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Can Business Change the World

Six LBS faculty debate whether business can find solutions to today’s big social and environmental problems

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When economist Milton Friedman spread his shareholder-first doctrine in a landmark New York Times essay five decades ago, there was a common belief that the worst problems in society should be solved by governments. The social responsibility of business, Friedman argued, was to generate profits. Providing employment, eliminating discrimination, avoiding pollution and tackling other issues should be left to the politicians. 

This distinction worked because the state was seen as best placed to tackle these tasks. Today, that view is changing, with our faith in the power of governments to take on today’s grand challenges, from climate change to racial injustice, greatly eroded. 

Now it is the company executives who Friedman saw only as profit-makers who are being forced to step into the breach and find solutions to societal issues far outside their core markets. And this paradigm shift is unlikely to reverse course any time soon. 

Discover fresh perspectives and research insights from LBS

‘Companies are now the world’s most trusted of the four institutions of government, business, NGOs and the media’

Stakeholder pressure

Companies are now the world’s most trusted of the four collective institutions of government, business, NGOs and the media. Fewer than half of people believe the government is reaching key milestones on social challenges, according to the 2022 Edelman Trust Barometer, which surveyed 36,000 respondents in 28 countries. On competence, business is ahead of government by a 53-point margin. 

At the same time, companies are under pressure from every stakeholder to deliver where other institutions are failing. More than half of consumers will buy brands based on their beliefs; while six in 10 employees will choose employers who share their values. 

Surveys also show that 81% of respondents want chief executives not just to speak out on social and political issues, but to lead the debate and show what their firms are doing to be part of the solution, instead of the problem. These stakeholders believe that business, far from overstepping the mark, is not doing enough to tackle prevalent social ills. The message is clear: business must step up and fill the void. 

“Since the 2008-09 global financial crisis there has been a silent revolution, with societal problems not being seen purely as the duty of governments to solve, but businesses also needing to play a role,” says Elias Papaioannou, Professor of Economics. “This is a drastic change of mindset because for decades the mantra of business, spread by Friedman, was to maximise shareholder wealth.”

Erosion of trust across global politics

Professor Papaioannou says the challenges facing society are simply too grave not to be viewed as a first-order concern for business leaders. “This cannot be seen myopically though economics 101; that it’s not the role of the corporate apparatus to save the world. We need to realise that business has a part to play.” 

Trust in government as an institution is collapsing in many countries around the globe. According to the Edelman Trust Barometer, faith in government has dropped in 17 of the 27 countries tracked, including more than half the world’s major economies, such as Germany, Italy, the US, the UK and South Korea. Only China and a few other countries have bucked the trend, owing to their response to the coronavirus pandemic and a nationalism stemming from an escalation of tensions with the US, according to Edelman. 

Elsewhere, confidence is falling. Fewer than a third of all countries have faith in government across a wide array of metrics ranging from leadership competence to visionary thinking, decision making, long-term thinking and planning. “What is required to solve today’s major problems is whole systems change,” says Ioannis Ioannou, Associate Professor of Strategy and Entrepreneurship. “Governments are lagging behind and there is a lot of societal pressure on firms to step into that gap between what is needed and what is happening. It’s an absolute necessity because humanity is in a fight for survival.” 

‘Financial-market cycles are nothing compared to the electoral cycle. Politicians are under pressure to win votes today, as opposed to solving the world’s existential challenges’

Short-term politics vs long-term leadership

What has led to this dramatic escalation in the role of business in society? Dr Ioannou believes it has been exacerbated by short-term politics trumping long-term leadership. “Financial-market cycles are nothing compared to the electoral cycle,” he says. “Politicians are under pressure to win votes today, as opposed to solving the world’s existential challenges in the future.”

A good example is the slow progress on tackling climate change and a lack of coordinated global action; not least because, as the world moves away from its reliance on fossil fuels, many countries, industries, communities and workers stand to lose out economically. 

The International Monetary Fund has forecast that implementing climate-change policies would shave up to 0.25 percentage points of global annual GDP growth through to 2030, but insists that the short-term costs would be dwarfed by the long-term benefits. 

“We have not thought through the transition risks and structural adjustment that is required to go from fossil fuels to renewable energy,” says Dr Ioannou. “That may well have created an electorate that does not trust politicians to handle that transition fairly.” 

Dr Ioannou notes that rich nations have already broken a pledge to channel $100 billion a year to less wealthy countries by 2020 to help them adapt to climate change. At the same time, in the wake of Russia’s invasion of Ukraine, governments are backtracking on their environmental goals by turning to fossil fuels to reduce dependence on Russian gas. “It is that level of hypocrisy that may also erode trust in institutions,” Dr Ioannou says. “They say one thing, but they do something different. They are flip-flopping.” 

‘We’re at a great cyclical turning point in history. And in the gap between policy and solutions, you see a pressure for corporates to do something’

New sense of responsibility

Despite a sense that capitalism as an economic system has left too many people behind, many citizens want corporations to help improve society. In the last few years, the idea of business models that put stakeholders first has become increasingly prominent, owing to social movements such as Black Lives Matter, events such as Covid-19 and the rise of climate activists, as well the vast sums of money pouring into ESG (environmental, social and governance) funds. Faced with reputational damage and the loss of investors, employees or customers, companies have embraced stakeholder interests like never before. 

“One of the challenges for firms is that the number of stakeholders has multiplied. It’s not just shareholders but employees, customers and anyone who is affected by what they do,” says Andrew Scott, Professor of Economics. “This brings that sense of responsibility. Business used to be about focusing on the bottom line, a few clear criteria and not worrying about everyone and all the knock-on effects of your operations. But in a period of profound change, such as today, companies need to think beyond their profit margin.” 

Professor Scott believes the fall from grace of shareholder capitalism is likely to prove more than a near-term shift, given the complexity and severity of the challenges society now faces. “We’re at a great cyclical turning point in history,” he says. “We’re seeing work being transformed by technology and a rising focus on sustainability. And in the gap between policy and solutions, you see a pressure for corporates to do something. We won’t resolve issues of sustainability, health, wellbeing and technology in the next few years. Until we sort that out, corporates will have a role to play.” 

Firms can also be very effective agents of change, Professor Scott argues. “Businesses are so often a distribution network for social change. Through their products and working practices, they have an enormous impact on society, which will need to be rewired.” 

He cites the example of how companies can help avoid a drop in economic output as the working population falls because of lower birth rates in some developed economies: “By adapting working practices to make work more appealing, businesses can ensure older people remain productive for longer.” 

Concerns over greenwashing

Being given greater responsibility for social issues can be both a blessing and a curse for businesses, with pitfalls that leaders of organisations will need to navigate carefully. Focusing on broader stakeholder interests has become mainstream in the business world, but some of the problems with this approach are now surfacing. These include concerns over greenwashing, or making unrealistic or misleading claims, particularly with respect to firms’ environmental credentials. There are concerns over the accuracy, transparency and comparability of ESG data and reporting by companies and their investors. This is where rigorous analysis and evidence-backed initiatives are vital. 

Anna Pavlova, Professor of Finance, has developed a methodology that helps “separate signal from noise” to determine the true ESG performance of a company. “Investment managers look at ESG ratings provided by rating agencies to evaluate companies and determine whether the company is green or brown,” says Professor Pavlova. “And what we have found is that there is a lot of noise in these ratings. And there is a big disagreement among different ESG rating agencies as to what the score of a company should be.”

She believes that models like hers will go a long way to helping channel capital into green projects. “There is a lot of appetite among investors to invest money consistent with ESG principles and this is where measurement comes in. So, we need to learn how to measure ESG. And I think this is where the future is.” 

Rajesh Chandy, Professor of Marketing, is working on a set of metrics to enable commercial entities to show how their products and services are not just generating a profit for shareholders, but also having “spillover effects” and enriching lives in their local communities. “We have to go beyond the lazy assumption that what is good for business is necessarily good for the world,” Professor Chandy says. “At the same time, we have to recognise that businesses can have a profound impact on lives and livelihoods and, indeed, on the environment that surrounds us.” 

He believes the tool he is developing will help unlock investment in sustainable companies that may not turn a profit for years to come: “If you can provide evidence that the business had an impact, not just on its own commercial profits but on society at large, then we can unlock a set of resources that are impact-focused that reward businesses for making investments in life-saving products and services.”

Re-regulation 

What does all this mean for companies that want to embrace sustainability and elevate their role in society? Professor Scott says it’s key to recognise that the time to act is now because environmental regulation is expected to significantly tighten as the climate crisis continues. 

“As a society, we went through a period of deregulation, which pushed market forces to the forefront, and we’re now going through a period of re-regulation because of economic, social and technological forces,” he says. In other words, if companies do not jump they are likely to be pushed – and it is better to get ahead of the curve of change on your own terms. 

When it comes to acting on sustainability, Professor Scott argues that business leaders must also recognise that these matters are complex and will involve making trade-offs between different goals. In practical terms, this means businesses should set out their priorities for specific goals that address the most material impacts on their firm. “There are so many social pressures and firms will need to make a call. You cannot focus on everything – you have to focus on what the key priorities are; concentrating on where your profits are most at risk and where the opportunities are,” he explains.

‘The products that businesses bring about are among the greatest sources of global change’

Commercial opportunities

While businesses that do not adapt will be at risk, those who embrace change will see greater commercial opportunities, Professor Scott believes. He cites the example of how sustainability has already become big business for consumer brands, which have launched eco-friendly products such as insect-based pet food and biodegradable shoes to attract consumers.

This is because people are increasingly worried about the future of the planet and some are prepared to make buying decisions in line with their values, even if that means forking out more money for green products. “The products that businesses bring about are among the greatest sources of global change,” Professor Scott says.

There is also a growing body of evidence that eco-friendly products trade at a premium to conventional products. In 2019, Unilever , one of the world’s largest consumer goods groups, reported that its sustainable brands grew 69% faster than the rest of the business and delivered 75% of the company’s overall growth.

“We see in the food chain a complete reassessment in terms of its environmental footprint and a focus on its health benefits,” says Professor Scott. “So there is a profit opportunity as people get more mindful about their health and a responsibility to ensure your products are not doing harm.”

Dr Ioannou agrees that companies need to focus on the trends that are affecting the ability of the business to create value. “This is precisely the power of business, to find a solution to a challenge and scale it up,” he says. “Business is the only institution that can scale up those solutions efficiently, effectively and quickly.”

Building effective coalitions

The shifting role of business in society also means that companies will need to get better at building effective coalitions with multiple economic actors. This is because the problems facing the world today are so complex that no one actor can address them alone, points out Randall S Peterson , Professor of Organisational Behaviour.

He believes that corporate giants should use their economic might to influence and galvanise action through lobbying and public-private partnerships, especially in the area of infrastructure. “If government doesn’t step up, private businesses will need to mobilise some action because the alternative pathway is totally destructive,” he argues. “One of the big complaints is that individuals have little power – it’s all concentrated in the giant multinationals. And the government listens to them. They can leverage that influence.”

That said, Professor Peterson underscores the risk that, although society wants business to play an active role in tackling societal challenges, there is a limit to how far they can stray into policy. “Businesses can’t do politics – there is a limit to what a company can do,” he points out. “But they can provide that basic sense of economic health and stability. When people feel that prosperity declines or causes relative deprivation, that is a big problem for stability. And businesses have deferred too much to governments around the issues of inequality over the past 30 to 40 years.”

Stick to your lane

Professor Scott agrees that there is a lane that businesses must keep to: “It usually comes down to whether you are meeting the needs of the population and not just your own shareholders, consumers and employees. If you’re in a country with a government that is seen to be failing you will need to step in, but when companies run into problems is when they overreach.” In other words, when companies are not moderating pursuit of profit by behaving with genuinely altruistic aims.

That motivation is likely to be tested in the coming months as the global economy edges towards recession. “Unlike governments, businesses cannot deficit-spend; they have to make the budgets work in the end,” says Professor Randall.

“There is a hard limit in a recession to what can be done,” he adds. “Historically, it’s the role of government to step in and provide liquidity. That is a big worry as in times of plenty it’s easy for business to be generous and focus on broader issues. But when it’s life or death for you, you’re just focused on surviving.”

Multidimensional change

Business leaders must also recognise that the pressure on them to step up is not going to disappear anytime soon, regardless of the economic cycle.

“There is still uncertainty over whether we are actually able to resolve some of the world’s biggest issues, such as biodiversity loss, climate change and social inequality,” says Dr Ioannou, noting that progress on meeting the United Nations Sustainable Development Goals is too slow. “We need profound, multidimensional change and the fact we are so far behind in achieving those targets and are already experiencing the negative impact means it’s a matter of accelerating change and increasing the magnitude of change.”

Ultimately, as Dr Ioannou says, the global pursuit of these goals is a huge undertaking and will only be possible with the help of the commercial sector. And with governments everywhere failing to step up to the plate, there is a greater role than ever for businesses to fill the gap.

Elias Papaioannou is Professor of Economics and Academic Director, Wheeler Institute for Business and Development at London Business School

Ioannis Ioannou is Associate Professor of Strategy and Entrepreneurship at London Business School

Andrew Scott is Professor of Economics at London Business School

Anna Pavlova is Professor of Finance and Academic Director, AQR Asset Management Institute at London Business School

Rajesh Chandy is Professor of Marketing; Tony and Maureen Wheeler Chair in Entrepreneurship and Academic Director, Wheeler Institute for Business and Development at London Business School

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