Ethics and Societal Value as Drivers of Business Performance

There is a growing realisation that success can and must be forged by prioritising people and paying scrupulous attention to business ethics and integrity.

Cyrus the Great governed the Achaemenid Empire comprising what we now call the entire Middle East, 2,500 years ago. One of the reasons for his title was because he was the archetype of a wise ruler. One of the ancient relics from his rule is the Cyrus Cylinder, a document recognised in 1971 by the United Nations as the very first “declaration of human rights.” Cyrus was extraordinarily powerful, but he left a legacy of ethical, equitable decision-making.

Fast forward through the centuries. Consider the domain of global commerce, the business of capitalism, arguably the lifeblood of worldwide economic growth and the incentive spurring technological and scientific achievements. But progress has not necessarily been evenly dispersed. In many parts of the world, the Gini coefficient – the measure of economic and income inequality – is distressingly high. (Indeed, South Africa is near the top of the Gini inequality rankings.)

Capitalism’s blemishes have various causes. But a late-20th century faultline was the ruthless outlook of shareholder capitalism, epitomised by the likes of former General Electric CEO Jack Welch. In pinpointing the precise end-goal of everything the corporation does – optimise profits to its owners – shareholder capitalism prioritises and focuses, laser-like, without due regard to whether they compromise the interests of other stakeholders: employees, supply chain partners, customers, the environment, the community in which factories and operations are located. Often, although not always, society as a whole may be compromised – at a macro level, for example, a country’s tax regimen and fiscal spending may need to legislate and allocate resources to compensate for the impacts of unbalanced capitalism.

Fortunately, some 25 years ago a parallel idea was taking root among visionary business leaders: that sustainable businesses depend upon vibrant and diverse communities; that markets can be more profitable if they comprise greater numbers of people with improved livelihoods and access to lifestyle opportunities. In sum, the realisation that profits could be made with principles.

Worldwide, the idea of capitalism for shared value was stimulated by the 2011 work of Michael Porter. His belief – that stakeholder rather than shareholder value was a company’s driver, and should be its financial motivator too – was important because it came from his platform as a professor at Harvard Business School. Porter’s main article, written with Harvard colleague Mark Kramer, defined the sweet spot as the intersection between social needs, business opportunities and corporate assets and actions, where shared value could be created for the benefit of all.

Reading some of Porter’s arguments today, they seem obvious and logical. But it’s important to realise they are nowhere near being fully realised. The Covid pandemic, in forcing companies to implement certain measures around workforce flexibility, health, and wellness, has reenergised discussions of why companies exist, and who, precisely, they serve. But progress takes time, and it seems clear that only a multi-directional push involving self-governing ethics, regulatory refinement, societal pressures and leadership by enlightened businesspeople will genuinely instil deeper, lasting change.

 

Whose profits?

Were he alive two centuries after forging ideas which earned his reputation as the father of economics and the founder of capitalism, Adam Smith would be shaking his head. He would be surprised at the huge success of a company such as Facebook, with a $750bn market capitalisation and generating far greater profits than companies that make tangible things – Boeing, or McDonalds, for example – or that own real assets, such as global hotel chains Marriot and Hilton. Furthermore, because Smith was a moral philosopher too, he would be shocked that Facebook is not well-liked.

Even hard-nosed analysts are now grasping the broader implications, and the need to think, act and invest differently. Says South African Dean Hand, Research Director at New York-based Global Impact Investing Network: “Impact investing is an investment strategy with the specific intention to generate positive, measurable social and environmental impact alongside a financial return. We envisage a world where positive social impact results, measured alongside financial results, are routinely integrated into all investment decisions, by default.”

Fuller, clearer corporate reporting.

Corporate reporting, too, has changed dramatically in the last decades – but it needs to further evolve. Accountants, auditors and directors need to assist investors in filtering the mass of data and information available in the data-driven Internet Age, to highlight the relevant and important information. More importantly, they need to use metrics to convey, transparently, how the company is managing risks, how it participates in society – and how it is anticipating and contributing to society’s changing needs. Reporting expectations have shifted: from profit, growth, and shareholder value, to an integrated account of fair profits and responsible growth, and stakeholder-societal value.

The International Integrated Reporting Council (IIRC) was founded in 2010 precisely for this purpose, and motivates for corporate reporting to cover information around six forms of capital: financial, manufactured, intellectual, human, societal, and environmental. How a company creates and consumes value across these six capitals is the essence of integrated reporting.

The crux is much broader than reporting.

It encompasses responsibility and accountability; how companies behave in the normal course of doing business. The SA Institute of Directors adopted the King IV Report on Corporate Governance for South Africa. Its comprehensive recommendations, which took effect for corporate reporting from April 2017, position SA as a leader in the theory of corporate governance and policy. Professor King’s fourth-generation report expanded previous control and monitoring related measures to include, within the governance definition, ethical culture, appropriate performance and behaviours, and operational legitimacy.

We know, from coverage of upsetting corporate wrongdoings in our country, that King IV is much needed – and is not yet being properly actioned.

Companies exist within societies. The more they work to improve these societies, the better they will perform.

It’s time for managers and leaders of companies to step up and embrace updated corporate governance and ethics standards, to exceed guidelines in reporting on issues such as sustainability and the environment, and to view capitalist enterprise through a society-first lens.

Companies that do so will create a better legacy, because society is all of us.

 

All these issues – corporate behaviours, governance standards, societal value, and reporting – converge into a vital arena of business today. Which is why, at WDC, we offer both a Governance and Ethics and an Integrated Thinking and Value Creation short course. These are specifically designed to assist leaders and managers in understanding how their organisations can navigate the increasingly complex and interrelated challenges of performance, profits, and principles.

We also invite you to consider the questions below. They may prompt reflection on how ethics, together with an expanded concept of using and investing capital to create value, will forge the legacy that you and your company wish to leave behind: 

It starts with you. As a manager or leader in your company, are you familiar with the King Report guidelines?

Next, look close to home. Leadership has a responsibility to employees. Work will increasingly be automated; workflows planned and executed digitally; routine management tasks will be performed by AI. Are you preparing your team by encouraging them to pursue new knowledge and skills?

Beyond the reporting horizon. KPIs and the bottom line are crucial. But think what Day 1 of the new financial year will look like. If your team will be doing the same work, and view the corporate purpose as unrewarding, they may not be with you on Day 2. How are you engaging them, and yourself, to perform with broader society in mind?

Technology is an enabler. Is the company capitalising on opportunities to generate better societal value through cocreation activities? Could you perform better if you had access to enhanced collaboration tools?

Are you in the finance department? Think about changing your identity, from Financial Manager to Value Creation Manager. (Professor King has started to call precisely for this.)

 

Written By:

Gavin Olivier

Senior Partner and Managing Executive

Wits DigitalCampus

 

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