“The one and only social responsibility of business,” Milton Friedman wrote, “[is] to use its resources and engage in activities designed to increase its profits.”
And so, shareholder theory came to be.
In the decades since Friedman’s now-famous 1970 New York Times article, it has been the prevailing view that the raison d’être of all companies is to maximise shareholder value. It was this mindset that drove the corporate raids of the 1980s and contributed to an unrelenting focus on earnings reports.
In more recent years, however, there has been a discernible shift in the corporate orthodoxy: shareholder theory is looking more and more like stakeholder theory.
This wind of change reflects a growing expectation from business stakeholders – a group that includes not only shareholders, but also customers, employees and communities – for business to apply a broader remit, one which considers environmental, social and governance (ESG) principles alongside company profits.
Carried in by this wind is as much an opportunity as a challenge for business.
The world we live in today is one of unprecedented wealth creation, technological advancement, and political freedom. At the same time, more than 40 per cent of the global workforce is in vulnerable employment; a billion people still lack access to electricity; and 17 per cent of children – 258 million – do not attend school.
This deprivation of basic needs consigns many to abject poverty. It inhibits economic growth and environmental sustainability, while stoking conflict and instability. It also represents billions of dollars of untapped value: an opportunity for start-ups, small businesses, national companies and multi-national corporations to help spread the benefits of development more widely.
Some have already begun realising this opportunity. British bank HSBC entered into an agreement with Mann Deshi Mahila Sahakari Bank (MDMSB), a microfinance institution based in the Indian city of Mhaswad. Established in 1997, MDMSB is run by women for women: its vision is to create a supportive environment for female micro-entrepreneurs to grow their businesses and support their families and communities.
As part of the agreement, HSBC provided MDSB with a line of credit, a new cash management system, and access to e-card technology. Recognising the importance of education in addition to access to funding, MDMSB and HSBC also launched a school to equip women with the financial, literacy and digital skills to run their businesses.
Vanita is a single mother of four, who sells tea at the local market. She used a loan facilitated by MDMSB to make improvements to her stall, which saw her sales increase from 40 cups to 70 cups a day. Her monthly income grew from 3,500 rupees (£35) to 9,500 rupees (£96). Vanita is now planning to open a vada-pav stall.
It is clear: there is a very real and significant opportunity for business to effect positive change while still meeting its responsibilities to its shareholders and stakeholders.
This makes the mission of the Wheeler Institute more important than ever.
The Institute seeks to improve lives through business – to create impact by identifying big challenges, applying busines insights to help solve these challenges, and forging communities of learning and practice to implement large-scale and enduring change.
This work can help shape new ways of thinking about the big challenges, informing innovative approaches to expand economic development and serve unmet social and environmental needs.
The potential is vast, and fulfilling it is a challenge in itself. But it is one which business should feel inspired to take up, to ensure a world where all individuals have the chance to realise their full potential.
Seonah Choi (MBA 2021) worked as a political adviser to a number of government ministers in New Zealand, including the Prime Minister, prior to studying at LBS. She experienced first-hand how cross-sector collaboration can drive positive, large-scale change. Seonah is an intern for the Wheeler Institute, contributing to the creation of content that amplifies the role of business in improving lives.
The Wheeler Institute is seeking to understand, illuminate and offer solutions to the challenges faced by the developing world, with an aim to identify the role of business in addressing these challenges and a focus on the implications and actions for those in developing countries. In support of our students, we approach this blog section as a reflective platform and a space where individuals can generate debate as long term agents of positive change.