. In the language of economics, this is known as a zero-sum game—what one gains, the other loses.
Firms create value for their owners at the expense of their other major stakeholders in a number of ways:
- short-changing customers with poor quality and higher-priced goods and services;
- underpaying workers;
- taking advantage of business partners;
- contributing to social and economic inequality; and
- degrading the environment
However, from a long-run, strategic perspective, these commonplace practices are self-defeating. For two reasons:
- They prevent business firms from maximizing the production of economic value, which, after all, is their mandated role for society
- They prevent firms from maximizing their profits over the long haul, which is the generally accepted goal of business strategy
Stakeholder strategy
An alternative view, one developed in my forthcoming book “Strategy in the new age of capitalism: Collaborative and Inclusive Approaches to Value Creation” (University of the Philippines Press, 2022), holds that firms can maximize shareholder wealth by creating value for all their stakeholders, particularly those that comprise the poorest members of the community.
This other approach to shareholder wealth maximization, commonly known as stakeholder strategy, has a number of implications for corporate strategy:
- create value for consumers by enhancing product quality, selling products and services at reasonably low prices, and providing adequate customer care;
- create value for workers by offering comfortable wages and other financial benefits and providing a healthy work environment;
- create value for suppliers and distributors by engaging them in a mutually beneficial, trusting and collaborative relationship;
- create value for the rest of the community primarily by developing the untapped productive potential of those at the bottom of the social pyramid—the poorest and the least productive members of society; and
- devote resources to maintain a healthy and sustainable ecosystem.
The economic resources allocated for these purposes are to be regarded not as short-run costs to be minimized, but as long-run investments to make the business more productive and profitable
In sum, by creating value for their stakeholders, firms at the same time are able to maximize their output of goods and services over time, and enable them to generate more profits for themselves.
The lasting impact of the COVID-19 pandemic
We conclude by showing how business and society have benefited from how many businesses have responded to the ongoing pandemic.
For all the pain and suffering caused by the COVID-19, it has also given us reasons for optimism about the future.
It has accelerated the development of life-saving vaccines that used to take years to develop. We refer, in particular, to the development of mRNA technology in the field of immunology, notably in the development of anti-COVID-19 vaccines, a feat made possible by the close collaboration between Pfizer and BioNTech.
It has hastened the pace of technological innovation by ushering in the era of open data. With prodding from governments, Big Tech has made their data and software more accessible to smaller tech firms and to consumers.
It has prompted governments to invest heavily in record-breaking economic stimulus packages. These initiatives include the Biden administration’s Infrastructure Investment and Jobs Act of 2021, and President Duterte’s “Build, Build, Build” program. Not only do these measures improve society’s ability to produce economic value, but they also tend to reduce poverty and lessen economic inequality.
Finally, the COVID-19 pandemic has sent the powerful message to corporate managers the world over that their economic fortunes and those of their other stakeholders are intimately and inextricably intertwined, and that what benefits or adversely affects one will also be felt by all others.
The realization that “we’re all in this together” has tended to foster closer ties and greater collaboration between business firms and their stakeholders. INQ
The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP. The author is a retired professor of economics and management, and currently professorial lecturer at the University of the Philippines – Diliman. Feedback at map@map.net.ph and nspoblador@gmail.com.