the social contract of business

In a recent McKinsey interview, social scientist Daniel Yankelovich discusses business' social contract.

In this article, Yankelovich discusses how there has been a recent seismic shift from Milton Friedman's argument against a corporation’s broader engagement with society, and towards a more pragmatic approach, incorporating public good.

Yankelovich seems to support the recent Economist article, in which it argued that every corporate strategy had to pass two tests—does it enhance the company’s long-term profitability, and does it serve the public good? However, this approach creates two divergent goals, and reconciliation of these can be close to impossible.

So putting away that article for a minute, the only disparity between the two goals is the definition of "long term." Financial success is merely society's way of telling an organization, "You create a product or service that serves a need so well, it's worth our money for you to provide it." Organizations focused on quarterly returns can easily miss this correlation, but a true long term focus will incorporate many things: market opportunities, growth and yes, the public good. A company following good governance practices looks not only at the immediate financial return, but also at the risk to the business of not watching the environmental impact or worker welfare.

Organizations have slowly adopted risk management procedures at the project level, such as hedging our bets by betting on two technologies simultaneously. Why not also take such a serious approach to strategic risk? Firms with positive reputations attract better people. Actively managing strategic risk, and the company's reputation, is a critically overlooked element of business.

Taking such a dynamic approach doesn't just mean having a quick and efficient reaction to disasters, whether they are backdating options or an environmental catastrophe, but creating the environment where issues like that are less likely to occur in the first place.

Yes, there are business impacts to creating such a positive, sustainable working environment. It's a lot cheaper to conform to China's norms for pollution and worker safety than it is to treat the country as we would a developed nation -- we're losing our competitive advantage and why we expanded here to begin with! However, what really happens when we play along with the looser norms of less developed nations? When you remove societal rules and expectations, you create an environment where fraud and corruption can thrive, including in ways the corporation could have never expected.

An interesting example of this is the United Nations. In order to be politically neutral, the UN has been unable to create rules that would not be honored in member countries. For example, if you're an employee of the United Nations in a same-sex relationship, can you marry your partner? The UN rules state that they will honor a same-sex marriage if the countries that both persons are from honor same-sex partnerships. While understandable from an expediency standpoint, it's absurd. So when you have UN employees and contractors working in developing nations, adhering to local laws, standards and norms, you can end up with a shocking level of fraud, sexual offenses and other atrocities. The UN, like corporations and other entities, needs to hold themselves to a higher standard.

It's a lot like governance in general. If I do the minimum I have to do to pass a law, I will go into a tailspin every time there is a new law enacted, or a new interpretation of an existing law. But if I take into account the reasons for the law -- honest and fair business practices, transparency, etc -- I won't have to revise my processes for every new law. This approach ensures that the organization has a strong framework for doing the right thing, and helps simplify decision making. It's also much more cost effective than engaging creative lawyers and PR firms to extricate the firm out of trauma after trauma, and trying creative accounting to get out of the ensuing stock price collapse!