I have just returned from the world’s biggest gathering of business school academics who study management and organizations, the annual meeting of the Academy of Management in Chicago. (Before you yawn and stop reading, I encourage continuing, as this post really is about the title question). Over 11,000 management researchers spent five days participating in professional development workshops and presenting papers under the conference theme “Improving Lives— Improving health and well-being in society: How can organizations help?”
The conference Chair elaborated:
“The Theme will explore such issues as whether (and why) organizations have a responsibility for improving the lives of individuals in society. Do organizations have an obligation to “give back”? Are there benefits for organizations who seek to improve lives as a strategic opportunity? Could—and should—organizations play more of a role in the overall health and well-being of a society? What does it take to achieve a coordinated and sustained effort from organizations to address the grand challenges of improving a society’s physical, psychological, social, and financial health?”
The Chair also asked what should organizations do about “rising inequality,” reducing poverty, and “ensuring the health of the planet.”
The question about the role of organizations—business firms in particular—in society is important, as the different answers impact human flourishing differently.
The sampling of the over 2,000 workshops and paper sessions that I attended does not give a full picture of the conference, but my experience suggests a particular view on the role of business. I summarize it below and then counter it with an alternative view and argue that the latter will improve lives whereas the former does not.
The dominant view at the conference was the familiar “Corporate Social Responsibility”. It is the idea, based on the morality of altruism, that companies should divert focus and resources from maximizing profits to social and environmental initiatives, such as reducing poverty and income equality and abandoning fossil fuels to fight climate change. There were also calls for companies and individuals “to give back” to benefit the less fortunate instead of just pursuing their own self-interest.
It is astonishing that many of those who do research and teach at business schools embrace the idea that that business can only do good by sacrificing profits for “helping” others. Business school academics who don’t understand the crucial role profit maximization (through creation and trading products and services) plays in human prosperity and well-being perpetuate the altruistic view through their teaching and writing.
The alternative view of the role of business in society is that as the producers and traders of material values—from reliable, affordable energy to labor-saving technology to health care services and entertainment—companies improve lives simply by engaging in production and trade to maximize profits for their shareholders.
Therefore, managers and shareholders should not ask “how, and how much, should we sacrifice profits to improve lives?” Improving the lives others should not be their goal—although that is the secondary consequence of focusing efforts on maximizing companies’ long-term profits.
In pursuing long-term profits, companies need to first ask what products or services they can offer that provide value to customers—products and services that improve customers’ lives, for which they are willing to pay more than it costs to produce them. That means profits for companies, which provide return on the shareholders’ investment. This makes their lives better: shareholders have more options in their lives through the increased wealth.
Profits also afford companies the opportunity to increase productivity: hiring more employees, training and paying them better, and investing in productivity-enhancing technologies. With increased productivity, companies can create more wealth, which means more investment by shareholders, either in further growth of the company or other companies. The increased wealth creation improves the lives, not only of the company’s shareholders, but of all of partners involved in trading, in ever-widening circles: customers, employees, suppliers.
It is the wealth creation by companies that has helped reduce poverty to its lowest levels in history. (Income inequality does not matter, as long as everyone’s flourishing is increasing—as it is). Wealth creation has also improved the quality of the natural environment significantly, especially in the last 30 years. (See the reports on human progress here.) These trends will continue, as long private property is allowed and governments protect individual rights, including property rights.
Companies that divert their focus and resources from profit maximization to charitable activities (which are properly undertaken by private individuals at their choice) will not improve lives but diminish them instead. Producing and trading material values is what allows businesses and the rest of us flourish.