The Business of Business

“It takes 20 years to build a reputation and five minutes to ruin it.”
Warren Buffett

Abstract

The business of business has never been as keenly contested as it is today. While one side argues that value creation is the sole objective of an organization, the other side rather idealistically says that every business is answerable to itself, the shareholders, and the society at large. They argue that CSR is no longer a favor that the organization is performing on the society, but a necessity for every business to survive. A lot of companies have made their fortune by investing back a large percentage of their earnings into the society, but an equally large number of companies do it out of sheer peer pressure, and some others have a history of not donating to the society in any form.

This paper elucidates the scenario when a company can both satisfy its own interests, as well as work for the benefit of the society. This theory is applicable in societies which need to be developed in order to make them a potent market. Some companies have implemented this, and put their earnings back into the community, in order to develop their standard of living and make them a possible market. This strategy has paid rich dividends to the company in the long run. A simple framework has also been devised to understand whether companies should spend in CSR, based on elementary parameters relating to the business of the organization.

Introduction
Business has indeed come a long way from the days of the imperialists when companies used to make use of exploitation, over pricing and sweatshops in order to make money. As the worker acquired more and more power, he realized that he had a right to be treated with respect, and this belief percolated through the society. Soon the producer and the consumer reached a situation of near social equality, and soon after, the company began treating the customer with more respect than itself, coining the phrase “The customer is king”.

There is little doubt that companies that work against the interests of the society cannot function profitably for long. Sooner or later, it becomes impossible to sell products or services to a society that perceives that you might not be working in their best interests. History is replete with companies that have ignored their societal responsibility, and have paid the price for it. Other companies have realized the power the society wields over them, and have paid millions in damage control when they had gone overboard in ignoring the society.

This paper was written with the core idea that that the business of doing business is still value maximization for the shareholders. But there is now a sixth force that would affect every industry. This force has been exercising power on corporations over the past few years, which has made us believe that it is more powerful than it actually seems. This paper says that this force, society, would not explicitly affect the competitive strategy of the company, unless it is “scorned”. This force, therefore, is on the top of all the other five forces that affect every industry, but is nascent.

This theory is also built on by proving that society should not always be looked at an adversary, or a problem to be overcome. In explaining this concept, the following questions get answered: Do organizations need to think of society as their adversary? Can organizations thrive even when they make the community a partner? Is it necessary that Corporate Social Responsibility is an obligation to the society or can it pay any tangible dividends?

Literature Review

A book authored by businesswoman and academic philosopher Dr. Elaine Sternberg titled ‘Just Business’ incisively defines the purpose of business. She is a strong advocate of a business’ sole purpose being to maximize the long-term value of the owners, keeping in mind the basic values of ordinary decency and distributive justice. A paper written by C.K. Prahalad and Allan Hammond effectively illustrates how corporations can benefit by including the society in their business operations, creating a mutually beneficial relationship. It says that such a company would reap top- line growth, massive cost advantages as well as effective innovation. Moreover, Stuart Hill’s book titled “Capitalism at a Crossroads: The Unlimited Business Opportunities in Solving the World’s Most Difficult Problems” elucidates the concept of the bottom-of-the-pyramid (BOP) and how targeting it might be extremely useful to corporations. It talks about the opportunity lying in BOP and how this may help solve the problems of the developing world effectively. Further review of secondary sources explains examples of companies that have developed a symbiotic relationship between itself and the community.

Society – The Sixth Force
Society has long been perceived as a duty, a responsibility that a company should fulfill. However, we believe otherwise. We hypothesize, that society has moved from being a responsibility, to being a force that every industry has to reckon with, and can significantly affect the balance of power in any industry. Exhibit 1 below explains this concept:

Exhibit 1: The sixth force
It satisfies the all criterion for other forces, and can be looked at from different perspectives:

• The products: The society defines an industry as being attractive or otherwise. Companies that have tried to market products that are against the interests of the society have had to change their strategy very quickly. An example is of Coca-cola Inc. Caffeine was a part of their formula which they had kept secret for a long time. Finally they had to disclose it, and now every can of Coke has a mention of the fact that Coke contains caffeine.
• The by-products: Companies cannot hope to survive by using substances in their products that the society perceives might be harmful. For long, Coca-cola donated sludge from its plant as manure to farmers in its plant in the Indian state of Kerala. After complaints, the Government of Kerala ordered the sludge to undergo testing. It was found that it contained dangerously high amounts of Cadmium, a proven toxic substance. As the litigation drags on in the Indian court, it has now become apparent to Coca-Cola that they cannot afford to take the society that they operate in for granted.
• The employees: Corporations have realized that it is imperative for them to keep in mind the well being of their employees in all their business decisions, and they cannot afford to take their employees lightly and compromise on their well being in any way. Nike has learnt this lesson the hard way in Asia, when it was alleged that they used child labor in their factories in the Far East. There was a severe backlash from around the world, and their sales immediately plummeted. They had to take corrective measures to make sure that their employees were of the right age. This is a lesson for all corporations, to never take their employees for granted.

The Business of business is business
We agree with Milton Friedman when he said that the business of doing business is simply business. The ultimate purpose of managers when doing business is to maximize the shareholder’s wealth. The only person that the manager is accountable to is the owner of the business and to use the wealth of the owners for any other purpose but for their interests would amount to being unethical. However, no business in today’s time can chose to completely ignore the society. There is a thin line between being responsible to the society and being accountable.

The fact that these corporations are creating wealth is by itself very beneficial to the society. They do not necessarily have to sacrifice their wealth through distribution in favor of the members of the society. In case the management feels that they might want to indulge in activities which will aid the society at large, so be it. But it still remains the free will and interests of the shareholders. There should be no pressure on them to do this as long as they are going about their business without hurting the society.

However, there is no reason to believe that investing in measures beneficial for the society and maximizing owner’s wealth are mutually exclusive. A company need not look upon CSR as an obligation; it could rather take it on as an opportunity. Till now, most companies have believed that there is a trade-off between investing for the good of the society and the financial performance of the company. However, a number of companies have come to recognize that it might be in the long-term interests of the shareholders of a company to invest in certain such activities. In fact, Dow Chemical estimated in the early 1990s that reactive efforts such as regulatory compliance, cleanup, and remediation result in returns in the range of –60 percent while proactive initiatives typically produce positive returns in excess of 20 percent. (Source: Capitalism at the crossroads: From obligation to Opportunity). A company can therefore directly reduce costs by indulging in measures which are both beneficial to the society as well as the shareholders. An example of reducing costs through participation with the society is that of ITC’s e-choupals. Its agri-business division has deployed a total of 970 kiosks connecting over 600, 000 farmers who provide it with a range of products like coffee, wheat, etc. These kiosks help in disseminating the latest information on weather conditions, best farming practices, soil and water-testing, etc, thereby increasing the farmer’s productivity, which in turn is good for ITC.

Moreover, those are not the only benefits to be reaped by a corporation by diverting some of its attention towards the society. As discussed in the literature review, it can also result in significant top-line growth through a wider customer base. There are more and more companies which feel that the 4 billion people (almost two-thirds of the world’s population) that make the ‘bottom-of-the-pyramid (BOP)’ (earning less than $2 a day) are poised to become the world’s largest market. To some companies the only way to tap this market is to first make them self-sufficient which will directly translate into them becoming consumers. So, companies actively engage in uplifting the BOP through direct measures (like opportunity creation) which will eventually translate into profits for them and at the same time double up as a measure of corporate social responsibility for the company. Figures from the UN and World resources Institute indicate that by the year 2015, 1300 of the largest cities of the world (most of them in Africa, Asia and Latin America) will support 1.5 to 2 billion people, half of whom will fall under the bottom-of-the-pyramid category. This implies that there is a huge opportunity to be tapped by corporations which form a base in these cities. This should be seen in context of the fact that most of the developed world is experiencing stagnant growth and the markets there are becoming increasingly saturated as well as difficult to exploit. An example of a company which has recognized this well in advance is Hindustan Levers Limited. The company has been aggressively focusing on rural India which houses two-thirds of India’s consumers (approximately 700 million people). HLL’s Project Shakti was conceptualized to increase their distribution reach in the rural markets by tying up with Self Help Groups of rural women. Armed with training from HLL, These SHGs have adopted distribution of HLL’s products as a business venture. For these women, they are earning far in excess of what they were earning earlier (and therefore spending more as well), and for HLL, it is bringing a larger number of villages within its distribution coverage increasing its customer base.

However, we believe there are certain generic situations under which a company can indulge in CSR. The following framework indicates this (Exhibit 2). It is a suggestive framework of whether a company should do CSR. It is to be noted that this is only a suggestive framework. The following are the limited situations under which the framework should be applied:

1. The top criterion to do CSR is always the willingness and the interest of the management to do CSR. The following framework is only a secondary criterion, if the company is undecided.
2. The assumption is that a company would do CSR if it thought that it was directly and tangibly benefiting its shareholders. We also assume that this would prompt the shareholders to agree to CSR. The following framework only defines a situation when a tangible connection might not be seen between CSR and returns.

Exhibit 2: The framework for levels of CSR spend by an organization
The goals of the organization vary from one to another. The point is, however, that the company two criterion to decide whether it should be involved in corporate social responsibility. This model can be explained as below:

• Company in initial years, high growth: The Company should look to maximize its returns, since it has enough opportunities for growth, and has limited cash, and hence does not surplus cash to invest in the society. We believe that such companies should not indulge in CSR, and that profit maximization and growth should be their objectives.
• Company after a few years, looking to fit into the league of the larger players of the industry: This is a stage when the company believes that it is now in the big league, and should hence try to imitate the CSR spends of other companies in its league. We believe that this is a valid reason for CSR, but it should still be minimal. We think that the money should still be pumped back into the business, because a lot of growth opportunities still exist for the company. It should utilize its resources more directly in the growth of the company, in order to gain more direct and tangible returns.
• Growth plateau-ing, company maturing: The company now should begin to increase spends on CSR, because it finds fewer opportunities for investment in its own industry. It should now look to contribute further to the society because it has surplus cash, its industry does not show too many prospects for growth, and it is just in that transition phase when it is looking to enter other industries. We believe this is an opportune time to invest in CSR, because it would help in brand building, and help in building the image of the company.
• Company mature, but growth on different fronts: Such companies are more run by a management, since the founder has usually stepped down. We believe that such companies are usually listed in the stock market, have a large number of share holders who they are answerable to, and through them, are answerable to the society. Such companies should look to up their spending in CSR, because such large companies usually have a much larger stake in the society. A large part of the society is, in a way, their customers, or shareholders, or employees. For example, in India, the Tata’s contribute about 3% of the GDP of the country, and employ over 1.5 lakh employees, and have an equally large number of shareholders. This means that they are much more spread in the society, and that every spending in CSR would translate to an investment in their company, directly or indirectly.

eBay: the business, the community
eBay, the online auction is a good example of a company that, in a developed economy, has kept the interests of the society in mind in all its important decisions. Evidently, such a business would be most susceptible to societal preferences, and would have to make the society an important stakeholder. They have been reacting dynamically to consumer perceptions, and this has helped them grow at a phenomenal rate and survive every vagary that the dotcom business has suffered. In fact, there have been instances when the company lacked the vision to move in the right direction. For example, initially, they did not anticipate that anyone would sell cars and motorbikes on their website. So when the first seller wanted to sell a bike, he had to list it along with “toy bikes and cars”. This kept increasing, and finally eBay realized that they would have to create a separate section to trade cars and bikes.

Another such instance is when eBay realized that they were having a lot of small entrepreneurs who were running full time businesses from eBay. They created a service called Prostores, where the customers could open an online store, which would be managed by eBay, but sold the customers products, for a fixed fee. This is another example of the society guiding the company in the right direction.

However, there have also been instances when they made strategic moves against the interests of the community they support, and the backlash has been quite visible. A few years ago, eBay increased its percent margin on sales worth more than $500 from 17% to 45%. The stock market reacted quite favorably, and the stock price of the company shot up immediately in anticipation of the increasing benefits to the company from this move. However, there was a backlash from its loyal clientele. CEO Meg Whitman received about 20,000 hate mails asking her to withdraw this move, because it hit small entrepreneurs who ran businesses using eBay. eBay understood the pulse of the customers, and fortunately, this move was reversed. The board and the shareholders had to be convinced that reversal of this move was in their best business interests as well, and the company, the shareholders and the community all moved in the same direction.

Conclusion
There are schools of thought that believe that a business should be actively involved in the well being of the society. However, we believe that this is a voluntary choice that should be made by the company, and a company should, apart from its choice, judge whether it needs to be involved in Corporate Social Responsibility based on the suggested framework. We believe that a company being involved in CSR should be a function of the stage of maturity that it is in. However, this is only a secondary criterion, and the primary criterion is the will of the organization to involve itself in CSR. Otherwise, CSR is only a force that should be part of every important strategic decision that a company makes, and not an obligation to the company. It is because of this criterion, that we think Society has come to be “The sixth force”, a nascent force that affects every industry and every component of it.

References:
1. Amit Srivastava, Coordinator, IRC: India resource center response to Coca cola; Retrieved August 4th, 2005 from
http://www.indiaresource.org/campaigns/coke/2004/responsetocokejuly2404.html
2. The symbiotic relationship between eBay the company and eBay the community; Retrieved August 6th from http://www.businessworldindia.com/AUG0105/invogue01.asp
3. “Serving the world’s poor profitably”, CK Prahalad, Allen Hammond, Harvard Business Review, September 2002
4. Elaine Sternberg · Elaine Sternberg, Just Business: Business Ethics In Action, Second Edition, Oxford University Press, 2000
5. Capitalism at the Crossroads: The Unlimited Business Opportunities in Solving the World's Most Difficult Problems; Stuart Hill; Wharton Publishing House

About the writer:

Kamini Gupta is an MBA from IIM Lucknow and an Economics graduate from SRCC, New Delhi. She has worked with an ITES company, responsible for their service delivery. Currently, she is working as an independent consultant primarily in the field of media and marketing.

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This work is a contribution of our readers, including firms and individuals. It represents opinions and ideas of the author alone and not India Reports. India Reports is not liable for errors in information or statistics. This work has not been subjected to our stringent plagiarism checks.

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