Businesses must ‘do good’ in order to ‘do well’ by dean Jon Foster-Pedley

Daily Maverick, 10 October 2018

Social entrepreneurship, creating a for-profit business to solve a societal problem, is not a new idea. The phrase itself is well into retirement age: most agree it was coined 65 years ago by US economist Howard Bowen. It’s matured well, though, and has grown in popularity over recent years to the extent that Deloitte analyst Josh Berstin, co-author of the firm’s recent Rise of the social enterprise report, reckons that the majority of established global companies are now to be taken seriously as social enterprises as well as traditional ones.

Berstin points out, however, that while C-suite leaders want this to happen, they are still not entirely sure how to go about it.

It’s not just about being altruistic. Growing social capital is seen as being as important to win and retain customers, staff and investors as growing traditional capital once was. You “have to ‘do good’ in order to ‘do well’ ”, Berstin quips, because it isn’t just the rediscovery of a buried collective conscience that is driving this change in the attitude of corporate boards.

Modern-day data collection and analytics applied to product consumption, HR and product designers are telling leaders that this is what they need to do to stay relevant and keep the brand alive.

In the 10 years since the financial crash of 2008, customers have become increasing fed up with businesses that refuse to recognise that they don’t exist outside of society, and still focus on short-term returns for shareholders over the long-term implications of their actions on everyone else.

Democratic South Africa has always been ahead of its peers on this issue. Addressing the atrocities of the past led to a formalisation of corporate social responsibility, in the B-BBEE codes, of a kind that other countries are only just beginning to talk about. Yet somewhere along the line innovative thinking on the subject stopped: If we want a fairer society then ownership and wealth redistribution are a good place to start, but they aren’t the only measures we can use.

We are getting very good at measuring things, after all. An explosion of tools for gathering and analysing data from all points of an organisation has become available in the last few years under the guise of big data. We can measure and predict industrial processes, online habits of users and the wellbeing of our employees to a remarkable degree and for little cost.

Yet when it comes to measuring the value of other types of impact, our tools are still extremely coarse. They are mostly based on inputs — such as ownership or resourcing policies — rather the type of value being created. This, inevitably, leads to some creativity around compliance since inputs are easily fixed — in the case of B-BBEE, we call it fronting.

What if, as well as keeping an eye on input value our CSI codes included outputs too? In the same way that “polluter pays” is an accepted (if much abused or ignored) principle for heavy industry and mining, what other creative measures could we use to change the way we think about the value chain? Are we thriving — or merely surviving? We have made problem description and analysis a vocal preoccupation. We remain bullied and mute on solutions. This, we really can change.

As a thought experiment, what if we required businesses to measure the direct impact of their products and services on this country’s most important measure, the Gini co-efficient, as one of their principal CSI commitments? We wouldn’t necessarily say that businesses had to prove their existence had an impact on closing the inequality gap, but at least that nothing they did worsened it. Either way, it would have to be reported.

Many of us have been preaching that businesses should be taking into account the impact of their activities for years, hoping to convince shareholders that there’s a triple bottom line of “people, planets and profits” which can be used as a guide to true value creation and destruction — and that this should be a key indicator in calculating a business’s worth. This thinking gives us the King codes for corporate governance, and obligations for sustainability reporting.

Let’s be honest, though: While sustainability reports and King codes have had some effect on corporate oversight, it’s not been enough.

As the Deloitte report makes clear, business leaders are struggling to create positive impact by themselves — some 77% of the 11,070 interviewees in that report said that corporate citizenship and societal impact are important objectives for their firms, and that they had a role to play to fill political leadership vacuums on these issues. But only 18% said that it was a top priority reflected in business strategy.

No wonder so many are getting caught out on issues such as gender pay gaps, corruption and environmental degradation. Civil society is embracing the tools of impact measurement and transparency faster than businesses are able to adapt to new mores.

Better rules and guidelines would help — perhaps not as far reaching as in our thought experiment, but heading in that direction. You might argue that this would be over-regulation — but in some respects business secretly loves regulations.

Knowing exactly where the bar is for the norms to which they must adhere is an important baseline for decision makers to work from and judge their own performance by. Look at the EU’s recent GDPR legislation or the B-BBEE codes themselves — as much as there’s grumbling on the sidelines, having a solid framework which makes the line of responsibility clear is generally accepted as a good thing. Indeed, it rapidly becomes the status quo.

To get there, however, what we really need is a first-principles discussion of what business is for, what acceptable forms of value creation are and how they fit in with long term aims to reduce inequality and promote opportunity for all.

Up until fairly recently, argues University College London economist Mariana Mazzucato in her popular book The value of everything: Making and Taking in the Global Economy, discussing where value comes from was a key role the study of economics played. Now it’s off the table: treated as if value and profits are synonymous — which leads to inequality.

“The way the word ‘value’ is used in modern economics has made it easier for value-extracting activities to masquerade as value-creating activities,” Mazzucato writes, “and in the process rents (unearned income) get confused with profits (earned income), inequality rises and investment in the real economy falls.”

For Mazzucato, one reason that value extraction is so common today is that we don’t acknowledge the whole supply chain in business accounting. All the value derived from society that is required for business to succeed — roads, schools, access to markets, investment in research and so on — is assumed to be paid back through corporate taxes. But this is a blunt instrument that is easy to avoid, and difficult to reform because of vested interests at stake.

This isn’t just a South African issue. In the UK, the influential think tank IPPR recently looked at the wealth gap there — where the richest households have 315 times the wealth of the poorest — and concluded that the country needs a new “economic constitution” in order to reduce the value of rent-derived income (such as dividends), and focus on value creation for all.

The steps it recommends aren’t, on the whole, extreme. They include improving the representation of workers on the boards of companies and reforming inheritance tax.

It turns out it’s quite hard to find comparative figures for South Africa, as you don’t actually have to be very rich to make it into the top 20% of the population (a Momentum/Unisa report published last year reckoned that a gross monthly income of R21,931 qualifies you). One study found that the richest 10% owns 90-95% of all the wealth in the country. In that context, multipliers between the richest and poorest become a trifle meaningless.

As business schools, we need to get better at teaching our students how to join the dots when it comes to tracing the impact of our actions. That this kind of inequality is inherently bad for business now and in the future: Profitability through wealth extraction rather than wealth creation will increase inequality and result in more instability and, as a matter of self-interest, fewer customers in the future.

And it’s not only about business, it’s about our world in general. We must commit to preventing our children having to grow up into a depleted, improvised, contaminated environment.

Yet right now, as we move through the process of the State Capture inquiry, it can still be difficult to understand even the effect of blatant high-level corruption on the average family in South Africa. How can we begin to have conversations about what is fair remuneration for CEOs, or the difference between exploitative and enabling business practices in bottom of the pyramid markets when we’re so bad at joining the dots? We need to learn about thinking systemically, and how to see longer chains of causality.

When these connections are visible, we win. The case in point is Net1/CPS, the direct consequence of whose illegal actions were impossible to deny. These are the kinds of stories we need to tell our next generation of business leaders — that their actions and policies have a real, measurable effect on value destruction and that they should hold themselves accountable.

We need to tell them the answer to the question “what is a social entrepreneur?” We all are. 

Jon Foster-Pedley is the Dean of Henley Business School Africa.