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New Models of Business

Introduction

The most fundamental characteristic of our social institutions is the necessity for self-preservation. Whether dealing with a corporation, a religion or a government, the foremost interest is to preserve the institution itself. For instance, the last thing an oil company would ever want is the utilization of energy that was outside of its control. For it makes that company less relevant to society. At the heart of this institution self-preservation lies the monetary system. For it is money that provides the means for power and survival. Therefore just as a poor person might be forced to steal in order to survive, it is a natural inclination to do whatever is needed to continue an institution’s profitability. This makes it inherently difficult for profit based institutions to change. For it puts in jeopardy not only the survival of large groups of people but also the coveted materialistic lifestyles associated with affluence and power. Therefore the paralyzing necessity to preserve an institution, regardless of social relevance is largely rooted in the need for money or profits. If a man makes profit by selling a particular product or service that’s where he’s going to fight the existence of another product that might threaten his institution. Therefore people cannot be fair and people do not trust each other. It’s hard in a monetary system to trust people. So when it is said that industry cares for people that’s not true. They can’t afford to be ethical. So the system is not designed to serve the well-being of people. It is quite relevant when there is outsourcing of jobs if they cared about people. Industry doesn’t care. They only hire people because it hasn’t been automated yet.

Why the need for change in the existing Models?

It is important to point out that regardless of the social system whether fascist, socialist, capitalist or communist, the underlying mechanism is still money, labor and competition. Communist China is no less capitalistic than the United States. The only difference is the degree by which the state intervenes in enterprise. The most dominant and fierce form of monetary-ism is the free enterprise system. The fundamental perspective as put forth by early free market economists like Adam Smith is that self-interest and competition leads to social prosperity as the act of competition created incentives which motivates people to persevere. However what isn’t talked about is how a competition based economy invariably leads to strategic corruption, power, and wealth consolidation, social stratification, technological paralysis, labor abuse and ultimately a covert form of government dictatorship by the rich elite. The word corruption is often defined as moral perversion.

Let us take an example. If a company dumps toxic waste into the ocean to save money, most people would recognize this as corrupt behavior. On a more subtle level, when Walmart moves into a small town and forces small business to shut down for they are unable to compete, a grey area emerges. For what exactly is Walmart doing wrong? Why should they care about the Mom and Pop organizations they destroy? Yet even more subtly, when a person gets fired from their job because a new machine has been created which can do the work for less money people tend to just accept that as the way it is and not see the inherent corrupt inhumanity of such an action. Because the fact is whether it is dumping toxic waste, having a monopoly enterprise or downsizing the workforce, the motive is the same: Profits. They are all different degrees of the same self- preserving mechanism, which always puts the well-being of people second to monetary gain. Therefore corruption is not some byproduct of monetary-ism. It is the very foundation. While some people tends to acknowledge this tendency, majority of people seems to remain ignorant of the broad ramifications of having such a selfish mechanism as the guiding mentality in society. This calls for a change in the existing traditional models of businesses and emphasize the need for development of sustainable new models for doing businesses.

Current Market Scenario and the problems with the dominant story of Business

In today’s market, more and more people are becoming entrepreneurs. They are inventing a lot of ways to make business successful. Current ways or the current narrative is mistaken and it can be improved. We have to explore the new models of business in society so that it can be made sustainable and where people are not second to monetary gains.

The old model or the old narrative of business has the following key assumptions:

·         Business is primarily about economics- making money and profits.

·         The only constituency that really matters are shareholders.

·         There is no need to be concern for the environment because we live in a world of limitless physical resources.

·         Capitalism works because people are self-interested.

·         Given the opportunity, business people will cheat or cut corners

·         Business works because people are competitive and greedy and as if by an invisible hand; the greatest good emerges.

The standard story or narrative of business has at least 4 flaws. Let us talk about them.

·         Business is not something just about the money or profits. Let’s take an example- My body needs to make red blood cells. But making red blood cells isn’t the purpose of life. Every business has to make money. It does not matter if you are profit seeking organization or non- profit organization- You just need to pay the bills. But this does not mean that the purpose of business is to make profits. Business is part of society. It is not some isolated activity that is concerned with money.

·         There is this idea in the dominant story that ethics is really not a part of the dominant business model. Most people in the industry are actually and want to act ethically and with integrity. So this idea that ethics and business do not actually mix is actually very problematic.

·         The third flaw is that people are simple and are easily motivated by money. Carrots and sticks theory (rewards and punishments) is actually flawed and are for jackasses. This theory when applied only create jackasses. Humans are much more complicated than that.

·         The fourth flaw is the idea the market scenario has changed- Globalization is one of the important component. However with globalization has come some political realities. This concept is not new, humans have always traded from ancient times- what’s new is borders and passports.

A New Story is emerging

The old story or narrative of business is no longer useful. The good news is that a new story is emerging in recent times. There are multiple ways to set business in society today. So what are the elements? First of all, business has to be an integral part of the society and expect business to act that way. Secondly business and ethics are not oxymoron but a pleonasm. Thirdly we should have a very robust idea of what makes people tick, more than money and self-interest. The 5 principles for this new story of business are

·         Business is primarily about purpose- Money and profits will follow.

·         Any business creates or sometimes destroys value for shareholders, as well as customers, employees, suppliers and communities. Building and leading a business involves getting these interests going in the same direction.

·         Capitalism works because we are complex creatures with many needs and wants, and we can cooperate to create value for each other. Sometimes we act for foolish reasons and sometimes for “other- regarding” interests. Incentives are important but so are values.

·         Most people tell the truth and keep their promises, and act responsibly most of the time. And we need to expect that behavior.

·         Business and capitalism are the greatest system of social cooperation and value creation, ever invented. Competition is important in a free society, since it ensures options. But the engines of capitalism is value creation.

Model 1: Corporate Philanthropy:

                History: It goes back to Andrew Carnegie’s 2 principle of wealth. This principle considers

·                                                                          Principle of Charity: It requires the most fortunate members of society to assist the less fortunate.

·                                                                          Stewardship Principle: It requires businesses and wealthy individuals to view themselves as stewards or caretaker of their property (Derived from the Christian Bible)

But it was not just Andrew Carnegie, there were others who articulated the same ideals. Andrew Mellon donated enough art to start the National Gallery of Art. Similarly John Rockefeller became the single largest funder of research. Henry Ford created the Henry Ford health system and his son started the Ford Foundation for the well-being of the society. Milton Hershey started the Milton School Trust. Such kind of philanthropic activities are still active today. The Corporations gave their money to health and social services, primary education, community and economic development, higher education, civic and public affairs, culture and arts group, disaster relief etc.

                Current Issues: In the New York Times article, Milton Friedman argued that this was the role of government and not corporations whose basic role was to earn profits for its shareholders. Milton Friedman’s argument raises this question- Can philanthropy be consistent with the interests of shareholders or should shareholders themselves decide if and where to donate money to charity?

Model 2: Corporate Social Responsibility:

Another way of connecting business and society is Corporate Social Responsibility. There is a question of how far back CSR goes. Most people who think about this suggest that it started with Howard Bowen in 1953 in a book that he wrote where he states that business produces two categories of products- the first consists of commercial goods and services and second consists of the conditions under which these goods and services are produced. And Bowen saw this conditions as social products of the business. This gives the rises of CSR concept in American context. In 1960s and 1970s, people in US took this idea very seriously. This gave rise to the business case for social responsibility. This was primarily done to gather support from customers, suppliers and government. CSR is just good business as it helps to remove a company from rules and regulations. By focusing on business case of CSR, Business Corporation could counter Milton Friedman argument that CSR is a waste of shareholder resources. Most of the CSR activities are driven by social issues or problems. A company would take up issues like- racial discrimination, pollution, and consumerism and try to do better with respect to its product and services. People began to talk about corporate financial performance as well as social performance. Many people argued that CSR to be successful should be institionalised through principles. Some people argue that companies are really doing this because there is a link between its profits. According to me there is still something missing here. These activities act as add-ons to the existing business models. This is kind of stuff that business do to make up for their morally questionable capitalism models. It seems for most of the time that way. So if we think that how do we build these activities for the very purposes of business, we might get a more robust way of understanding of doing business in society.

Model 3: The Environmental Crisis Argument: 

The third model is Environmentalism- taking care of the environment and paying attention to the environment can help us situate business in society. So is there an environmental crisis or not. That's often how the question gets framed. Is climate change something to worry about? Is climate change, air pollution, water pollution and land pollution, hazardous waste, over-population really affecting people? The answer is obviously yes. Well, one way to think about this is to think, we have to wait for the facts. Science will tell us whether or not there's an environmental crisis, and we just have to wait for more studies. Now the problem with this idea is that it turns on thinking about science. As if its value free, as if it's just the facts and that's all science tells us. But we know that science itself, the questions that we ask and the way we frame these questions; even the methods we use, have values built into them. This was demonstrated by Richard Rudner in a paper called The Scientist Qua Scientist. Here he talked about in 1940’s Enrico Fermi, a physicist was involved in Manhattan project for the development if the first nuclear bomb. The scientists knew about the probability of this nuclear reaction happening and turning the entire atmosphere into sand. Though the probability was very small yet not zero. However they decided that the possible benefits out weights the very tiny risk. As we all know the atmosphere didn’t turn to sand and we are all here. Nonetheless the scientist have to make value judgments. So this idea that the scientists will tell us the facts and then we get on with it or not doesn’t really work. It is not that scientific studies are irrelevant however using judgment to sort out which are relevant and then trying to make policy wise decision is a very complicated process. I believe that we have to take this seriously. Can business leaders act as if there's an environmental crisis, regardless of how the facts, if there are any, turn out? Can we continue to create value and trade with each other? Can we continue to improve the wellbeing of company’s stake holders? In other words rather than is there an environmental crisis? I want to turn the tables to say is there a green capitalism? Can we think about capitalism from the stand point of how we make the world cleaner, safer, better for our children, and how our companies can make our societies better improve the standard of living for its stakeholders and make money.

  

Model 4: The Shades of Green Argument:

We're trying to discover and build new models of business and society, new models that are not just theoretical models, but new models where they're real companies actually doing this. And environmentalism is a great place to look for some of these new models. Companies often argue that they are more greener compared to its competitors, that they are more environment sensitive towards than their competitors. Sometimes companies say that they are doing things and they don’t and that’s green washing. Some things are green washing but it’s a mistake to think that everything is green washing. The following model proposes how business can set in society based on environmentalism. This model is based on efficiency, the duty to obey laws, customer service, harmonizing the interest of shareholders and lastly living in harmony with nature. This model proposes 4 shades of green.

·         First shade- Legal Green: It is based on the idea of efficiency and the duty to obey the law. Legal green proposes that a green company can be based on the idea of simply obeying the law and use these laws to be more efficient and effective. Harvard professors have demonstrated that countries with fairly strict environmental regulations actually have more innovative companies. These regulation forces the company to be more innovative. E.g.: Company named UPS washed their planes so that there is less drag on the planes making it more fuel efficient.

·         Second shade- Customer Green: It proposes that a green company can be crafted by responding or even anticipating the green values of the customers. A really good example of this is the development of the Prius car at Toyota. People wanted to drive a car that they perceive as more environmentally friendly, as more fuel efficient and as doing less emission of green-house gases.

·         Third shade- Stakeholder Green: The basic idea is that a green company can be crafted by responding to and anticipating the green values of the stakeholders. For instance, NIKE needs to have a sustainable growth business plan and in the process of creating sustainable business they involve their suppliers and stakeholders in thinking what their overall strategy should be.

·         Fourth shade- Dark Green: The idea that a green company can be crafted by orienting the value equation i.e. – how we create value for the stakeholders and also living in harmony with nature earth. There are lots of companies trying to figure out how to live in more in-tune with Earth and are trying to develop a darker shade of green.

So the argument here is yes, a green capitalism is possible and it is happening in the world today and it is one of the most exciting ways to think about how business us setting inside our society.

Model 5: The Stakeholder Theory

As the business environment began to change and get more global and people began to be aware of things, outside of their companies. There needed to be a way to organize this same thinking. And so a group of people at the Stanford Research Institute in the 1960s, came up with this idea. Let's organize it by customers, suppliers, employees, communities and financiers, the people with the money. And let's call those groups stakeholders. A second thing happened in the Scandinavian countries primarily in Sweden. A thinker named Eric Renman began to worry about not only the environment and how changes in the environment changed the way of doing business but also began to be worried about the role of employee and the whole movement in Scandinavian countries of industrial democracy. And so, from this, came the idea that businesses needed to pay attention to its stake holders.

By the way, thinking about stakeholders isn't separate from thinking about philanthropy and corporate social responsibility and the environment. Usually these things build together. We've talked about how thinking about stakeholders has to go along with purpose. Two principles needs to be discussed that often times are a little counterintuitive, because the standard story just can't deal with these principles. They're worth spelling out because they are really important.

The First principle is The Interconnection Principle. This principle works like this because stakeholder interests go together over time, we need solutions to issues that satisfy multiple stakeholders simultaneously. Many years ago, in the United States, Datsun, now Nissan ran developed an engine, it ran on just regular gas. This was before unleaded gas and they, they planted a tree for everyone who test drove. They figured out a way to satisfy multiple stakeholders simultaneously. Companies need to figure out how to creating value for one stakeholder implies value creation for another. It's a win-win situation for all. It's about how when the company does something for customers as well as make the community greener, etcetera.

The Second principle is No Tradeoff Principle. If we take the stakeholder idea seriously, we try to never trade off the interest of one stakeholder versus another. Certainly not, continuously over time. If you always make trade-offs in favor of shareholders versus employees, what happens? In a relatively free society it's straight forward. Employers would use the political mechanism to have their rights enforced. If you always trade off the interest of customers over suppliers, what's going to happen? Suppliers are going to go to your competitors and help make your competitors better because you're not creating enough value for them. So the idea here is the No Tradeoff Principle.

Another principle that is really required to make the stakeholder theory really work is The Friction Principle. It goes like this- The conflict between and among stakeholders conflict around values critics, even time horizons, can all be sources of value creation. Now, lots of times we just want friction to go away. It's uncomfortable, it's conflict and in different societies we have different ways of handling it. But we think about value creation in business, understanding friction can be a really important resource. Look no further to an industry other than tobacco and again regardless of what you think about the industry or the companies in it. You can think about the critics of the industry as saying, look until you give us the pleasure of smoking, without the health risk if that's possible, you haven't done your job. The critics can be a source of value creation.

Conclusion:

Now that we know about the new models of society, it is up us, the new generation in order to think differently how business can make society better. The old narrative is obsolete and has to go away. It’s an appeal to the new entrepreneur to think and build new models of business that will change the society in a better way. We can be generation that can make this happen or should we say we have to be the generation that will make this happen. That’s the real challenge that we have to engage in. The first Industrial Revolution brought in many problems now it’s time for a new and better Industrial Revolution that would change the world all together.