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The Corporate Mitzvah: Creating Value with Values

May 9, 2009 | by Richard L. Cravatts, Ph.D.

Companies concerned with both profit making and providing social benefits outperform businesses that focus exclusively on financial gains.

The sight of Kenneth Lay, founder and former CEO of Enron, being led into Federal Court in handcuffs early this July may well have satisfied critics and put some long-awaited closure on the three-year investigation into egregious fraud, a particularly unsavory story that serves to typify some of the real and perceived corporate excesses of recent times.

But the salient message in this incident is the oft-repeated, and seemingly true, accusation that American corporations are rife with self-interest, unethical business practices, arrogance, greed, and an apparent indifference to the economic suffering of shareholders and ordinary citizens. Their chief executives are believed to be corrupt, entitled, and compensated way beyond reasonable standards -- exponentially above what all employees in their same companies receive themselves.

Those opinions are bad news for corporations, especially as they struggle already in the wake of the explosion of the dot-com bubble, sluggish worldwide economic growth, increasing negative sentiment against globalization, and skittishness over terrorism and international economic stability. Companies are not against the ropes yet, but they increasing have had to defend themselves against accusations by stakeholders, politicians, international partners, activists, and the public for their actions -- both for how they actually behave in doing business and how they fall short, as is frequently the case, as corporate citizens.

Corporate social responsibility (CSR) -- how well businesses behave in the marketplace as citizens and what they contribute, beyond how they actually run their businesses -- has been on the corporate agenda for several decades, and served as a proactive way for corporations to demonstrate core 'values' beyond the profit incentive.

For some stakeholders seeking a renewed sense of social justice, the Jewish concept of 'tikkun olam,' mending or repairing the world, has begun to have particularly relevant meaning as the corporation begins an introspective examination of its role in making society at large a better place. And in instances when harm has been done to society at large through the very actions of corporations themselves, there is an even more compelling reason to undertake positive change.

Not all corporations are inspired, of course, to do good; and most businesses viewed CSR as being limited to charitable donations and philanthropy, not to a systemic and strategic choice for embracing social values to create core value for stakeholders. In the late 1990s, when Americans saw their financial wealth increase by $3 trillion a year for the years 1998-2000, at a time when the Dow had rocketed to the11,000 level, stakeholders were less concerned with how well the corporation was doing for society.

Businesses now must react to public demands for better governance, transparency, and accountability.

But those days are over, at least for the foreseeable future, and businesses now must react to public demands for better governance, transparency, and accountability. They have to do this on their own, building trust from stakeholders, enlarging their reach to fuel economic growth, tapping their 'distinctive competencies' to harness innovation for public good, and do so while adding real value (in the form of profits) while they create values, grow stock price, improve employee satisfaction, and enhance their global brands as a fundamental part of doing business.

A new approach for helping corporations to achieve that ambitious task is Profits With Principles: Seven Strategies for Delivering Value With Values, by Ira A. Jackson and Jane Nelson, both fellows at Harvard's Kennedy School of Government, a book that uses case studies of companies that have created incremental value for their firms while bringing values into the way they do business.

They also suggest that companies have to react to a crisis in confidence facing business, that while "two-thirds of Americans think that corporations make good products and compete well in the global economy… only one-third feel large corporations have ethical business practices." Those attitudes inevitably affect share price and sustainable competitive advantage, issues that reflect directly on company worth, shareholder return, and brand equity.

In fact, Jackson and Nelson suggest that intangible assets -- the very kind CSR activities help create -- contribute significantly to corporate value, with some 50 to 90 percent of value being based on those assets, depending on industries. "They are often spoken about in terms of different types of capital," they say of these intangible assets, "intellectual capital or human capital; social capital or relationship capital; and environmental capital."

To leverage these assets, businesses have to start thinking in a new way about creating long-term profitability and sustained competitive advantage. In fact, corporations have to begin thinking more like entrepreneurs, who exploit opportunities to create a new way of doing business, and who use what is termed "incongruous situations" to drive growth strategies in innovative, revolutionary ways. For businesses, this will mean fostering an intrapreneurial effort from within the organization, using the techniques and vision of entrepreneurs and driving change from inside existing corporate models.

One important prescription being suggested is external innovations corporations can use to create value while effecting positive social change and benefits. Jackson and Nelson's suggestion, for instance, to "spread economic opportunity," shows how companies can have a profound and direct effect on economic and social systems, not only in the immediate communities in which they do business, but also beyond with a national and global reach.

Why is this good business? According to Jackson and Nelson, spreading economic opportunity creates and protects long-term shareholder value by helping to "open up possibilities for new products and markets, improve the productivity and reliability of suppliers, build the skills of future employees, and open companies to the new ideas and diverse perspectives that fuel innovation."

A salient example the authors provide is the case study of how BankBoston achieved a startling resurgence in profitability and influence "consistent with values and a concern for purpose beyond profits." The case study describes how the Bank established a new paradigm by beginning to address serious societal concerns, among them the difficulty experienced by inner-city minority residents of obtaining credit and mortgages. BankBoston proactively answered that need by setting up First Community Bank, a bank-within-a-bank designed to address the specific needs of the once-marginalized, largely-minority population of urban Boston.

What has now become Fleet Community Bank since the 1999 merger of Fleet and BankBoston, Jackson and Nelson note, "has grown to 157 inner-city branches, with 1,500 employees in five states. It has $5 billion in deposits, a $14.6 billion commitment to mortgage and small business lending -- one of the largest by any bank -- and an innovative inner-city investment bank." And the value created for shareholders by embracing values? BankBoston's share price, which in the early 1990s had been as low as three dollars a share, by the late 1990s climbed to $118 a share and saw a market capitalization exceeding $15 billion.

Another innovative principle, "engage in new alliances," calls for shifts in thinking about social responsibility and the way businesses impact on the communities where they operate. Here the authors suggest a change in the way corporations make philanthropic contributions, so that instead of the "stand-alone, one-way transactions" common to traditional corporate giving, 'strategic partnerships' are established between the business and the recipient. These relationships are much more dynamic, sustainable, and beneficial -- both for the recipient nonprofits and for the businesses who become their sponsors.

The core belief here is that companies concerned with both profit making and providing social benefits -- creating value and values -- outperform businesses that focus exclusively on financial gains. That view is supported by other studies which looked at the relationship between the financial and social performance of 95 companies. Reviewing the findings of that research, Lynne Sharp Payne, a professor at Harvard Business School, wrote "that only 4 of the 95 studies found a negative relationship between social and financial performance. Fifty-five studies found a positive correlation between better financial performance and better social performance."

No one suggests that transforming corporations into socially-responsible entities is an easy task. But each time a Ken Lay walks into a Federal courthouse to answer for grave corporate misconduct, it is yet another compelling argument why companies that do not embrace a strategy for delivering value with values do so at the risk of losing competitive advantage, brand equity, and a leadership role in the global marketplace.

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