PROFIT, SOCIAL RESPONSIBILITY & CORPORATE PERFORMANCE:The Case for Regulatory Reform with the Finance Industry as the Case
By Dave Livingston, Managing Principal, Llinlithgow Associates (
Dave is a management consultant primarily focused on improving enterprise performance by coupling strategy with execution thru the design and implementation of workable, integrated management systems. He blogs on this and related issues in Economics, Markets & Investments and specific industries and companies at
, his BizzXceleration blog.
The focus of the Finance Industry on short-term financial reform and bonuses led us all to the brink of disaster in2008 and has caused a wave of anger in the citizenry, most business folk and even much of the industry itself. Atleast those portions that were badly damaged by the mis-behaviors the caused them to almost be driven out ofbusiness themselves. While that anger is obviously justified much of the discussion has centered on emotional judgments. Here we would like to consider the case for reform from two more hard-headed, analytical if you like,perspectives. One is from the point of view of Society and the Industry as members of that society. The other froma “business case” perspective. Either alone justifies significant regulatory reform. Taken together we consider thecase to be overwhelming.No business or other organization exists solely for the sake of existence. It exists to create a value for society,whether that’s measured in profit terms or not. A hospital’s contribution, for example, is the effective andaffordable treatment of patients while a university contributes educated students. The contribution of anybusiness, properly understood instead of pejoratively labeled, is profits. Profits are NOT a bad thing per se. In factwithout profits no business could or would exist. Profits are not just the reward for management of resources.There are also the funds which provide insurance to keep a business running in bad times, the source of fundingfor developing new products and services and they pay for labor and investment. A reasonable return isnecessary for the health of business and the health of society.Overall then a business, as a business, has three strategic goals. First, it must deliver value. In this case profits.But those profits should be based on contribution and not financial engineering. Second, in its own long-terminterest, it needs to be a productive workplace where the worker is made effective. People are social animals andthe more comfortable they are in their environment then the more they will contribute to the health andperformance of the organization. Third, an organization or business must be socially responsible.Specifically it must do three things as a component of society. First, it must create no harm as the result of itsoperations. When it does it’s obligated to correct that as soon as feasible. Second, where the industry collectivelycreates a harm, it is the responsibility of the business to band together to address those harms, when otherwiseindividual firms would not be able to do so affordably. And third, when society is itself suffering from larger ills, forexample pollution, healthcare or education challenges, it is in business own interests to contribute to solving thoseproblems.At the end of the day it is in any business’s own self-interest to create the environment and ecology that bestbalances its own opportunities with the overall health of society. It is in fact a fundamental responsibility ofmanagement to act in a socially responsible manner. A failure to do so can be considered a failure of fiduciaryresponsibility in the broadest sense. In the case where a business fails to act responsibly, and in fact harms andseeks to continue to harm society, there is no choice but for Society to act to eliminate or reduce that harm whenthe business will not. This is likely to be a second best alternative to willing, constructive and cooperative actionon the part of the business, which will know its own operations better than outsiders. It is, unfortunately, betterthan the alternatives.In this collection of essays we work thru the interactions between society and businesses using the FinanceIndustry as the case study, mostly because of the current situation, but also because it is a litmus test for the roleand importance of regulation. The issues of business performance are considered in separate essays. But let ussummarize them here for reference.