What’s the role of business in society? Can businesses have a negative impact on society?
As watching the market and customers should make clear, organizations only exist in the context of a larger community. Therefore, in addition to guiding the inner workings of a business, managers must also set objectives relating to the impact their organization has on the wider world.
Continue reading to find out if businesses have a social responsibility they have to uphold.
Management in Society
Peter Drucker divides businesses’ social impacts into two classes—what an organization does to society, and what it can do for society—while arguing that an organization’s primary social responsibility is to carry out the function for which it was designed.
First of all, Drucker insists that social objectives aren’t just window dressing—they’re vital for an organization’s continued existence. After all, society won’t tolerate a business that it perceives as causing more harm than good. Managers must always be aware of any negative impacts of business in society and find a way to minimize those impacts before they do harm to the business. However, that solution may come at a cost, especially for large industries. Some negative impacts require cooperation between competitors and government agencies to find a cost-efficient path to mitigation. In these cases, Drucker says the responsible course is for a business to actively participate in the solution before one is imposed from the outside.
(Shortform note: A key way to align a company’s interests with the social responsibilities that Drucker says are vital is to establish a core philosophy that guides a business’s relationship with society. The example Collins and Porras give in Built to Last is that of the pharmaceutical company Johnson & Johnson, whose core philosophy prioritizes the health of their consumers above shareholder profits. Therefore, during the 1982 Tylenol poisoning crisis, Johnson & Johnson went out of its way to communicate the danger to the public, rather than trying to silence the problem. Because of its philosophy, Johnson & Johnson took part in framing the response to the crisis, rather than having its response dictated to it by a regulatory body.)
What Does a Business Owe Society?
There are also problems in society that aren’t a particular business’s fault but may still be worthy of that business’s concern. These may take the form of societal ills that negatively impact customers to the business’s detriment. There may also be problems customers face that a business might be uniquely suited to address, creating an outlet for even more business. Drucker warns against managerial overreach—in which a business steps into a social arena outside its area of competence—but within an organization’s expertise, there may be opportunities to make social contributions that pay dividends in higher revenues and new markets. Managers would be foolish to let chances like that slip by.
(Shortform note: One pitfall Drucker doesn’t address when discussing businesses’ relationship with society is their danger of confusing appropriate market behavior with social behavior. In Predictably Irrational, Dan Ariely gives examples of businesses that violate social agreements—and inadvertently harm themselves—to do what’s right from a market perspective, such as an insurance company denying claims for people to whom they market themselves as a “friend.” However, Ariely goes on to argue that using social norms to guide market decisions usually has a positive effect by cultivating relationships with both customers and employees.)
Nevertheless, Drucker insists that management’s first responsibility to society is to make sure the organization fulfills its primary mission. A successful business or nonprofit exists only because it fills a social need. If a business’s job is to provide the world with shoelaces, then it should focus on making the best shoelaces it can before it gets involved in external social problems. The same holds true for nonprofit groups, each of which has its own circle of competence. It’s always possible—and even desirable—for that circle of competence to grow, but that growth should be deliberate, well-planned, and consistent with an organization’s fundamental reason to exist.
(Shortform note: In 2005, Drucker passed away, a year before seeing the largest expression of this principle put in action by the world’s most successful investor, Warren Buffett. In Buffett’s biography The Snowball, Alice Schroeder explains that Buffett saw his responsibility to the world not in terms of lifelong philanthropy but as being a responsible steward of wealth. As such, he grew his company Berkshire Hathaway’s financial resources until 2006, when he announced that he would give away $37 billion—the largest charitable donation in history. Knowingly or not, he’d acted on Drucker’s thesis that fulfilling his primary mission as a businessman also fulfilled his obligation to society.)
