This article was written by Nick Gausling, former Cansultant.
You can’t go near the business press these days without hearing terms like ESG (Environmental, Social, and Governance) or Stakeholder Capitalism. Businesses, particularly larger corporations and Wall Street firms, have increasingly found themselves in — or in many cases, inserted themselves into — major social issues and trends that go beyond the traditional business aspects of business. At the same time, there is a robust and vocal anti-movement opposing these changes for a variety of reasons ranging from alleged commercial inefficiency up to taking a firmly opposite stance. As a business leader in 2023, how are you supposed to navigate these uncharted and stormy waters?
A Brief Social History of Business
For most of recorded human history, one’s trade was integrated into virtually every part of their life. If you were a farmer, merchant, artisan, blacksmith, or whatever else, your identity and family were substantively wrapped up in the way you made a living. The distinction between the individual businessperson and society’s issues was virtually nonexistent. However, this was also a time when almost everyone was an ‘entrepreneur’ or ‘small business owner’ or at least a semi-independent tradesperson; the corporation or large company as a major societal institution is relatively new in the history of civilization, appearing during the Industrial Revolution.
From the advent of the factory and up thru the mid-20th century or so, social reform in business largely centered on things like worker’s rights and labor conditions; these are still an issue today in many developing economies. But at least in the industrialized west, labor conditions improved and the focus shifted more onto financial diligence, particularly in light of the Great Depression and then later with various securities frauds of the 1980’s, the Enron / Arthur Andersen implosion of the early 2000’s, and the Great Recession. Attention centered on the integrity of a company’s accounting and fiscal standards and how that negatively impacted shareholders when there was fraud or the reckless deployment of capital.
This all made sense in the context of the then-dominant Shareholder Primacy model best represented by Milton Friedman: the concept that the sole aim of a business is to maximize shareholder wealth. This concept is also encoded into much of western business law, which typically requires boards and management (at least in public companies) as shareholder fiduciaries to consider maximum shareholder return as primary in all of their decisions.
Over the past decade or so, the focus has now shifted onto the corporation as an instrument of social change. Large corporations impact virtually every area of modern life in some way. They are just as entwined with our lives as one’s individual trade was in the past, but with a much larger platform. Should these businesses just focus on generating maximum profit for shareholders, or should they use their considerable reach to comment on and influence the major social issues of the day?
The Corporation as Social Activist
So what happens when your employer, suppliers, customers, or favorite brands begin espousing views that contradict your own? After all, legal definitions aside, a ‘business’ or ‘corporation’ is just a term we use to describe a group of individuals working together towards some common commercial aim. Despite trendy assertions to the contrary, a corporation can’t have ‘values’ or a ‘mission.’ What has values and mission are the individuals who associate or do business with the corporation, and while those individuals may have some shared values, rarely are they 100% uniform. Who really wants their boss, supplier, or customer telling them what to believe and value in their personal lives?
And what happens when asset managers on Wall Street who control massive amounts of shares — for example, by voting the shares that your 401(k) has invested in a mutual fund — start using your assets to push companies in a direction that conflicts with your own personal views? This gives a massively disproportionate balance of power to Wall Street, disenfranchising the voice of the individual shareholder in corporate direction specifically and society generally.
Whatever one’s views, we as a society need to consider the potential pitfalls of aggrandizing power to large institutions, be they political, commercial, or otherwise. It often sounds good as long as one’s own views are prevailing, only to be seen as the exact opposite if sentiment shifts. A system that only ‘works’ when one gets their way 100% of the time isn’t much of a working system at all.
But even if it were desired, it isn’t necessarily an easy thing, or perhaps even possible, to completely separate business decisions from the social sphere. Even in the Shareholder Primacy model, there is a dimension of Business Ethics that applies. Obviously a company cannot do literally anything and everything to maximize shareholder value; there are limits within the bounds of ethics. But alas, even ethics itself is a vast, diverse field with different interpretations and values, so perhaps the idea that business has ever been an entirely value-free endeavor simply focused on profit is an illusion.
It’s clear that this topic is much more complicated than it is often made out to be by either proponents or opponents. Rather than viewing this as a novel development, it seems that business has simply become the next great platform for society’s constant struggles to adapt and shift, as those battles always tend to migrate to wherever the most power and influence reside.
As such, it may be nigh impossible for a contemporary business to escape this trend even if it wanted to. The practical reality is that no matter what, your business will end up weighing in on the social issues of the day in some form, and no matter what decisions you make, you will risk alienating certain customers, suppliers, or employees. Given that, how do you navigate this environment as a business leader who wants to be a good social steward while also not losing sight of the actual commercial aspects of your business?
Conscious Capitalism as a Way Forward
The most balanced approach I’ve found is best represented in John Mackey and Raj Sisodia’s book Conscious Capitalism. I remember when the book came out in 2013, before most people had ever heard of terms like ESG or Stakeholder Capitalism. It immediately resonated with me and has shaped my entire approach to business in the decade since.
Mackey & Sisodia identify business as a great force for social good in and of itself. In other words, rather than seeing business as either a vehicle of greed to amass as much shareholder wealth as possible with no regard for how it impacts others, or as a well-funded vehicle that exists primarily to comment on social issues, we should instead view business as an intrinsic social good that can elevate humanity through its core commercial activities.
But this isn’t just a tired old rehashing of supply-side economics, either. It recognizes that businesses have real responsibility towards communities, customers, employees, and suppliers in addition to shareholders, and so in the truest sense is still a stakeholder-driven model. But this thinking focuses on the good to be done in business itself through the mechanics of commerce: creating value, innovating, and improving peoples’ lives through voluntary service and exchange.
While it certainly isn’t a philosophy of maximizing shareholder profit at nearly any cost a la the Friedman model, it also acknowledges that businesses exist primarily to do business. Profitability is absolutely critical; a business likely can’t succeed if it runs its operating model like a non-profit, think tank, social movement, or religion. In short, the focus is on doing social good by and through being a great business and treating stakeholders well.
Is the philosophy articulated in Mackey & Sisodia’s Conscious Capitalism a perfect answer to the contemporary question of business’ proper role in society? Of course not, and even adopting such a view will be taken as a combative stance by some who prefer a different approach. But while not perfect, it’s perhaps the best approach we have.
Business and its models and methods will continue to change over time, but commerce in some form will likely remain an integral part of all of our lives. If we put the social focus of business back on the goodness to be found in commerce itself and how that can be used to enrich peoples’ lives, rather than what businesses can say as social commentators, perhaps we’d all be better off and society may be a little less polarizing.
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