NAME

Online with Zahid Riaz - Stakeholder capitalism, business purpose and strategy.mp4

DATE
March 10, 2024

DURATION
26m 40s

START OF TRANSCRIPT

Welcome to the third online lecture for the Business Policy course. In this discussion, we aim to answer the following
questions. What does a business organization represent in the realm of our ontology(study on reality)? What is the
interrelationship between ethics and business? What is the stakeholder capitalism? What is corporate social
responsibility? And finally, how do the firms prioritize social issues for creating shared value? Modern organizations do
not only need tangible and intangible resources for their survival, but they also require social acceptance and
credibility. Social acceptance can provide legitimacy to organizations or license to operate. Here, we can be devil's
advocate and raise an essential question as what does a business organization represent in the realm of our ontology?
Is it an example of a social relationship? Can we trust business organization who engage in in responsible activities and
conduct broadly defined social relationships? Refer to the connections that exist to facilitate exchange among people
who have recurring interaction, and these interactions are perceived by the participants to have personal meaning. Is
the business a social relationship? How? Going back to Basic implies that we are going to understand and analyze the
modern business organizations as the manifestation of a social relationship. Historically, these businesses are
institutionalized by both formal and informal institutions, including laws, rules and regulations, norms, values, and
shared understanding. Like any other social relationship, businesses and their activities and relationships are
unavoidably ethical at the. At the same time, there is no denying of the fact that businesses are the sites of their own
particular ethical dilemmas and difficulties.

There is something disturbing in the view of ethics as a sort of supplement to business, which thereby preserves a
separation that is itself questionable. What needs to be understood is how business and ethics got separated in the first
place, especially how in our minds are they separate orders from this perspective. Like any social relationship, business
relationships are unavoidably ethical, even if the business is the site of its own particular ethical dilemmas and
tribulations. There is arguably more hope to be gleaned from this insistence that business has always been an ethical
domain. It is as if ethics has been hiding in business in the myriad ways in which organisations, managers and
employees have often gone out of their way for others in and around the conduct of their work. Due to the intensification
of competitive and performance pressures in recent years. It is accompanied by an explosion of interest and concern
with business ethics. For instance, in the 1970s, Milton Friedman have argued that the only responsibility of business is
to make a profit only because it could still be assumed that it was the responsibility of other institutions, notably the
state, to provide a safety net for those who were damaged or disadvantaged in the single minded pursuit of economic
efficiency. Paradoxically, the embrace of this monetarist ideas by governments itself signaled the demise of the welfare
capitalism.
Stakeholder capitalism, a popular management theory in the 1950s and 60s that focused on the needs of all
constituents, not just shareholders, has been poised to make a comeback since weaponized financial instruments
brought down the economy in 2008. Not spurred by the alarming climate crisis and increasing social challenges such
as rising inequality, the the movement is gathering additional steam. Increasingly, there is a sense among business
leaders that the prevailing ideology of putting shareholders above everyone else, which has reigned for the past 40
years, needs a serious update.BUSINESS ROUNDTABLE (MEMBERS OF BUSINESSES)The Business Roundtable
(BRT) is a nonprofit lobbyist association that lobbies for public policy that favors business interests. The BRT's
purpose is to promote a thriving economy and expand opportunities for all.Doughnut Economics: Seven Ways to
Think Like a 21st-Century Economist is a 2017 non-fiction book by Oxford economist Kate Raworth. The book
elaborates on her concept of doughnut economics, first developed in her 2012 paper, A Safe and Just Space for
Humanity. Naysayers will call stakeholder capitalism a PR stunt window dressing designed to placate protesters and
pretty, uh, pretty up corporate images. But there are signs that it's far more than that, and the shift has just started. For
instance. This aspect is evident from the move by the Business Roundtable. What is Business Roundtable? What the
Business Roundtable has done in this regard. Business roundtable exclusively represents chief executive officers,
CEOs of America's leading companies. These CEOs, the CEO members, lead companies with more than 15 million
employees. And, uh, more than 7 trillion, uh, dollars in annual revenues. For more than 45 years. The membership of
Business Roundtable has applied SEO expertise to the major issues facing the nation through research and advocacy.
Business roundtable advocates policies to spur job creation, improve USA competitiveness, and strengthen the
economy. On August 19th, 2019, just before the onset of the pandemic. The Business Roundtable redefines the
purpose of a corporation.

It is done to promote an economy that serves all Americans. The updated statement moves away from shareholder
primacy, or shareholder centric model that springs from the premises of agency theory to include commitment to all
stakeholders, thereby leading more support to the notion of stakeholder capitalism that resonates with the idea of
stakeholder theory. This new statement on the purpose of cooperation was signed by 181 CEOs who commit to lead
their companies for the benefit of all stakeholders, including customers, employees, suppliers, communities and
shareholders. Since 1978, Business Roundtable has periodically issued principles of corporate governance. Each
version of the document, issued since 1997, has endorsed principles of shareholder primacy. That corporation exists
principally to serve shareholders. The new statement supersedes previous statements and outlines a modern standard
for corporate responsibility. Similarly, Larry Fink of Blackrock, the world's largest investor with $7 trillion in assets under
management, sent his annual letter to CEOs placing long tum sustainable sustainability at the center of his investment
approach. Awareness is rapidly changing, he writes, and I believe we are on the edge of a fundamental reshaping of
finance. In January 2020, the World Economic Forum updated its Davos manifesto for the first time since 1973 to to to
more clearly state that the businesses must be stewards of the environment, uphold human rights throughout their
global supply chains, and pursue sustainable shareholder returns that do not sacrifice the future for the present.

Like all cultural change, it's a long and winding tale of social, financial and political forces. The story is filled with good
intentions, questionable assumptions, data, uh, light economic models, willful blindness, and a fair amount of hubris.
Yes, shareholder capitalism has delivered economic growth with many important benefits, but it also left a path of
environmental and social destruction for future generations to grapple with. As Kate Roberts articulates in her excellent
book Doughnut Economics, this tension lays bare an extremely uncomfortable reality. No country has ever ended
human deprivation without a growing economy, and no country has ever ended ecological degradation with one. This
reality leaves business leaders and strategists with two critical and wickedly tough questions. Number one, how can
groups across socioeconomic and political divides get better aligned on the current reality we are facing? And number
two, what is the appropriate approach, including taxation and regulation strategies, or to produce the economic,
environmental and social outcomes? We need to survive and thrive for generations to change. An emergent fiscal
crisis of the state, along with the globalization of capital and product markets, has since led to a wholesale wholesale
retreats by governments from their nanny rule. As governments increasingly seek legitimacy only in terms of their ability
to create the conditions for economic growth, the profusion of interest in business ethics can be seen as an
acknowledgment of this new reality, whether real or imagined. The weakening of the capacities of the nation state,
particularly in relation to business organizations, provide further fuel to the demand that the ethics should return to
where it is most needed within business itself.
This return can only be facilitated through the revival of stakeholder capitalism, and key normative business institutions
have picked the baton. What is corporate social responsibility? Social responsibility proposes that a private corporation
has responsibilities to society that extend beyond making a profit. As discussed earlier, Friedman has argued that the
only responsibility of business is to make a profit. There is one, and there is one and only one. Social responsibility of
business is to use its resources and engage in activities designed to increase its profit, so long as it stays within the
rules of the game, which is to say, engages in open and free competition without deception or fraud. Friedman's
traditional view of a business firm. He argued against the concept of social responsibility. According to Friedman, the
primary goal of business is profit maximization, not spending shareholder money for the general social interest. Do you
agree with Fridman? Why and why not? For instance, the millions spent in the social services could have been invested
in new product development or given back as dividends to the shareholders. This expenditure can be interpreted as the
third layer, a third layer of taxation on the income of investors or shareholders. Corporate tax, CSR as a tax and then as
income tax.

Let's hear the defendant Friedman's contention that the primary goal of business is profitable. Profit maximization is
only one side of an ongoing debate regarding corporate social responsibility. According to William J. Brown,
Distinguished Professor of Ethics and Georgetown University. He says that prophets are merely means to an end, not
an an end, an end in itself. Let me repeat, he says, prophets are merely means to an end, not an end in itself. Do you
agree? Just as a person needs food to survive and grow, so does a business corporation need profits to survive and
grow? Maximizing profits is like maximizing food. Thus, contends Brian, maximization of profits cannot be the primary
obligation of business. Then the question arises what is the primary obligation of the business? This question has been
answered very recently by the Business Roundtable and the World Economic Forum. Both business associations
acknowledge the importance of stakeholder capitalism over and above the shareholder capitalism. In the similar
manner, Carroll Carroll has identified the four responsibilities of a modern corporation, namely economic, legal, ethical,
and discretionary. What are these responsibilities? Economic responsibilities of a business organization. Management
are to produce goods and services of value to society, so that the firm may repay its creditors and shareholders. Legal
responsibilities are defined by governments and laws that management is expected to obey. For example, business
firms are required to hire and promote people based on their credentials rather than to discriminate on non-job-related
characteristics such as race, gender, or religion.

To this point, both Carroll and Fredman are in agreement. Carroll, however, goes further by arguing that business
managers have responsibility responsibilities beyond economic and legal ones. Ethical responsibilities of an
organization, management, or to follow the generally held beliefs about behavior in a society. For example, society
generally expects firms to work with the employees in the community in planning for layoffs, even though no law may
require this. The affected people can get very upset if an organization management fails to act according to generally
prevailing ethical values. Discretionary responsibilities are the purely voluntary obligations a corporation assumes.
Examples are philanthropic contributions, training the hardcore unemployed and providing free of cost daycare centers
or medical facilities. Do? Are the ethical and discretionary dimensions operating in reality? For example, when Cisco
Systems decided to dismiss 6000 full time employees, it provided a novel severance package. These employees, who
agreed to work for a local non-profit organization for a year, would receive one third of their salaries, plus benefits and
stock options, and be the first to be rehired. Nonprofits were delighted to hire such highly qualified people, and Cisco
was able to maintain its talent pool pool for when it could, uh, hire once again. So what is the difference between ethical
and discretionary? Responsibilities or the philanthropic responsibilities? The difference between ethical and
discretionary activities that few people expect an organization to fulfill discretionary responsibilities, whereas many
expect an organization to fulfill ethical ones.
As societal values evolve, the discretionary responsibilities of today may become the ethical responsibilities of
tomorrow. For example, in 1990, 86% of the people in the USA believed that obesity was caused by the individual
themselves, with only 14% blaming either corporate marketing or government guidelines. By 2003, however, only 54%
blamed obesity on individual and 46% put responsibility on corporate marketing and government guidelines. Thus, the
offering of healthy, low calorie food by food processors and restaurants is moving rapidly from being a discretionary to
an ethical responsibility. This change in values is also documented in the following documentaries, namely Super Size
Me or Food Incorporated, which criticizes the health benefits of eating McDonald's deep fried fast food. Mcdonald's
responded by offering more healthy food items. Why did the McDonald offer healthy food items? This is an important
question that we need to ponder during our class discussion. Furthermore, in this context, we also need to understand
what Coca-Cola and Pepsi are doing in terms of their product offerings in early 2020. James Quincey, the 14th chair of
the 133 year old the Coca-Cola company, was in the midst of a years long transformation of Coca-Cola from being the
leading carbonated soft drink beverage company into a total beverage company, the company's flagship product.
Coca-cola had been the world's best selling beverage for 100 years, yet some consumers were turning away away
from csds or carbonated soft drinks due to health concerns over sugar consumption and a proliferation of other
beverage options.

The company had both acquired and developed many new beverage brands. It was in the process of changing its
culture, uh, to be, uh uh, to be faster moving and more willing to take risks and a culture where the new brands meant
as much to the company as did its flagship product, which was still the company's largest selling beverage. Coca-cola
was also working to improve its environmental sustainability and social conscious, uh, consciousness activities, and
building a company where people were proud to work. Why did Indra Nooyi face criticism from board of directors,
institutional investors and shareholders to make CSR as the cornerstone of Pepsi strategy for creating shared value.
Why did she face the wrath of the investor that she was making CSR as its strategic priority? Many firms corporate
social responsibility efforts are counterproductive for two reasons. What are those two reasons? Number one, the pit
business against society when the two are actually interdependent. And why do we think that the business and society
are interdependent? And then they and and consequently, uh, we pressure companies to think of CSR in generic ways
instead of crafting social initiatives appropriate to, uh, to the individual strategies of the companies. It is important to
keep in mind that CSR can be much more than just a cost constraint, image building or charitable deed approach.
Strategically, it generates opportunity, innovation and competitive advantage for corporations while solving social, uh,
pressing, uh problems.

How Porter and Kramer advising, uh, pondering innovations into your product offering and operations that create
distinct value for your company and society. We can take the example of Toyota. The company's early response to
public concern about auto emissions gave rise to the, uh, hybrid engine Prius. The Prius has not only significantly
reduced pollutants, it's given Toyota an enviable lead over over rivals in hybrid technology. A few years ago. Suzuki
has offered hybrid cars in the Indian markets. Polestar and Tesla design and manufacture electric cars. Tesla's current
products include electric cars, batteries, energy storage from home to grid scale solar panels and solar roof tiles, as
well as other related products and services. How do these companies are making it possible? Adidas making shoes
from the ocean waste is another example of eco friendly products. They are able to do so by making strategic choices,
trade offs and fits. Empirical research now indicates that socially responsible actions may have a positive effect on a
firm's financial performance. Although a number of studies in the past have found no significant relationship, an
increasing number are finding a small but positive relationship and in-depth analysis by Margellos and Walsh of 127
studies found that there is a positive association and very little evidence of a negative association between a
company's social performance and its financial performance. Another meta analysis of 52 studies on social
responsibility and performance reached this same conclusion.
A very recent study in 2018 analyzes. The relationship between economic and social performance in an organizational
context. It performed a meta analysis of 83 different studies to test this relationship and to examine the influence of the
measurement criteria and organizational characteristics such as such as activity, social orientation, technology, and
cultural environment. The results reveal a positive relationship between economic and social performance. According
to Porter and Kramer, social and economic goals are not inherently conflicting, but integrally connected. Being known
as a socially responsible firm may provide a company with social capital, the goodwill of key stakeholders that can be
used for competitive advantage and repetition. Companies that take the lead in being environmental friendly, such as
by using recycled materials, preempt attacks from environmental groups and enhance their corporate image. Their
environmental concern may enable them to charge premium prices and gain brand loyalty. For example, Ben and
Jerry's ice cream. As per their product mission, Ben and Jerry aims to make, distribute and sell the finest quality all
natural ice cream and euphoric Concord concoctions with a continued commitment to incorporating wholesome, natural
ingredients and promoting business practices that respect the Earth and the environment. Their trustworthiness may
help them generate enduring relationships with suppliers and distributors with without requiring them to spend a lot of
time and money policing contracts. Some firms can attract outstanding employees who prefer working for a responsible
firm, for example Procter and Gamble, Timberland and Starbucks.

They are more likely to be welcomed into a foreign country. They can utilise the goodwill of public officials for sport and
difficult times. They are more likely to attract capital infusions for investors who view reputable companies as desirable.
Long tum investments. How do the firms prioritize social issues? These issues are divided into three categories generic
social issues, value chain, social impacts, and social dimensions of competitive context. Responsive CSR comprises of
two elements acting as a good corporate citizen, attuned to the evolving social concerns of stakeholders and mitigating
existing or anticipated adverse effects from business activities. Good citizenship is a senior concern of CSR and
companies need to do it well. Many worthy local organisations rely on corporate contributions, while employees derive
justifiable pride from their companies positive involvement in the community. The best corporate citizenship initiatives
involve far more than writing a philanthropic cheque and following best practices. For any company, strategy must go
beyond best practices. It is about choosing a unique position, doing things differently from competitors in a way that
lowers costs or better, serves a particular set of customer needs. These principles apply to a company's relationship to
society as readily as to its relationship relationship to its customers and drivers. Strategic CSR moves. Beyond good
corporate citizenship and mitigating harmful value chain impacts. Strategic CSR involves both inside out and outside in
dimensions to create shared value.

What is creating shared value or what is CSP? Corporate policies and practices that, uh, enhance the competitiveness
of a company while simultaneously advancing social and economic condition in the communities in which it operates.
These firms create economic value by creating societal value. What is good for the community is good for business.
The pursuit of shared value represent the next evolution of capitalism as stakeholder capitalism. Incorporating societal
issues into strategy and operations is the next major transformation in in in business policy thinking. We will examine
this major transformation in the context of the Pepsi Case study presentation and more importantly, the same aspect
you would be explore further through your, uh, simulation. In reality, CSV adds a social dimension to the strategy. The
shared value opens up new needs, markets, and value chain configurations. New strategic position will bring new
opportunities to extend existing position. The social dimension will move the firm away from cost or quality based
competitions to have more sustainable competitive advantage. It is because of the reason that only 7% of the fortune
500 CEOs believe their companies should mainly focus on making profits and not to be distracted by social goals. The
annual Gartner 2022 CEO and Senior Business Executive Survey was conducted between July 2021 through
December 2021 among over 400 CEOs and other senior business executives in North America, Europe and Asia
Pacific across different industries, revenue and company sizes. In this survey of CEOs and senior executives by
Gartner Incorporated revealed significant shifts in their thinking regarding people, purpose, prices, and productivity.
In 2022, specifically on matters of sustainability, workforce issues, and inflation. These findings were consistent with the
Gartner 2023 Board of Directors Survey reported on 13th January 2023, which included 281. Board of Directors and
members of various boards across industries and geographies, aims to understand the group's focus on investment in
digital acceleration, sustainability and diversity, equity and inclusion. 80% of the boards consider the increase in
sustainability investment over the next two years. Michael Porter and Mark Kramer have offered a pragmatic approach
to CSR. They provide three reasons why CSR might also be the interest of a company. The sustainability argument.
Csr is in firms interest due to mutual interest in sustaining the ecosystem. The reputation argument. Csr enhances a
firm's reputation with consumers and other third parties, and finally the licence to operate argument to conduct their
business. Firms need the support of the constituencies upon which they depend. The critical task in selecting which
CSR initiative firms should pursue is to identify specific intersections between the interests of the firm and those of
society, that is, projects and activities that create competitive advantage for the firm while generating positive social
outcomes. So we will explore all these ideas in the context of the Pepsi Case study, and we will have a thorough
discussion related to these questions. And important pedagogical pointers, uh, during our class. Thank you very much.

END OF TRANSCRIPT

Automated transcription by Sonix

www.sonix.ai