Image courtesy jEd dC
Business must return from the shareholder model back to the stakeholder model. This return is necessary primarily because of the shift Milton Friedman started when he published his 1962 book ‘Capitalism and Freedom’. In the book, he described his view that executives’ social responsibility is to maximize shareholder profits. He justified his staunch opinion by saying that it’s the government’s job to guide those robotically self-interested executives in a direction that helps society. Problem: what greedy executive wouldn’t use this text to their advantage? The more significant problem, though, is that Friedman’s idea had contextual relevancy that doesn’t apply anymore.
Friedman’s view came at a time when there was enough congressional and socio-political alignment to win the space race by sending a man to the moon. According to Pew research, in 1962, approximately 75% of Americans trusted Washington all or most of the time. That sounds like a joke, but it’s not. 75%. Today, that figure is 18%, meaning that over 60% of the 46% of America that voted for Trump do not trust in the government. Welcome, Friedman, to the age in which government is dominated by two factors: polarization and ballooning.
Polarization is strong. Today, the left, the right, and the camps that support both have a difficult time finding middle ground. We know that based on the number of bills Congress passes, which is less than 25% of the number passed in 1948. We see that through the unfounded level of hatred even our well-educated friends have toward the ‘other’ party, even if their views effectively support much of the party’s platform. Unsurprisingly, Edelman, the world’s biggest PR firm, used ‘polarization’ as the key word to describe 2018.
The second factor to note is ballooning. It’s described in “Rebalancing Society”, a recent book by management expert and McGill professor Henry Mintzberg’s. Henry says that historically there was a balancing act of power that shifted in weight between the public sector and the private sector. The problem, however, is that crony capitalism, along with other forces, has allowed both sectors to balloon in power together. For society, this is bad news, especially within a Friedman-driven dystopia. The good news is that business leaders are recognizing these contextual factors. They are seeing that Friedman’s concepts are less relevant while other concepts are more pertinent.
To outlast their competition and drive performance, American businesses need to step up to meet the call of what Michael Porter calls Creating Shared Value (CSV). Porter, professor at Harvard Business School and arguably the world’s top expert on competitive strategy, has been harkening business leaders toward a model of stakeholder competitive advantage for over a decade. Furthermore, BCG is now on the leading edge to help business leaders see the value of that approach and act on it. BCG’s body of work that comes out of their Sustainability Practice is called Total Societal Impact (TSI). In Wendy Woods TED Talk last year, she showed how BCG’s ‘TSI’ proves that businesses with a stakeholder model are gaining a competitive advantage and outperforming their peers.
There’s a clear case for a stakeholder model, but there is also what one could call a moral imperative to guide the direction society goes. In 2016, leaders at Honeywell, DuPont and other chemical firms banded together to meet the call in their domain. Knowing the impact HFC’s have on the ozone layer, they rose above government and united to essentially halt the global use of HFC’s. Behavior like this is the new trend and will rebalance society the way Mintzberg prescribes. He says that to balance the public and private sectors, the plural sector, or social sector, as some call it, must unite to increase its power and become the third equal leg of the societal stool. Corporate actions like those from DuPont, or from Danone when it committed to becoming a B-Corp, or from Nespresso which does much of its work alongside of Rainforest Alliance, are the actions that strengthen the social sector. Business must, and is, stepping up to guide society.