Perry_Aidian_Reflection .docx

Global Sustainability INTL 612Carle Aidian Perry Reflection

Global Sustainability Reflection

Adam Smith, the author of The Wealth of Nations in the 18th century and often viewed as the father of modern capitalism has had a very heavy influence on many modern day economists as well as myself. Smiths three main underlying concepts were (1) the invisible hand,(2) that individuals pursuing their own best self-interest would result in the greatest overall good to society, and (3) that levels and kinds of goods and services in the market should be determined by the free market alone. It is the second of his three principles that is most relevant to this reflection. From this principle, the following concept was derived: the main responsibility of a firm is to create wealth for its shareholders. In line with Smiths thinking and further supporting it was Milton Friedman, a modern day disciple of Adam Smith. He was famously quoted saying, There is one and only one social responsibility of business to use its resources and engage in activities designed to increase its profits.

Having been exposed to these schools of thought, I have often referred to, with some conviction, these two gentlemen and their teachings when posed with the question, what is the purpose of the firm? However, my perception has been altered. Though I still believe that it is necessary to create profits, I understand that in 2015 and looking further into the future, business must be approached differently; the traditional capitalist system is under siege in favor for more sustainable long-term benefits.

In recent years, business has increasingly been viewed as a major cause of social, environmental, and economic problems. Companies are widely perceived to be prospering at the expense of the broader community. A big part of the problem lies with companies themselves, which remain trapped in an outdated approach to value creation that emerged over the past few decades. They continue to view value creation narrowly, optimizing short-term financial performance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their longer-term success. (Porter, 2011)

As such, the pursuit of shared value represents the next big revolution in the way business should be conducted. The legitimate concerns of translating economic growth into benefits that trickle down to the rest of society will become a defining characteristic of economic operations in this post-crisis era. Therefore, these will have to be incorporated into strategies, operations, business management and public policies.

There are misconceptions that shroud the business world and its policies and practices when it comes to defining shared value and the appropriate corporate social responsibility (CSR) of the firm. For most of the firms, this starts with externalities and the pressure put on them by the government and social organizations and ends with an array of disjointed and incoherent activities which fills up their annual CSR report and acts as a cure to relieve the pressure and build the reputation of a caring organization. This is nothing but a feel-good exercise (otherwise known as green washing) as it not only fails to improve the economic or social conditions of the community in which the companies operate but also fails to enhance their competitive position in the market that they cater to.

Moving forward, gone are the days when businesses could see themselves as totally unrelated and unconcerned with the needs, requirements and problems surrounding the community that they serve. Today, companies should quickly identify and notice that social needs and business gains are codependent. This is the core of the idea of Shared Value, a concept that means to conduct business in such a way as to enhance profitability and at the same time improve the economic and social condition of the community in which they operate.

Contrary to my long held belief that social concerns and responsibility are an impediment to the profit margins of the company and are nothing but a necessary hole in the pocket for the sake of their business, they act as an opportunity for the businesses to reap benefits while being socially relevant and responsible. While in Central America, we came across several examples to support this view. For example, a number of companies like NESTLE, FIFCO, Posada Amazonas, and ECAMI have modeled their businesses in such a way that benefit the society as well as generate dividends for their shareholders in values far greater than before. Another example of such a company closer to home is First Green Bank.

These societal benefits are not superficial or considered green washing; they go far beyond the concept of redistribution where companies only share a part of their business profit with their suppliers and communities in which they operate. This is about collaboration and co-creation of value. NESTLE, for example, provides financing, shares technology and helps its suppliers in production of coffee which ensures that it will have an uninterrupted supply of quality coffee for its Nespresso brand. This translates to increased profits and offsets the costs incurred in helping its suppliers, who are also more prosperous because their produce has increased in quality and quantity and in turn their income is boosted from its sale.

Many other companies are realizing very quickly, as they should, that they depend on societal resources, infrastructure and people to ensure the sustainability and profitability of their businesses. Companies must recognize the social problem related to their line of business and address it in such a way that increases their gains and makes a positive impact in society. For example, ECAMI, a renewable energy business, has invested a lot of money in rural areas of Nicaragua to grant access to electricity. This serves two purposes. It first improves health conditions by providing health centers with electricity and enabling the pumping of clean water. Secondly, learning conditions improve as children have light to study at night. A residual benefit of the program is that it provides healthy and educated individuals who are able to be a productive asset to companies when recruited. Similarly, Posada Amazonas, an ecotourism lodge, started an initiative that provides unemployed local individuals with a basic level of education through training on the job.

Companies must identify value chain activities like procurement, distribution and production where they can create shared value. There must also be an effort to Initiate working conditions that allow for the use of renewable resources like solar energy. These strategies should no longer be considered a burden or forced into action by external pressure, but considered necessary exercises to reduce cost and increase efficiency. Companies must realize that creating shared value is not simply philanthropy but is in their own self-interest. If this becomes the norm through the private sector, then the government could be pressured to implement coherent policies that are supportive of these businesses and not restrictive or imposing.

This reflection started with the discussion of an 18th century concept, held in high esteem by a young MBA student. However, this concept, while still valid, may no longer be completely relevant due to current social, economic and environmental trends and a shift in values. Smith and Friedman can be forgiven because of the era in which they lived. For the concept of shared value to become the norm today, it must begin on an individual level and planted as a seed to grow through young MBAs such as myself. If companies want to have a sustainable and profitable business in the long run, the concept of shared value must be adopted.

References

Porter, Micheal E., and Mark R. Kramer. "Creating Shared Value." Harvard Business Review. 01 Jan. 2011. Web. 02 Feb. 2015. .

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