The business of business is business?
February 22, 2018
Why companies must assume social responsibility, especially when it comes to climate protection
When the leaders among the world’s political and business elite converge in scenic Davos over the days to come for the annual World Economic Forum, as always the focus will be on social responsibility in business. Be it climate protection, social inequality, fighting poverty, education: The challenges are substantial, and many companies have corporate social responsibility agendas that are accordingly extensive.
“Companies must serve a social purpose”
Yet all that isn’t enough, says Larry Fink. He is the founder and proprietor of the world’s largest private asset manager, Blackrock. Fink published an open letter to CEOs, calling upon companies to contemplate their fundamental entrepreneurial values and focus on the pressing questions of our time: Companies must not concentrate on profits alone. Fink says a license to operate is dependent upon whether corporations are serving a purpose relevant to society.
The letter is striking because Blackrock is the largest single shareholder of many global corporations – which means it should actually have a vested interest in profits being as high as possible. No other private company owns a larger share of the global economy. That means what Fink says will carry weight.
Moving away from shareholder value
This letter reveals a fundamental change in thinking. For many decades, entrepreneurs were able to hide behind the philosophy of “the business of business is business!” American economist Milton Friedman, whom that quote is generally attributed to, was of the conviction that the social responsibility of companies consists exclusively in generating high profits. Over the long term – Friedman thought – that will benefit all parts of society.
At the core of Fink’s criticism is that this philosophy comes up short and means companies can damage themselves over the long term. A focus on short-term profits ultimately restricts a company’s innovativeness and leads to holding on to business models that are socially outdated too long. That means companies need to demonstrate how their activity contributes to solving the most pressing problems in our society.
Climate protection and innovation – the automotive industry as an example
Climate protection plays a key role here because the dimensions of this challenge are immense – and every company can contribute to the solution and benefit from it over the long term. Tesla is a prime example on that point. The American start-up delivered precisely the pioneering innovation that established automakers have largely spurned – presenting a practical, highly attractive alternative to the combustion engine. At times, Tesla’s market value has exceeded that of General Motors, Ford, or BMW – with a fraction of the turnover. Why? Because it is making a contribution to solving one of humanity’s fundamental problems through its business model.
Instead of merely following in the wake of this trend, the German automotive industry could have taken on a leadership role years ago. After all, there has been knowledge of these concepts for a long time. In 1994, Daimler-Benz AG introduced the world’s first fuel cell vehicle in the world – at the time, it was the size of a delivery truck. Just three years later, the technology could fit into an A Class model. That represented an enormous development advancement. Yet these vehicles never went into series production – the temptation to continue generating high profits with conventional motors was apparently too great. The irony here: More than 20 years after that first introduction, Daimler presented at IAA 2017 a prototype for a fuel cell vehicle – potentially too late to be economically successful with it.
Companies for climate protection – and climate protection for companies
As the only truly comprehensive sustainability issue, climate protection bears the potential to be one of the principal drivers for innovation in business. The profile it takes isn’t always as highly visible as it is in the automotive industry. Yet every company can profit from getting involved in climate protection and establishing a corresponding strategy. For example, having a carbon balance computed on a regular basis can help to identify inefficiencies and potential for improvement so the necessary changes can be implemented. And having a business model with a clear orientation on climate protection makes offerings even more attractive for customers. Not lastly, a comprehensive commitment to climate protection also necessitates cooperation across companies – after all, at most companies, the majority of carbon emissions are incurred in upstream value addition stages. That means the emissions have already been incurred at the time of material procurement. Innovative solutions are needed now more than ever.
An analysis by Dr. Christian Reisinger, ClimatePartner