Corporate social responsibility can no longer be a sideshow
In the absence of a forcing function, these shifts would have taken decades to realize. But this unplanned transformation has also exposed a highly distorted world where the agents of capitalism are increasingly out of sync with societal priorities.
The data bears this out: in a year where the Nasdaq delivered a return of over 40 percent and e-commerce sales saw gains of over 30 percent, over 22 million jobs were lost and more than 425,000 people died in the United States.
This has created an entirely new set of risks and opportunities for global companies, especially those at the center of disruption. As the populist backlash against elites continues to grow, companies that fail to embrace their power to deliver on public aspirations will find themselves caught in a storm that threatens their very existence.
Changing perceptions about the role of companies in society will calm this storm. The signs are clear: shareholder value alone is not paramount. Investors and consumers are increasingly attributing disproportionate value to businesses that show promise as shepherds of social and environmental progress.
Some business leaders can already sense the change in weather.
Larry Fink has made a vocal and vociferous case for stakeholder capitalism long before the pandemic. CEOs of the Business Roundtable have declared that companies must “serve not only their shareholders, but also deliver value to their customers, invest in employees, deal fairly with suppliers and support the communities in which they operate.” In his book “Grow the Pie: How Great Companies Deliver Both Purpose and Profit,” London Business School Professor of Finance Alex Edmans has argued for “an approach to business that seeks to create profits only through creating value for society.”
To do this, we believe that companies must think beyond product-market fit and embrace ‘product-society fit’ by making strategic investments that deliver both financial rewards and net public benefit.
The pre-pandemic business era largely embraced Milton Friedman’s view that an entity’s greatest responsibility lies in the satisfaction of the shareholders. To deliver shareholder value, companies are structured to develop product-market alignments, where decisions are made with a view towards growing revenue and boosting profitability. Faced with growing external pressures, large companies have added corporate social responsibility and environmental, social and corporate governance goals. While growing in importance, these topics still have little boardroom gravitas outside of a veneer of social impact.
This reality reinforces the zero-sum game where executive rewards reflect shareholder gains, even if it comes at the expense of long term societal progress and erosion of a company’s reputation and strategic positioning in the market.
I believe that it is possible to generate long term value for shareholders while moving society forward. To do so, leaders must recognize strategic business choices that intersect with the context of the society in which they operate and create opportunities to redefine the role their business plays in society. This means aligning with the aspirations of key constituents, contributing to the vision reflected by key stakeholders and leading the way on issues of national and global importance.
The book “No Rules Rules: Netflix and the Culture of Reinvention,” says Netflix demonstrated the value of this approach by conducting a contest for the best movies in Mexico. The two most popular films won a one-year distribution contract on the streaming platform, allowing Mexican cinema — a reflection of Mexican aspirations — to reach a global audience while giving Netflix exclusive access to the best content in the country.
Today, Netflix boasts over 8 million subscribers in the country and invested $200 million to produce original Mexican content. By leveraging its core competencies to benefit key stakeholders — the Mexican film industry in this case — Netflix delivered benefit to Mexican society while creating long term shareholder value.
This thinking can also dramatically increase a company’s social license to operate and its perception among key constituencies. This is vital, especially for businesses that are operating in a world where policy volatility is becoming the norm. Consumers, influencers and pressure groups are also collaborating and leveraging their power to force a change at companies.
Over time, aligned businesses will gain a loyal and emotionally invested base across society, building a strategic reserve that can generate further momentum towards achieving the organization’s long term goals.
Society is begging businesses to think differently, rewarding those who do and punishing those who do not — Volkswagen saw its sales and overall reputation plummet after its rigged emissions test scandal. Constituents are rethinking their perception of business and are looking for leaders to rebuild a better and more inclusive world.
Product-society fit is not an option, but an imperative. The trillions of dollars in wealth that has been accumulated by the richest households in recent months will only fuel the backlash against the current avatar of capitalism.
Companies who do not recognize the need to align with societal needs will face mounting pressures that will erode long term shareholder value. On the flip side, those that take advantage of this unique opportunity will find themselves at the vanguard of a movement that propels their company and the world at large into a new era of prosperity.
Anand Shah is the founder of Dhamiri, a strategic innovation firm that develops solutions for business to align with public interest. Prior to founding Dhamiri, Shah co-founded Ola Electric, Sarvajal, Indicorps, Teach for India and led the South Asia practice of Albright Stonebridge Group. Shah is a senior fellow at the Rocky Mountain Institute and a fellow of the Aspen Institute and TED.