Corporate liberalism

[Marvin Gandall <marvgandall@xxxxxxxxxx>]

The head of one of the world's largest management consulting firms has a
longish piece (excerpts below) in the next-to-last issue of the Economist
calling for a new round of corporate liberalism. Much as 20th century
capitalism was forced on a state by state basis to accommodate to reform
demands by the unions and other social forces in the interests of  a stable
and profitable operating environment, Ian Davis of McKinsey Associates
argues that modern corporations need to similarly respond to current
worldwide demands for environmental, financial, trade, health and other
reforms being pressed on them by global social movements. Davis
distinguishes his position from the "corporate social responsibiity" school
which he sees as a "fuzzy" and half-hearted attempt to blunt NGO criticisms
of business. He says growing public hostlty and instability demands a more
serious reform effort, and can generate "value-creation opportunities" for
certain sectors besides - a good expression as any of the viewpoint of the
"enlightened bourgeoisie" which built the welfare state.

MG

Business and society
The biggest contract
Ian Davis
May 26th 2005
The Economist

THE great, long-running debate about business's role in society is currently
caught between two contrasting, and tired, ideological positions.

On one side of the current debate are those who argue that (to borrow Milton
Friedman's phrase) the "business of business is business". This belief is
most established in Anglo-Saxon economies. On this view, social issues are
peripheral to the challenges of corporate management. The sole legitimate
purpose of business is to create shareholder value.

On the other side are the proponents of "Corporate Social Responsibility"
(CSR), a rapidly growing, rather fuzzy movement encompassing both companies
which claim already to practise CSR and sceptical campaign groups arguing
they need to go further in mitigating their social impacts.

Large companies need to build social issues into strategy in a way which
reflects their actual business importance. They need to articulate
business's social contribution and define its ultimate purpose in a way that
has more subtlety than "the business of business is business" worldview and
is less defensive than most current CSR approaches.

Examples abound of the long-term business impact of social issues. These are
growing fast. In the pharmaceuticals sector, a storm of social pressures
over the last decade-stemming from issues such as public perceptions of
excessive prices charged for HIV drugs in developing countries, for
example-are now translating into a general (and sometimes seemingly
indiscriminate) toughening in the regulatory environment. In the food and
restaurant sector, meanwhile, the long-escalating debate about obesity is
now resulting in calls for further controls on the marketing of unhealthy
foods. In the case of big financial institutions, concerns over conflicts of
interest and mis-selling of products have recently led to changes in core
business practices and industry structure. For some big retailers, public
and planning resistance to new stores is constraining growth opportunities.
And all this is to say nothing of how social and political pressures have
reshaped and redefined the tobacco industry, say, or the oil and mining
industries over the decades.

In all such cases, billions of dollars of shareholder value have been put at
stake as the result of social issues that ultimately feed into fundamental
drivers of corporate performance. In many instances, a "business of business
is business" outlook has blinded companies to outcomes (or shifts in their
implicit "social contract") which often could have been anticipated.

Just as important, these outcomes have posed not just risks to companies,
but also have generated value-creation opportunities. In the case of the
pharmaceuticals sector, for example, in the growing market for generic (ie,
non-patent-protected) drugs; in the case of fast-food restaurants, in
providing healthier meals; and in the case of the energy industry, in
meeting fast-growing demand (as well as regulatory pressure) for cleaner
fuels such as natural gas. Social pressures often indicate the existence of
unmet social needs or consumer preferences. Businesses can gain advantage by
spotting and supplying these before their competitors.

It is neither sufficient nor wise to say that it is up to governments to set
laws, and for companies simply to operate within these rules. Nor is it
enough, even if it is often valid, to point out that many criticisms of
businesses are unmerited, or that those throwing the mud ought also to
examine their own practices and social responsibility. Irrespective of
whether the criticisms are valid or not, their cumulative effect can shape
the strategic context for companies. It is imperative for business to seek
to lead rather than react to these debates...

In the limitations of both CSR and of the "business of business is business"
thinking lie the outlines of a new approach for business (as relevant for
Chinese, Indian and German companies as for American and British
businesses). Three main strands stand out.

The first is a helpfully simple prescription. Businesses need to introduce
explicit processes to make sure that social issues and emerging social
forces are discussed at the highest levels as part of overall strategic
planning..

The second and third strands both relate to the idea that there is an
implicit contract between big business and society, or indeed between whole
economic sectors and society-the contract that is the subject of this
article...there are two sides to a contract-and business must acknowledge
that in return for the ability to function it is subject to rules and
constraints...

What might this mean specifically? There is no shortage of big social issues
today that directly affect many big businesses and that require new debate.
These include: ensuring aid and trade regimes successfully promote the
development of Africa and other poor regions (the economic lift-off of such
regions would present a major potential boon to global markets as well as
international security); promoting a more sophisticated and sensitive
approach from both companies and governments to balancing the societal risks
and rewards from new technologies; spearheading dialogue on the health-care
and pension challenges in many developed countries; and supporting efforts
to resolve regional conflicts.

...Public receptiveness to active business leadership on issues such as
these
may be a lot better than some might be inclined to think. Despite the poor
image and bad press of big business in recent times, polls suggest that
people retain a belief in the ability of business to provide a positive
contribution to society.

More than two centuries ago, Rousseau's social contract helped to seed the
idea among political leaders that they must serve the public good, lest
their own legitimacy be threatened. The CEOs of today's big corporations
should take the opportunity to restate and reinforce their own social
contracts in order to help secure, for the long term, the invested billions
of their shareholders.

Ian Davis is worldwide managing director of McKinsey & Company