Today, it’s a given that that the playing field for business has changed. Technology and communications are continuously advancing. Dramatic sociopolitical events continue to occur at an accelerating pace. Global leaders have acknowledged that the UN’s Sustainable Development Goals (SDGs) cannot be met without private sector involvement. And people’s definitions of value are shifting alongside mounting evidence that social and environmental practices impact corporate performance over the long-term.
There is no going back. The mantra that has defined our economy and our notions of capitalism for decades – the primary purpose of a corporation is to maximize profits and shareholder value – no longer speaks to the needs and practical realities of our modern society. Business can no longer be seen as an end in and of itself. Long-term success is dependent on meeting the needs of a wide range of stakeholders: a virtuous—or ethical—interdependent circle that includes customers, employees, suppliers, communities, society at large, and even the planet.
Business and society: a two-way bargain
Peter Drucker identified business as an “organ of society” in his 1986 book, Management: Tasks, Responsibilities, Practices:
To know what a business is we have to start with its purpose. Its purpose must lie outside of the business itself. In fact, it must be in society since business enterprise is an organ of society. There is only one valid definition of business purpose: to create a customer… . The customer is the foundation of a business and keeps it in existence. He alone gives employment. To supply the wants and needs of a consumer, society entrusts wealth-producing resources to the business enterprise.
According to Drucker, “Society entrusts wealth-producing resources to the business” to serve the customer. In other words, business serves society through an interdependent circle that begins by serving the customer:
- When a company understands its customers’ needs, wants and desires, prices its products and services at fair value for quality, lives up to its claims, and provides excellent services, the customer will buy its products and services.
- The company can then pay its employees a living wage, treat them fairly, maintain equitable supplier relationships, and provide shareholders with a healthy return on their investment.
- Satisfied employees will produce higher quality products and services and shareholders will invest more so the company can produce higher quality products and services based on customers changing needs.
- The company cultivates loyal customers, who buy more from the company at more premium pricing, reducing the cost of sales and increasing profits.
- With increased profits, the corporation pays higher returns to shareholders, provides its workforce with better benefits, fosters positive community relationships, improves the supplier chain and invests more into R&D. The cycle begins again, and the circle becomes virtuous.
With few or no customers or access to society’s resources, a business isn’t sustainable. Therefore, to be successful over the longer term, it’s essential that a company understands it is part of a larger ecosystem that requires it to be socially responsible. It serves society, not itself, and exists only because of customers.
Social responsibility: part of the culture, not a separate department
Social responsibility is a dynamic discipline that has been evolving for decades. Yet, today, even with the microscope focused on ethical issues, fair labor practices, and sustainability, social responsibility remains a specialized department in most companies. While experts are necessary to integrate effective policies and procedures into operations, all employees, beginning with the CEO, should be accountable for social responsibility and good corporate citizenship in the same manner that they are responsible for serving the customer and profitability. Responsible – in other words, ethical and moral – practices should be engrained into a company’s culture, not segregated to a few departments.
When a CEO pioneers a meaningful purpose for a business, and that mandate emanates from “the tone at the top,” social responsibility and good citizenship is more effectively integrated into a company’s DNA. As more people expect companies to respond to an increasingly long list of social and environmental challenges, programs that are aligned with the purpose of a business will create greater financial and social value over the long term.
A purpose beyond shareholder value
“Most people need to feel that they are here for a purpose, and unless an organization can connect to this need to leave something behind that makes this a better world, or at least a different one, it won’t be successful over time.” -Peter Drucker
A new mindset reflecting Peter Drucker’s management principles is gaining momentum and influence in business: long-term business success is dependent upon meeting the needs of multiple stakeholders and mindful environmental and social practices. The challenge companies face in actualizing this is twofold: (1) aligning the purpose of the business with strategies that speak to their customers’ needs and desires; and, (2) developing criteria that guides managers to make the necessary trade-offs among interdependent yet competing stakeholders that fosters a virtuous circle.
To create lasting value, managers must remember a long-term focus isn’t about crafting one-off solutions that meet expectations for executive boards and corporate public relations. A long-term focus requires aligning value creation both inside and outside a firm to optimize value for customers, employees, investors, and other stakeholders, as compared to a top-down dictate to maximize shareholder returns.
About the Author:
Anne Bahr Thompson is the pioneer of the Brand Citizenship movement, author of Do Good: Embracing Brand Citizenship to Fuel both Purpose and Profit, and founder and chief strategist of Onesixtyfourth. Previously, Anne was head of the consulting busineses for Interbrand, first in the USA and then in the UK. Follow her on @annebt.
This article first appeared in the Drucker Forum Series on Linkedin Pulse.