The tension between institutions creates the conditions that societies need for innovations
Milton Friedman declared that the business of business must be only business. Now many global forces are making business leaders confused and concerned about the role of business in society.
Prime Minister Narendra Modi has appealed to Indian business leaders to revive their “animal spirits", to take risks and boost economic growth. At the same time (in a form of disguised taxation), corporations are being pressed to discharge their corporate social responsibilities by handing over 2% of their profits to social causes defined by the government. The message is: businesses must be free to take risks, but cannot be trusted to determine what is good for society.
The combined forces of globalization and capitalism, ascendant since the collapse of the Soviet Union 24 years ago, have propelled the growth of multinational businesses and spread their brands across the world. Exponential advances in information and communication technologies have accelerated the growth of many new businesses and increased the reach of multinational corporations (MNCs). It should worry business leaders when The Economist, a cheerleader of capitalism and globalization, highlights the growing opposition to the expansion of MNCs. In India, the Prime Minister appeals to Indian and foreign businessmen to invest in India. But he must also contend with public mistrust of the conduct of Indian businesses and MNCs.
Whereas the Internet may homogenize the world, and “flatten" it, globalization and capitalism, assisted by Internet-driven technologies, are exacerbating divisions within societies. On all continents, identities formed by histories and geographies are being smothered by globalization. At the same time, capitalism stratifies societies through a process of cumulative causation. Those who already have wealth can increase their wealth faster as new opportunities arise with the opening of markets. The poor may become richer, but the rich become much richer, and so gaps tend to increase.
The ideology that private capital and business are the only ways to progress, and that public enterprises and government are bad, became dominant with Margaret Thatcher, Ronald Reagan and the Washington Consensus. Since then, business values have been infecting governments and civil society organizations. Government leaders are exhorted to behave like corporate CEOs. And civil society organizations are urged to adopt business management practices. The global financial crisis could only dent the dominant ideology because there does not seem to be any alternative. No one anywhere wishes to go back to totalitarianism and communism. Therefore, the solution must be to rediscover the purposes of institutions of business, government and civil society, and to change the ways in which businesses function.
Simply, in a sentence, the purpose of business is to find opportunities to make profit; the purpose of government is to ensure order and fairness in society; and the purpose of civil society organizations is to take up causes not properly addressed by businesses and governments. The tension between these institutions creates the conditions societies need for innovations with sustainability to advance the human enterprise. If any one of these institutions becomes too weak or is misdirected, either innovation or sustainability will suffer, and the human enterprise will falter.
The human enterprise has many dimensions. They include improvement of the material well-being of all people. They also include the evolution of institutions to ensure justice and equity to uplift raw animal spirits into a loftier human enterprise. Progress of the human enterprise must be measured along all its essential dimensions. Performance of institutions must be measured along these essential dimensions, too.
The trajectory of human progress has veered towards unsustainability with scorecards of institutions becoming too focused on measures of their sizes and contributions in monetary terms. Measurement of business revenues and profits are essential for the performance of businesses, whose role in society is to find and exploit opportunities for economic profit. But when international civil society organizations are also measured and ranked by the sizes of their budgets (as they are), rather than the impacts they have on human conditions, business ideas of performance of institutions in monetary terms have wandered too far. Above all sits GDP—the size of an economy in money terms—the widely prevalent measure for ranking the performance of nations. There is growing dissatisfaction with the overuse of GDP as a grand measure of the progress of human societies.
The business of governments of nations, and the business of civil society organizations, is not to increase their own sizes and economic surpluses.
Other measures must be used for their performance. Even businesses, for whom revenues and profits are important performance measures, must be judged by broader measures. Businesses’ pursuit of profit, with unleashed animal spirits, must not cause any harm to communities and the environment. Therefore, businesses too need new scorecards.
What is measured is managed. Acceptance of the Sustainable Development Goals, recently adopted by the United Nations, will not be sufficient to achieve them. Governments, civil society organizations and businesses will have to play their parts more effectively. Therefore, it has become imperative for leaders to develop better scorecards for the performance of their respective institutions, and for citizens to demand that they do.
If India aspires to be an exemplar in the world for the 21st century, its institutions will have to take the lead in clarifying their purposes and accounting with better scorecards.