COVID-19 has indeed exposed the existing vulnerabilities of the world, but it also shed light on models and concepts that need to be mainstreamed. That was the theme of a series of webinars by the AUC School of Business’s John D. Gerhart Center for Philanthropy, Civic Engagement and Responsible Business. In the series of articles “Changing Business As Usual”, Business Forward presents key ideas from a selected number of webinars.
While fortunately many corporations of various sizes are lending increasing importance to their Corporate Social Responsibility (CSR) roles, setting up departments, and allocating budgets, the general understanding about responsible business is changing to go beyond that.
In the webinars, “Responsible Business Shifts and Trends in the Wake of COVID 19” featuring Daria Ofman, global consultant with Better Future, and “The Impact of COVID 19 on the Business” featuring Colin Mayer, professor of Management Studies, Oxford University; both speakers made a point about how businesses with a purpose is a powerful force for change. Not only that, what responsible business entails will be changing as a growing segment of consumers becomes more selective and conscientious about their choices.
Revisiting inherited business thought
Mayer explains that six decades ago, thinkers like Milton Friedman have put forward concepts that have largely shaped business literature, business leadership and policy, business practice, and business education. These concepts were built around the idea that the fundamental purpose of business is to increase profits as long as it stays within the rules of the game (i.e. is not held accountable for doing any harm), “and it has largely been that way ever since,” says Mayer. Yet, things have been changing, and according to Mayer “the notion that the sole purpose of business is to make profit has been the cause of environmental degradation, inequality and mistrust.”
The purpose of a business as explained by Mayer, is the reason why it was created, why it is existing, and what it aspires to become, and it is not an intermediate objective to ultimately achieve profits. Mayer argues, that a purpose of a business directs it to produce profitable solutions rather than solely producing profits, not in philanthropic sense but rather motivated by “converting the process of finding solutions into commercially viable outcomes that are profitable for investors and therefore sustainable for the business”. A purpose according to Mayor is different from a mission statement in which a company states what it is, or its vision statement that is more aspirational and focused on the bigger picture, but rather a purpose is precise in identifying where the gap is, how exactly this business is able to fill it, for whom, when and why that business is particularly well suited to do so.
Mayer explains that even before COVID-19, this has been a growing trend, highlighted in the Business Roundtable August 2019 statement about moving away from shareholder primacy towards delivering what customers need, investing in employees, supporting suppliers and societies, contributing to communities, while delivering long-term value for their shareholders. In September 2019, the Financial Times launched ‘The New Agenda’, a campaign calling for a better form of capitalism and a stronger corporate purpose. The purpose of a company in the fourth industrial revolution was also the theme of the new Davos Manifesto of 2020.
Similarly, Ofman, spoke about one of the trends happening right now with more businesses keen to transform from being shareholder-oriented to being stakeholder-oriented, and this is what ‘Better Future’, the Netherlands-based organization she consults in specializes in.
According to her, today’s world of business is not like a landscape where each business operates within its confined boundaries, with a calculated amount of inputs predicted to yield specific outputs. She rather envisions it as a jungle, where there is a lot of interrelation and unpredictability. “The shareholder model is not equipped to deal with today’s world, definitely not in a responsible way,” shares Ofman.
So, what exactly should responsible business be like?
Ofman refers to a spectrum of responsible business models in the webinar, from Non-Governmental Organizations (NGOs) whose sole objective is to create social impact to a business whose sole objective is to generate profit while doing no harm. For the purpose of this article, we focus on organizations that want to be financially sustainable and hence are looking to generate profit. There are three levels of responsible business: doing business as is without any proven liability of doing harm, actually doing no harm, and doing good, with all what it takes of innovation and adapting the business model to solve problems.
This shift in business thinking becomes harder for large corporations, who also happen to have more power to create change. “A lot of corporations integrate Environmental, Social and Governance (ESG) factors from a risk management point of view, to ensure they do no harm,” says Ali Awni, professor of practice at the AUC School of Business, and Director of the John D. Gerhart Center for Philanthropy, Civic Engagement and Responsible Business. “For example, a large chocolate brand will ensure suppliers who engage in slavery are not showing on their supply chain. Another could revisit their supply chain and find alternatives to avoid engaging in harmful practices. Both are very different from a business mindset to do good, get involved with society and understand their needs, and work bottom up. Some corporations have the value of doing good embedded in their DNA. One example is Mars Inc’s working on the Economics of Mutuality.”
Mayer draws an example from the pharmaceutical industry- the Danish company Novo Nordisk, whose purpose tagline reads as “driving change to defeat diabetes”. Originally focused on producing treatment for those who have type 2 diabetes, the company then redefined its purpose to be about helping people avoid getting type 2 diabetes. The company started working with national and local level government, health workers, universities, and researchers to identify the changes in lifestyle that would prevent type 2 diabetes. “But doesn’t this undermine the basic business model of the company?” Mayer makes his point, “Exactly the opposite. It has helped the business boom, because in the process of building those relationships with local authorities, universities, hospitals and health workers the company has built itself an extremely strong asset: trust.”
Not all flashy purpose statements have a real intention to create a social benefit behind them, as Ofman points out, “Some are just written by very smart marketing departments.” In the webinar featuring her, Ofman displays some purpose statements asking the audience to think about which were the most believable ones. The more specific and sharp the statements are, and the more they work to guide the internal operation of the business and hold it accountable, the more real they are, explained Ofman.
B-Corporations (Benefit Corporations) emerged as one way to identify businesses who successfully balance purpose and profits, and those businesses undergo a process of ratings and assessments that are context-specific before obtaining the two-year certification. The label is widely recognized in Europe and as Ofman shares almost all consumer goods and services can be bought from B-Corps.
The originally French corporation Danone is the only B-Corp in the Middle East. Following their certification last year, the company stated that “it has a dual commitment towards business success and social progress: from working with some of the smallest members in the value chain – farmers, milk collectors and micro distributors – to providing access to nutritional education for consumers.”
What is pushing a face-lift of responsible business?
Mayer refers to the Edelman Trust Barometer 2020 spring update showing that only less than forty percent of people globally believe that business is doing enough in terms of putting people before profits; almost the same percentage believe that businesses are helping their employees by safeguarding jobs; and again almost the same percentage believe that businesses are helping their suppliers stay in business. So, trust in the brand and how it reacts and contributes to its stakeholders is an attribute with increasing impact on consumer behavior.
Additionally, being a more responsible and purposeful organization will be an increasingly valid reason to retain young talent, according to Ofman, elaborating that research and current trends about millennials suggests that if given a choice, millennials would prefer a more socially and environmentally-conscious employer.
The emergence of the global pandemic, as with other issues, accelerated this growing change in how businesses want to define themselves. “COVID-19 created a sense of urgency for businesses to be more attuned with public wellbeing, with the environment and the community,” says Awni.
Mayer also addressed how the crisis revealed how the purpose of the company and values underpinning it determined the priorities of the company; for example, how it reacted to choices like cutting costs versus retaining employees. The pandemic has presented an opportunity to develop new products and new ways of doing business and meeting the changes in consumer attitudes resulting from the crisis. “The purpose of the firm tells it how it should be moving forward to get out of this crisis.”
What does it take to create a purposeful business?
Leadership is key. Ofman, reflecting on her work with ‘Better Future’, believes that unless the leadership team of a corporation are fully involved in defining purpose, change will not happen. One of their clients ‘ECOM Ghana’ were concerned about the sustainability of their supply chains because of farmers cutting down cocoa and coffee trees as they were no longer profitable for them. ‘Better Life’ took the leadership team of their client to spend a day in a farmer’s house to understand the core of the problem; because if they weren’t able to solve it they would go out of business, and this kind of experience is what makes real change, according to Ofman. “You need to have the farmers, middlemen, traders along the supply chain in your strategy meetings or else you just being in a bubble,” she says.
Mayer reiterates the importance of leadership, as well as ownership of the purpose for it to translate into more responsible changes in the business model and more innovation. The third component Mayer mentioned is governance; how a firm measures performance against its purpose. “Traditionally, performance is measured by profit, and it should remain this way as long as those profits are not resulting in problems for people or the planet. And in the case that it does, the company should make provisions to clean up the mess, to fix those created problems,” argues Mayer. More significantly a firm’s performance needs to be measured in terms of how much it was able to contribute to solving the problems of its customers, its society and the natural world, emphasizes Mayer.
There is also a huge role for the regulatory system, precisely for corporate law to shift from emphasizing shareholder benefit, to putting purpose at its heart, believes Mayer. He gives an example of how the UK changed its corporate governance code two years ago directing all companies in the country regardless of size, to have a purpose that positively contributes to the enhancement of society.
“You need the whole ecosystem to be mature enough for that shift in the role of business or else efforts by any business to be impactful will be fragmented and diluted,” reflects Awni, “you need better governance systems at the local level, and an infrastructure that involves the small players and civil society.”