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Should businesses concentrate solely on profits, or should they enhance their own interests by addressing the interests of a larger group of stakeholders?
Julia Homer, CFO Magazine
October 1, 2006
For centuries, economists have debated the best way to make money. Writing about British industry around 1763, Adam Smith famously asserted that companies should focus solely on their returns; "the invisible hand" of the marketplace would ensure that their efforts ultimately worked to the general good.
In the 1830s, Alexis de Tocqueville, describing the unique characteristics of America, identified Americans' "enlightened self-interest" as a key to their prosperity. Americans, he said, believe that some measure of cooperation among themselves and association with the state actually helps them make more money.
The slogans change with the times. We've all heard "the business of business is business" and "doing well by doing good." More recently, people have phrased the debate as shareholder value versus stakeholder value. But underneath the rhetoric, the argument is unchanged: Should businesses concentrate solely on profits — the return to their shareholders — or should they enhance their own interests by addressing the interests of a larger group of stakeholders — community, employees, and society?
The answer, I think, depends on market conditions, and on the level of discontent within a particular business or industry. When the market isn't delivering and cost-cutting beats revenue growth, social responsibility starts to seem a prudent strategy. Take General Electric. Under Jack Welch, with the economy in full boom, GE epitomized ruthless dedication to shareholder value. Today, under Jeff Immelt and in more-difficult market conditions, GE promotes its Ecomagination campaign and a more mellow workplace.
GE is not alone. As staff writer Kate O'Sullivan explains in our cover story, "Virtue Rewarded," companies as diverse as British Petroleum and General Mills are explicitly linking socially responsible behavior with better returns. Today, thanks to corporate scandals, the post-boom blues, and the visible erosion of health-care and pension benefits, many other companies are embracing the spirit of de Tocqueville.