Business doing good is doing good business

Tom spoke to a gathering of London Futurists at Birkbeck College, London, in September 2017. His theme – Why Business Doing Good is Doing Good Business – very much pre-empts The Company Citizen which will be published late in 2017.

This half hour video includes a 20-minute presentation followed by a Q&A. (Scroll down to the third presentation).

The talk complements a chapter Tom wrote for Derek Bates’ book ‘Agenda for the Future’, also published in September. Here’s that chapter:

The Case for the Company Citizen

Society needs ‘company citizens’ to be better engaged in our communities: fortunately, it’s in business’ interests to pursue the same agenda. However ‘better’ shouldn’t mean ‘more of the same’: rather business needs to rethink its role in society, at local and national levels.

There are moral, political and business cases for this change and pioneers from whom aspiring businesses can learn. There’s also a global framework for such activity – the United Nations’ Sustainable Development Goals – and ample evidence in localities across the world that engagement works in the interests of the companies, beneficiaries and nations.

The moral case

The moral case is that those who exercise power should do so responsibly, not simply to mitigate any negative impact of their activity on society or the environment but in a socially positive way. This collaborative spirit drove the formation of the United Nations, bringing together the world’s economic and political powers – 20 nations in 1939, over 50 by 1945 and 193 today. An early associate, from 1946, was the International Labor Organisation – whose mission to promote a human dimension to business practices dates from 1919.

That the UN is the principal voice of moral authority on a global scale is beyond question even if its impact may have underwhelmed on occasion. In 2000 it established 8 global Millennium Development Goals, based on ideas of community, fairness, dignity and basic rights, and surprising no one.

The MDGs set 15-year targets but their successor programme, the Sustainable Development Goals, are subtly different in that they challenge not just governments and communities but also businesses to ‘walk the walk’. By adding Goals on energy use, clean environments and the better management of (industrial) raw materials business has been irretrievably implicated in their implementation.

That moral charge on business, to accept some responsibility for achieving these UN goals, based on universal values, is supported by a stark statistic: 60 of the world’s 100 largest economies are no longer countries but businesses. How different is the 21st century from the mid-20th!

Whatever the countries of the world decide to do together, through UN conventions, the Paris Climate Change Agreement or other accords, they will not achieve their goals unless business is on board. Where once it was enough for business to co-exist with global society, not standing in its way, today the SDGs, the embodiment of decency, sustainability and fairness, absolutely rely on the active involvement of the corporate sector. This is a challenge that global company citizen pioneers like Unilever have taken up with relish.

People regard paying fair levels of tax as a moral duty and they do not understand why, on their modest incomes, they’re contributing more tax than some major multinationals which pay none, despite trading here. Nor do they accept that even top business leaders need to be paid so much more than the most accountable person in the country, the Prime Minister: shareholder revolts on top pay packages are becoming commonplace. For the first time in half a century business spending on dividends is growing at the expense of employee pay and people are naturally suspicious that companies who arbitrarily headquarter themselves offshore are ‘up to no good’. That the cost of a business’ ‘licence to operate’ is partly measured in moral terms has never been more true.

There’s an old saying ‘if you’re not with us, you’re against us’. As we explore the (small ‘p’) politics and the practicality of the case for greater business engagement with society, that case for engagement will be seen to apply as much in local communities – if not more – as on the global stage.

The political case

Britain is one of the world’s most generous countries. Charitable giving, volunteering and corporate philanthropy are all at a high, if static, level. Over the last 60 years a growing and increasingly professional voluntary sector, in particular, has shared with government and public sector the responsibility for delivering services which meet people’s basic and other needs. Recently a number of trends have challenged the dynamics of cross-sector relationships: ‘outsourcing’ of services has proved controversial; commissioning practices may have perverted charity missions and encouraged dependency on government funding; poor privatisation practice has allowed questionable profits to be made whilst reducing the accountability (and sometimes the quality) of such services.

On the other hand, there’s no doubt that cross sector partnerships can increase the qualitative value of services and that business efficiency can make them more effective (and even cost effective). Although these positive virtues are not guaranteed, cross sector working is here to stay. Indeed, we have seen businesses and charities voluntarily come together to work collaboratively without the need for fine print in a government contract.

A decision to outsource to a ‘for profit’, or an inaccurately labelled ‘not for profit’, company is a question not of economics but of values. Southern Cross was a private equity-owned company which grew to be Britain’s largest private provider of care home beds before its spectacular collapse in 2011, when it lost 98 per cent of its share value. The oft-quoted example is a case in point. How, it is asked, can a company whose mission is the maximisation of short term profit be trusted with the care of frail and vulnerable people? That is not to say that a ‘for-profit’ company with a different ethos and more nuanced values cannot be trusted with such a duty; is that really so different from a body with overtly social values which employs business tools to attain them?

This blurring of historic sector boundaries is permanent. So, it appears, are government austerity and its consequences, public spending cuts, the dependency of the third sector on government funds and the flatlining of charity income in the face of growing demand on their services. So are rising levels of inequality and the ‘poverty premium’, the phenomenon whereby elements of the cost of living are actually higher for the poor than for the rich. Official figures show more people in working poverty than ever before, despite legislation on low pay, and they’re employed disproportionately in the private sector.

It’s no surprise, therefore, that the poorest communities are often becoming, literally, more hopeless. Those least able to afford it have borne the brunt of spending cuts. This is a political reality in which it’s not for business to take sides, as all politicians are committed to helping the country achieve stability in a sustainable way, according to their vision of what is fair and possible, following that global financial crash. Aren’t they?

But neither can business stand idly by. The economic case for being involved in the relief of poverty is that poor people are poor consumers, a challenge central to the ‘shared value’ philosophy of Michael Porter. So too are sick people, and those who are isolated – geographically, digitally and socially. Those who lack dignity often lack capacity. Employees who are sick, stressed and unfulfilled are suboptimal performers – factors which will be influenced by the world outside the workplace. There’s also a business case for engaging with the community, to which we will return, but the political case is summed up by the concept of the ‘Company Citizen’.

A Company Citizen, like any other, cares for the welfare of fellow citizens; works with them to address common issues in the community; is generous with their time, skills and other resources. The Company Citizen is actively engaged, not in Party politics but in lobbying for what is right and helping mitigate what is wrong.

And yet in the most deprived areas there are fewer employers, even SMEs, compared to slightly more affluent areas. Ironically, research shows that those communities have fewer successful voluntary sector organisations too: they lack the social capital necessary to cope with poverty and social exclusion, withstand ongoing economic shock, even to organise at a basic level. Where business is absent, how can the Company Citizen help?

Community organisations are the key. Ask them what they most need and they will probably say money, but it’s not true. They need skills: skills to plan their operations, to strategise, to lobby, to even provide for themselves through sharing. These are essentially business skills that can be given away by a company at no cost, in the course of an ongoing and committed relationship with a community. Get these skills right and whilst the money won’t necessarily look after itself at least it will go further. Better still, skills transfer is a two way street and workers will become better employees, better people, through their involvement.

According to a 2016 report by Social Enterprise UK, one third of local authorities have chosen to implement the 2012 Social Value Act. This says that in commissioning the supply of services over a certain value a council may insist that bidders demonstrate positive values towards the community and the environment: reducing carbon footprint, increasing apprenticeship levels, encouraging employee volunteering and more. In Manchester and Birmingham the councils apply these values to all of their tendering for goods and services and can demonstrate benefits for the community as a result. In those cities a business that wants to trade with the council has to be a Company Citizen.

The business case

The business case for philanthropy per se is minimal. Philanthropy is too often regarded as donor-focused and paying little heed to the long term impact of the funded project. Many businesses give big sums from corporate coffers to charity as a matter of course, boast about it then forget it: currently £6 billion per year. This not insignificant sum is, of course, welcome but could be utilised better, as more sophisticated corporate donors are discovering. Philanthropy can undoubtedly enhance reputations but this falls apart when a company acts in ways which undermine the values associated with their philanthropic gestures. This is called ’greenwashing’.

Many community engagement activities are more sustainable than simply writing cheques:

  • employer supported volunteering can transfer, boost and extend employee skills
  • a business with value-led purposes better engages its employees
  • a values-led, ethical and sustainable supply chain creates a broader community and enhances reputation
  • employee-generated ideas can reduce carbon footprint and promote innovation and effectiveness.

An engaged employee is more productive and loyal than others; stays in post longer, reducing recruitment costs; and is a better informal ambassador. A company with CSR or ESG values integrated into its mainstream activity recruits a higher calibre of graduates, especially amongst millennials; and let’s not forget the marketing benefits of the best charity partnerships, too, like Boots with Macmillan Cancer Care.

SME start-ups with a social primary purpose, so-called social enterprises, have a lower failure rate than others. On a global scale investments in ‘ethical’ or ‘responsible’ causes produce higher long term returns than do mainstream FTSE indices.

A conventional business case in a new environment.

Conclusion

In the 18th century Adam Smith argued that a business could only sell what someone would buy and in the 1930s Milton Friedman argued that making a profit was the primary purpose of business. Essentially, both are correct: without a return on investment any business will fail and a company trying to sell a product that no-one wants is also doomed. But these are inward-looking values which don’t completely reflect today’s complex business world which, while not perfect, is in a state of flux.

That’s because over recent generations an appreciation has emerged of the external responsibilities that business has to all of its stakeholders – employees, customers, suppliers – and not just to its owners. Citizens accept that paying tax is both a moral obligation we all have to help those worse off than ourselves and the price tag of that ‘licence to operate’, so tax avoidance and evasion are increasingly frowned upon. Clearly not all companies agree; but contributing fairly through taxation is surely a hallmark of citizenship.

Most companies accept the stakeholder argument and would not dream of bending regulations to suit their own gains or, even worse, risk being discovered doing so – but the ‘external duty’ of company citizenship is not yet universally adopted.

Still fewer are the companies that adopt a philosophically global approach to citizenship. One of the two responsibilities enshrined in this duty is from history: it’s to the future. In the era of family-owned firms companies were driven by the desire to hand a thriving business over to the owner’s children. That generational perspective has been lost and short term thinking has come to dominate business practice: witness the shrinking time spans of share ownership and CEO tenure, the growth of impatient venture capital, the use of quarterly reporting and aspects of the bonus culture.

Let’s return to the positions of business and charity relative to each other. Britain has 5 million companies, 99% of which employ fewer than 250 workers and 2 million employ no one at all (witness the veritable army of self employed). The average company has an annual turnover of £500,000 whilst the biggest are mind-bogglingly large: a single supermarket superstore can turn over a million pounds each day, the same as the charity, Oxfam.

Of 180,000 registered charities in Britain only 14 have a bigger turnover than Oxfam. 80% turn over less than £100,000 per year and half have an income of under £10,000. So big are the biggest charities that charities’ combined turnover is £70Bn and average income is £400,000.

The American company Salesforce employs an ‘integrated philanthropy’ model, giving to charities roughly 1% of their turnover and time. If every company did the same this could generate £25Bn of value in Britain for charities (some of which is, of course, already available).

If we assume that each charity is not 1% but 75% effective, interpreting 75% of turnover as social impact – which may be generous – we find that they create £53Bn-worth of impact. In other words, 100% of charity effort at 75% efficiency delivers only twice the social impact that 1% of business effort could, if it was pointed in their direction.

Salesforce targets charities which are supported by either the company or its employees, to create new capacity. Now, if all of that 1% of business turnover, across Britain, representing the creativity, impact and passion of businesses were focused on increasing the impact, efficiency and effectiveness of charities and the good that they can do…

Our poorest communities are in crisis. They feel ignored, excluded, exploited. They lack the social capital that a vibrant voluntary sector creates – which is why the otherwise worthy concept of David Cameron’s Big Society was always doomed to fail where it really mattered. Business can make the difference, partnering with others in the voluntary and public sectors, but only if it adopts the garb and practices of Company Citizenship. In doing so they will find they become better places to work, better at what they do – and better citizens.

 

The Problem with Morality 

The following thoughts were inspired by a discussion at a KPMG event ‘A New Vision of Value‘ in October 2014 (and an earlier KPMG / Tomorrow’s Company event on ‘Relational Capitalism‘ a year earlier). It seemed to me that too much emphasis was being put on morality as a driver for good corporate behaviour when compared to the business case. 

There appears to be a (wholly unnecessary) split in the corporate responsibility community as to whether business engagement in the community should be driven by morality or a business case. Whilst the ‘business case’ may be deemed cold and calculating, even portrayed as self-serving, I believe that morality alone is an inadequate guide to action.

Let me explain why.

If ‘business case’ means ‘driven by what works’ and ‘morality’ is ‘driven by what’s right’ then of course morality should underpin any corporate community engagement, as indeed it should guide all business decisions (payday lenders and massive tax avoiders please note). But if morality alone was sufficient to be the engine for a greater positive engagement of corporates with communities, charities and causes, then surely it would have generated a greater impact by now? Morality doesn’t change that much over a lifetime, after all.

But morality is a state of mind, not a programme – nor necessarily an incentive – for action. It answers the question ‘why’ social action is right but not that of ‘what’ or ‘how’. By basing such decisions on morality alone we are in danger of saying ‘Everything our business does is guided by a business case – except social action’. Which is odd.

Perhaps the problem is our definition of ‘business case’. To me the phrase does not mean ‘the best way to maximise profit’ or any Friedmanite assumption that the business of business is isolated from the world or the community around it. Social action backed by a business case would:

  • deploy company resources in a manner which discharges the duties of a corporate citizen
  • engage, inform and motivate employees
  • deliver a positive, desirable and observable social outcome over a period of time
  • contribute to the sustainability of the business as a whole.

Social action may generate a programme which enhances employees’ skills, stimulates innovation and boosts corporate reputation; business outcomes well worth having.

None of these are in conflict with a morally-framed approach but nor are they necessarily included in it – and to exclude any of these three reasons is to miss potentially significant opportunities. A creed which says that morality alone should guide corporate social action reminds me of the old Puritan idea that profiting from doing good is inevitably wrong.

Let us consider a real case. For the past three years Boots has enjoyed a partnership with Macmillan, the cancer charity, aiming to improve cancer patients’ access to support and services in the community at no charge. This was undoubtedly a morally sound case, for which there is a great need. A second three year phase has recently been agreed.

Over that first period Macmillan trained Boots’ staff to identify and refer cancer patients and their families while Boots supported the charity in a number of ways, not least through fundraising, advertising and co-branding. The chemist became the first choice ‘go to’ pharmacy for cancer patients whilst the profile of the charity was significantly raised. Together the moral case and the business case both work.

In three years’ time the moral case for continuing this relationship will be just as strong as it was three years ago – but the business case will be less persuasive. The ‘go to’ reputation for both chemist and charity will have been embedded, deservedly, but the beneficiary flow will be subject to the law of diminishing returns. The social impact of continuing to invest time, money and resources into exactly the same ongoing project will be diminished. Morally, the relationship should continue from then on – but, from a business case perspective, if it does so then it must change.

In short, every input should lead to one or more outcomes. The moral case says that inputs and outcomes must be morally sound (and preferably untainted by any business benefit?) but the business case says that the inputs should be calculated to produce the maximum, sustainable, beneficial outcomes without compromising the business itself in an unacceptable manner.

In 2007 all four giant American motor manufacturers had well established CSR programmes – as is the norm in the US. In the absence of evidence to the contrary, let us assume that all delivered a cost effective set of outcomes which were morally sound and, at least in part, helped the company discharge its duties as a corporate citizen.

But the moral justification was not strong enough to prevent three of those companies abandoning their CSR programmes in a cost-cutting measure in the face of the global recession. There is no reason to believe that Ford is any more of a moral company than the others but Ford retained its CSR programme and, despite a reduced budget overall, its employee volunteering rose by half in just three years. This, they argued, was supported by the business case. In the light of thousands of job losses something had to be done to improve the morale of remaining staff and this was to add ‘social purpose’ to their reasons for coming to work. Much of the CSR output was focused in countries with developing markets, enhancing Ford’s reputation in advance of the expected upturn in world markets, and the company makes no apology for deliberately focusing a proportion of its social spending on branded activity. Today, Ford is widely held to be benefiting from one of the most highly engaged workforces in the corporate world. An engaged workforce is more loyal, productive and healthy (with fewer days lost due to sickness) than one that is not.

Of course there is a moral justification for much of Ford’s community-based activity but the motivator is a complex and multifaceted business case: doing good and doing good business are combined.

A particular area of interest is the role of the SME as a corporate citizen. Research shows that SMEs generally do not recognise CSR as relevant to them although they do believe it is right to expect business to engage with the local community. Perhaps this is a moral position although few SMEs (outside the relatively recent growth area of social enterprise) would claim to have a mission, let alone a statement of values, which guides their path or informs their business decisions. Where they do engage with community organisations that relationship is informal, reactive rather than proactive, often short-term and usually superficial.

But in rare cases where strategic engagement with a civil society partner has been embarked upon the mutual benefits to business and community can be profound. For example, a steel stockholder described to me the after-effects of a serendipitous giving of goods and volunteer time to a local nursery as ‘changing my company, giving employees a greater purpose in coming to work’. A storage company owner, who engaged a serving prisoner on work experience through a local charity, told me that the process ‘opened my eyes’ and that ‘I will definitely invite former prisoners via the charity for future recruitment purposes’.

Most small businesses engage with charities, voluntary organisations and schools on a one-off basis, perhaps when a request for a gift of cash or kind triggers a spike of moral conscience. For them to engage with communities strategically, sustainably, requires business planning – and a business case. Small businesses often claim they do not have the time or money to think about the morality of their business or engage strategically with the community; but those who have passed through this barrier are generally convinced by the arguments for doing just that. Old-fashioned proprietorial views – ‘the purpose of my business is the survival of me and my family, now and in retirement’ – still pervade even though self-interest is not generally regarded as the peak of moral purpose.

In conclusion, I share the wishes of those who want to see morality play a greater role in the business world and I praise to the rafters those believers who practice what they preach. But the tools they use are business tools whose deployment requires a business justification – which means a business case.

Admittedly, too much CSR today is supported by self-centred business arguments which focus on, for example, employee engagement with the company rather than with the community. But this need not be the case.

The fact that morally sound behaviour by companies can be supported by a business case is something we should be celebrating, not segregating. Business has a huge amount to offer to society globally and the fact that morality alone has so far failed to release significant resources for this purpose is a matter of regret.

In the best of all possible worlds corporate behaviour, both the essence of corporate citizenship and the ethos of good business, would be backed by both moral/ethical and business arguments. Ultimately both are both necessary and justifiable.

Roll on the day!

 

In reply, Vincent Neate – Head of Sustainability at KPMG – wrote:

I enjoyed the paper and basically think I agree with you.  I think I might go further though in two directions – one by asserting that there is no possibility of an amoral human act and second that the existence of morality is not the same as the existence of moral obligation. 

In this context the choice Boots made in respect of Macmillan was both morally good and one where the only obligation driving it was the obligation to make commercial sense.  If it had not made commercial sense there would have been no moral obligation – such that if in three years it no longer makes commercial sense there will not be a moral obligation then.

The key question I think this is raising is whether or not any obligations ever exist other than contractually – whether the contract is explicit (e.g. with the shareholder to “make commercial sense”) or implicit (e.g. with the cancer patient to give them best possible advice).  I would argue not – Boots creates the latter contract by claiming to be a health focused pharmacy rather than a money focused pharmacy and the partnership with Macmillan is just the mechanism for executing in a way that makes commercial sense on a contract they have already implicitly created.

Best

Vincent