Sustainable Value Creation

The framework presented in this book, Sustainable Value Creation, is the result
of more than twenty years thinking and writing at the intersection of two
subjects, strategy and CSR. I teach strategy and I think about CSR, almost
constantly. Given my academic home in the business school, I appreciate the
importance of markets and the ability of their essential actors (for-profit firms)
to create value. Equally, of course, I see the ability of firms to destroy value,
on an all-too-frequent basis. As such, I have spent a lot of time thinking
about how to promote the beneficial work firms do and eradicate the harm.
The result is this book: a framework through which managers can understand
the essential purpose of the for-profit firm, the most powerful entity we have
devised to drive societal progress.
At its core, this book is structured around the ten principles that define
Sustainable Value Creation. The foundation for these principles is a pragmatic
philosophy, oriented around stakeholder theory and designed to appeal to
managers skeptical of existing definitions of CSR, sustainability, or business
ethics. It is also designed to stimulate thought within the community of aca-
demics committed to these ideas, but who approach them from more tradi-
tional perspectives. Ultimately, therefore, this book aims to reform both
business practice and business education. By building a theory that redefines
CSR as central to everything the firm does (as opposed to peripheral practices
that can be marginalized), these ten principles redefine how firms approach
each of their operational functions, but also how these subjects should be
taught in universities worldwide. As such, this book will hopefully be of value
to instructors as a complement to their teaching, students as a guide in their
education, and managers as a framework to help them respond to the
complex, dynamic context that they are expected to navigate every day.

David Chandler is Associate Professor of Management at the University of

Colorado Denver Business School. His research focuses on the dynamic inter-
face between the firm and its institutional environment and has been published
widely. Additional related publications include the textbook Strategic Corporate
Social Responsibility: Sustainable Value Creation (5th edition, 2020).
Sustainable Value Creation
Second edition

David Chandler
Second edition published 2021
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon, OX14 4RN
and by Routledge
52 Vanderbilt Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2021 David Chandler
The right of David Chandler to be identified as author of this work
has been asserted by him in accordance with sections 77 and 78 of the
Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or
reproduced or utilized in any form or by any electronic, mechanical,
or other means, now known or hereafter invented, including
photocopying and recording, or in any information storage or retrieval
system, without permission in writing from the publishers.
Trademark notice: Product or corporate names may be trademarks or
registered trademarks, and are used only for identification and
explanation without intent to infringe.
[First edition published by Business Expert Press 2015]
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Names: Chandler, David, 1969– author.
Title: Sustainable value creation / David Chandler.
Description: Abingdon, Oxon ; New York, NY : Routledge, 2020. |
Includes bibliographical references and index. |Identifiers: LCCN
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Subjects: LCSH: Social responsibility of business. | Value.
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Few trends could so thoroughly undermine the very foundations of our free
society as the acceptance by corporate officials of a social responsibility other
than to make as much money for their stockholders as possible. This is a
fundamentally subversive doctrine.
Milton Friedman (1962)1
Contents

Foreword x
Acknowledgments xii

Introduction: Corporate Social Responsibility 1

Defining CSR 2
Measuring CSR 3
Profiting from CSR 7
Sustainable Value Creation 8
Plan of the book 11

Principle 1: Business is social progress 12

For-profit firms 12
Business is ethical and moral 14
Self-interest and public interest 16
Summary 19

Principle 2: Shareholders do not own the firm 20

Limited liability 21
A legal person 24
The business judgment rule 27
Stakeholders, not shareholders 29
Summary 32

Principle 3: Prioritizing competing stakeholder interests

is difficult 33
Stakeholder theory 34
Prioritizing stakeholders 36
A decision-making model 39
Summary 40
viii Contents
Principle 4: CSR is a stakeholder responsibility 41
Corporate social responsibility 41
Corporate stakeholder responsibility 43
Stakeholder democracy 44
Summary 47

Principle 5: Market-based solutions are optimal 48

Imperfect markets 48
Unintended consequences 52
Behavioral economics 56
Summary 60

Principle 6: Profit = total value 61

Economic value + social value 62
Profit optimization 64
Production value and consumption value 66
Summary 68

Principle 7: The free market is not free 69

Free markets 70
Externalities 71
Lifecycle pricing 72
Summary 75

Principle 8: Only business can save the planet 76

Sustainability 77
Waste 78
Materialism 80
Scale 83
Summary 86

Principle 9: Value creation is not a choice 87

Not philanthropy, but core operations 87
Not caring capitalism, but market capitalism 88
Not sharing value, but creating value 91
Summary 93
 Contents ix
Principle 10: The business of business is business 94
Milton Friedman 94
The purpose of the firm 96
Summary 99

Conclusion: Sustainable Value Creation 100

Defining SVC 101
Enlightened management 104
Final thoughts 106

About the author 107

Notes 108
Foreword

June, 20141
What is the purpose of a business corporation? For much of the past three
decades, observers and even many business leaders embraced the view that
corporations “belong” to their shareholders and that the legal responsibility of
corporate directors and executives is to single-mindedly seek to maximize
shareholder wealth. Today, experts and laypersons alike increasingly recog-
nize this view of business to be both mistaken and harmful.
As a purely factual matter, corporate law does not require directors and
executives to try and maximize profits or share price. Although a business
must be profitable to survive, corporate law grants executives and directors of
business corporations the discretion to pursue any lawful purpose as a business
goal. This “business judgment rule” is something that is consistent across
almost all legal jurisdictions.
Nor do shareholders own corporations. Corporations, as legal entities, own
themselves. Shareholders own shares that are legal contracts with the corpo-
rate entity, just as employees own employment contracts with the entity and
bondholders own debt contracts with the corporate entity. A firm’s share-
holder body is an important partner, but only one of many.
The combined effect of these legal realities, which are the products of
decades of both case and statutory law, is to liberate executives and directors
to pursue a wide range of practices that they believe to be in the best interests
of the organization as a whole. In other words, executives and directors are
not bound by any imperative to maximize profits for shareholders in the short
term, but can seek to sustain the organization over the medium and long
term, ensuring that value is created for a broad range of constituents.
This is important because, from a practical perspective, the dogma of
“maximizing shareholder value” does not seem to be working out particularly
well for the companies that choose to adopt it. In the quest to “unlock share-
holder value,” managers have sold off key assets; fired valuable employees;
leveraged firms to the brink of bankruptcy; and showered CEOs with stock
options in order to “incentivize” them to raise the share price. Some have
even committed fraud. Such strategies have proved harmful not only to
 Foreword xi
customers, employees, and taxpayers, but to shareholders themselves. Indeed,
even as the business sector has embraced the ideology of shareholder value,
shareholder returns from holding public equity have declined. Society, as a
whole, is worse off as a result.
This book helps explain why. The framework detailed by David Chandler
offers a roadmap for building companies that can do more not only for share-
holders, but also for customers, suppliers, employees, and society as a whole.
The questions Who owns the firm? and In whose interests should the firm be run?
are central to this quest. Once we successfully challenge the idea that share-
holders own the firm, we remove much of the pressure that drives executives
and directors to always favor shareholders’ interests over the interests of other
stakeholders who are often more invested in the organization and more
central to its sustained success.
Corporate Social Responsibility: A Strategic Perspective offers compelling argu-
ments against shareholder primacy. In its place, it presents an alternative
vision of strategic CSR that builds on a foundation of stakeholder theory and
takes into account core insights from the fields of psychology and economics
to demonstrate that it is in the strategic interests of the firm to respond to the
values, needs, and concerns of all stakeholders. Through this approach, firms
generate the most value for the broadest section of society.
Corporate Social Responsibility: A Strategic Perspective is a manifesto for busi-
ness today. It is essential reading for academics interested in CSR, for students
interested in business, and for executives who seek insight into the complex
web of competing stakeholder interests they must balance every day.

Lynn A. Stout
Distinguished Professor of Corporate and Business Law
Jack G. Clarke Business Law Institute, Cornell Law School
Acknowledgments

The framework presented in this book, Sustainable Value Creation, is the result
of more than 20 years’ thinking and writing at the intersection of two sub-
jects, strategy and CSR. I teach strategy and I think about CSR, almost con-
stantly. Given my academic home in the business school, I appreciate the
importance of markets and the ability of their essential actors (for-profit firms)
to create value. Equally, of course, I see the ability of firms to destroy value,
on an all-too-frequent basis. As such, I have spent a lot of time thinking
about how to promote the beneficial work firms do and eradicate the harm.
The result is this book – a framework through which managers can under-
stand the essential purpose of the for-profit firm, the most powerful entity we
have devised to drive societal progress.
This framework, as far as I can see from the constant stream of CSR-
related articles that cross my desk, is unique. I also believe it is revolutionary.
It challenges much of what is currently taken-for-granted about CSR, both as
it is taught in universities and practiced in corporations. The consequences of
this contrary approach can be seen in answer to the essential question, What
does it mean for a firm to be socially responsible? If you ask that question in most
CSR classes, I believe the answer would be that it looks something like Pat-
agonia or TOMS; with SVC, it is Walmart (or Amazon or Apple). If you ask
that question in most corporations, I believe the answer would be that it
looks something like philanthropy or employee volunteer programs; with
SVC, it is strategy and core operations. Understanding why these differences
are so stark will alter your understanding of business – what the firm is and
what it does.
When I began this journey in the mid-1990s, I held a more traditional
CSR perspective. It has taken me over 20 years of reading, about economics
and social psychology, to reject what I previously accepted. But, although this
perspective is mine and is something for which I am solely accountable, I was
only able to develop it with considerable help along the way. In particular,
when I think about the intersection of strategy and CSR, I think about the
intersection of two Bills: First, Bill Werther, who taught me much of what I
needed to know about strategy and how to be an academic; and second, the
late Bill Frederick, whose intellectual depth and generosity continue to shape
 Acknowledgments xiii
the fields of CSR and business ethics and will do so for many generations of
academics to come. I owe a great deal to both Bills.
More specifically, this book benefitted from the insights and constructive
criticism of many friends and colleagues as the core ideas were being
developed. In particular for the first edition, the following people kindly gave
their time and attention to read early drafts and provide feedback: Bart Alex-
ander of Alexander & Associates, LLC; Michael L. Barnett of Rutgers
University; Mark A. Buchanan of Boise State University; William C. Freder-
ick of the University of Pittsburgh (emeritus); R. Edward Freeman of the
University of Virginia; Stuart L. Hart of the University of Vermont; Laura
Pincus Hartman of DePaul University; Joshua D. Margolis of Harvard
University; Miguel Athayde Marques of Católica University; James E. Post of
Boston University (emeritus); Mark P. Sharfman of the University of Okla-
homa; Lynn A. Stout of Cornell University; Roy Suddaby of the University
of Victoria; and William B. Werther of the University of Miami. While all
errors are mine, this book is significantly better due to their expertise.
I am also indebted to a number of colleagues who kindly agreed to review
the proposal (both named and anonymously) for this edition of the book,
including: Robert Arp of Webster University; Kevin Eckerle of New York
University; Scott Freehafer of the University of Findlay; Bruce Kibler of
Gannon University; Seoki Lee of Pennsylvania State University; Karen
Palumbo of the University of Saint Francis; and Andrew Trew of John
Carroll University. The constructive feedback of these experienced teachers,
drawn from many years of experience in the classroom, ensured that this
edition of SVC is considerably better than it otherwise would have been.
Finally, I would like to thank the editorial team at Routledge for their
assistance in preparing this manuscript. In particular, I would like to thank the
senior editor who commissioned this edition of the book, Rebecca Marsh.
Rebecca is a big reason why I decided to revisit this framework, and I am
very happy she persuaded me to do so. More broadly, it is the support of
publishers like Routledge for projects like this that help realize the goal of
building a stronger intellectual framework for more responsible management
education practices in universities around the world.
Introduction
Corporate Social Responsibility

Corporate Social Responsibility (CSR), on the surface, is flourishing. In its

various guises, CSR appears to be everywhere as firms rush to respond to the
ever-evolving and seemingly never-ending demands of their stakeholders. In
whatever direction CEOs turn, they are being pressed for an opinion about
this controversial topic, or asked to take action to introduce that progressive
change. Everything they say and do is fraught with danger as they try to
navigate what, to many, is new terrain. The moment feels different, and CSR
appears to be driving both the uncertainty and the excitement that
accompanies it.
As a movement for meaningful change, however, there is a more convinc-
ing argument that says CSR is floundering. We have yet to agree on a single
definition, we do not know how to measure it, and we have failed to make a
compelling business case for it. Most firms equate CSR with peripheral activ-
ities, such as philanthropy or employee volunteer programs, while short-term
shareholder primacy continues to dominate the business landscape.1 This, in
spite of revisions of the purpose of the firm promoting stakeholder capitalism
announced by both the Business Roundtable2 and the World Economic
Forum.3 If radical change was the goal, then 70 years of CSR has failed.4 The
economy today is no more sustainable than it ever was, while emissions of
carbon dioxide and other greenhouse gasses sit at “a record high.”5
Given the stakes, an alternative approach is required. The response advo-
cated in this book is Sustainable Value Creation (SVC) – a reinterpretation of
the relationships firms have with their broad range of stakeholders that are
fundamental to the value creating purpose of the for-profit firm in a capitalist
society. In particular, this book presents the ten defining principles of SVC.
Together, they constitute a critique of the current CSR discussion, while
building a framework that can be integrated into the firm’s strategic planning
process and across operations. As such, SVC is in the firm’s best interest; it
also produces optimal outcomes for society.
At its core, this book makes the following case: If the purpose of a firm’s
strategy is to build a sustainable competitive advantage that can be sustained
over the medium to long term, then the best way to do that in today’s
complex, dynamic business environment is to create value for the firm’s
2 Corporate Social Responsibility
stakeholders, broadly defined. While the firm cannot please all of its stake-
holders all of the time, the firm’s job (and, in particular, that of the firm’s man-
agers) should be to please as many stakeholders as much of the time as possible.
While this may sound straightforward, however, it is incredibly difficult in
practice. It is what makes management such a challenge because competing
claims are constantly being made on a finite set of available resources. Worse,
the manager must not only understand what the firm’s stakeholders want today,
but be able to predict what they are going to want tomorrow.
In order to tackle their task, the manager first has to understand the basics
of economic exchange (how firms operate, what profit represents, etc.) and
then, equally important, social psychology (how humans make decisions,
react to incentives, define value, etc.). In other words, if you want to under-
stand macro-level market dynamics, you need economics; while, if you want
to understand micro-level human decision-making, you need (social) psych-
ology. To understand business, you need both. That is the purpose of this
book – to incorporate what we know about economic theory and human
psychology to explain how a complex social system (i.e., a market-based
economy) functions. In the process, this book challenges many of the taken-
for-granted assumptions of the CSR debate. In their place, it builds a frame-
work for stakeholder value creation that exists at the center of the firm’s
purpose – Sustainable Value Creation.
An essential step in this process, therefore, is to redefine what we mean by
CSR. For too long, CSR has been relegated to the periphery of operations. As
a result, it has been marginalized as an organizing principle of the firm, as
Milton Friedman’s quote on the dedication page of this book suggests. Fried-
man dismissed CSR as “a fundamentally subversive doctrine”6 because he saw
it as a harmful distraction; a waste of the firm’s time and effort – or, as he might
have put it, the inefficient allocation of scarce and valuable resources. Advocates
of CSR have done little to alter this perception in the decades since, which has
allowed critics to continue to dismiss CSR as secondary to what the firm is and
does. In contrast, SVC redefines CSR as central to the firm’s identity and oper-
ations. All firms have stakeholders and all firms, to varying degrees, create value
for those stakeholders. Everything the firm does contributes to this process.
Seen in this light, business and SVC (or CSR, redefined) are synonymous. But
we are getting ahead of ourselves. Before we can arrive at this conclusion, it is
important to understand why this redefinition is necessary – in short, we need
to know what is currently wrong with CSR.

Defining CSR
What is Corporate Social Responsibility (CSR)? What is sustainability? What is
the difference between these two concepts and business ethics? Is CR (Corpo­
rate Responsibility) different from CSR? Is a firm’s purpose different from its
responsibility? What does it mean to be a corporate citizen? All of these terms
have become commonplace in recent years, but beyond a general sense that
 Corporate Social Responsibility 3
corporations have some form of obligation beyond their organizational
boundaries, what do they actually mean? Are these concepts mutually exclu-
sive or is there significant overlap among them? And, if they are not the same,
why is it that we cannot agree upon universal definitions that convey clearly
to firms the set of behaviors expected of them?7

Right now we’re in a free-for-all in which “CSR” means whatever a

company wants it to mean: From sending employees out in matching
t-shirts to paint a wall for five hours a year, to recycling, to improving
supply-chain conditions, to diversity and inclusion. This makes it difficult
to have a proper conversation about what corporate responsibilities are
and should be.8

In other words, in spite of a large and growing amount of work that seeks to
understand a firm’s social responsibility, there remains great confusion and incon-
sistency. Far from the absence of possible definitions, however, as the above
list of terms suggests, “the problem is rather that there is an abundance of defi-
nitions, which are … often biased toward specific interests and thus prevent
the development and implementations of the concept.”9 As a result, while
there is broad agreement about the idea that firms have a social responsibility,
there is little agreement on what that responsibility looks like in practice:

There is … considerable debate as to whether [society] requires more of

the corporation than the obvious: … creating and delivering products
and services consumers want, providing employment and career oppor-
tunities for employees, developing markets for suppliers, and paying taxes
to governments and returns to shareholders and other claimants on the
rents generated by the corporation.10

How can we argue that CSR is important if we cannot agree what CSR is,
or at least narrow it down to a reasonable set of definitions?11 If CSR remains
idiosyncratic (different things to different people), then it loses its essential
meaning and ability to influence the way we structure the economic order.
This confusion suggests the need for additional clarification, and hopefully
some agreement, in terms of what we mean when we talk about CSR.

Measuring CSR
Central to the challenge of defining CSR is the ability to measure CSR. You
have to know what something is before you can quantify it; equally, you
have to be able to measure it before it can be widely disseminated. Unfortu-
nately, because we have not been able to define CSR, we have also not done
a very good job of measuring CSR. And, as a direct result, we cannot easily
say which firms are better or worse at CSR (as an objective fact). Even more
problematic, although we have some intuitive sense of which firms are good
4 Corporate Social Responsibility
and which firms are bad (based on our individual assumptions and values), we
are presently unable to compare one firm to another reliably across all aspects
of operations (particularly if the firms operate in different industries). The
reason we are not able to do these things, of course, is because they are
incredibly difficult. It is certainly not for want of trying. But the challenges
involved in defining societal expectations and then quantifying those expecta-
tions holistically in terms of firm performance quickly become apparent with
a simple thought experiment. Consider the complexities inherent in any
attempt to parcel out and quantify the impact an individual firm’s operations
has on the environment:

Let’s suppose changes in average world temperature lead to the extinc-

tion of, let’s say Blue Whales, and an obscure currently undiscovered
insect in the Amazon. What valuation would we place on the Blue
Whale, and how would we calculate it? On the potential economic value
of products that might be extracted from it? On the basis of what
someone would be prepared to pay for its existence to be preserved? And
what about the insect we never even heard of? Suppose it might hold the
secret of a new pharmaceutical discovery? Or then again, it might not.12

While we may be able to agree that the aggregate effect of all economic activ-
ity is detrimental and causing climate change,13 the degree to which it is doing
so and what we might do about it remains unclear. In essence, calculating the
present-day value of that future cost and determining what percentage can be
attributed to an individual firm is extremely challenging. Should a firm be
responsible only for the costs incurred during the production of its products,
for example, or also for those incurred during their consumption? Should
automobile companies be held responsible for the pollution caused by people
driving cars or only for the pollution involved in making the cars? What about
smartphone companies, where there is little cost to the environment during
consumption of the product, but the potential for significant damage during
disposal due to e-waste? And, what about a firm’s supply chain – where does
one firm’s responsibility begin and another’s end? Should a sports shoe
company be responsible for the costs incurred during the manufacture of the
shoe (even though that process is completed by an independent contractor)?
What about any work that is further outsourced by that contractor to a sub-
contractor? What about the rubber used to make the soles of the shoes – is
that also the sports shoe company’s responsibility, or the responsibility of the
contractor (or sub-contractor) who purchased the raw material, or of the plan-
tation where the rubber was initially harvested? There are no easy answers to
these questions, which relate only to the costs incurred by a firm. What about
quantifying the benefits the firm and its products provide, which raise a whole
new set of challenges? And, perhaps most importantly, how should these bene-
fits offset the costs – should we sum them to create a net effect or should the
costs be weighted more heavily than the benefits (or vice-versa)?
 Corporate Social Responsibility 5
In spite of these complexities (and many more), the idea that firms have a
social responsibility continues to capture our attention.14 We remain convinced
that this special thing we are talking about, CSR, matters. It must matter,
right? After all, being responsible has to be better than being irresponsible. And it
is important for our sense of justice that those firms that are more responsible
should be rewarded in some way, while those firms that are less responsible
should be punished. But, what if the reverse is true and it is those firms that
make the most effort to be socially responsible that are penalized for doing so
by stakeholders who fail to reward the behavior they claim to want from
firms (and fail to punish the behavior they say they do not want)?15 Ulti-
mately, if we cannot develop consistent definitions of good/bad, better/
worse, and then construct a set of measures that capture the extent to which
these ideas are implemented in practice, how can we determine whether
CSR actually matters?

The empirical literature on the relationship between CSR and perform-

ance is mixed and fraught with empirical question marks around not just
how performance is measured but what it means to “do good.” … we
simply do not understand the causal link between a firm’s specific CSR
activities and the operational outcomes that can influence performance.16

We need to get this right because erroneous assumptions and inconsistent

empirical correlations cause deterministic judgments to be made about these
essential ideas. If we are honest with ourselves, we would understand that, in
spite of large numbers of studies on this topic17 and the tireless work of groups
such as SASB, CDP, and GRI,18 we do not yet have the capability to measure
the all-encompassing nature of CSR. On the contrary, there is good reason
to believe that not only are we unable to measure CSR, but that the meas-
ures we have are gravely misleading. That would explain why firms like
Enron and BP can win CSR, sustainability, and business ethics awards shortly
before they commit devastating ethics and environmental transgressions. It
also explains why it has been reported that there is “total chaos” surrounding
ESG19 reporting in the U.S.,20 with few established standards resulting in “the
current hotchpotch of competing (and often misleading) measures of how
firms fare.”21 As one analyst reported:

In one year, a large industrial company was recognized as a top 10 ESG

performer by one data provider and a bottom 10 ESG performer by
another. … Both [monitors] had legitimate considerations, [which sug-
gests] large public companies are complex and dynamic in a way that
does not lend itself to absolutism.22
One reason for this confusion is that different monitoring firms
place different weights on the different ESG dimensions. Even the
philosophical question, “Should a highly polluting company be able to
offset that [pollution] by having great governance and treating workers
6 Corporate Social Responsibility
well?” is challenging.23 The result, of course, is different results for the
same firm, depending on the priorities (and biases) of the organization
conducting the evaluation. Comparing Exxon’s ESG score against four
firms in different industries, for example:
Sustainalytics ranks Exxon top of the five companies overall because it
puts a 40% weight on social issues, where Exxon does well thanks to
strong policies for its workers, supply chain and local communities.
MSCI ranks Exxon fourth of the five in part because it puts a 51%
weight on environment and only 17% on social issues.24

In spite of the apparent futility involved in measuring a firm’s CSR profile,

does that mean we have to throw up our hands and surrender, relying instead
on subjective moral and ethical arguments designed to persuade managers to
do the right thing? To the extent that we can arrive at a standardized way of
measuring what we agree should be measured, then we will be able to
compare one firm’s activity with another’s.25 Whether those numbers are
100% accurate is less important than whether any biases are known and
applied equally across all firms. So many of our measurements involve sub-
jective interpretations and assumptions, but are widely perceived as objective
statements of fact (e.g., think about how accountants measure brand value or
goodwill). Placing a cost on the extinction of the Blue Whale versus the lost
opportunity of an unrealized pharmaceutical discovery will always involve
some element of subjectivity and debate. Nevertheless, there is a great deal of
benefit in being able to construct a relative and standardized measure of
which firms add more or less value. Doing so will help us define CSR accu-
rately and in a way that encourages the reforms in our corporations that are
essential to building a more sustainable, value-adding economic system.
This pursuit of defining and measuring CSR is essential because the question
What is the purpose of the for-profit firm in society? is highly consequential. Whether
we are talking about environmental degradation or social cohesion, wealth dis-
tribution or global free trade, the answer to this question defines our immediate
and future quality of existence. It determines the society we live in and will pass
on to future generations. While some people argue it is impossible to conclude
whether a firm is truly socially responsible,26 the more essential question is rel-
ative (rather than absolute). In other words, it is important to identify those
firms that are more or less responsible than others, without needing to make
definitive claims as to whether a firm is objectively responsible or irresponsible.
While recognizing the challenges in doing so, being able to identify the busi-
ness models that create more value is a challenge that seems to be inherently
worth tackling. Yet, the confusion sown by inconsistent definitions, partial
measures, and the multitude of labels and rating systems that purport to reveal
which products and which firms are green, ethical, or socially responsible serves
only to undermine the good intentions of all involved.
Urgently, we need to agree on a definition of CSR and recognize that,
until we can measure this complex construct, we should be careful about
 Corporate Social Responsibility 7
drawing definitive conclusions based on unrepresentative empirical studies.
Rather than rely on good intentions, which inevitably lead us to inaccurate
conclusions, perhaps a more constructive approach would be to turn to eco-
nomic fundamentals, which have been measuring societal impact for
centuries.

Profiting from CSR

If we are able to agree on a definition of CSR and then begin to measure this
elusive concept, we would be in a much better position to answer the ques-
tion: What is the business case for CSR? The challenge in answering this ques-
tion is related directly to our inability to agree on what we want firms to do
and to know whether they are actually doing it. Conceptually, the collective
failure of advocates to construct a convincing argument in favor of CSR also
reflects a fundamental debate that is yet to be resolved – whether CSR should
be voluntary or mandatory.
In the absence of a compelling argument built around self-interest, most of
the debate about CSR seeks to compel firms to act more responsibly.
Whether via moral or ethical guilt, normative association, or restrictive legis-
lation, many advocates believe CSR should be coerced, rather than incentiv-
ized. This perspective is founded on the assumption that managers do not
believe CSR to be in the best interests of the firm (and, by extension, them-
selves) and that, as a result, they are either unable or unwilling to act in ways
that benefit society unless compelled to do so.
This book rejects that assumption on two levels. First, the argument that is
framed here is based on the idea that it is only firms that incorporate CSR
voluntarily into their strategic planning and all aspects of operations that will
do so comprehensively and genuinely. And second that, as a result, building
this argument around enlightened self-interest is our best hope of introducing
meaningful change. Comprehensive and genuine implementation is likely to
generate further innovation and creativity (and social benefit), while selective
and coerced implementation is likely to result in resistance and obstruction
(and social harm). Worse, by compelling CSR, the danger is that it becomes
something to be avoided, rather than something to be embraced – an obliga­
tion rather than an opportunity.27 The course of human development demon-
strates the fallibility of coercion, while the progress our society has made since
the industrial revolution reveals the powerful benefits that spring from the
pursuit of self-interest. In free societies, humans (and, by extension, organiza-
tions) are effective at avoiding coercion – we resist efforts to control and con-
strain our collective productivity:

the soundest objection to government intervention in business is not

that the matter is none of the government’s affair, for it is everybody’s
affair; the essential point is that controls imposed from without are always
less authentic in a dynamic sense than those evolved from within.28
8 Corporate Social Responsibility
For-profit firms are most efficient when they are acting in their own self-
interest. The most effective laws are those that are founded on widespread
social support. If such support is widespread, however, then that behavior is
generally accepted as normative (and the law is therefore less necessary).
Over-zealous attempts to constrain market forces, on the other hand, will
generate unintended consequences as firms seek to evade artificial limits. As
noted by The Economist, “Finance has yet to meet a rule it doesn’t want to
game,” while, in general, “[capital flows] to where frictions are lowest.”29 If
the intended target does not agree with a specific law or regulation, it will
attempt to subvert it, however surreptitiously. In fact, such behavior will
often be encouraged by that very same law or regulation that is, by definition,
broad and ambiguous because it is intended to apply so widely. There is a
reason why, for example, corporations employ armies of skilled accountants
whose job is to find ways for the organization to avoid paying taxes:

The United States income tax laws allow companies to claim they earned
profits in countries where they actually had few, if any, operations, but
where taxes are extremely low. … the U.S. Public Interest Research
Group Education Fund and Citizens for Tax Justice, said that 372 of the
companies in the Fortune 500 … reported a total of 7,827 subsidiaries in
countries that the groups view as tax havens. Some of those subsidiaries
no doubt do real business. … But most … are engaged only in the busi-
ness of tax avoidance.30

Whether such behavior is right or ideal is a complicated discussion that

revolves around the roots of human innovation and creativity. Nevertheless,
it is central to the framework presented here that any attempt to amend capit-
alism in a way that encourages more socially beneficial behavior will be most
effective when it is aligned with firms’ self-interest, which is related directly
to economic success. While we can argue that any particular policy is more
or less beneficial, it is the contention of this book that we will only succeed
in developing a holistic business case when firms integrate CSR fully through-
out operations and create an environment in which it is understood to be in
their best interest to do so.
To date, a sufficiently convincing case has not been made to managers that
CSR is of strategic value to the firm. The lack of specificity in terms of both
defining and measuring CSR suggests the need for a new conceptualization
that is grounded in a business-focused perspective – one that is pragmatic,
rather than idealistic; one that deals with human nature as we know it to be,
rather than as we may wish it were.31

Sustainable Value Creation

Together, our failure to adequately define CSR, measure CSR, and build
the business case for CSR suggests the need for an alternative approach.
 Corporate Social Responsibility 9
The response advocated in this book is a framework grounded in empirical
observation and developed over more than two decades of thinking and
writing about CSR – SVC.32 Specifically, this book establishes a set of unify-
ing principles that define the intellectual debate around CSR, while also pro-
viding a program for managers to implement what, up until now, has been a
collection of interesting ideals, but has fallen short of a coherent philosophy
and plan of action.
As discussed above, “After more than half a century of research and debate,
there is not a single widely accepted definition of CSR.”33 Importantly,
however, although there is no commonly agreed definition, it is acknowledged
that there has been a common purpose to all of the work produced in the name
of CSR – “to broaden the obligations of firms to include more than financial
considerations.”34 The field of CSR and business ethics has long focused on the
ends of business – forcing firms to focus on goals other than, or in addition to,
profit. The result has been a lot of wasted energy and a large number of prema-
ture pronouncements. As Howard Bowen claimed optimistically in his founda-
tional 1953 book, the Social Responsibilities of the Businessman:

The day of plunder, human exploitation, and financial chicanery by

private businessmen [sic] has largely passed. And the day when profit
maximization was the sole criterion of business success is rapidly fading.
We are entering an era when private business will be judged solely in
terms of its demonstrable contribution to the general welfare.35

Urging firms to “include more than financial considerations” as part of their

business model is not the purpose of this book and, in my use of the term, it
is also not the purpose of SVC. The goal of this book is to refocus the CSR
debate onto the means of business, rather than the ends. Demanding that man-
agers expand the goals of the firm suggests a problem with the ends of capit-
alism (i.e., profit). In contrast, the underlying principles of SVC suggest that
any problem with capitalism, as currently practiced, is not with the ends but
the means. Seeking profit (which is the best measure we have of long-term
value-added) is not the problem; it is the methods by which profit is sought
that can be problematic. In other words, it is not what firms do, but how
they do it that matters. When rules are broken, costs are externalized, and key
stakeholders ignored (or worse, abused), value is broadly diminished. While
some firms may benefit from such practices in the short term, such antagonis-
tic behavior that benefits only a narrow subset of constituents is difficult to
sustain. Meanwhile, the costs are borne by society as a whole.36
Put another way, it is the environment in which the firm operates that
creates the boundary conditions that define what the pursuit of profit means
at any given point. The rules of the game determine what is acceptable and
unacceptable in the way that any single firm conducts operations. The goal
(profit) stays the same and has always been so, back to the earliest markets on
10 Corporate Social Responsibility
the Silk Road; it is the rules that evolve and vary from culture to culture.
And, it is the more astute managers who understand the current conditions
and when the rules (both written and unwritten) have shifted who can guide
their firms to greater economic success. They understand that abiding by
those rules provides the firm with the license it requires to operate.37 But, for
this relationship to work, it is essential that the rules are enforced. If the rules
are enforced, they will determine the outcome.
The business case for CSR, therefore, originates within the firm. It is a
process by which managers interpret the shifting environment in a way that
allows their firm to be successful. In other words, it is in the firm’s self-
interest to understand the rules as they are constructed by their stakeholders
(internal and external) and abide by them. The problem, of course, is that
there is no rule book, per se, and the signals that the firm receives on a day-
to-day basis are not consistent, but are many, varied, and contradictory. There
is a limited market for sweatshop-free T-shirts, for example, but great savings
to be made in waste reduction. Similarly, consumers have demonstrated
limited loyalties to firms with a reputation for CSR, but employees are more
likely to want to work for such firms. If key stakeholders react positively to a
new practice, then it becomes in the self-interest of the firm to continue with
that practice. Equally, if key stakeholders disengage or punish the firm for the
same action, then the firm would be foolish to continue doing it.
The key is that the motivation to act must be internally generated, based
on an iterative relationship with all the different components of society (busi-
ness and non-business) that create the rules that constitute the social fabric.
Laws are one way that these rules are defined for firms (the government is a
stakeholder), but only one of many and, as argued above and throughout this
book, one of the least efficient. More effective are the myriad signals that cus-
tomers, employees, suppliers, non-governmental organizations (NGOs), the
media, and any other invested constituent conveys to the firm through their
day-to-day interactions with it. The result is complex and the message is
often garbled, but the stakes for everyone involved are high.
It is not necessarily the case that firms that ignore these rules will immedi-
ately fail but, instead, that they will gradually find their degrees of freedom to
operate increasingly constricted. In this sense, therefore, much of what is
meant by CSR can be captured in a progressive approach to management. As
new rules are formed and societal expectations coalesce around these new
standards, those firms that understand and abide by them (and anticipate
future evolutions) will find the conditions under which they seek profit are
easier than those firms that resist. That is what CEOs are experiencing today
when they are asked to take a stand on same-sex partner benefits, or the
current political administration, or religion in the workplace, or any number
of other controversial social issues that increasingly demand their attention.
This book is designed to detail the principles on which these new rules are
constantly being redefined for those managers who are sufficiently sensitive to
detect them and react.
 Corporate Social Responsibility 11
Plan of the book
If SVC is to be widely accepted by the business community, it has to establish
itself as a comprehensive approach to business, replete with its own set of
assumptions and guiding principles. This will allow SVC to be studied as a
conceptual framework, but also implemented as a realizable set of practices.
Specifically, this book is structured around a set of ten defining principles that
define SVC and enable it to be integrated into the firm’s strategic planning
process and across operations. It builds the case that SVC is a strategic deci-
sion that is in the best interests of the firm and all its stakeholders. Following
this Introduction, ten chapters present and discuss each of the principles in
turn, followed by a concluding chapter that integrates all ten principles into
an overarching discussion of the concept of SVC.
The ten defining principles of SVC, together, constitute a pragmatic philo-
sophy, extending stakeholder theory and designed to persuade managers skep-
tical of existing definitions and organizing principles of CSR, sustainability,
or business ethics. It is also designed to stimulate thought within the com-
munity of academics committed to these ideas, but who approach them from
more traditional perspectives – how these ideas are taught is as important as
how they are practiced. Most importantly, the goal of this book is to solidify
the intellectual framework around an emerging concept, SVC, that I believe
is essential to our future progress and continued prosperity.
Ultimately, therefore, the purpose of this book is radical. By building a
theory that redefines CSR as core to business operations and value creation
(as opposed to a set of peripheral practices that can be marginalized), these
defining principles become applicable across the range of operational func-
tions. In the process, they redefine how businesses approach each of these
functions in practice, but also how these subjects should be taught in univer-
sities worldwide. To internalize these ten principles is to understand how the
firm can respond to stakeholder needs to optimize value creation over the
medium to long term. In short, it is a manifesto for success in business in
the twenty-first century.
Principle 1
Business is social progress

Key takeaway: There is a direct correlation between the amount of business

in a society and the extent of progress enjoyed by that society. For-profit firms
are the most effective means of achieving that progress.

Principle 1 states that business is progress. In other words, as a general rule,

the more business that exists within a community, the greater the economic
and social progress that community will experience. Central to the delivery
of that progress is the for-profit firm, which has long been one of the most
effective means for humans to channel their innovation and creativity. As
Micklethwait and Wooldridge note in their history of the company:

Today, the number of private-sector companies that a country boasts …

is a better guide to its status than the number of battleships it can muster.
It is also not a bad guide to its political freedom.1

In short, society is stronger when capital flows freely and business is incentiv­
ized to innovate and compete. This may seem intuitive when we stop and
write it down, but the point is not made often enough. And, in its rush to
improve an economic system that has already delivered phenomenal social
progress, many in the CSR community overlook this fundamental aspect of
capitalism. This does not mean that improvements should not be made and
certainly does not mean that the government does not have a role to play, but
keeping this starting point in mind anchors the framework underpinning Sus­
tainable Value Creation (SVC).

For-profit firms
Broadly speaking, there are three types of organizations: for-profit, not-for­
profit, and governmental. There are also hybrid mixes of these three forms,
such as social businesses, government-backed enterprises, and benefit corpo­
rations.2 Of the basic forms, however, only the for-profit firm is consistently
 Business is social progress 13
able to combine scarce and valuable resources efficiently and on the scale
necessary to improve meaningfully our society and standard of living. This
unique position of for-profit firms in our society is enhanced when we con­
sider the challenges we face, the timeframe in which substantive action is
required, and the complexity inherent in what the former CEO of Unilever,
Paul Polman, calls today’s “vuca world; volatile, uncertain, complex and
ambiguous.”3
In general, there are two sides to the debate as to how firms should
navigate this dynamic environment. On the one hand, for-profit firms receive
much from society that is essential for them to operate – a stable legal system,
an educated workforce, a modern infrastructure, and so on. As such, many
CSR advocates argue that firms have a broader responsibility to recognize
(and appreciate) that they externalize many of the costs that are associated
with these benefits. Some of these costs are implicit in the social contract and
are a universal good (such as an educated workforce); some of these costs,
however, have harmful societal consequences (such as pollution). Either way,
firms rely on society to thrive – they “receive a social sanction from society
that requires that they, in return, contribute to the growth and development
of that society.”4
On the other hand, however, society receives much from strong, for-profit
firms that operate within a vibrant, market-based economy. Look around
you. Virtually everything you can see was made by a for-profit firm. It is for-
profit firms that are responsible either for much of the innovation that allows
society to progress or for converting the innovations made by others (e.g.,
scientists, artists, and academics) into products that make our lives better.
More important than the value added by for-profit organizations through
innovation, however, is the efficient means by which they are able to convert
valuable and scarce resources into usable products, and distribute those prod­
ucts to those who demand them at the price those individuals are willing to
pay. The details of this process (what for-profit firms do and how they do it)
defines our quality of life and our level of social progress. The recognition of
this leads supporters to claim that:

The most important organization in the world is the company: the basis
of the prosperity of the West and the best hope for the future of the rest
of the world.5

In other words, while firms benefit greatly from a stable and enlightened
society, society also benefits greatly from a vigorous, competitive set of for-
profit firms. In considering these tradeoffs and tensions, however, it is
important to remind ourselves that juxtaposing firms and society in this way,
as many in the CSR community continue to do, suggests that firms and
society are independent of each other. In reality, of course, they are insepar­
able. Firms exist as part of society in the same way that society is made up of
many functioning parts, an important component of which is for-profit firms.
14 Business is social progress
Equally, managers, board directors, employees, and shareholders each have
additional roles elsewhere in society (as consumers, activists, volunteers, com­
munity members, etc.), as well as working together at the same for-
profit firm.
In essence, therefore, business and society are interwoven – their interests
are aligned and business has as much to gain from a strong and healthy society
as society has to lose from a constrained and ineffective business sector. The
question, therefore, is not What do firms owe society? or What does society owe
firms? but, instead, is the more nuanced debate about What role do firms play in
society? While social progress over centuries demonstrates the inescapable
value of for-profit firms within a market-based system, each firm should be
routinely assessed to determine whether their individual contribution is net
positive or net negative. Where it is net positive, we need to ask Is that contri­
bution as good as it can be? Alternatively, where it is net negative, we should
inquire How can we introduce incentives to improve performance? But, each firm’s
interest lies not in waiting for this evaluation to be imposed externally, but
initiating it to ensure its operations meet the ever-shifting expectations placed
upon it. Paul Polman understands this iterative dynamic better than most:

Business simply can’t be a bystander in a system that gives it life in the

first place. We have to take responsibility, and that requires more long-
term thinking about our business model.6

Addressing these questions and providing constructive answers, I believe, is

the most important challenge our society faces today.

Business is ethical and moral

It is impossible to separate ethics and morals from any aspect of human behav­
ior. Everything we do involves ethical and moral components and, more
often than not, tradeoffs among ideals. These same tensions and pressures
exist in business. All aspects of a firm’s operations, to some degree, have
moral, ethical, or value-laden elements.7 While we may agree or disagree
about whether an employee should be paid a living wage or a minimum
wage, for example, there is no doubt that the decision is consequential for the
firm, the employee, and for the society in which both exist. As a result, there
is an ethical and moral perspective from which the problem can be addressed,
and about which we can agree or disagree. These same considerations and
conflicts extend to all aspects of operations:

When a businessman decides whether or not to produce a new product

or service, he is helping to decide the range of products available to cus­
tomers. When he decides whether or not to purchase new plant and
equipment, he is helping to determine the rate of economic progress and
is influencing the level of employment and prices. When he decides to
 Business is social progress 15
close down a plant or to move it to another location, he may be affecting
the economic future. When he decides to build up or reduce inventories,
he may be contributing to inflation or accelerating recession. When he
changes his wage policy or dividend policy, he may be influencing both
the level of employment and the degree of justice achieved in our distri­
bution of income. When he uses the newspaper, radio, and television for
advertising or public relations, he may be influencing moral and cultural
standards. When he introduces new personnel policies, he may be con­
tributing toward cooperation and understanding between labor and man­
agement or he may be reinforcing existing tensions and frictions. When
he transacts business in foreign lands, he may be contributing to inter­
national tensions or to international understanding.8

Because the relationship between firms and the societies in which they
operate is symbiotic, because firms are able to combine resources on a scale
and with an efficiency that no other human-invented entity can match, and
because there is an ethical and moral component to all aspects of business/
human decisions, it is vital to understand the role of for-profit firms in
society. The behavior of firms (how they do what they do) affects not only
our material wellbeing, but all other aspects of our quality of life and, by a
large margin, they are the dominant predictor of that outcome – from our
experiences at work, to the products we buy, to the air that we breathe; cor­
porations define the lives that we live.
As such, the for-profit firm is cause both for celebration and concern. It is
true, for example, that, as a rule, societies that provide more freedom for their
for-profit firms to operate will experience more innovation and progress than
those societies that do not. It is also true that we should expect this relation­
ship to hold consistently, all else being equal. Of course, however, all else is
not equal, which is the reason for writing this book, and today many feel
there is more reason than usual for concern:

Business is the cultural, organizational, and economic superforce in

human development. And yet the current state of this social institution is
fundamentally flawed: It falls short in its potential to serve our global
society. Today’s predominant business models drive public companies,
for instance, to focus on predictable, short-term shareholder returns that
may be detrimental to employees, communities, or the broader social
good. They also fail to motivate industries to reduce their environmental
impact.9

As with many things in life, the relationship between economic freedom and
societal progress is not linear. While the correlation is undoubtedly positive,
there are limits to the value of untrammeled economic freedom. It does not
necessarily hold, for example, that complete freedom for firms equals
maximum societal progress. If we did not have controls on the use of toxic
16 Business is social progress
chemicals in consumer products, there is plenty of evidence to suggest that
some firms would take advantage of consumer ignorance and use those chem­
icals, irrespective of the consequences for public health. Similarly, there is a
reason why we place restrictions on the marketing and sales of products that
are deemed to be socially harmful, such as alcohol and tobacco. There are
good reasons why we allow firms to emit only certain levels of pollutants into
the atmosphere or waste stream; there are also reasons why we pressure firms
to curb their marketing to vulnerable segments of society, such as children,
and so on, and so on.
Rampant, unrestrained capitalism is unlikely to maximize value, broadly
defined. A capitalist system that is constrained through a series of checks and
balances, however, promises outcomes that serve a broad set of interests.
Firms have micro interests and societies have macro interests. A problem
arises, therefore, when the interests of the firm and the interests of society
conflict. When this happens, those societies with fewer controls over firms
will still experience a large degree of innovation, but it will likely result in a
reduction in overall value as firms innovate and bring those innovations to
market in ways that suit their short-term interests, but work against the
longer-term, competing interests of society. The optimal situation is to have
the interests of the firm overlap with the interests of the broader society, with
both parties working to generate constructive, mutually beneficial outcomes.

Self-interest and public interest

The mechanism by which the interests of the firm and the interests of society
become aligned is through the interactions the firm has with its stakeholders
– employees, consumers, suppliers, the government, the media, NGOs, and
so on. For example, if I, as a consumer, decide that I want to shop at firms
that do not outsource their manufacturing jobs overseas and I actively dis­
criminate in favor of such firms (even if it costs me more to do so), then I am
making a statement about the kind of firms that I want in my society. Sim­
ilarly, if I, as an employee, decide to work for firms that have a diverse work­
force and I actively apply for jobs only at such firms (and avoid applying for
jobs at less diverse firms), then I am again making a statement about the kind
of firms that I want in my society. Now, if I am alone in imposing those
values on firms, it will not alter anything. If, however, many other people
make the same decisions based on a similar set of values, then such values will
quickly become standard operating procedure across the majority of firms.
This means that, while there is no longer a differentiation advantage to be
gained for firms that implement these practices, there is a significant dis­
advantage for firms that resist. So, standards evolve and society progresses (or
regresses, depending on the nature and extent of the change).
These tradeoffs are resolved via values that are embedded in the decisions
the firm and its stakeholders make as they interact. As these values are applied
and enforced by stakeholders across the thousands of interactions each firm
 Business is social progress 17
has with its various constituents on a day-to-day basis, the interests of the
firm become more closely aligned with the values of the broader society. As
long as the firm is willing to pay attention to the needs and demands of its
stakeholders (both internal and external), and those stakeholders are willing to
actively shape the society in which they want to live, then it is in the interests
of the firm to advance that goal (and its own success) by altering its behavior
to match the demands that are placed upon it.
In other words, over time, firms reflect the societies in which they operate
(in the same way that politicians reflect the time and context in which they
were elected). As organizations, they are not conscious actors so much as
mirrors that respond to the values-based constraints placed upon them. If we
loosen these constraints, those looser standards will quickly become apparent
in the behavior they encourage. Equally, however, if we tighten these con­
straints, firms will respond quickly and efficiently – simply because it is in
their interest to do so. But such an iterative relationship relies on our vigil­
ance if it is to generate the outcomes we say we desire. Less vigilance is con­
sequential, but is something over which we have control.
The logic behind building this argument of empowered actors and fluid
checks and balances (which will be developed further over the remaining
nine principles), and encouraging executives to adopt it as a managing philo­
sophy, is that it should face less resistance than attempts to coerce for-profit
firms to act in ways they perceive to be against their interests. As noted in the
Introduction, a core unresolved debate within the CSR community is
whether more socially responsible behavior is best encouraged via mandated
or incentivized actions. The resolution around which SVC is based (taking
into account human nature and centuries of economic development) is that
firms are more likely to implement CSR genuinely and substantively if they
are convinced it is in their self-interest to do so. Central to this argument is
the belief that firms are more likely to avoid or try and circumvent legislation
if they are compelled to act.
In addition to the idea of voluntary action being more fruitful than coerced
action, building an argument around incentivized self-interest is likely to be
more successful because the concept of moral duty or ethical values (over and
above those already enshrined in laws and social customs) is extremely diffi­
cult to define and standardize. This is true because an ethical standard is less
easily enforced – in a free society, there are no ethics police. Who gets to
decide which morals/values apply and in what situations, for example? And,
if I disagree with those morals/values (i.e., if I live by a different set of stand­
ards), why should I be forced to comply with them? What will happen if I do
not comply with someone else’s ethical standards?
Take the debate over whether an employee should be paid a minimum
wage or a living wage. While I may think a minimum wage is an ethical
compensation (after all, by definition, it has been determined by government
to be a sufficient income), you may disagree and, instead, argue that a living
wage is ethical, while a minimum wage is unethical.10 But, since it is legal for
18 Business is social progress
me to pay a minimum wage; as long as there are sufficient workers willing to
work at that level, my company will continue to operate (and possibly
thrive).11 And, since I am providing employment to workers who are volun­
tarily choosing to work at that pay level, who is to say that I am being unethi­
cal by hiring them? What if, as an employer, I cannot afford to pay wages that
are any higher? In that case, would it be more ethical if I hired no one and
left those people unemployed? Would it help anyone if I paid higher wages
and went out of business? If, however, workers with the skills that I need for
a particular job refuse to work for the minimum wage (or consumers refuse
to shop there because of the wages that I pay), then the only way my firm
will continue to operate is if I raise the wages I am offering. And, importantly
in that circumstance, the support from my stakeholders will provide the
resources that enable me to do that.
Similarly, is it more ethical for me to hire domestic workers in my factory
or outsource production to workers overseas? Some would argue that sup­
porting local jobs is ethical, since you are helping reduce unemployment at
home, at least in the short term. But, who is to say that is more ethical than
hiring a worker overseas, who probably has fewer opportunities and access to
fewer resources to improve their life? Well, there is a good chance that,
depending on the job and the industry, the overseas worker is underage. But,
even if that is true, the ethics of the decision to allow that individual to work
depend on the available alternatives. It would be unethical to hire a 16-year­
old garment maker, for example, only if a well-resourced school was a realis­
tic alternative. What if, due to financial pressures, the alternative to factory
work is prostitution? How does that affect the relative ethics and morality in
hiring a local person versus outsourcing work overseas? My point, of course,
is only to note that What is ethical? and What is unethical? are highly complex
and relative questions that, once you start to understand the context and
different perspectives, do not lead to easily identifiable answers. Where there
is consensus, societies should legislate that consensus into legally enforceable
standards. Where consensus does not exist, however, your ethics and values
differ from mine, and result in measurable variance in behavioral outcomes.
Having said this, it is important to re-emphasize the enlightened approach
to management that is central to SVC. Managers reading this are taking away
the wrong message if they conclude that self-interest is purely reactive – that,
as a firm, I will wait for my stakeholders to declare their interests before
responding to them and get away with what I can in the meantime. As
argued above, a core component of SVC is that it is the process that matters
– not what a firm does, so much as how it does it. A firm is established to
meet specific needs. As in any competitive market, it pays firms to be slightly
ahead of the curve in doing so, and the internal culture of the firm and the
personal values of the manager help achieve that. To put it crudely, values tell
you not to do the stuff you can get away with today but feel uncomfortable
about, because there is a good chance you will not be able to get away with
it at some future point. Being able to anticipate what stakeholders need
 Business is social progress 19
tomorrow is therefore as important as understanding what they need today
and is central to the firm’s ongoing success, even if it means constraining
immediate profits. Even better, articulating those needs in a way those stake­
holders had not yet envisioned has the potential to generate astounding eco­
nomic success. As Steve Jobs famously said:

You can’t just ask customers what they want and then try to give that to
them. By the time you get it built, they’ll want something new.12

What is clear from Principle 1 is that enlightened managers working in pro­

gressive, for-profit firms are the most effective means to deliver the innova­
tion that drives societal progress.

Summary
Principle 1 states that Business is social progress. It argues that the for-profit firm
is the most important organizational form because it is best able to convert
valuable and scarce resources into products that we demand that, persistently,
raise the overall standard of living. The incentive to innovate is central to this
process, but innovation occurs elsewhere in society, too. Irrespective of its
origin, for-profit firms excel when they seek to bring such innovation to
market. Integral to this process are the multitude of decisions, laden with
ethical and moral implications, that the firm makes every day. While self-
interest is a powerful motivator, value is optimized in its broadest sense when
the interests of the firm overlap significantly with the interests of its invested
stakeholders. SVC represents the mechanism by which these interests are
aligned.
Principle 2
Shareholders do not own the firm

Key takeaway: Contrary to popular myth, shareholders are not the legal
owners of the firm. Similarly, managers do not have a fiduciary responsibility
to maximize shareholder value. Instead, the firm is an independent legal entity
that should be run in the interests of its broad set of stakeholders.

As argued in Principle 1, for-profit firms are the most effective way we have
devised to advance social wellbeing. Because firms are part of society and
society is constructed of multiple components, including firms, the interests
of the firm and the interests of society are inextricably interwoven. In other
words, business is not a zero-sum exchange, but an ongoing reciprocal rela­
tionship between the for-profit firm and its various invested constituents.
Together, all of these stakeholders, plus firms, form the broader group that
we refer to as society. An answer to the fundamental question that we face
(What is the purpose of the for-profit firm in society?), therefore, is best achieved
when the interests of the firm and its stakeholders are aligned.
This iterative relationship stems from the origins of the corporation and
the evolution of this organizational form throughout history. In particular, it
relates directly to the introduction of limited liability in the mid-nineteenth
century.1 Prior to this point, corporate charters were granted by the state as a
privilege (rather than a right) and under strict conditions in terms of the pro­
jects that were to be completed (e.g., building a bridge or a railroad) and the
length of time the corporation was allowed to exist. Importantly, these pro­
jects were determined on the basis of perceived societal need, rather than the
ability of the firm to make a profit:

In the legal environment of the 1800s, the state in the initial formula­
tion of corporate law could revoke the charter of a corporation if it
failed to act in the public good, and routinely did so. For instance,
banks lost their charters in Mississippi, Ohio, and Pennsylvania for
“committing serious violations that were likely to leave them in an
insolvent or financially unsound condition.” In Massachusetts and
 Shareholders do not own the firm 21
New York, charters of turnpike corporations were revoked for “not
keeping their roads in repair.”2

And, when the specified project was completed, the corporation ceased to
exist. In short, the corporation existed at the pleasure of the state:3

In 1848, Pennsylvania’s General Manufacturing Act set a twenty-year limit

on manufacturing corporations. As late as 1903, almost half the states
limited the duration of corporate charters to between twenty and fifty
years. Throughout the nineteenth century, legislatures revoked charters
when the corporation wasn’t deemed to be fulfilling its responsibilities.4

It is because the fundamental legitimacy of the corporation is grounded in

these societal origins (i.e., invented to serve society’s needs) that, ultimately,
business is a social exercise. The introduction of limited liability, however, led
directly to a shift in the operating principles of the firm. As profit became the
primary purpose, rather than the outcome of a valued and meaningful busi­
ness, it altered the parameters by which the firm’s success is measured. While
this shift initially generated many benefits, it has become detrimental over
time. Specifically, executives today operate under the assumption that the
firm’s primary obligation is no longer to the state or society, but instead that
it has a legal responsibility to operate in the interests of its owners – its share­
holders. While this belief that shareholders own the firm is widely shared,
there is compelling evidence to suggest it is contrived (a social construction),
rather than a legally defined fact:5

Conceiving of public shareholders as “owners” may in some instances by

a helpful metaphor, but it is never an accurate description of their rights
under corporate law. Shareholders possess none of the incidents of
ownership of a corporation – neither the right of possession, nor the right
of control, nor the right of exclusion – and thus “have no more claim to
intrinsic ownership and control of the corporation’s assets than do other
stakeholders.”6

Understanding the true nature of the relationship between the firm and its
investors is therefore necessary to re-orient firms to act in the interests of
society as a whole. In short, it is essential in order to adopt Sustainable Value
Creation (SVC) as the managing philosophy of a firm.

Limited liability
The great value of limited liability is that it enabled corporations to raise the
capital that was needed to finance the infrastructure that fueled the industrial
revolution. In particular, limited liability allowed firms to build the railways,
canals, and bridges that were central to economic development in the West
22 Shareholders do not own the firm
during the nineteenth century (particularly in the United Kingdom and
United States). As such, at least in its original formulation, the idea of share­
holders as a firm’s owners had some validity because, while stocks were still
traded, the primary purpose of shares was to raise capital and provide a return
on that investment from the firm to its investors. Over time, however, the
shareholder’s role and value to the firm has evolved.
Today, on the surface, the relationship between the firm and its share­
holders appears unchanged. Many people believe that the primary function of
the stock market is for firms to raise the capital they need to finance their
business and, indeed, when firms initially list their shares, this transfer of funds
from investor to entrepreneur occurs. In reality, however, this initial trans­
action is only a minor part of the stock market’s function. Increasingly, it has
evolved into a forum for the subsequent trading of those shares, rather than
for their initial offering. This shift represents the difference between a trade
for which the firm receives money (the initial listing) to one where it receives
no money (a subsequent trade between third parties).
As a firm’s shares continue to trade and a track record of performance is
established, the share price increasingly becomes a vote of confidence in the
firm’s current management team and its future potential. In other words,
when I buy a share in Apple, I almost certainly buy it not from the company,
but from another investor who is seeking to sell that share. The price on
which we agree reflects our respective bets on the future success of the
company. I buy at a price that I believe is lower than it will be in the future,
while the seller sells at a price they believe is higher than it will be in the
future. So, we place our respective bets and the trade is made. In the process,
however, an important shift has occurred in the primary function of the stock
market and of investors who buy and sell shares today, not because they
expect to influence a firm’s strategic direction but because they hope to profit
from the strategic direction that has already been decided by management.
Although activist investors occasionally win seats on a board by amassing
significant share holdings, these investors are a minority. In reality, most
shareholders can only express their opinions about a firm’s management by
holding, buying, or selling shares.
The consequences of this shift in the underlying relationship between the
firm and its shareholders is reflected in the evolving role of stock markets,
which are neither efficient (in terms of complete and freely available informa­
tion guiding capital allocation) nor public (in terms of equal and evenly dis­
tributed access). Stock markets have benefits (in terms of liquidity and
enabling retirement saving), but it is legitimate to question the overall value
they provide. This is especially true today as the majority of trades on any of
the major exchanges are made by high-frequency algorithms – computers
running programs and holding positions for micro-seconds:

Each day around 7bn shares worth $320bn change hands on America’s
stockmarket. Much of that volume is high-frequency trading, in which
 Shareholders do not own the firm 23
stocks are flipped at speed in order to capture fleeting gains. High-
frequency traders, acting as middle-men, are involved in half of the daily
trading volumes. … rules-based investors now make the majority of
trades. … The total value of American public equities is $31tn, as meas­
ured by the Russell 3000, an index. The three types of computer-
managed funds – index funds, ETFs and quant funds – run around 35%
of this. Human managers, such as traditional hedge funds and other
mutual funds, manage just 24%.7

One characteristic of high-frequency trading, therefore, is the sheer volume

of activity. While high-frequency trades “comprise half of all trades on the
American market [they] submit almost 99% of the orders.”8 Partly this is
because the algorithms are able to handle the associated complexity and can
arbitrage value in small increments; partly, though, it is because placing a
large number of small orders allows high-frequency traders to learn the inten­
tions of other traders in the market and, as a result, trade more advantageously
on that information.9 In addition to volume, another characteristic of high-
frequency trading is speed. By positioning themselves between buyer and
seller, high-frequency traders can generate massive profits on small margins
and extremely large volume. Central to this advantage is being the first to
market – the value of which is indicated by the extent to which high-
frequency traders are willing to invest in order to gain the slightest of edges
over the competition:

[One] group spent $300m to lay a cable in the straightest possible line from
Chicago to New York, cutting through mountains and under car parks,
just so the time taken to send a signal back and forth could be cut from 17
milliseconds to 13. In return, the group could charge traders $14m a year
to use the line. Traders were willing to shell out those fees because those
fractions of a second might generate annual profits of $20 billion.10
Almost all of these stock trades are third-party transactions in which
the firm receives no capital. The overall effect is to drive a wedge
between the interests of the shareholder (return on investment) and the
managers of the firm (sustainable competitive advantage). As pools of
assets are increasingly managed by a concentrated number of massive
investment firms, this wedge grows larger. Take BlackRock, for example,
which, along with Vanguard and State Street (the “Big Three”), are now
“the largest shareholder in just over 40% of listed American firms,”11 and
are predicted to be “less than a decade away” from managing more than
$20 trillion.12 Firms such as BlackRock (the largest asset manager in the
world with “more than $6trn of assets under management”)13 specialize
in what are known as passive investments, such as exchange-traded funds
(ETFs), which attempt to mirror (rather than outperform) the perform­
ance of the markets while minimizing fees to their clients.14 The traders
who work for firms like BlackRock therefore have little interest in the
24 Shareholders do not own the firm
day-to-day management of the firms in which they invest. By definition,
traders that seek to mirror market performance invest in proportion to
the size of each firm in the market, rather than caring necessarily whether
Firm A performs better or worse than Firm B.

The combination of high-frequency traders holding positions for micro­

seconds and massive investment funds holding large but passive positions is
redefining what it means to be a shareholder. In essence, John Maynard Keyes’
characterization of financial speculation as “anticipating what average opinion
expects the average opinion to be”15 is truer today than ever before. And,
when traders act on behalf of investors, “they’re actually in the business of
convincing other people that they can anticipate average opinion about
average opinion.”16 The cumulative effect is for an individual investor to sur­
render any claim of ownership in favor of managerial control. This trend has
been apparent for at least half-a-century:

under modern conditions of large-scale production great power over the

lives of people is centered in the relatively few men who preside over
our great corporations. Though the stock ownership of these corpora­
tions may be diffused, effective ownership in terms of control resides in
management.17

In response, some concede that, while shareholders may not control the firm,
they still own it. But, does ownership not encompass the ability to control? It
is very difficult to think of a definition of ownership that does not also include
aspects of control or authority over the thing that is owned. The Oxford
English Dictionary, for example, defines ownership as the “act, state, or right of
possessing something,” with possession defined as “the state of having, owning,
or controlling something.”18 Yet clearly, shareholders do not control the firm.

A legal person
Irrespective of dictionary or intuitive definitions of ownership, what does the
law say about the relationship between the firm and its shareholders? Given
the extent to which the idea that shareholders are the “legally defined”
owners of the firm is believed throughout society, it would follow that such a
fact is unambiguously stated in law and demonstrated via legal precedent.19 In
the place of clarity, however, the evidence suggests there is ambiguity:

This argument [that shareholders own the firm] is based on a misinterpre­

tation of the legal position on the issue of share ownership. … Once share­
holders subscribe to shares in the corporation, payment made in
consideration for the shares is considered property of the corporation, and
the shareholders are not free to withdraw the sum invested except for pay­
ments through dividends, selling their shares, and other permitted means.20
 Shareholders do not own the firm 25
Shareholders own shares – a legal contract between the investor and the firm
similar to employees, suppliers, and others who also hold legal contracts with
the firm. What is becoming increasingly clear is that, while stockholders
invest capital in firms (in the same way employees invest time, effort, and
skills), they have no greater claim to ownership of those firms than other
stakeholders.21 And, there is a growing number of commentators, such as
Martin Wolf in the Financial Times, who believe their claim is significantly
less than other stakeholders:

The economic purpose of property ownership is to align rights to control

with risk-bearing. The owner of a corner shop should control the business
because she is also its chief risk-bearer. Risk, reward and control are
aligned. Is it true that the chief risk-bearer in [a publicly-traded corpora­
tion] is the shareholder? Obviously not. All those who have stakes in the
company that they are unable to hedge bear risks. The most obvious such
risk-bearers are employees with firm-specific skills. … Shareholders, in
contrast, can easily hedge their risks by purchasing a diversified portfolio.22

Essentially, being a shareholder entitles the owner of that share to a few spe­
cific and highly limited rights: they are able to vote (although the practical
application of shareholder democracy is weak and narrow); they are able to
receive dividends (only as long as the firm is willing to issue them); and they
are able to offer their share for sale to a third-party at a time of their choos­
ing. These rights constitute a contractual relationship between the firm and
the shareholder, but do not constitute ownership. As noted by Eugene Fama,
one of the originators of the agency theory of the firm, “Ownership of capital
should not be confused with ownership of the firm.”23
But, if the shareholders do not own the firm, then who does? One of the
great advantages of the LLC (Limited Liability Company) form is that the
organization is recognized as an independent entity in the eyes of the law (a
legal person). As such, the firm, as an artificial person, has many of the rights
(although, it seems, fewer of the responsibilities) of a human being or natural
person. It can own assets; it can sue and be sued; it can enter into contracts;
and, in the U.S., it has the right to freedom of speech (which it exercises by
spending money). It is these rights (the right to be sued, in particular) that
allow investors to have their legal liability limited to the extent of their
investment. In short, the firm is a legal creation that exists, by design, inde­
pendently of all other actors “and it is the corporation not the individual
shareholders, that is liable for its debts.”24
This concept of the firm as a legal person is established in the subconscious
of society in the same way that the idea that firms are owned by their share­
holders is also established. The difference between the two is that the idea of
the corporation as a person is legally defined, while the idea of shareholders as
owners is not. In fact, the unique legal status of corporations is constitution­
ally protected. Following the Civil War, the Fourteenth Amendment was
26 Shareholders do not own the firm
passed to protect the rights of recently freed African-American slaves. In par­
ticular, it stipulates that the states cannot “deprive any person of life, liberty,
or property without due process of law.” It is via the Fourteenth Amendment
that corporations appropriated those rights for themselves.25 In other words,
the U.S. Supreme Court has agreed with the argument that corporations are
legally similar to real people and, as such, enjoy similar constitutionally pro­
tected rights. The fact that the root of this legal status lies in the Fourteenth
Amendment, specifically passed to prevent the ownership of individuals by
others, reinforces the idea that the corporation is an independent legal
entity.26
A similar legal foundation for the idea that shareholders own the firm does
not exist, in spite of the popular perception that it is true. In other words, as
even supporters of the notion of shareholder primacy note, “shareholder
wealth maximization is widely accepted at the level of rhetoric but largely
ignored as a matter of policy implementation.”27 The reason for this is that,
even if it was an ideal, “the rule of wealth maximization for shareholders is
virtually impossible to enforce as a practical matter.”28 As a direct result, under
U.S. corporate law, courts are reluctant to intervene in the business decisions
of a firm unless there is evidence of fraud, misappropriation of funds, or some
other illegal activity. The law is clear that corporations are managed by the
board of directors who have “broad latitude to run companies as they see
fit.”29 Although shareholders nominally have the right to vote for directors,
nominating candidates is extremely difficult and, once elected, directors can
ignore shareholder interests. Although shareholders can protest in terms of
resolutions at AGMs, “only certain kinds of shareholder votes – such as for
mergers or dissolutions – are typically binding. Most are purely advisory”:30

The principle that a company’s directors should have a free hand to

manage its affairs can be traced at least as far back as an 1880 New Hamp­
shire Supreme Court decision. In Charlestown Boot & Shoe Co. vs.
Dunsmore, directors won a ruling that shareholders couldn’t second guess
their decisions, including one to skip insurance on a plant that later
burned down. The principle has been adopted by many states, including
Delaware, where many large companies are organized.31

This business judgment rule (see below) is similar to common law in the United
Kingdom, which refers to the board and senior managers as the “controlling
mind and will” of the company. This finding can be traced back to a 1957
Court of Appeal decision by Lord Denning, in which the judge made a dis­
tinction between the hands and brains of a company:

A company may in many ways be likened to the human body. It has a

brain and nerve centre which controls what it does. It also has hands
which hold the tools and act in accordance with directions from the
centre. Some of the people in the company are mere servants and agents
 Shareholders do not own the firm 27
who are nothing more than hands to do the work. … Others are dir­
ectors and managers who represent the directing mind and will of the
company and control what it does. The state of mind of those managers
is the state of mind of the company.32

The legal relationship between the firm and its shareholders is most clearly
defined in the event of a bankruptcy – shareholders’ claims to the firm’s assets
lie behind those of bondholders and all other creditors. In theory, share­
holders have a claim to the future earned profits of the firm. In reality, that
claim is weak, with no right to demand the firm issue dividends or buyback
shares if it does not wish to do so. In essence, the reason limited liability is so
important (because it enables investors to limit their risk while allowing firms
to raise capital from multiple sources) also explains why the shareholder is
legally impotent in terms of ownership:33

Corporations are universally treated by the legal system as “legal persons”

that exist separately and independently of their directors, officers, share­
holders, or other human persons with whom the legal entity interacts. …
shareholders do not own corporations; nor do they own the assets of
corporations.34

Contrary to popular myth, as well as widespread belief among executives and

directors,35 therefore, shareholders do not own the corporation.36 Instead, they
own a type of security (a legal contract) that is commonly referred to as stock.
The rights associated with this stock are highly limited; in reality, the value of
a share lies largely in its re-sale price, achieved via a transaction on a stock
exchange based on third-party perceptions of the firm’s future performance
potential. As acknowledged, even by shareholder advocates:

Today … there seems to be substantial agreement among legal scholars

and others in the academy that shareholders do not own corporations.37

The business judgment rule

This challenge to the idea of shareholders as the legal owners of the firm is
gradually becoming established. This process is aided by a compelling argu­
ment that there is weak legal precedent, in the U.S. or elsewhere,38 for the
idea that managers and directors have a fiduciary responsibility to place share­
holder interests over the interests of other stakeholders:39

Contrary to widespread belief, corporate directors generally are not under

a legal obligation to maximise profits for their shareholders. This is
reflected in the acceptance in nearly all jurisdictions of some version of
the business judgment rule, under which disinterested and informed dir­
ectors have the discretion to act in what they believe to be in the best
28 Shareholders do not own the firm
long term interests of the company as a separate entity, even if this does
not entail seeking to maximise short-term shareholder value. Where dir­
ectors pursue the latter goal, it is usually a product not of legal obligation,
but of the pressures imposed on them by financial markets, activist share­
holders, the threat of a hostile takeover and/or stock-based compensation
schemes.40

This core concept within corporate law of deference to directors concerning

operational decisions (the business judgment rule) is embedded firmly in the
U.S., as well as almost all other developed economies, such as the UK:

courts in the United States have on several occasions clearly stated that
directors are not agents of the shareholders but fiduciaries of the corpora­
tion. Section 172 of the U.K. Companies Act 2006, moreover, requires
directors to act in the way they consider, in good faith, would be most
likely to promote the long-term success of the company for the benefits
of its members as a whole, heeding the likely consequences of their deci­
sions on stakeholders such as customers, suppliers, and community, not
simply shareholders. The Law even allows the board to put the interests
of other stakeholders over and above those of shareholders.41

The legal foundation for the belief in the primacy of shareholder interests
rests largely on a single case decided in 1919 by the Michigan Supreme
Court – Dodge v. Ford Motor Co.42 In the case, two brothers, John Francis
Dodge and Horace Elgin Dodge (who, together, owned 10% of Ford’s
shares), sued Henry Ford because of his decision to distribute surplus profit
to customers in the form of lower prices for his cars, rather than to share­
holders in the form of a dividend. As noted above, however, the value of
this case as legal precedent for the idea that the firm must operate in the
interests of its shareholders is disputed. As Lynn Stout explains in her analysis
of this case, contrary to widespread perceptions and norms, there is no
obligation on managers or directors to focus the firm’s efforts primarily on
maximizing shareholder value:

Dodge v. Ford is … bad law, at least when cited for the proposition that
the corporate purpose is, or should be, maximizing shareholder wealth.
Dodge v. Ford is a mistake, … a doctrinal oddity largely irrelevant to cor­
porate law and corporate practice. What is more, courts and legislatures
alike treat it as irrelevant. In the past thirty years, the Delaware courts
have cited Dodge v. Ford as authority in only one unpublished case, and
then not on the subject of corporate purpose, but on another legal ques­
tion entirely.43

More specifically, Stout’s empirical analysis of historical case law provides

compelling evidence to support her arguments. Not only was the case
 Shareholders do not own the firm 29
decided by the Michigan Supreme Court and essentially ignored in Delaware
(where the most important points of U.S. corporate law are established), but
the legal precedent it represents is more properly understood as a question of
the relative responsibilities of majority shareholders (in this case, Ford) toward
minority shareholders (in this case, the Dodge brothers).44 As a result, Stout
argues that “we should stop teaching Dodge v. Ford”45 in our universities and
business schools as support for a perceived obligation that is neither legally
required nor operationally necessary:46

United States corporate law does not, and never has, required directors
of public corporations to maximize either share price or shareholder
wealth. To the contrary, as long as boards do not use their power to
enrich themselves, the law gives them a wide range of discretion to run
public corporations with other goals in mind, including growing the
firm, creating quality products, protecting employees, and serving the
public interest.47

There is even precedent to suggest that courts will favor the firm’s directors
over shareholders when the investors have been deceived, basing investment
decisions on the firm’s publicly stated goals, even if those statements later turn
out to be false.48 A lack of competence or an honest mistake are not sufficient
to override the courts’ reluctance to interfere with the running of the firm.
Unless it can be proved that the directors acted dishonestly or with the inten­
tion to deceive, the business will be allowed to rise or fall on the basis of its
operational decisions. Although this issue has been studied and debated by
corporate legal scholars, however, it is less well known in the business school.
This is important and should change:

Oddly, no previous management research has looked at what the legal

literature says about [shareholder control of the firm], so we conducted a
systematic analysis of a century’s worth of legal theory and precedent. It
turns out that the law provides a surprisingly clear answer: Shareholders
do not own the corporation, which is an autonomous legal person.
What’s more, when directors go against shareholder wishes – even when
a loss in value is documented – courts side with directors the vast
majority of the time. Shareholders seem to get this. They’ve tried to
unseat directors through lawsuits just 24 times in large corporations over
the past 20 years; they’ve succeeded only eight times. In short, directors
are to a great extent autonomous.49

Stakeholders, not shareholders

Contrary to popular myth, therefore, shareholders do not own and firm and
directors do not have a fiduciary responsibility to act primarily in their
interests. As a result, a growing number of legal and corporate governance
30 Shareholders do not own the firm
scholars argue for a return to the driving purpose of a firm being to meet
the needs of society, broadly defined. Central to this argument is the idea
that firms seek to return value over the medium to long term among all of
their stakeholders and avoid the temptation to focus disproportionately on
short-term returns to shareholders. The reason why such a narrow focus is
counter-productive is that it privileges the interests of a minority (share­
holders) over the majority (everyone else)50 in ways that often do not even
benefit the firm.
Pressures from shareholders to maximize results in the short term can be
expressed internally within the firm in many ways,51 “including lower expen­
ditures on research and development, an excessive focus on acquisitions rather
than organic growth, underinvestment in long-term projects, and the adop­
tion of executive remuneration structures that reward short rather than long-
term performance.”52 The overall effect is to skew decision-making. Why
invest for the medium to long term, for example, when that expenditure will
diminish the chances of achieving the more immediate priority – short-term
profits? Cutting long-term costs, such as R&D or safety and preventative
measures, has the desired effect of increasing profits, which is then reflected
in a higher share price.53 While this immediate accounting profit pleases those
investors who have a short-term outlook, such actions constrain the firm’s
medium to long-term operations.
In order to manage the firm based on a more sustainable business model,
one of the most important changes managers must make is to adopt a broader
stakeholder perspective. The difference from the CEO’s perspective centers
on whether the goal is to maximize performance in the short term (the
average tenure for a Fortune 500 CEO is about three and a half years) or to
preserve the organization for the foreseeable future (10, 15, 20 or more years
from now). The focus should be on what Gus Levy, former senior partner of
Goldman Sachs, characterized as being “long-term greedy”54 – the willingness
to privilege long-term value over short-term profits. To achieve this, an
important step is for firms to adopt policies that better align executive remu­
neration with long-term performance drivers that matter to key stake­
holders.55 In addition, firms can de-emphasize short-term results by refusing
to issue quarterly earnings reports to investors (“Over three quarters of com­
panies still issue such [earnings] guidance”).56 Above and beyond specific
policy solutions, however, the key is to deconstruct the idea that there is a
legal compulsion to operate the firm in the interests of its shareholders. Once
this is achieved, the justification is removed for favoring them over other
stakeholders (and, with it, the cause of much of the short-term focus of our
economic system):

As a theoretical matter, the issue of ownership is necessary to a proper

understanding of the nature of the corporation and corporate law. As a
practical matter, it is an important consideration in the allocation of rights
in the corporation: if shareholders are owners, then the balance of rights
 Shareholders do not own the firm 31
will tip more heavily in their favor, and against others, than if they are
not. … Because the issue of ownership has the potential to shape all of
corporate law and direct the very purpose of corporations, it is of utmost
importance.57

The value to the firm in understanding this (removing a short-term focus on

shareholder interests, and, instead, seeking constructive, trust-based relations
with all stakeholders) is that it immediately alters the nature of the decision-
making process. If I see interactions with my stakeholders as one-off
exchanges (i.e., a short-term perspective), for example, I am likely to priori­
tize my own interests during negotiations. If I perceive all my interactions as
repeat transactions (i.e., I want to build long-lasting relationships), however,
then I am more likely to also care about my partners’ interests because, if my
partners do not value the exchange, it is less likely that they will want to do
business with me again in the future.58
In other words, the key focus for debate is temporal. Attempts to maxi­
mize profits over the short term lead to all the problems that are evident with
a narrow focus on shareholder value. If a firm seeks to optimize value over
the medium to long term, however, many of those problems dissolve and the
process of building meaningful, lasting relations with a broad range of stake­
holders becomes central to the mission. It is fundamental to the idea of SVC
that, by seeking to meet the needs of as broad an array of stakeholders as pos­
sible, a firm holds a competitive advantage that can be sustained. Central to
achieving this, however, is understanding the true nature of the relationship
between the firm and its shareholders and removing the misplaced and inac­
curate belief that executives and directors have a legal obligation to make
decisions in the interests of shareholders, who are only one of the firm’s many
stakeholders.59
To reiterate, corporate law in the U.S. is clear: No one owns the corpo­
ration. It is an independent person in the eyes of the law. This has constitu­
tional grounding in the Fourteenth Amendment, which abolished slavery
and granted individuals equal rights (in conjunction with the Thirteenth
and Fifteenth Amendments). In short, any claim of shareholder primacy “is
flawed in its assumptions, confused as a matter of law, and damaging in
practice.”60 This position is supported by the Delaware General Corpora­
tion Law,61 which says the principal of the company is the firm’s board of
directors, whose fiduciary responsibility is to the organization (and no one
else). This is also the basis for limited liability. If you set up a corporation
tomorrow and you are the only investor and you are the only employee,
you still do not own it. You may have full control, but you do not own it.
And, you should not want to own it. The fact that the company is a legal
person who can own assets and be sued in court is what prevents you from
having full liability. This is an essential and valuable cornerstone of our
capitalist system.
32 Shareholders do not own the firm
Summary
Principle 2 states that Shareholders do not own the firm. In reality, nobody owns
a firm – it cannot be owned. In addition, executives and directors do not
have a fiduciary responsibility to manage the firm primarily in the interests of
shareholders. Legally, the corporation is an independent entity (a legal person)
with contractual interests. Philosophically, it is the collective effort of the
actions and interests of multiple parties, all of whom have a stake in the value
creation process. An important step managers can make to reinforce this
reality is to resist pressures for short-term performance and, instead, make
decisions that are in the medium- to long-term interests of the organization,
and all of its stakeholders.
Principle 3
Prioritizing competing stakeholder
interests is difficult

Key takeaway: Implementing SVC requires the firm to operate in the inter­
ests of its stakeholders, broadly defined. While identifying these stakeholders is
easy, however, stakeholder theory will only be of practical value when it helps
managers prioritize among competing stakeholder interests.

As detailed in Principle 2, shareholders neither own the firm, nor do man­

agers and directors have a legal obligation to run the firm with the primary
goal of generating shareholder value. Once managers understand they are free
of the mythical obligation to act solely in the interests of the firm’s share­
holders, they can take a more expansive (and, in terms of the health of the
organization, more sustainable) approach to building relations with a much
broader range of stakeholders.
This is essential because, although the firm is a legal person, it cannot act
alone. A firm is not a sentient actor, but a bundle of contracts (formal and
informal) that reflect the aggregated interests of all its stakeholders. If we agree
that employees are stakeholders, as well as executives, directors, shareholders,
consumers, the government, suppliers, distributors, and so on, then we
understand that the firm does not exist independently of these groups. If you
take them all away (the executives, directors, and employees, in particular),
there is nobody left to act – the firm’s substance is derived from the indi­
viduals that constitute it. This substance comes from the actions initiated by
stakeholders pursuing their specific interests (sometimes competing, some­
times complementary) that intersect within the firm’s organizational bound­
aries via day-to-day operations. This is why stakeholder theory is central to
any CSR perspective (really, to any view of the firm), but also explains why
it is so important for managers to be able to manage these different interests.
To do this, they need to be able to prioritize among stakeholders, on an
issue-by-issue basis, in order to create value for most of the firm’s stakeholders
most of the time.
34 Stakeholder definition and prioritization
Stakeholder theory
The success of contemporary stakeholder theory is most often credited to
the work of the management and philosophy professor, Ed Freeman. In his
important 1984 book, Strategic Management: A Stakeholder Approach, he
defined a firm’s stakeholder as “any group or individual who can affect or is
affected by the achievement of the organization’s objectives.”1 While
Freeman did much to popularize stakeholder theory (particularly in the
business school), however, the idea that the “businessman” has responsibil­
ities to a broad range of constituents predates his work by many years. As
far back as 1945, for example, Frank Pierce, a director of the Standard Oil
Company (New Jersey), argued that a firm’s managers have a duty “to act
as a balance wheel in relation to three groups of interests – the interests of
owners, of employees, and of the public, all of whom have a stake in the
output of industry.”2 In 1951, Frank Abrams, the CEO of Standard Oil,
extended this argument:

Business firms are man-made instruments of society. They can be made

to achieve their greatest social usefulness … when management succeeds
in finding a harmonious balance among the claims of the various inter­
ested groups: the stockholders, employees, customers, and the public at
large.3

Similarly, in 1953, Howard Bowen discussed the idea of the “participation of

workers, consumers, and possibly of other groups in business decisions.”4 And
more specifically, in 1964, Eric Rhenman defined the stakeholders in an organ­
ization as “the individuals and groups who are depending on the firm in order
to achieve their personal goals and on whom the firm is depending for its
existence.”5 As is therefore apparent, the idea of the stakeholder has been
around for a while. While Freeman did not claim to have invented the
concept,6 his contribution was pivotal for two main reasons: first, he rendered
the concept relatable in meaning and action for business practitioners; and
second, he promoted the concept within the academic community in general,
and the field of management in particular. As a result, a stakeholder is widely
understood to be a group or individual with a self-defined interest in the
activities of the firm.7 A core component of the intellectual argument driving
Sustainable Value Creation (SVC) is that it is in a firm’s best interests to meet
the needs and expectations of as many of these stakeholders as often as
possible.

A stakeholder
An individual or organization that is affected by the firm (either voluntarily or
involuntarily), and possesses the capacity and intent to affect the firm.
 Stakeholder definition and prioritization 35
In identifying and understanding the interests of its core stakeholders, the firm
may find it helpful to divide these constituents into three separate groups:
organizational stakeholders (internal to the firm), and economic and societal stake­
holders (external to the firm). Together, these three kinds of stakeholders
form a metaphorical concentric set of circles with the firm and its organiza­
tional stakeholders at the center within a larger circle that signifies the firm’s
economic stakeholders. Both of these circles sit within the largest outside
circle, which represents the firm’s operating context and its societal
stakeholders.
Within this overall classification, all possible actors fit primarily into one of
the three stakeholder groups. First, stakeholders exist within the organization
and include the firm’s employees, managers, and directors. Taken together,
these internal stakeholders constitute the operational core of the organization
and, therefore, should be its primary concern. Second are economic stake­
holders that include the firm’s shareholders, consumers, creditors, and com­
petitors. The interactions these stakeholders have with the firm are driven
primarily by financial concerns. As such, these stakeholders fulfill an important
role as the interface between the organization and its larger social context in
ways that create bonds of accountability. Third are those stakeholders that
constitute the broader political and social environment in which the firm
operates. Examples of these stakeholders include government agencies and
regulators, the media, and the broader communities in which the firm oper­
ates (including non-governmental organizations, NGOs, and other activist
groups). These societal stakeholders are essential for the firm in terms of pro­
viding the legitimacy necessary for it to survive over the medium to long
term.8
This model of concentric circles indicates the primary association of each
actor, but it is important to recognize that almost all stakeholders exist simul­
taneously as multiple stakeholder types with network ties among each of
them, as well as with the firm.9 A company’s employees, for example, are
primarily organizational stakeholders, but are also occasional customers of the
firm, as well as being members of the society in which the firm operates. The
government that regulates the firm’s industry, however, is only a societal
stakeholder and has no direct economic relationship with the company
(beyond the taxes it levies and the subsidies it pays), nor is it a formal part of
the organization. The firm’s economic stakeholders represent the interface
between the organizational and societal stakeholders. A firm’s customers are,
first and foremost, economic stakeholders. They are not organizational stake­
holders (unless they are also employees), but they are part of the society in
which the firm operates. They are also one of the primary means by which
the firm delivers its product and interacts with its society. Without the eco­
nomic interface, a firm loses its mechanism of accountability, and therefore its
legitimacy, over the long term.
The three layers of a firm’s stakeholders all sit within the larger context of a
business environment that is shaped by macro-level forces such as globalization,
36 Stakeholder definition and prioritization
climate change, and the increasing affluence that is driving development and
raising the expectations different societies place on their for-profit firms,
worldwide.

Prioritizing stakeholders
In spite of its importance to the concept of SVC, stakeholder theory can only
be of value to the firm when it accounts fully for the dynamic environment
in which business is conducted. In particular, while stakeholder theory is con­
ceptually useful for managers in terms of defining those groups with an
interest in the firm’s operations, it has been much less instructive in providing
a practical roadmap for implementation. There is a reason for this – while
accounting for a broader range of interests is valuable, it also complicates a
firm’s decisions more often than not:

A single goal, such as maximum profit, is simple and reasonably concrete.

But when several goals are introduced and businessmen must sometimes
choose from among them (e.g., greater immediate profit vs. greater
company security, or good labor relations vs. low-cost production, or
higher dividends vs. higher wages), then confusion and divided counsel
are sometimes inevitable.10

In short, while identifying stakeholders is easy, prioritizing among stake­

holder interests is extremely difficult, and stakeholder theory has been largely
silent on this essential issue. Partly this is because the process is so idiosyn­
cratic (firms have different stakeholders who see each action as more or less
important), but mostly it is because the interests are so compelling and con­
flict so often. What is required is a framework that can guide managers on
how and when to prioritize stakeholder interests. As a first step in this
process, managers need to define the firm’s operating context in terms of
issues that evolve and stakeholders that compete. Accounting for this
dynamic reality, relative to the strategic interests of the firm, will help man­
agers decide how to prioritize among stakeholders. This is essential because
stakeholders have claims on activities that range across the firm’s operations.
Yet, stakeholder theory will remain merely an interesting intellectual exer­
cise until it can help tease apart what John Mackey (the founder of Whole
Foods Market) describes as the complex demands stakeholders continuously
place on his company:

Customers want lower prices and higher quality; employees want higher
wages and better benefits and better working conditions; suppliers want
to give fewer discounts and want you to pick up more of their products;
communities want more donations; governments want higher taxes;
investors want higher dividends and higher stock prices – every one of
the stakeholders wants more, they always want more.11
 Stakeholder definition and prioritization 37
Each stakeholder group “will define the purpose of the business in terms of
its own needs and desires, and each perspective is valid and legitimate.”12 As
such, it is essential for the firm to be able to identify any potential conflict
and, where possible, act to mitigate the potential operational threat. In other
words, the businesses most likely to succeed in today’s rapidly evolving global
marketplace will be those best able to adapt to their dynamic environment by
balancing the conflicting interests of multiple stakeholders. It can even be
argued that, at its core, the fundamental “job of management is to maintain
an equitable and working balance among the claims of the various … interest
groups” that are directly affected by the firm’s operations.13 Just because an
individual or organization merits inclusion in a firm’s list of relevant stake­
holders, however, does not compel the firm (either legally or logically) to
comply with every demand that they make. Doing so would be counter­
productive as the business would be forced to spend all its time addressing
these different demands and negotiating among stakeholders with diametri­
cally opposed requests. A key function of the ability to prioritize stakeholder
interests, therefore, is determining which stakeholders warrant the firm’s
attention and when.
The concentric circles of organizational, economic, and societal stake­
holders discussed above provide an initial guide to prioritization. By identify­
ing the firm’s key stakeholders within each category, managers can prioritize
the needs and interests of certain groups over others. In addition, among cat­
egories, as a general rule, stakeholders decrease in importance to the firm the
further they are removed from core operations. Implicit in this discussion,
therefore, is the idea that organizational stakeholders are a firm’s most
important set of constituents. Organizational stakeholders are followed in
importance by a firm’s economic stakeholders, who provide it with the eco­
nomic capital to survive. Finally, a firm’s societal stakeholders deliver it with
the social capital that is central to the firm’s legitimacy and long-term validity,
but are of less immediate importance in terms of day-to-day operations.
In seeking to prioritize its stakeholders, however, a firm needs to keep two
key points in mind: First, no organization can afford to ignore consistently
the interests of an important stakeholder, even if that group is less important
in the relative hierarchy of stakeholders or is removed from day-to-day oper­
ations. A good example of this is the government, which is a societal stake­
holder and, therefore, is in theory less important than an organizational or
economic stakeholder. It would not be wise, however, for a firm to ignore
the government repeatedly in relation to an important issue that enjoys broad
societal support. Given that the government has the power to constrain or
support industries in ways that affect profit levels dramatically, it is only
rational that firms should be constantly aware of the government’s basic needs
and requests.
Second, it is vital to remember that the relative importance of stakeholders
will differ from firm-to-firm, from issue-to-issue, and from time-to-time.
And, depending on these factors, the change in relative ordering can be
38 Stakeholder definition and prioritization
dramatic. As such, addressing the fluctuating needs of stakeholders and
meeting them wherever possible is essential for firms to survive in today’s
dynamic business environment. In order to do this, it is important that man­
agers have a framework that will enable them to prioritize stakeholder inter­
ests for a given issue and account for those expectations in formulating a
strategic response.
The key to building such a framework revolves around three moving
parts: the firm, the issue, and the stakeholder. First, the firm. Any for-profit
organization has strategic interests that determine the industries in which it
operates and the products or services that it produces. In addition, the firm
has market goals that outline future levels of performance that it deems both
attainable and desirable (such as percentage market share or a particular level
of sales). Together, these strategic interests and market goals determine the
firm’s operational priorities. With this benchmark in mind, managers are able
to gauge the strategic relevance of any particular issue.
Second, the issue. The key factor with any issue that arises is the extent to
which it is relevant to the firm’s operational priorities. There has been some
useful work in this area by Simon Zadek (founder and CEO of the consul­
tancy AccountAbility) that firms can use to evaluate which issues pose the
greatest potential opportunity and danger.14 First, Zadek identifies the five
stages of learning that organizations go through “when it comes to develop­
ing a sense of corporate responsibility.”15 Then, he combines these five stages
of learning with four stages of intensity “to measure the maturity of societal
issues and the public’s expectations around the issues.”16 The maximum
danger, Zadek argues, is for companies that are in defensive mode when
facing an institutionalized issue, as they will be ignoring something that
potentially poses a significant threat to their business. A firm that continues
to deny the existence of climate change, for example, falls into this category.
In contrast, those businesses that are promoting industry-wide adoption of
standard practices in relation to a newly emerging issue stand to gain the
maximum economic and social value for their effort (notwithstanding
the risks involved). Even more effective, for those firms willing to take a
bold stand on “issues that are contested enough to feel hot, but that have
pretty strong consensus from the tastemakers, mavens and social-media influ­
encers of the day,” they both help move the idea to the mainstream, while
positioning themselves to reap the benefits when it arrives.17 Once the firm
has established an issue as operationally relevant and worked out what posi­
tion it favors, the next step is to identify those stakeholders that are most
affected.
Third, the stakeholder. In addition to identifying the importance of a par­
ticular issue, the firm must account for its various stakeholders. A firm’s stake­
holder relations will vary within stakeholders and across issues; they will also
vary within issues and across stakeholders. In other words, each stakeholder
will have a number of issues that it values. The range of issues will not be
valued equally, however, with some prioritized as more important than
 Stakeholder definition and prioritization 39
others. Similarly, for each issue the firm faces, its different stakeholders will
have different positions, pushing the firm to respond in one way or another
(or another). The firm’s ability to understand how important an issue is to
any one stakeholder, and how its stakeholders will vary in response to any
one issue, will depend on the depth of the relationship already established. It
is a key aspect of stakeholder theory in implementation that any firm is better
placed to understand its stakeholders if it has already established strong rela­
tionships based on trust. If the firm is contacting a stakeholder for the first
time only in response to a crisis, its outreach is likely to be less well received.
If, however, the firm has an established relationship and is already aware of
the needs and positions of the stakeholder, when a crisis arrives, the potential
for a value-added solution is higher.

A decision-making model
Once the three factors (firm, issue, and stakeholder) have been considered
independently, it is necessary for the manager to combine them on an
ongoing basis to determine the appropriate response. This is achieved by con­
sidering the three factors in terms of four dimensions: Strategic relevance, Issue
evolution, Stakeholder motivation, and Operational impact. Strategic relevance
captures how important an issue is to the firm – in other words, how proxi­
mal it is to the firm’s core competency or source of competitive advantage.
Issue evolution captures the extent to which the issue has become institutional­
ized – in other words, the extent to which it has become accepted business
practice. Stakeholder motivation captures how important the issue is to each
stakeholder – in other words, how likely that group is to act in response.
And, Operational impact captures the extent to which a particular stakeholder
group can affect firm operations – in other words, the stakeholder’s ability to
damage reputation, diminish earnings, or demotivate employees.
The extent to which a firm should act in response to a stakeholder concern
about a particular issue, therefore, is determined by the interaction of these
four dimensions.18 The goal is to build a multistep process by which managers
can account for variance in the strategic interests of the firm, the evolution of
each issue, the motivation of the stakeholder(s), and the potential operational
impact of any response. The resulting analysis enables managers to decide
how best to prioritize stakeholder concerns and when to act. Importantly, this
framework should be embedded within a culture of outreach to stakeholders
that allows firms to understand their evolving concerns and assess which issues
are more or less important to which group. It also should be repeated on a
regular basis since any issue will continue to evolve and stakeholders’ interests
will adapt, accordingly. Ultimately, when the firm’s strategic interests are rel­
evant, an issue is important, stakeholders are motivated, and there is the
potential for damage due to intransigence, the firm is compelled to act and
act quickly to protect its interests and preserve its relations with stakeholders.
This iterative process can be summarized in a seven-step model of stakeholder
40 Stakeholder definition and prioritization
prioritization that empowers managers to analyze the firm’s operating
environment on an ongoing basis:

1 Identify and engage the set of stakeholders relevant to the firm.

2 Scan the environment to identify relevant issues as they arise and evolve.
3 Analyze any controversial issue through the filter of the firm’s strategic
interests.
4 Prioritize among competing stakeholder interests in relation to the issue
at hand.
5 Act while seeking to satisfy as many stakeholders as possible, in order of
priority.
6 Evaluate the effect of the action to optimize the outcomes for the firm
and its stakeholders.
7 Repeat regularly and when necessary.

Following these seven steps maximizes the value of a stakeholder perspective

for the firm. The process can be applied to identify stakeholder concerns on
either an issue-by-issue basis (i.e., a single issue and multiple stakeholders) or
a stakeholder-by-stakeholder basis (i.e., a single stakeholder and multiple
issues), depending on the firm’s strategic interests. Importantly, this model is
also both proactive and reactive. It constitutes a tool that managers can use
either to anticipate or respond to stakeholder concerns in relation to both
opportunities (adding value) and threats (avoiding harm). Ultimately, the goal
is to ensure the firm’s interests are protected, while also creating value by
meeting the needs of most of its stakeholders most of the time (and all of its
stakeholders at least some of the time).

Summary
Principle 3 states that, while identifying stakeholders is easy, Prioritizing com­
peting stakeholder interests is difficult. It lays out the broad ideas behind stake­
holder theory, which is the intellectual backbone of SVC. Importantly,
however, it also extends stakeholder theory by moving beyond merely defin­
ing a firm’s stakeholders to developing a seven-step process of prioritization as
a decision-making tool managers can use to extract the maximum value of a
stakeholder perspective. It is the intersection of the firm’s strategic interests,
the evolution of a particular issue, and the stakeholder’s motivations to
respond (and the impact those responses can have) that determine the need
for the firm to act.
Principle 4
CSR is a stakeholder responsibility

Key takeaway: CSR will only work if firms are rewarded for acting and pun­
ished for failing to act. As such, while CSR includes a responsibility for a firm to
meet the needs and demands of its stakeholders, the stakeholders themselves
have an equal, if not more important, responsibility to hold the firm to account.

As illustrated by Principle 3, business is a collective enterprise that is defined

by the firm’s stakeholder relationships. A firm that is acting responsibly is
seeking to create value for all of these stakeholders. In doing so, that firm is
also acting in its own best interests, as measured over the medium to long
term. But, within this complex web of complementary and conflicting rela­
tions, exactly whose responsibility is CSR? The term Corporate Social Respons­
ibility misleadingly suggests that the burden rests solely (or even largely) with
the firm.

Corporate social responsibility

The entirety of CSR can be discerned from the three words this phrase con­
tains: corporate, social, and responsibility. CSR covers the relationship between
corporations (or other for-profit firms) and the societies with which they
interact. CSR defines society in its broadest sense and, on many levels, to
include all stakeholders that maintain an ongoing interest in the organization’s
operations. And, as interpreted by the majority of advocates, CSR also
includes the responsibilities that the firm has to these varied constituent
groups. What this discussion ignores, however, is an understanding of where
the motivation for socially responsible behavior comes from. Should corpora­
tions act responsibly because they are convinced of the moral argument for
doing so (irrespective of the financial implications of their actions), or should
they act responsibly because it is in their self-interest? What is the point of a
firm acting responsibly if its key stakeholders do not care sufficiently to pay
the costs that are often associated with such actions?1 Unless business suffers as
a result of the refusal to act, should firms be expected to change?
42 CSR is a stakeholder responsibility
Two points are worth emphasizing here: First, for-profit firms are efficient
organizations, but managers have no special powers to foresee the future. In
spite of this, much of the CSR debate has focused on demanding that firms
act proactively out of a social, moral, or ethical duty. In other words, man­
agers are being asked to take a leap of faith – that, if they act responsibly (what­
ever that means), business success will follow. The label CSR itself talks about
the social responsibility of corporations without understanding that, often, there
are no meaningful consequences for firms that do not act responsibly and that,
in contrast, they are often rewarded economically for not doing so. Because
of this, firms are reluctant to risk their future viability implementing a busi­
ness model (and the accompanying set of products and services) that does not
have an established market demand. While every manager seeks to be ahead
of the curve, in reality, there is as much danger in being too far ahead of the
curve as there is in being behind it.2 It is important for us to remind ourselves
that for-profit firms are mirrors to society and, as such, they react to stake­
holder concerns/needs far more effectively than they anticipate those concerns
and needs.
Second, having a responsibility to do something means there is a con­
sequence to not doing it. No consequence, no responsibility. In order for a
responsibility to be enforced, therefore, someone or something must hold the
firm to account.3 If this does not happen, then compliance will vary accord­
ing to the individual actor’s set of personal beliefs and values. In other words,
for CSR to work effectively, stakeholders need to act – they need to shape
the behavior they want to see from firms in terms of what they feel is
important. They then must enforce these standards and encourage the behav­
ior they seek by backing up their demands with meaningful commitment and
actively discriminating in the relations they build. For consumers, for
example, this requires them to educate themselves about their purchase deci­
sions and be willing to pay higher prices where the consequences of their
demands raise costs (and therefore prices). This same approach and equal
responsibility apply to all of the firm’s stakeholders, such as employees (seek
firms with progressive policies and diverse workplaces), government (enforce
laws and regulations), suppliers (build constructive, productive ties), the
media (investigative journalism focusing on abuses of power), and so on. By
acting in this way, stakeholders convey to the firm the message that it is in
the organization’s self-interest to act in a particular way, whether it would
have done so voluntarily (i.e., in the absence of such pressures), or not.
In short, existing discussions around CSR have focused almost exclusively
on the responsibilities of business, while ignoring the responsibilities of the
firm’s stakeholders to demand the kind of behavior they deem to be socially
responsible. In essence, we get the firms we deserve, just like we get the politi­
cians we deserve. If there is a problem, it is with us, rather than the firms we
create. If the firm’s stakeholders are unwilling to set standards for firms and
then enforce them, firms instead will respond with whatever behavior finds
success in the market.4
 CSR is a stakeholder responsibility 43
Corporate stakeholder responsibility
The philosophy underpinning Sustainable Value Creation (SVC) is clear that
CSR is not only a corporate responsibility. Stakeholders share an interest in
optimizing societal outcomes that add value, broadly defined. As a result, they
carry an equal, if not more important, responsibility to hold firms to account
for their actions. The concept of corporate stakeholder responsibility is there­
fore an essential addition to any definition of CSR that fits within the SVC
framework.5

A new definition of CSR

A view of the corporation and its role in society that assumes a responsibility among
firms to meet the needs of their stakeholders and an equal (if not more
important) responsibility among stakeholders to hold firms to account for their
actions.

The change in emphasis that forms the core of this definition is subtle, but
the implication for our understanding of what CSR means is radical. To this
end, it is worth keeping two points in mind: First, this reciprocal relationship
does not remove the moral and ethical dimensions of economic exchange.
On the contrary, these factors are embedded in the decisions all stakeholders
take in determining which firms to engage with and which actions to
endorse. As such, this reconceptualization of CSR shifts the role of morals
and ethics in the debate away from absolute standards that are imposed arti­
ficially on firms, toward the relative values of each stakeholder that, together,
constitute the convoluted environment to which firms have to operate,
every day.
Second, this division of responsibilities should not be seen as a burden, but
as empowering stakeholders to create the society in which they want to live.
Contrary to how they are often presented, firms are neither inherently evil
nor divinely angelic. As discussed in Principle 3, firms should not be anthro­
pomorphized – they cannot be separated from the aggregated interests of their
collective set of stakeholders. Brands and companies are inert – it is the
people inside them that bring them to life. The for-profit firm is a group of
individuals that, collectively, reflects the values of those individuals. In the
same way that we get the politicians we deserve (by electing them), the way
we (as stakeholders) manage our relations with firms generates directly the
companies that dominate our economies. As such, the firm’s stakeholders
need to uphold the values and behavior that they say they want firms to
implement:

One report showed that ensuring good working conditions would add
less than one dollar to the price of a pair of blue jeans. But despite
44 CSR is a stakeholder responsibility
responding to surveys that they care about ethics, shoppers refuse to pay
more. In one study, only half of customers chose a pair of socks marked
“Good Working Conditions” even when they were the same price as an
unmarked pair; only one quarter of customers paid for the socks when
they cost 50 percent more.6

In short, if we want to change firm behavior, it is incumbent on us (all stake­

holders, not only consumers) to take responsibility for the consequences of
our actions and decisions. Firms are largely reactive and will respond, effi­
ciently, to the signals we send. In a system of checks and balances (both
formal and informal), it is incumbent on all parties to play their respective
roles. To date, firms have been reluctant to change and stakeholders have
been reluctant to enforce the leverage they possess. Until firms become more
responsive and stakeholders become more proactive, substantive change will
be slow in coming.

Stakeholder democracy
As these boundaries of acceptable behavior are formed, it is the responsibility
of firms to adhere to them, but it is also the responsibility of the firms’ stake­
holders to enforce them. The outcome of this iterative process is akin to a
form of stakeholder democracy:

The duty of business in a democracy is not merely to meet its social

responsibilities as these are defined by businessmen, but rather to follow
the social obligations which are defined by the whole community
through the give-and-take of public discussion and compromise.7

In reality, the way that we differentiate between private sector motivations

and public sector demands is usually via the pursuit of profit. But, does that
really distinguish different types of behavior? Another way of expressing the
balancing act between conflicting stakeholder interests is the push and pull of
market forces. While markets are normally thought of in terms of exchanges
quantified in monetary value, this concept can be expanded to include a
firm’s relationships with all of its stakeholders, but valued in different ways.
Each stakeholder brings different resources to the exchange in ways that can
be expressed as opportunities or threats to the firm. As the firm responds to
these forces, different outcomes are shaped that, ultimately, match the desires
of all parties involved. A good example of a company that actively institu­
tionalizes this mutually dependent relationship is Patagonia, whose Product
Lifecycle Initiative represents:

a unique effort to include consumers in Patagonia’s vision of environ­

mental responsibility. An internal document articulated that reducing
Patagonia’s environmental footprint required a pledge from both the
 CSR is a stakeholder responsibility 45
company and its customers. The initiative thus consisted of a mutual
contract between the company and its customers to “reduce, repair,
reuse, and recycle” the apparel that they consumed.8

As mentioned in Principle 2, the history of the modern-day company is

embedded in its foundation as a tool to serve society’s purposes. Although the
emphasis in the company-society relationship has shifted over time, the idea
that the corporation is a tool that serves society’s interests remains fundament­
ally intact. In short, if capitalism is no longer serving our interests well, it is
because we are not using it correctly. More specifically, we are sending firms
the wrong signals; and those signals relate directly to our collective set of
values.
The idea that firms are imposing $5 T-shirts on us, for example, greatly
misrepresents the way markets operate. If we tell firms with our purchase
decisions (and materialistic values) that with our $30 we want to buy six
T-shirts at $5 each rather than two T-shirts at $15 each, then that is what the
market will provide. This is not merely an economic decision, however, but
one that is laden with values that have monumental consequences for the
kind of society in which we live – one that values quantity over quality,
material goods over holistic wellbeing, and short-term comfort over long-
term sustainability. If, in contrast, we were willing to buy two T-shirts at $15
each, that would have consequences that would revolutionize our economy
(fewer workers in the apparel industry, but better conditions and higher
quality T-shirts, for example). Just because we can make T-shirts for $5 each
does not mean that we have to – it is a reality that we create. It is essential to
the ideas underpinning SVC that we understand that our consumption deci­
sions (as in all stakeholder relations with the firm) represent our values in
action. Firms are not actively choosing to supply $5 T-shirts so much as they
are responding to our demand for such products.9 If we want the market to
change, therefore, we are likely to be more successful if we change the col­
lective set of values that the market reflects (i.e., change ourselves), rather
than trying to change the centuries-old economic principles on which the
market and for-profit firms operate.
In other words, the argument constructed in this book is not an absolution
of the ethical responsibilities of the business executive, but instead a call for
those responsibilities to be enforced by the firm’s stakeholders (including its
managers) who, collectively, have the power to shape the organizational
behavior they wish to see. The result of a system that is characterized by
tension among competing interests, with give and take on both sides, is a
more democratic distribution of the overall value embedded within that
system. As Howard Bowen noted back in 1953:

In a rapidly growing society, even if industry is predominantly com­

petitive, there is nothing to prevent the society from receiving part of its
increasing product in the form of better working conditions, shorter
46 CSR is a stakeholder responsibility
hours, greater security, greater freedom, better products, etc. Gains need
not be realized solely in the form of a greater flow of final goods and ser­
vices. The rising standard of living may consist not alone in an increasing
physical quantity of goods and services, but also in improved conditions
under which these goods and services are produced.10

Increasingly, the tools are becoming available that enable stakeholders to

embrace this proactive role. Another way of saying this is that we no longer
have an excuse for failing to act. The internet provides access to the informa­
tion we need to make values-based judgments on the policies and operating
procedures of the firms with which we interact. Moreover, the price of com­
munication has been lowered essentially to zero, which enables us to mobilize
in ways that counteract the power previously held only by governments or
corporations. The overall effect of the encroachment of the internet into
every aspect of our lives is to cause firms to lose control over the flow of
information. The rise of social media has broken down barriers in ways that
alter how stakeholders interact with firms. While firms can benefit from
increased communication and data (to increase efficiencies and market-test
products, for example), this technology also hands stakeholders a tool they
can use to take direct action and hold firms to account. When we demand
more and demonstrate a willingness to sacrifice in order to obtain it, the firm
is the most rapid and efficient mechanism to meet that demand. There is
plenty of evidence to suggest that stakeholder activism is effective. SVC calls
for an expanded sense of responsibility among all stakeholders to ensure such
activism becomes the norm, rather than the exception.
The ideal ecosystem in which business and society co-exist consists of a
constant back-and-forth between the self-interest of the business minority and
the collective interest of the majority. As society’s interests evolve, the result­
ing external pressures on firms increasingly reflect this change. As these pres­
sures rise, it becomes apparent to the manager that their self-interest lies in
conforming to these external expectations. Similarly, as businesses innovate
and introduce new products and services to society that shape how we
interact with each other, so these changes challenge existing norms and
expectations in ways that inform how we live our lives. Understanding that
all parties in our economic system help identify this point of balance is essen­
tial to creating an economic system that optimizes total value.
As a mirror to the collective set of values that make up society, firms react
to the signals its stakeholders send. It is when those signals become mixed or
we fail to enforce the behavior we have previously said we want that prob­
lems can emerge. The temptation to substitute short-term profits for neces­
sary safety steps, for example, led to a change in culture at BP and a series of
serious accidents, from Alaska, to Texas, to the Gulf of Mexico. If the firm’s
stakeholders had enforced their oversight (e.g., government inspections,
partner operating procedures, employee whistleblowing, etc.), these hugely
consequential accidents would have been prevented. Even viable companies
 CSR is a stakeholder responsibility 47
that produce legal products (such as the tobacco and gun industries often vili­
fied by CSR advocates) exist only due to stakeholder support. If we feel these
companies do more harm than good, then it is the responsibility of govern­
ment to make their products illegal or customers and employees to boycott
them. Stakeholders have it in their collective power to shape the firms we
want to populate our economies. Firms are not to blame for profiting by
selling products that their collective set of stakeholders say that they value.
Within this framework, an ethics or CSR transgression committed by a
firm represents a failure of stakeholder oversight – a breakdown in collective
vigilance. Whether as a result of lapsed government or media oversight, exec­
utive fraud, consumer ignorance, employee silence, or supplier deceit, a trans­
gression (which, by definition, is only a socially constructed assessment of right
and wrong) occurs when the firm’s stakeholders fail to hold it to account. In
other words, the firm violates our collective determination of what consti­
tutes responsible behavior.
Rather than favoring a form of unregulated capitalism, therefore, which has
been roundly (and correctly) criticized for causing economic mayhem in
recent decades, the core argument in this book calls for an expanded form of
regulation – stakeholder engagement. Rather than rely on legislatures merely
to constrain business via restrictive laws (a necessary but insufficient stake­
holder action), however, an effective and comprehensive form of corporate
stakeholder responsibility, in which all stakeholders act to hold firms to account,
will generate a market-based system of checks and balances formed around
individual values. As such, this web of complex interests acts as a curb on
unlimited power; it also provides unbounded opportunity for the firm that is
sufficiently progressive to meet and exceed the expectations of its stakeholders.
The ultimate effect will be to ensure capitalism is tailored more toward
broader, societal interests, rather than narrow, individual or corporate interests.
In this sense, SVC is not a passive doctrine; it is highly empowering and
potentially revolutionary. True, it is working within the current system, uti­
lizing a firm’s pursuit of profit and individuals’ self-interest to achieve its
goals; but the subtle shifts that it advocates seek to generate very different
outcomes throughout society.

Summary
Principle 4 states that CSR is a stakeholder responsibility. If we are to achieve
the socially responsible outcomes we say we seek, it is essential that all parties
(the business and each of its stakeholder groups) play their part. While firms
have a responsibility (founded in self-interest) to accommodate, wherever
possible, the needs and concerns of their stakeholders, each stakeholder group
has a responsibility (founded in self-preservation and social progress) to shape
firms’ behavior through the expectations that it conveys via meaningful
engagement. This stakeholder responsibility is equally as important (if not more
so) as the responsibility of the firm.
Principle 5
Market-based solutions are optimal

Key takeaway: In general, market forces generate superior outcomes to

alternative means of allocating scarce and valuable resources, such as govern­
ment mandate. While stakeholders have an interest in shaping the behavior of
firms, the mechanism by which this occurs most effectively is the market.

As reflected in Principle 4, business is a collaborative exercise. It is in society’s

best interests to encourage capitalism because for-profit firms are able to foster
social progress above and beyond any other organizational form in any other
economic system. It is also in society’s interests, however, to shape the eco­
nomic behavior of firms by holding them to account for their actions – a
stakeholder democracy that ensures it is in firms’ best interests to seek to accom­
modate the needs and interests of all stakeholders. This system of checks and
balances works best within a capitalist economic system, where enterprise
drives innovation, which promotes progress:

it’s multinational corporations, and not governments or non-profits, that

have the vast human and financial capital, advanced technology, inter­
national footprint, market power and financial motivation to solve the
world’s most daunting problems.1

Imperfect markets
The core idea around which Principle 5 is built is that markets trump all
other known means by which scarce and valuable resources are allocated on a
society-wide basis.2 The beauty of the market, in large part, is its chaotic
complexity, where structure somehow emerges out of a multitude of micro-
level individual decisions that aggregate into a stable macro-economic system.
As Friedrich Hayek noted long ago:

We are led – for example by the pricing system in market exchange – to

do things by circumstances of which we are largely unaware and which
 Market-based solutions are optimal 49
produce results that we do not intend. In our economic activities we do
not know the needs which we satisfy nor the sources of the things which
we get. Almost all of us serve people whom we do not know, and even
of whose existence we are ignorant; and we in turn constantly live on the
services of other people of whom we know nothing. All this is possible
because we stand in a great framework of institutions and traditions –
economic, legal, and moral – into which we fit ourselves by obeying
certain rules of conduct that we never made, and which we have never
understood in the sense in which we understand how the things that we
manufacture function.3

Market freedoms are particularly efficient in contrast to government mandate.

In part, this is due to the lack of expertise and local knowledge that a central
body, by definition, does not have: “Soviet bureaucrats sitting in Moscow,
for example, could not possibly know enough to dictate to farmers in indi­
vidual fields about how to plant their crops.”4 But, it also reflects the powerful
ability of the market (via the pursuit of profit) to mobilize resources and
incentivize human creativity in ways that alternative motivations, such as
altruism and public service, cannot match:

Johnson Controls joined real-estate firm Jones Lang LaSalle to retrofit the
Empire State Building for energy efficiency in 2012. The Clinton
Climate Initiative and Rocky Mountain Institute also collaborated on the
project. The groups estimate the project will cut energy costs by 38%,
saving $4.4m annually and reducing carbon emissions by 105,000 metric
tons over 15 years. Given that the building sector consumes up to 40% of
the world’s energy, energy efficiency is key to reducing our energy use.
Retrofitting for energy efficiency is good for the world, while also gen­
erating profit for Johnson Controls. The power of financial motivation
… solved this problem.5

In contrast, the cumulative effects of excessive micro management by govern­

ments, as Milton Friedman dryly noted, can be widespread inefficiency and
distorted incentives: “If you put the federal government in charge of the
Sahara Desert, in 5 years there’d be a shortage of sand.” While an exaggera­
tion, to be sure, it is also instructive as a cautionary tale. The history of
humankind provides substantial evidence that, while the government has a
vital role to play in delivering certain services (such as national defense) and
creating the boundaries within which economic exchange can thrive (such as
a stable legal system), it is via the spirit of free enterprise that innovation
flourishes and poverty is diminished. In Milton Friedman’s words again:

The great achievements of civilization have not come from government

bureaus. Einstein didn’t construct his theory under order from a bureau­
crat. Henry Ford didn’t revolutionize the automobile industry that way.
50 Market-based solutions are optimal
In the only cases in which the masses have escaped from [grinding
poverty], the only cases in recorded history, is where they have had
capitalism and largely free trade. If you want to know where the masses
are worst off, it is exactly in the kinds the societies that depart from that.
So the record of history is absolutely crystal clear, that there is no altern­
ative way so far discovered of improving the lot of the ordinary people
that can hold a candle to the productive activities that are unleashed by a
free enterprise system.6

In spite of the demonstrated power of markets to build wealth and promote

social progress, it is also true that, in application, markets are inherently
flawed. Markets, for example, have the ability to misallocate resources (the
reason why CEOs are overpaid), skew priorities (the reason why externalities
exist), and focus on the short term (the reason why stock prices fluctuate
sporadically). As another Nobel Prize-winning economist, Joseph Stiglitz,
notes:

Perfect competition should drive profits to zero, at least theoretically, but

we have monopolies and oligopolies making persistently high profits.
C.E.O.s enjoy incomes that are on average 295 times that of the typical
worker, a much higher ratio that in the past, without any evidence of a
proportionate increase in productivity.7

These flaws arise due to the fact that markets (like governments) are enacted
by humans. And, as James Madison astutely noted, “If men were angels, no
government would be necessary.”8 The inescapable presence of human influ­
ence means that many of the theoretical assumptions underlying market inter­
actions are undermined. Markets work best with complete information, for
example – that is, accurate information that is freely and equally available to
all participants. In the absence of these conditions (i.e., reality), markets
become imperfect. The reason why insider trading in shares is illegal is
because it directly transgresses on the assumption of complete information.9
Unfortunately, incomplete or asymmetric information is the norm. Some­
times this is a result of deliberate manipulation (as in the case of insider
trading); more often, however, it is due to human limitations (an inability to
process large amounts of information, act rationally, ignore sunk costs,
evaluate opportunity costs, overcome biases and fears, and so on).10
One market that is often cited by supporters as purer than most is the stock
market. Yet, we know from prior financial crises that the stock market is
inherently challenged when it comes to pricing risk accurately. It is not even
clear that investors are good at assessing overall value. As Warren Buffett has
stated, “I’d be a bum on the street with a tin cup if the markets were always
efficient.”11 The prevalence of bubbles and the tendency toward herd behav­
ior demonstrate that psychology and emotion play as large a part in determin­
ing stock movements as rigorous analysis. Buffett’s success relies on traders
 Market-based solutions are optimal 51
either under- or over-valuing shares as a result of imperfect information and
poor judgment, which allows so-called value traders to take advantage:

Mr. Buffett began an investment partnership in 1956 and, over the next
12 years, achieved a 29.5 percent compound return. … In comparison,
the Dow Jones industrial average rose by 7.4 percent per year during the
same period. Then, in 1965, Mr. Buffett took control of a small Massa­
chusetts textile manufacturer and through a combination of buying stocks
and, later, buying entire companies, achieved a 19.7 percent annual
increase in Berkshire Hathaway’s stock price while the average was
increasing by 9.4 percent.12

An example of the limits of the market in valuing goods is evident in relation

to nature. Whether dealing with “use value” (natural goods with a functional
application, such as water) or “non-use value” (natural goods without a func­
tion, but valued for intangible reasons like beauty, such as a water geyser),
there are market tools that can be employed (e.g., the level of admission
people are willing to pay to visit a national park). Arriving at a complete valu­
ation for such goods, however, is challenging.13 Fresh water is a good example
of this. While it is essential to life and is also relatively scarce (and, therefore,
in theory, should have a high valuation), its exchange value is limited (the
trade value for a bottle of water is low), largely because equal access to it is
considered the cornerstone of a civilized society:

Adam Smith spotted that economics has problems valuing nature.

“Nothing is more useful than water: but it will purchase scarce anything;
scarce anything can be had in exchange for it. A diamond, on the con­
trary, has scarce value in use; but a very great quantity of other goods
may frequently be had in exchange for it,” he wrote.14

The bottled water industry is a good example of how, even when faced with
such limitations, the market is able to overcome them – even while the solu­
tion provided is replete with additional externalized costs (e.g., increased pro­
duction of single-use plastics). Similarly, the example of access to clean water
demonstrates that, because of the flaws inherent in the application of market
ideology, some constraints are often beneficial. As detailed in Principle 4, the
ideal in an effective system of checks and balances is empowered and invested
stakeholders willing to hold the firm to account. This ensures the firm is
incentivized to act in the best interests of its collective set of stakeholders
(which, together, constitute society), rather than the interests of a narrow
select group, such as its shareholders. Although this perspective implies an
equal responsibility across all stakeholders, when CSR advocates envision
what such constraints might look like, they tend to focus disproportionately
on the role of the government. Of course, there is good reason for this as the
government has demonstrated, on many occasions, the value that can be
52 Market-based solutions are optimal
obtained for society by seeking to curb the strongest self-interested impulses
of for-profit firms:

Before the Clean Air Act was passed in 1970 many Americans led
shorter, sicker lives because of pollution. White-collar workers in Gary,
Indiana, a steel town, often went to work with an extra shirt because the
first one looked too dirty by midday. Between 1980 and 2012 total emis­
sions of six common air pollutants in America dropped by 67%, accord­
ing to the Environmental Protection Agency (EPA). This happened even
as the country’s population grew by 38% and Americans consumed 27%
more energy.15

In reality, however, the balance between government oversight and free

enterprise is a fine line that politicians often cross, with sub-optimal out­
comes. The guiding principle should be to protect the freedom to innovate
and conduct commerce, avoid central planning, and curb the greatest excesses
of capitalism that result in counter-productive outcomes16 – “to reconcile the
goals of freedom and economic progress, which are paramount in the laissez­
faire philosophy, with the goals of stability, security, justice, and personality
development, which are emphasized in modern humanitarian philosophy.”17
It is this complex interplay that forms the foundation of modern market capit­
alism that, via for-profit firms, is the superior structure for allocating resources
in ways that promote overall value. In other words, market forces generate
better solutions than those arrived at through political distortions, such as
coercion (e.g., government regulations), favoritism (e.g., lobbying), price
controls (e.g., subsidies or quotas), or nationalist trade protection (e.g., tariffs).
The problem with such distortions is that, however well-intentioned, they
have a habit of producing unintended consequences that lead to the ineffi­
cient allocation of resources and the destruction of value.

Unintended consequences
When market forces are subverted with ulterior goals, unintended con­
sequences are common. At the extreme, the actual consequences achieve the
opposite of those that were intended. An example of this might be if an
increase in the minimum wage (designed to protect low-wage earners) were
to result in a reduction in overall jobs (reducing the number of low-wage
jobs available). This effect is based on the assumption that:

In a competitive market anything that artificially raises the price of labour

will curb demand for it, and the first to lose their jobs will be the least
skilled – the people intervention is supposed to help. … [T]opping up
the incomes of the working poor with public subsidies [is] a far more
sensible means of alleviating poverty.18
 Market-based solutions are optimal 53
Economists refer to this phenomenon of unintended consequences as Jevon’s
paradox: “named after a 19th-century British economist who observed that
while the steam engine extracted energy more efficiently from coal, it also
stimulated so much economic growth that coal consumption increased.”19 A
modern update of this example is the unforeseen consequences of energy effi­
ciency, particularly in consumer products, such as appliances or cars. While
these innovations undoubtedly use energy more efficiently than the technolo­
gies they were designed to replace, there is often a compelling argument that
the net energy consumed as a result of their purchase is zero (unchanged) or
even positive (an overall increase):

The problem is known as the energy rebound effect. While there’s no

doubt that fuel-efficient cars burn less gasoline per mile, the lower cost at
the pump tends to encourage extra driving. There’s also an indirect
rebound effect as drivers use the money they save on gasoline to buy
other things that produce greenhouse emissions, like new electronic
gadgets or vacation trips on fuel-burning planes.20

A related term for this ability to convince ourselves that the best way to solve
our excessive resource depletion of the Earth is through further consumption
is “The Prius Fallacy.”21 By substituting one (possibly) greener product for
another, we kill two birds with one stone – we satisfy both our psychological
and material needs. We also give ourselves the moral license to continue con­
suming – a process we are very good at rationalizing after the fact.22 What we
fail to realize is that, even as we innovate and consume, rather than reducing
our environmental impact, the unintended consequence is the opposite.
While generally ignored by environmentalists today, there are important
policy implications to be gleaned from this phenomenon:

if your immediate goal is to reduce greenhouse emissions, then it seems

risky to count on reaching it by improving energy efficiency. To econo­
mists worried about rebound effects, it makes more sense to look for new
carbon-free sources of energy, or to impose a direct penalty for emis­
sions, like a tax on energy generated from fossil fuels. Whereas people
respond to more fuel-efficient cars by driving more and buying other
products, they respond to a gasoline tax simply by driving less.23

The danger becomes particularly prevalent when artificial economic incen­

tives are added to the consumption equation. For example, during the 18th
century, when the British government was still shipping its criminals to Aus­
tralia, sea captains were compensated based on the number of people they
carried on their ships. What the government found, however, was that many
inmates were dying during the journey – up to one-third in some instances.
Neither taking a doctor onboard for the journey nor raising the captains’
compensation increased the number of passengers who survived the trip.
54 Market-based solutions are optimal
It wasn’t until the government began paying captains based on the number of
people who arrived in Australia (rather than the number of people who left
the UK) that behavior changed and the survival rate greatly increased – to as
high as 99%.24 A similar effect was evident in another example from India:

During the time of British rule in colonial India, in order to free Delhi
from a plague of snakes, the City’s governor put an incentive scheme in
place for their capture by introducing a bounty on cobra skins. The
bounty was quite high as cobras are tricky to catch. And so, instead of
the snakes being caught in the city, it became a sound business idea to
start farming them. All of a sudden, the number of bounty claims
increased disproportionately. The local authority realised what was going
on and responded by abandoning the incentive scheme. And as they
were no longer profitable, the cobras were released from the farms into
the city, exacerbating the original problem.25

The key to avoiding such unforeseen consequences is, clearly, to ensure the
correct behavior is being incentivized:

Where governments want to raise revenue without distorting markets,

the best approach is to charge businesses a flat fee, like a cab licence.
Firms then have an incentive to do as much business as they can. But
where governments want to discourage consumption – as with cigarettes
and alcohol – they should tax each unit sold.26

In the example from India above, the desired outcome was a reduction of the
number of snakes in Delhi, but the action that was incentivized was an
increase in the number of snakes killed. As demonstrated, these things can
result in opposite outcomes in practice. In the case of calls to raise the
minimum wage, the goal is to reduce poverty and income disparity, but the
action prescribed is to increase the cost of labor. Although economists dis­
agree on the effects of a minimum wage (some research indicates that small
increases have little or no effect on job creation), it is possible that in some
cases an increase would result in existing employees being fired (because the
employer can no longer afford to employ them) or a reduction in the number
of new hires (because the cost limits a planned expansion), hence vastly wors­
ening the economic situation for these individuals:

In flexible economies a low minimum wage seems to have little, if any,

depressing effect on employment. America’s federal minimum wage, at
38% of median income, is one of the rich world’s lowest. Some studies
find no harm to employment from federal or state minimum wages,
others see a small one, but none finds any serious damage. … High
minimum wages, however, particularly in rigid labour markets do
appear to hit employment. France has the rich world’s highest wage
 Market-based solutions are optimal 55
floor, at more than 60% of the median for adults and a far bigger frac­
tion of the typical wage for the young. This helps explain why France
also has shockingly high rates of youth unemployment: 26% for 15- to
24-year olds.27

The issue of unintended consequences is one of the most important issues for
the CSR community to address, particularly in relation to sustainability.
When we attempt to subvert centuries of economic development, substitut­
ing altruistic motivation for economic incentives, we should tread carefully.
Whether it is government subsidies or tax breaks for a particular kind of
alternative energy, or a new technical innovation that interacts with some
other factor (or is applied inappropriately), the result is often an unexpected
outcome that can detract from, rather than promote, overall value. That is
not to say that government intervention is necessarily unwarranted or unhelp­
ful. In fact, in terms of shaping the rules of the game to ensure a level playing
field and enforce existing regulations, the government is an essential stake­
holder of the firm – what David Sainsbury in his manifesto for progressive capit­
alism refers to as an “enabling state,” with responsibilities to support, rather
than direct, markets:

Market institutions are human artefacts created, in all their varieties

beyond the most simple, by the state and, ultimately, they all need to be
justified by their contribution to the well-being of society and to be per­
petually open to reform.28

As a general rule, the more heavy-handed or misguided the intervention, the

less likely it is to generate an optimal solution. There is still much that we do
not understand about the motivations that drive human behavior and generate
societal-level outcomes. By definition, we can only base future projections on
past experience and are constrained when we do, likely over-emphasizing the
potential benefits and failing to account for all risks. That does not mean
change should never occur, but it does imply we should be humble in
attempts to temper these refined forces that have evolved over centuries. As
Adam Smith illustrated in The Wealth of Nations:

The woollen coat, for example, which covers the day-labourer, as coarse
and rough as it may appear, is the produce of the joint labour of a multi­
tude of workmen. The shepherd, the sorter of the wool, the wool-
comber or carder, the dyer, the scribbler, the spinner, the weaver, the
fuller, the dresser, with many others, must all join their different arts in
order to complete even this homely production. … Let us consider only
what a variety of labour is requisite in order to form that very simple
machine, the shears with which the shepherd clips the wool. The miner,
the builder of the furnace for smelting the ore, the feller of the timber,
the burner of the charcoal to be made use of in the smelting-house, the
56 Market-based solutions are optimal
brick-maker, the brick-layer, the workmen who attend the furnace, the
mill-wright, the forger, the smith. … Without the assistance and co­
operation of many thousands, the very meanest person in a civilized
country could not be provided, even according to what we very falsely
imagine, the easy and simple manner in which he is commonly
accommodated.29

As Smith insightfully demonstrates, it is the effect of hundreds of individuals,

each pursuing their individual interests, that collectively ensure the laborer’s
coat is made in a way that meets the laborer’s needs. Moreover, the pursuit of
self-interest is not devoid of morals or ethics. On the contrary, as Adam
Gopnik explains in his summary of Adam Smith’s work, a framework of
guiding values is inherently embedded in the application of market forces:

Where can you find a sympathetic community, people working in

uncanny harmony, each aware of the desires of the other and responding
to them with grace and reciprocal charm? Forget the shepherds in
Arcadia. Ignore the poets in Parnassus. Visit a mall. For Smith the plain-
seeing Scot, the market may not be the most elegant instance of human
sympathy, but it’s the most insistent: everybody has skin in the game. …
That’s what keeps the mob from rushing the Victoria’s Secret and steal­
ing knives from the Hoffritz and looting the Gap. Shopping, which for
the church moralist is a straight path to sin, is for Smith a shortcut to
sympathy. Money is the surest medium of exchange.30

The phenomenon of Jevons paradox demonstrates that good intentions that

seek to subvert market forces and established market practices can result in
counter-productive outcomes. Markets are far from perfect and can distort
behavior, but manufactured interventions exacerbate this possibility. As such,
the conflicting stakeholder interests described in Principle 4 demonstrate the
value in encouraging checks and balances that can curb the market’s worst
excesses. Government regulation is one of these checks, but should be applied
cautiously. The ideal would be to design more intelligent curbs that avoid
unforeseen consequences by accounting for what we know of the imperfec­
tions involved in implementing market ideology (i.e., by accounting for
human behavior).

Behavioral economics
In 2002, the psychologist Daniel Kahneman won the Nobel Prize for Eco­
nomics for his work on the cognitive biases of humans. In his 2011 book,
Thinking, Fast and Slow,31 he notes that the human brain works with two
systems – one that helps make decisions rapidly based on emotion (“fast
thinking”), while a second helps make decisions more deliberately (“slow
thinking”), but often rationalizes the choices generated by the first system.
 Market-based solutions are optimal 57
The combination creates a contrast between the rational, agentic decision-
makers that we think we are and the emotional, impulsive decision-makers
that the evidence suggests we are more often:

Although humans are not irrational, they often need help to make more
accurate judgments and better decisions, and in some cases policies and
institutions can provide that help. … The assumption that agents are
rational provides the intellectual foundation for the libertarian approach
to public policy: do not interfere with the individual’s right to choose,
unless the choices harm others. … For behavioral economists, however,
freedom has a cost, which is borne by individuals who make bad choices,
and by a society that feels obligated to help them.32

Many of these ideas, which integrate insights from economics and psychology
(social and cognitive), form the foundation of what today is known as behavi­
oral (or nudge)33 economics. The advantage of behavioral economics is that it
works with what we know of the imperfections in human nature to curb the
raw excesses of market forces, yet preserves the illusion of choice that markets
enable and is an essential component of an open society:

Behavioural economists have found that all sorts of psychological or neu­

rological biases cause people to make choices that seem contrary to their
best interests. The idea of nudging is based on research that shows it is
possible to steer people towards better decisions by presenting choices in
different ways.34

If there was wider use of behavioral economics in policy making, it is argued,

we would be able to nudge individuals to make decisions that better serve
their own (and society’s) interests. When deployed intelligently, the results
can be powerful:

In one trial, a letter sent to non-payers of vehicle taxes was changed to use
plainer English, along the line of “pay your tax or lose your car”. In some
cases the letter was further personalised by including a photo of the car in
question. The rewritten letter alone doubled the number of people paying
the tax; the rewrite with the photo tripled it. … A study into the teaching
of technical drawing in French schools found that if the subject was called
“geometry” boys did better, but if it was called “drawing” girls did equally
well or better. Teachers are now being trained to use the appropriate term.35

Nudge economics demonstrates the value of an accurate, grounded apprecia­

tion of human nature – explaining behavior due to empirical observation
rather than ideological assumption. The results, when implemented, demon­
strate how human decision-making can be shaped dramatically by applying
this knowledge to public policy (and, by extension, to market interactions):
58 Market-based solutions are optimal
When you renew your driver’s license, you have a chance to enroll in an
organ donation program. In countries like Germany and the U.S., you
have to check a box if you want to opt in. Roughly 14 percent of people
do. But behavioral scientists have discovered that how you set the
defaults is really important. So in other countries, like Poland or France,
you have to check a box if you want to opt out. In these countries, more
than 90 percent of people participate.36

It is fascinating how relatively simple incentive structures can be used to

nudge people in the direction of greater societal value. One more example
presents the dramatic shifts in eating behavior among children achieved
through subtle changes to the layouts of school cafeterias:

A smarter lunchroom wouldn’t be draconian. Rather, it would nudge

students toward making better choices on their own by changing the way
their options are presented. One school we have observed in upstate
New York, for instance, tripled the number of salads students bought
simply by moving the salad bar away from the wall and placing it in front
of the cash registers.37

In considering the value of behavioral economics for Sustainable Value Cre­

ation (SVC), it is important to think through two considerations. On the one
hand, what rights do consumers have to purchase resource-intensive prod­
ucts, even if we assume that the full costs associated with producing that
product (i.e., all externalities) are incorporated into its purchase price? Should
we have the right to destroy the environment if that is the result of the deci­
sions we make (consciously or unconsciously)? On the other hand, what role
should the government play in micro-managing our lives, given the blunt
tools it uses to decide where to draw the lines, as well as the biased and
corrupt process by which it does so (due to the influence of money in deter­
mining which lines at which times)? The debate between the value of a
strong, benevolent government that can shape a progressive society (in
theory) and the inefficiency and unintended outcomes associated with top-
down directives (in reality) is extremely difficult to resolve:

Milton Friedman didn’t need behavioral economics to know that each of

us typically spends our own money on ourselves more wisely than a
stranger spends other people’s money on us.38

My first instinct was to agree with this quote. After all, government has con­
sistently demonstrated an inability to shape outcomes as effectively as markets.
On second thoughts, however, it is clear we are often incapable of making
ideal (or even beneficial) decisions when left to our own intuition. Because
humans are driven by our inherent and persistent fallibilities (bounded ration­
ality, innate biases, emotional impulses, and cognitive constraints), we often
 Market-based solutions are optimal 59
make short-term decisions that do not serve our long-term interests. This
happens even when we are trying to be rational – there are good reasons, for
example, why many people fail to save enough money for their retirement,
even when they have the capacity (sufficient earnings) and tools (corporate
pension plans) to do so.
Given that we are living in a system designed for and operated by humans,
where is the balance between government oversight and individual enter­
prise? As an integral component of SVC, behavioral economics helps push
the debate in a helpful direction. Cass Sunstein, who wrote Nudge with
Richard Thaler,39 for example, draws on human frailties, such as “‘framing
effects’ (our interpretation of facts is affected by how they are presented to us)
and ‘status-quo bias’ (we prefer the status quo, simply because it is the status
quo, over potential alternatives) to promote what he calls ‘libertarian
paternalism’ ”:40

Government, he thinks, should change behavior using “nudges” instead

of commands. Regulations can tap into people’s psychological quirks and
prompt them to choose “better” behaviors – while still leaving them free
in many circumstances to act differently. Cigarette packages with grisly
images of cancer-ridden lungs are an effort to nudge – rather than
command – people not to smoke.41

It is important to tread carefully here. There is a reason why the market

economy has proved so resilient – it draws on core human values and desires
and accounts for them in a way that, in general, optimizes outcomes. And, if
anything, we are inertial, captive to patterns and biases that are deeply
ingrained in all of us. As Bill Frederick reminds us,

what we are today is, to a very large extent, a function of what we were
yesterday. … this means [for business practitioners] that there is not likely
to be any escape from the very powerful motive of private gain and
profit, which is often at variance with social interest.42

In other words, it is more effective to work within the constraints of human

nature as it is, rather than as we would wish it to be. Behavioral economics
does this by incorporating aspects of social and cognitive psychology into
economic models that would otherwise rely on unrealistic assumptions about
human behavior. As the noted economist, N. Gregory Mankiw, admits:

We economists often have only a basic understanding of how most pol­

icies work. The economy is complex and economic science is still a
primitive body of knowledge. Because unintended consequences are the
norm, what seems like a utility-maximizing policy can often backfire. …
In some ways, economics is like medicine two centuries ago. If you were
ill at the beginning of the 19th century, a physician was your best bet,
60 Market-based solutions are optimal
but his knowledge was so rudimentary that his remedies could easily
make things worse rather than better. And so it is with economics
today.43

Nudge economics incorporates the biases and prejudices that inform our
decisions into policies that encourage optimal social outcomes, while still
retaining the illusion of choice. As such, it is a valuable consideration in the
debate between government oversight and unrestricted market forces and,
therefore, is an important part of SVC.

Summary
Principle 5 states that Market-based solutions are optimal. It argues that, while
markets are far from perfect, they are the most efficient means we have of
allocating scarce and valuable resources via the for-profit firms that populate
them. More importantly, the evidence suggests that, when we seek to subvert
these highly developed forces, however well-intentioned, the result is often
an unintended consequence that destroys (rather than creates) value. One way
to curb the raw excesses of market forces, yet preserve the illusion of choice
that markets enable, is the wider use of behavioral economics to help nudge
individuals to make decisions that better serve their own (and society’s)
interests.
Principle 6
Profit = total value

Key takeaway: In essence, a firm’s profit represents the ability to sell a good
or service at a higher price than what it costs to produce. Production and con­
sumption, however, are more than merely technical decisions. They encap­
sulate the total value (to all stakeholders) that is added by the firm.

A significant reason for the supremacy of market forces in delivering value to

stakeholders, as discussed in Principle 5, is the pivotal role played by profit:

The existence of a profit is an indication prima facie that the business has
succeeded in producing something which consumers want and value. …
a business that fails to make an adequate profit is a house of cards. It
cannot grow or provide more jobs or pay higher wages. In the long run,
it cannot even survive. It offers no stability or security or opportunity for
its workers and investors. It cannot meet its broader obligations to
society. It is a failure from all points of view.1

I would amend this quote only to replace the narrow stakeholder group, con­
sumers, with the much broader concept of society. If a society (the collective
set of all stakeholders) permits a firm to continue operations, then it is
acknowledging that it adds value – that society is better off than if the firm
did not exist. At present, the best method we have of measuring that value is
the profit the firm generates. This statement is core to the idea of Sustainable
Value Creation (SVC), but exists in contrast to the way profit is often dis­
cussed within the CSR community – as a narrow measure of economic value
and something that can detract from social, moral, and ethical value. This
representation of economic value as an independent construct, separate from
other kinds of value, demonstrates a misunderstanding of what profit is and
how it is generated. In reality, a firm’s profit represents the total value added,
to all stakeholders, as a result of ongoing operations.
62 Profit = total value
Economic value + social value
The profit motive is closely linked in business to the price mechanism, which
is an assessment of the cost of bringing a product or service to market, plus a
margin that provides sufficient incentive for the business to operate. In the
marketplace, price is the best way we have developed to measure the value-
added in an exchange. In terms of firm performance, a profit or loss is the
aggregated outcome of multiple production and consumption decisions.
These decisions are arrived at through individual evaluations of cost and
benefit along many, many dimensions, at each stage of development, and ulti­
mately expressed in the consumer’s willingness to pay the price that is being
charged. If the value I obtain from a product exceeds the costs involved in
earning sufficient money to pay the price, then I should be willing to buy it.
In other words, when I buy a product, I am signaling to the firm that I value
what it does. When this transaction is repeated by all stakeholders in each of
the ways they interact with the firm, this signal amounts to a societal-wide
sanction of the underlying business. As Howard Bowen noted back in 1953:

when businessmen follow the profit motive they are merely following
social valuations as expressed in the prices at which they can sell their
products and the prices at which they can buy productive services, mater­
ials, supplies, and their other requirements. … When the businessman
follows this signal, he is following not only his own interest but that of
society as well. … The practical and the democratic thing for him to do
is to rely primarily on profit as his guide in deciding his business actions.2

Conceptually, therefore, while it can be helpful to think of economic value and

social value as separate constructs; in reality, they are not independent. On the
contrary, they are highly correlated and infused in the firm’s decisions
regarding production (Do we pollute the local river or not? Do we hire at
the minimum wage or a living wage?) and the consumer’s decisions regarding
consumption (Do I buy from the firm that produces locally or the one that
outsources? Do I pay the premium associated with a more environmentally
friendly product or purchase the cheaper, disposable product?). Further, they
are embedded in all stakeholders’ decisions to interact with the firm. All of
these production and consumption decisions contain value-laden foundations
and consequences that, ultimately, sum to determine the economic success of
the firm:

Two hundred years’ worth of work in economics and finance indicate

that social welfare is maximized when all firms in an economy maximize
total firm value. The intuition behind this criterion is simply that (social)
value is created when a firm produces an output or set of outputs that are
valued by its customers at more than the value of the inputs it consumes
(as valued by their suppliers) in such production. Firm value is simply the
long-term market value of this stream of benefits.3
 Profit = total value 63
Similarly, we know from a significant body of research in fields such as
strategy and marketing that, when I buy a product, I am not just purchasing
something that will fulfill a technical function – I am buying something that
makes me happy, that conveys my status, that boosts my self-esteem, and, yes,
something that is socially responsible (depending on the values I hold and the
criteria I prioritize in my purchase decisions). This is something that we all
know intuitively to be true. It is why car companies like BMW, Mercedes,
and Audi exist – they provide a product that does much more for the con­
sumer than transport them from point A to point B.
In addition to this private, non-technical value that is built into the price
the consumer pays for a good, there is also a component that relates to the
level of public value that is generated. If I buy a Toyota Prius, for example, I
pay a premium over similar, non-hybrid cars because of the superior techno­
logy built into the Prius’ engine and battery. While I get a private benefit
from this purchase in that I can now demonstrate to everyone how environ­
mentally conscious I am, there is also a significant public benefit in the
reduced pollution that my car emits. In this, the price I am paying represents
a partial subsidy to society in that I am covering the cost of improving the air
quality, incrementally – a positive externality from which everyone benefits,
but is built into the price that I pay (and, therefore, is incorporated into the
profit that Toyota reports at the end of the year). More specifically, by pro­
viding this product that reduces environmental pollution, is Toyota engaged
in solving an economic problem (the demand for cars) or a social problem
(the need to transport people in a way that minimizes damage to the
environment)?
Management researchers talk about the need for “compassion in organiza­
tions” that allows them also to “focus on social problems and social welfare
concerns,”4 as if economic problems and social problems are separate entities.
Again, a simple thought experiment highlights the overly-simplistic nature of
this forced dichotomy. Is feeding people a social problem or an economic
problem? Of course, there are hundreds of for-profit food manufacturers (not
to mention the hundreds of thousands of restaurants and supermarkets) that
produce food and distribute it widely (and efficiently) to whole populations
of people. What about clothing people – a social problem or an economic
problem? A visit to the mall will quickly reveal how efficiently for-profit
firms have essentially eradicated the supply of clothes as a challenge for all but
the most deprived societies. Or, what about providing internet access to every
household in the country – economic or social? Certainly, you could make
an argument that, today, a family is essentially excluded from many aspects of
society if it cannot get online (“what many people consider as basic a utility
as water and electricity”);5 yet, internet provision in most developed eco­
nomies is the sole responsibility of the private sector (as it is for the food and
apparel industries).
So, how is it that for-profit firms are not already intricately involved in
addressing social problems? In fact, you could argue that, essentially, every
64 Profit = total value
company uses economic means to solve social problems. Now, you may chal­
lenge the business models of some of these firms, or the quality of the final
product they produce, but I believe there is no way that anyone can say these
for-profit firms are not involved in addressing complex problems that have
intertwined economic and social (and moral and ethical) components. In
essence, there are no economic problems or social problems; there are just
problems that have both social and economic consequences.
As the above examples indicate, much of what is referred to as social value
(the value that is derived above and beyond the functional purpose of a
product or service) is largely captured in a willingness among consumers to
part with their disposable income. Given that, for most of us, our disposable
income is a scarce resource, how we decide to spend it reflects our values in
action. That is not to say that market forces are perfect, as noted in Principle
5. Unfortunately, 100% of social value is not captured in the price charged
and the profit earned. Negative externalities are a good example of how
imperfect the market can be (e.g., pollution during manufacturing that goes
undetected, or the pollution involved during consumption that is not paid
for). Human beings’ tendency to favor short-term gratification over longer-
term investments (which explains why many people fail to save sufficient
funds for their retirement) is another example of how the private profits that
are generated immediately as a result of our consumption decisions do not
reflect perfectly the public costs incurred by society at some later date:

The profit motive can be objected to legitimately when the quest for
profits results in restrictive monopoly, exploitation, fraud, misrepresenta­
tion, political bribery, waste of nature resources, economic insecurity,
etc. It is the abuse of the profit motive, not the motive itself, that comes
under criticism.6

Nevertheless, given what we know, monetary value is the best way we have of
capturing overall value creation. The price of a product and the profit of a firm
incorporate a significant amount of all aspects of value (economic, social, moral,
and ethical) that is encapsulated in market transactions. While the correlation
among these different measures of value is high, however, it is not perfect. As
such, SVC exists to redefine our understanding of economic exchange in order
to minimize the gap among different measures of value. One example of this is
to ensure that firms internalize the complete costs of production and consump­
tion in the price that is charged for the finished good (detailed in Principle 7).
Before we turn to that discussion, however, it is necessary to complete our
consideration of the role played by profit in terms of total value creation.

Profit optimization
In the process of delivering value to its broad range of stakeholders, it is
essential that the firm generates a profit. Profit generation is, therefore, also
 Profit = total value 65
central to the concept of SVC. Rather than challenge what the firm does
(make money), SVC is focused more specifically on how the firm does it (the
hundreds and thousands of operational decisions made every day). In the
process, one of the goals of SVC is to shift the debate around the purpose of
the for-profit firm in society. By challenging taken-for-granted assumptions
about business and the value it delivers, the potential for reform to help build
a more sustainable economic system becomes possible. One of the taken-for­
granted assumptions that must be challenged is the idea that firms pursue pol­
icies and practices that result in profit maximization. First, this concept is not
provable; second, it is unhelpful.
First, the idea of profit maximization is something that is impossible to
prove as a firm can never know whether the profit generated was in fact
maximized or what effect making an alternative decision would have had
instead:

A simple statement that managers try to maximize corporate profits, as is

frequently assumed in economic theory, is almost meaningless. The
concept of profit is a highly tenuous one in that it involves the valuation
of assets, the allocation of joint costs, the treatment of developmental
expenses, and a host of similar problems for which there are no easy or
definite solutions. The idea of profit maximization raises the troublesome
question of the time period over which profits are to be maximized, and
it is difficult for either managers or observers to calculate the effect on
profits of given actions which may affect the business indefinitely in the
future. Obviously, businessmen [sic] are often deterred by custom and by
ethical principle from exacting the highest possible profit. The business­
man may forgo profits to avoid the demands of organized labor, or public
regulation, or entry of new firms. Businessmen often show greater
interest in business volume and business expansion that they do in profits.
… It may be more realistic to describe the quest for profit as a seeking
for “satisfactory profits” rather than maximum profits (“satisfactory”
defined in relation to the profit experience of other firms).7

Second, the idea of profit maximization is unhelpful. It is an ideological

fallacy that distorts expectations and decision-making within the firm. The
only way we can know if a particular set of decisions maximized profits for
the firm is to re-run the time period, under the exact same internal and exter­
nal conditions, investigating all the different possible combinations of decision
outcomes. Given that there is no control group,8 it is not possible to know
whether current profits are any higher or lower than if different decisions had
been made. As such, the decision matrix that guides the firm comes down to
a debate among different philosophies – for example, Do you believe paying
a minimum wage to employees will generate larger profits (by reducing costs)
than will be generated by paying a living wage (by increasing loyalty and pro­
ductivity)? Any firm or executive that claims their set of decisions maximize
66 Profit = total value
profits for the firm is, therefore, being disingenuous at best; most likely, they
do not fully understand the nature of the statement and certainly cannot in
any way prove the claim. As Robert Skidelsky reminds us:

Economics is luxuriant with fallacies, because it is not a natural science

like physics or chemistry. Propositions in economics are rarely absolutely
true or false. What is true in some circumstances may be false in
others. Above all, the truth of many propositions depends on people’s
expectations.9

As a result of being both impossible to achieve and unhelpful because it dis­

torts decision-making, rather than profit maximization, a more valuable focus
for firms to adopt is the goal of profit optimization. Although equally imposs­
ible to prove definitively, profit optimization (rather than maximization) is a
flexible goal that more closely approximates the subjective nature of the
decision-making process – different people will use different sets of values to
determine what they consider to be optimal. In other words, while the idea of
a maximum suggests an absolute point (a definitive highest amount), an
optimum suggests a more relative state of existence. What is optimal for me
may not be optimal for you, but you cannot say the values by which I deter­
mine my optimum are wrong, just that they differ from the values you use to
determine your optimum. As such, this rhetorical shift helps encourage a
balance between short-, medium-, and long-term decisions that create value
across the firm’s broad range of stakeholders.

Production value and consumption value

As the discussion above indicates, while defining social value and economic
value and understanding how they relate to each other appears superficially
straightforward, it is highly complex in reality. Beyond a conceptual discus­
sion, it is also useful to think through the challenges of drawing this distinc­
tion in practice. For example: Do employees’ wages relate to economic value
(a cost of production) or social value (a determinant of income inequality)?
Similarly, is the level of pollution related to economic value (an output of
production) or social value (a blight that is borne by society)? In both cases,
you might answer “both” and, of course, you would be correct. In reality,
there is no social value and no economic value; there is only value (positive and
negative) that is distributed among all stakeholders in different ways due to
different decisions. Any attempt to present these highly complex and com­
plementary concepts as independent reveals a fundamental misunderstanding
of the role firms play in society, but also of the ability of profit to capture
what people mean when they talk about social (and ethical and moral) value.
Given these complexities, an alternative conceptualization is to think of
the value added by a firm during production and the value added by a
product or service during consumption. At either stage, the assessment of the
 Profit = total value 67
value added would be either neutral, net positive, or net negative. In this
alternative conceptualization, employees’ wages would contribute to the total
value added during production, as would any pollution emitted during manu­
facturing, while pollution emitted during consumption (e.g., driving a car,
the e-waste created by a discarded smartphone) would be accounted for as
part of the value added (or subtracted) during consumption. The net effect, in
theory, would define our collective quality of life and, in turn, help deter­
mine necessary reforms:

Our standard of living … consists of two parts: that which derives from
the conditions under which production is carried on and that which
derives from the goods and services resulting from that production. An
improvement in the conditions of production – resulting in a better
working environment of better functioning of the economy – may fre­
quently be entirely justified even if achieved at a sacrifice in output of
final goods and services.10

The challenge we face as a society, therefore, is to strike a balance between

the part of our standard of living that is formed from the production of goods
and services, and the part of our standard of living that is formed from the
consumption of those goods and services. The production component
includes incorporating costs that firms currently seek to externalize (such as
the pollution emitted during manufacturing), while the consumption com­
ponent includes incorporating costs that society currently seeks to avoid (such
as the pollution emitted during consumption, e.g., driving a car or discarding
e-waste). If a marginal $1 spent on production yields greater returns than the
same $1 spent on consumption, it is in our collective best interests to spend
the $1 on improving aspects of production (and vice-versa). While true, it is
also important to keep in mind that understanding the true nature of what
profit represents is conceptually important, but helpful only up to a point. If
we accept that long-term profit is a good (if imperfect) measure of total value
added, we must also recognize that it is just that – a measure of performance
that still does not help us understand how the firm should go about adding
that value:

Defining what it means to score a goal in football or soccer, for example,

tells the players nothing about how to win the game. It just tells them
how the score will be kept. That is the role of value maximization in
organizational life.11

In other words, profit is the outcome of a highly complex process that, more
accurately, determines whether the firm is being socially responsible. As such, it
is the detail of that complex process that matters. Understanding how firms
can balance the pursuit of profit and the need to satisfy a broad range of
stakeholder interests (how they should achieve their profit) is essential.
68 Profit = total value
Recognizing that this realization of empowered stakeholders is achieved
largely through the value creation process, and that a necessary element of
this is understanding what value (all kinds of value) looks like for each of these
stakeholders, is central to understanding the different approach to business
that is demanded by SVC.

Summary
Principle 6 states that Profit = total value. It argues that conceptualizing eco­
nomic value as an independent construct, separate from other kinds of value
(such as social, ethical, and moral), demonstrates a fundamental misunder­
standing of what profit represents. Although imperfect, profit is the best
measure we have of capturing the total value added by a specific company
and product/service during production and consumption. Rather than asking
firms to focus on profit maximization (both impossible to prove and unhelpful
because it distorts decision-making), the goal of profit optimization better
reflects the value judgments made every day as firms balance competing
stakeholder interests. Even better, understanding the total value added in
terms of the separate processes associated with production and consumption
provides a mechanism by which society can more easily identify those behav­
iors that create (and destroy) total value.
Principle 7
The free market is not free

Key takeaway: The free market is an illusion. It encourages firms to external­

ize costs that are borne by society rather than consumers; it is rife with subsidies
and quotas that favor some firms and industries over others. The result is an
economic system that is distorted and, as a result, unsustainable.

As explored in Principle 6, although economic value and social value are

highly correlated, the relationship is not perfect. In other words, not all of the
value that is sought by stakeholders is captured in the profit generated by the
firm. The reason for this is that our current economic model is distorted. In
order to build on Principles 5 and 6, therefore, it is essential to address the
structural characteristics that embed barriers to free exchange throughout the
economy.
In terms of protectionism, for example, the barriers to trade are numerous
and, because they are often designed to appease local political constituencies,
can appear absurd from afar. America, for example, reportedly “tacks a 127%
tariff on to Chinese paper clips,”1 while Japan continues to levy “a whopping
778% tariff on imported rice.”2 Amazingly, $500 billion is spent by govern­
ments worldwide on energy subsidies, “the equivalent of four times all official
foreign aid.”3 And, when externalized costs are added to these subsidies, the
IMF estimates that “the fossil fuel industry got a whopping $5.2 trillion in
subsidies in 2017. This amounts to 6.4 percent of the global gross domestic
product.”4 For these reasons (and many more – quotas, tax breaks, bailouts,
export rebates, externalities, and so on), markets are far from freely com­
petitive. Failed oversight and misaligned incentives allow otherwise uncom­
petitive firms and harmful products to remain viable, while active
intervention, usually by the government, undermines innovation and free
enterprise.5 Overall, the wide variety of market distortions generate an eco­
nomic system that is less efficient, less competitive, and less sustainable than it
otherwise would be.6
70 The free market is not free
Free markets
As currently constituted, “markets fail to price the true costs of goods.”7 The
reason for this is that the markets we have created are riddled with inefficien­
cies (what politicians call subsidies, tax breaks, legal loopholes, etc.). These
inefficiencies introduce costs into the system and skew incentives that,
together, sustain uncompetitive companies and erect barriers to more com­
petitive alternatives. As such, we need to reform our market system. The goal
should be to work toward a model in which all costs are included in the price
charged for each product and service. An economy where externalities are
internalized and embedded within a moral framework moves us closer to the
economy Adam Smith envisioned and wrote about in his classic treatise The
Theory of Moral Sentiments8 – truly free markets filled with values-based busi­
nesses and vigilant, engaged stakeholders. Instead in the U.S., for example,
we have a very different reality:

Every year, states and local governments give economic-development

incentives to companies to the tune of between $45 billion and $80
billion. Why such a wide range? It’s not sloppy research; it’s because
many of these subsidies are not public. For the known subsidies, such as
Maryland’s recent $8.5 billion incentive bid for Amazon’s second head­
quarters, the support includes cash grants for company relocations, subsi­
dized land, forgiving company taxes on everything from property taxes
to sales taxes and investments in infrastructure for the company. Mary­
land is even offering to give [the state income tax rate of] 5.75 percent of
each worker’s salary back to the company.9

Politicians on both the left and the right tend to favor government inter­
vention when it is in support of a cause in which they believe (e.g., sub­
sidies for solar power on the left; tax breaks for oil firms on the right), but
at least the left admits that it favors government intervention. Right-wing
ideology, in contrast, preaches free market ideas, but then implements
heavily subsidized intervention in contravention of that ideology. Although
shocking in itself, the above quote about the extent of corporate welfare
only hints at the inefficient system of corporate support we have created in
the West. A good example of these distortions can be found in the energy
market:

Economics 101 tells us that an industry imposing large costs on third

parties should be required to “internalize” those costs. … [Energy extrac­
tion by] Fracking might still be worth doing given those costs. But no
industry should be held harmless from its impacts on the environment
and the nation’s infrastructure. Yet what the industry and its defenders
demand is, of course, precisely that it be let off the hook for the damage
it causes. Why? Because we need that energy!10
 The free market is not free 71
In a similar way, a significant cost associated with nuclear energy is absorbed
by the government when it takes responsibility for waste containment. While
there is a valid national security interest in doing so, the effect is to external­
ize the true cost of nuclear power generation. A truly free market is only pos­
sible, therefore, if we both reduce government intervention (i.e., the removal
of subsidies, quotas, tax breaks, etc.) and internalize all externalities in pricing.
One without the other is not free; at present, we have neither:

So it’s worth pointing out that special treatment for fracking makes a
mockery of free-market principles. Pro-fracking politicians claim to be
against subsidies, yet letting an industry impose costs without paying
compensation is in effect a huge subsidy. They say they oppose having
the government “pick winners,” yet they demand special treatment for
this industry precisely because they claim it will be a winner.11

In this light, a government tax on carbon is simply a means of accounting for

the full environmental costs of oil/gas extraction, processing, and consump­
tion. In other words, it is a means of creating the conditions for a free market.
Once the level playing field has been created (with more accurate prices for
all forms of energy), then the market will determine which energy sources
should drive our future economies. Ultimately:

markets are truly free only when everyone pays the full price for his or
her actions. Anything else is socialism. … Our future will largely be
determined by our ability to admit the need to end planetary socialism.
That’s the most fundamental of economics lessons and one any serious
environmentalist ought to heed.12

Externalities
A core tenet of economic theory is that, over the long run, prices are formed
by the market in response to demand and supply and, as such, are essentially
outside the control of individual firms. In other words, in the long run, firms
can only charge what market forces will allow them to charge. Any higher
and the firm will lose business to its competitors; any lower and the firm will,
at a minimum, leave money on the table and, more likely, will operate at
a loss.
The problem with this theory is twofold: first, many of the assumptions
that accompany it (free and open competition, complete information, equal
access among buyers and sellers, etc.) are rarely, if ever, present; and second,
most business occurs in the short run – as Keynes noted, “In the long run we
are all dead.”13 As a result, markets are imperfect and prices fail to capture all
costs associated with production and consumption. Given the opportunity,
firms will externalize these costs, allowing others (society, broadly speaking)
to incur them. Thus, firms are not directly responsible for building roads,
72 The free market is not free
although they benefit greatly from using them to transport goods; they also
do not pay for the education system, legal infrastructure, or national defense,
even though they value access to an educated workforce, enforceable prop­
erty rights, and stable borders. All of these costs are what economists refer to
as an externality – a cost (or benefit) that is incurred, but not paid for, either
by the firm (during production) or the purchaser (during consumption):

Over the past century, companies have been rewarded financially for
maximizing externalities in order to minimize costs. … Not until we
more broadly “price in” the external costs of investment decision across
all sectors will we have a sustainable economy and society.14

While it takes 500–2,000 liters of water to produce the 4oz. of ginned cotton
necessary to make a cotton T-shirt, for example, the farmer who produced
that 4oz. of cotton receives only approximately U.S.$0.20.15 This is because,
in many countries, water is provided free or heavily subsidized by the state in
ways that fail to reflect either the true value of water in the production process
or the cost of replenishing stocks so others may have a guaranteed supply in
the future. Clearly this is less than optimal because it distorts the normal inter­
action of demand and supply to create an artificially low price (and distorted
market) for, in this case, T-shirts. If we are to fundamentally reform our eco­
nomic model, therefore, a vital step is to account adequately for such external­
ities. In other words, the price of a product should not only include the cost of
production, but also the cost of replenishing the raw material and disposing/
recycling the waste post-consumption. If all firms are forced to incorporate
externalities into the price of the finished product or service, many of the
cheap items in our disposable economy will become significantly more expen­
sive and firms will be incentivized to produce sustainable alternatives.

Lifecycle pricing
A major flaw in economic theory will remain if we continue to allow
resources to be treated as though they are infinite. Until Elon Musk works
out a way to get us to Mars,16 there is only one planet and, as much research
has demonstrated, we are already placing significant constraints on the
resources at our disposal:

Some seven billion people are alive today; the United Nations estimates
that by the end of the century we could number as many as 15.8 billion.
Biologists have calculated that an ideal population – the number at which
everyone could live at a first-world level of consumption, without
ruining the planet irretrievably – would be 1.5 billion. … Each year the
world adds the equivalent of another Germany or Egypt; by 2040, China
will have more than 100 million 80-year-olds. We add another million
people every four and a half days.17
 The free market is not free 73
Population level, in itself, however, is not necessarily a problem. It is a large
population combined with a materialistic lifestyle that places such a strain on
resource levels:

If everyone on Earth lived the lifestyle of a traditional Indian villager, it is

arguable that even 12 billion would be a sustainable world population. If
everyone lives like an upper-middle-class North American (a status to
which much of the world seems to aspire), then even two billion is
unsustainable.18

There is a cost to extraction, production, and consumption without reuse or

replenishment.19 Waste, wherever it occurs in the value chain, is a significant
economic and ecological drag on efficiency.20 Externalities distort markets
and underprice products that generate long-term ecological damage. Where
resources can be re-used or replenished, we need to account for the cost of
doing so in the prices charged to consumers. Where resources cannot be re­
used or replenished, we need to impose a cost that accounts for the perma­
nent loss to humanity that results from their extraction. As Paul Hawken
astutely put it:

Without doubt, the single most damaging aspect of the present economic
system is that the expense of destroying the earth is largely absent from
the prices set in the marketplace.21

One idea that has been proposed to solve the problem of externalities by
accounting for (internalizing) these true costs is lifecycle pricing22 (related to the
idea of Pigovian taxes).23 In other words, the price of a product should not
only include the cost of production, but also include the costs associated with
replenishing the raw materials used and disposing/recycling of the waste after
consumption.24 Attempts to price carbon reflect this process (either through a
carbon tax or some form of cap-and-trade), while firms’ efforts to measure
the carbon footprints of their products (such as a carton of Tropicana orange
juice)25 provide a possible means of implementation.
The core idea behind lifecycle pricing is to capture all of the impacts at
each step of the production process and assign a quantitative value to that
step. At the risk of over-simplifying a highly complex calculation (managing
to avoid double-counting is, in itself, extremely challenging); in essence, life-
cycle pricing requires a firm to add up all the positive and negative costs in
the value chain to arrive at a net impact score for each product. This is
important because, “If prices reflected all the costs, including ecological costs
spread across generations, the world would not face sustainability challenges;
at least in theory.”26 The debate surrounding the pricing of “natural capital”
(the resources that exist naturally and are exploited by business, often for
free – a form of “environmental profit and loss accounting”)27 is central to
this task:
74 The free market is not free
Natural capital is simple. The value of well-functioning natural systems is
clearly manifest to all people and companies – in the form of clean air,
reliable availability of freshwater and productive topsoil in which to grow
food, among other benefits. Yet, the way that finance works – from
GDP calculations through corporate to accounting – it is as if reliable
flows from well-functioning natural systems have no value.28

One of the earliest adopters of the concept of “environmental profit and loss”
(EP&L) accounting was Puma. The firm developed and first published an
EP&L statement in 2011, in which it concluded its operations had an “impact
of €51 million resulting from land use, air pollution and waste along the value
chain added to previously announced €94 million for GHG emissions and
water consumption.”29 It is an idea that is making progress, with a number of
firms already incorporating carbon pricing into their planning and budgeting
models. Sometimes this is driven by a genuine desire to account for all costs
incurred; other times it is to prepare for anticipated legislation that must come
at some point. Exxon, for example, applies a cost of “$80 a tonne … when
making investment decisions for 10 years,”30 while Microsoft “charges all
departments for every kilowatt-hour of dirty energy they contract or air mile
flown by executives, to help meet firm-wide climate targets.”31 According to
CDP, “a British watchdog, 607 [firms] now claim to use ‘internal carbon
prices.’ … Another 782 companies say they will introduce similar measures
within two years.”32
If firms can account for all costs incurred at all stages of the value chain
(extraction, processing, manufacture, wholesale/retail, purchase/consump­
tion, disposal/recycling), including transportation and storage, as well as all
resource inputs (e.g., energy and materials) and outputs (e.g., waste and other
pollutants), they would have an accurate snapshot of the true costs involved
in producing a product. More important, they would be able to include those
costs in the price they charge to customers, which would then allow the
market to determine the true demand for that product. Perhaps the best
example of a firm that has comprehensively attempted to integrate this life-
cycle approach throughout all aspects of operations is Interface carpets, whose
inspirational founder and CEO, the late Ray Anderson, explained his journey
in terms of the seven (+1) faces of Mount Sustainability: 1. Waste. 2. Emis­
sions. 3. Energy. 4. Materials. 5. Transportation. 6. Culture. 7. Market. 8.
Social equity.33 In Anderson’s vision, the peak of the mountain represents
sustainability, which he defines as “take nothing, do no harm.” The natural
conclusion of such a closed-loop system is zero waste and, to Anderson, this
makes perfect business sense:

More happiness with less stuff. You know, that would reframe civiliza­
tion itself and our whole system of economics – if not for our species,
then perhaps for the one that succeeds us – the sustainable species, living
on a finite earth, ethically, happily, and ecologically in balance with
 The free market is not free 75
nature and all her natural systems for a thousand generations or ten thou­
sand generations. … But, does the Earth have to wait for our extinction
as a species … I don’t think so. At Interface, we really intend to bring
this prototypical, sustainable, zero-footprint industrial company fully into
existence by 2020. We can see our way now clear to the top of that
mountain and now the challenge is in execution.34

It is only by developing industry-wide standards within a lifecycle pricing

model that we will move closer to understanding the holistic impact of our
current economic system and business practices.35 We have created an
economy based on convenience and waste – we spend money we do not
have, on things we do not want, for purposes that are often unimportant.36
To begin to rectify this, we need to find a way to decrease our unsustainable
exploitation of virgin resources. The market remains the most effective means
we have of allocating scarce and valuable resources in ways that optimize
social outcomes. Rather than continue to subsidize specific industries and
uncompetitive firms, lifecycle pricing allows for a less distorted competition
of ideas in the marketplace that should also generate more sustainable (and
socially responsible) outcomes.

Summary
Principle 7 states that The free market is not free. It argues that, at present, our
economic system allows firms to externalize costs (to society) that are then
not included in the prices that are charged (to customers). The problem,
therefore, is not that the price mechanism does not work, but that all relevant
costs are not currently included in the prices that are charged. And if prices
are distorted, the resulting economic exchange will be distorted – producers
benefit from lower costs, while consumers benefit from lower prices, and the
rest of us pick up the tab. Not only does this create an artificial market for
existing products and services; it creates artificial barriers to entry for more
competitive alternatives. The solution lies in lifecycle pricing, where all related
costs of production and consumption are incorporated into the final prices
charged.
Principle 8
Only business can save the planet

Key takeaway: The environmental crisis has reached the point where
individual-driven change is insufficient. While for-profit firms were the main
cause of the problem, they are also the main hope for a solution. Scale is vital
and large firms must do much more if we are to build a sustainable economy.

When we internalize Principle 7, we understand the scale of the required

change, with two implications. First, we cannot get there with higher levels
of consumption – at least, not with our current economic model that equates
progress with waste.1 Something more radical is essential. At the end of his
documentary, An Inconvenient Truth, Al Gore famously presented a call to
action – for viewers to “be part of the solution.” Having sketched a vision of
global calamity, however, Gore then implores the audience to go home and
“change a light bulb” or “plant a tree”:

That’s when it got really depressing. The immense disproportion

between the magnitude of the problem Gore had described and the puni-
ness of what he was asking us to do about it was enough to sink your
heart.2

Second, it is not about the actions of the individual, however worthy, but the
actions of the for-profit firm. And, in particular, it is the actions of large cor-
porations that will matter most. Scale is central to any meaningful solution.
While much of the focus remains on reusing shopping bags and banning
drinking straws, the planet is deteriorating before our eyes. In spite of all the
attention to this issue and all the micro actions taken, greenhouse gas emis-
sions continue to rise:3

The problem we face is far greater than anything portrayed by the media.
… recycling aluminum cans in the company cafeteria and ceremonial
tree plantings are about as effective as bailing out the Titanic with
teaspoons.4
 Only business can save the planet 77
Only for-profit firms are able to deliver the necessary reforms on the scale
and at the speed at which they must occur to avert widespread ecological
devastation.

Sustainability
In 1987, The Brundtland Report was published. The report, which was named
after its lead author, Gro Harlem Brundtland (Norwegian Prime Minister and
chair of the United Nation’s World Commission on Environment and Devel-
opment), was established to investigate the sustainability of our economic
development. As well as concluding that our current system is unsustainable,
the committee provided a definition of what a sustainable system would
look like:

Sustainable development is development that meets the needs of the

present without compromising the ability of future generations to meet
their own needs.5

The discussion fostered by the report essentially defined the field of sustain-
ability as concerned primarily with resource use (in particular, the rapid rate
of depletion and accompanying waste).6 As such, most people today under-
stand sustainability to represent issues related to the natural environment.7
Importantly, however, the report was also prescient in framing the central
role of business as both the cause of the problem and also the best hope for a
solution:

The Brundtland Report, which inspired the 1992 Earth Summit in Rio
de Janeiro that resulted in the Climate Change Convention and in turn
the Kyoto Protocol, acknowledged that many “of the development paths
of the industrialized nations are clearly unsustainable.” However, it held
fast to its embrace of development toward industrialized nation living
standards as part of the solution, not part of the problem. “If large parts
of countries of the global South are to avert economic, social, and
environmental catastrophes, it is essential that global economic growth be
revitalized,” the report stated.8

In the debate over whether we should pursue sustainability via material sacri-
fice (produce and consume less) or technological innovation (produce and
consume more effectively), The Brundtland Report, with the supporting legiti-
macy of the UN, came down firmly in favor of progress. This presents a clear
paradox between the damage to the environment done so far by the industrial
revolution and subsequent economic development, and the future potential
contributions firms can make to create a more sustainable economic system.
The key is to move quickly:
78 Only business can save the planet
The world has warmed more than one degree Celsius since the Industrial
Revolution. The Paris climate agreement … hoped to restrict warming
to two degrees. The odds of succeeding, according to a recent study
based on current emissions trends, are one in 20. … Keeping the planet
to two degrees of warming, let alone 1.5 degrees, would require trans-
formative action. It will take more than good works and voluntary com-
mitments; it will take a revolution.9

Given the scale of the problem, large-scale business is central to any potential
solution. While greenhouse gas emissions from energy use are an important
source of global emissions, for example, they form only 35% of the total, with
industry (21%), forestry and agriculture (24%), transportation (14%), and
buildings (6%) contributing the remainder.10 There is much work to do, espe-
cially given the inherent flaws in our economic system built on waste and
materialism.

Waste
Waste is a central component of the economic model that drives the global
economy. For the majority of for-profit firms, the more you buy of their
products, the better they perform and the faster the economy grows. In other
words, excessive consumption and quick turnover are essential. Whether we
need a product is less important than whether we want it. And, if we buy
something, the quicker we throw it away and buy another one, the better for
all concerned. Restraint and conservation are not encouraged. When you
realize that Starbucks goes through 4 billion disposable cups a year at its
30,000 locations worldwide,11 you understand that refusing a straw or bring-
ing your own reusable cup (even if you get all of your friends to do the same)
pales in comparison to the scale of the action required to make a difference.
An important assumption of this economic model is that the world’s
resources are unlimited. When a company extracts a raw material and converts
it into something consumers want to buy, the price covers only the costs the
firm incurred during the extraction and conversion. For the most part, there is
no charge associated with the replenishment of the resource (e.g., the cost of
losing forever the precious metals used in smartphones not recycled) or the
pollution emitted during consumption (e.g., when driving a car). In short, our
economy is based on waste – the more the firm uses and customers discard,
the higher a country’s GDP, and the stronger its economy. A question worth
asking is “Are we sinking under the weight of our disposable society?”12

According to the OECD, the average person creates 3.3lb (1.5kg) of

rubbish a day in France, 2.7lb in Canada and no more than 2.3lb in
Japan. By the OECD’s reckoning, the average American produces 4.5lb
a day, and more recent accounting puts the figure at over 7lb a day, less
than a quarter of which is recycled.13
 Only business can save the planet 79
Our consumer-oriented economic model dictates that we trade-in our fully
functioning old smartphone and buy a new model whenever one comes out,
without thinking through the consequences of that exchange. The problem is
particularly acute in terms of the electronic waste (e-waste) that we generate in
the process. As electronic consumer goods become obsolete and are dis-
carded, the vast array of toxic metals they contain inflict significant costs onto
society. And the problem is only growing as “the worldwide accumulation of
e-waste has more than doubled in the last nine years. … [Shortly], the annual
total is predicted to surpass 57 million tons”:14

Though often laced with lead, mercury or other toxic substances, laptops
and phones also contain valuable elements like gold, silver and copper.
Yet barely 20 percent of the world’s e-waste is collected and [recycled].
… the raw materials contained in e-waste were worth roughly $61
billion in 2016. … the gold in the world’s e-waste equaled more than a
tenth of the gold mined globally that year. … Based on e-waste disposal
rates, Americans alone throw out phones worth $60 million in gold and
silver every year.15

There is a similar story with the amount of plastic that we use and discard
every day. Plastic, which was invented in the early twentieth century and
commercialized in the 1950s, has become one of our most versatile materials
– “Some 322m tons of plastic were produced in 2015, and that number is
expected to double by 2025.”16 It is particularly useful in single-use applica-
tions, which are convenient in households (e.g., bottled water) and critical in
hospitals (e.g., syringes and packaging), where hygiene is life and death. In
addition to being so useful, of course, plastic is highly durable, which unfor-
tunately makes it difficult to dispose of. In fact, since the 1950s, while “8.3bn
tonnes [of plastic] has been created. … just 9% has been recycled, 12% incin-
erated and 79% has accumulated in landfills or the wider environment.”17 At
the rate we are going, by 2050, it is estimated there will be “12 billion metric
tons of plastic waste … in landfills or the natural environment”18 and “more
plastic than fish by weight in the oceans.”19
Together, e-waste and plastic are poster children for the ecological con-
sequences of our consumption-based economic model, which treats all
resources as infinite and fails to fully account for the externalities created
during the production process. Yet waste reduction, when approached with a
more enlightened attitude, can be a potential source of differentiation.
Walmart, for example, whose ex-CEO (Lee Scott) committed the firm to the
goal of “zero waste” in 2005,20 presents an excellent case-study of what this
can look like in practice. Ever since, Walmart has been committed to mini-
mizing the waste packaging that is processed through its stores:

Our packaging team, for example, worked with our packaging supplier to
reduce excessive packaging on some of our private-label Kid Connection
80 Only business can save the planet
toy products. By making the packaging just a little bit smaller on one
private brand of toys, we will use 497 fewer containers and generate
freight savings of more than $2.4 million per year. Additionally, we’ll
save more than 38-hundred trees and more than a thousand barrels
of oil.21

When a large corporation such as Walmart alters its business practices, it has
immediate ramifications for its tens of thousands of suppliers that have to
adapt to the firm’s new demands. And, given that Walmart has over 11,000
stores worldwide, in 27 countries, it only has to make a minor change to
produce a dramatic effect.22 The reason we have concentrated laundry deter-
gent, for example, is because Walmart (which is responsible for “approxi-
mately 25 percent of the liquid laundry detergent sold in the United States”)
told its suppliers it wanted to reduce packaging waste and transportation costs.
Every three years, the firm estimates its decision saves “more than 400 million
gallons of water; more than 95 million pounds of plastic resin; and more than
125 million pounds of cardboard.”23 For Walmart, the connection between
waste reduction and its overarching strategy is clear. Driving waste out of its
supply chain creates savings, which the firm passes on to its customers in the
form of lower prices. The extension of this philosophy to its support of the
Sustainable Product Index,24 ultimately, is designed to enhance consumer
awareness by allowing like-for-like comparison across all products in its
stores. Equally important for Walmart, however, it will provide more data
about its supply chain that the firm can use to drive costs even lower.
Examples such as these exist in many industries. Unfortunately, there are
many more examples of waste and inefficiency. We use and dispose of far
more resources than we conserve or recycle. A direct driver of this waste is
the materialism that motivates our desire to consume.

Materialism
A characteristic of the developed world is that, as a general rule, our posses-
sions vastly exceed our needs on a day-to-day basis. Perhaps it is part of our
genetic inheritance from our hunter-gatherer days but, for some reason, we
seem incapable of living within our means.25 It is not clear that we are more
prosperous as a result. It is a pity that, given our obvious capability for inge-
nuity, we have created an economic system that impoverishes as much as it
enables:

A quote from the former Vogue editor Diana Vreeland comes to mind:
“Give ’em what they never knew they wanted.” Fast-fashion retailers
like H&M, Topshop and Forever 21 are great at hawking what we never
knew we wanted. Not only that, they offer it at steadily reduced prices.
… Quality is no longer an issue, because you need clothes to last just
“until the next trend comes along.”26
 Only business can save the planet 81
It is equally distressing that we are willing to place our superficial concern for
material objects above the wellbeing of other humans. In addition to wasted
resources, there are social and human costs to the mass-production of cheap
T-shirts. We may believe that it improves our lives to have someone else do
our hard work for us (“Today, the United States makes only 2 percent of the
clothing its consumers purchase, compared with roughly 50 percent in
1990”),27 but there is nothing sustainable (in a holistic sense) in manufacturing
clothes thousands of miles away, shipping them to the West, all for under
$10. Ultimately, we are all worse off as a result:

The wastefulness encouraged by buying cheap and chasing the trends is

obvious, but the hidden costs are even more galling. … “disposable
clothing” is damaging the environment, the economy and even our souls.
… Have we somehow become disconnected from ourselves? If we don’t
stop to consider this, we may end up perpetually rushing out to buy
more “stuff,” never realizing what we truly need, genuinely want and
cannot afford to waste.28

In terms of stakeholder responses to firm behavior (a willingness to reward

those firms that best meet expectations), we are constrained by our desire to
consume, our insistence on convenience, and our fixation on price. In short,
while there are any number of studies that report consumers’ willingness to
buy green or socially responsible products, there are many others that suggest
we are all quite capable of saying one thing, while doing another.29 Most
individuals, when asked, want to believe they are ethical and persuade the
person asking them that this is the case. When it comes time to purchase,
however, we seem either to be unwilling or unable to put our ethical aspira-
tions into practice. It seems that our best intentions are easily distracted and
there is a limit for firms that rely too heavily on the market segment of ethical
consumers:

On the surface, there has seemingly never been a better time to launch a
sustainable offering. Consumers – particularly Millennials – increasingly
say they want brands that embrace purpose and sustainability. … Yet a
frustrating paradox remains at the heart of green business: Few consumers
who report positive attitudes toward eco-friendly products and services
follow through with their wallets. In one recent survey 65% said they
want to buy purpose-driven brands that advocate sustainability, yet only
about 26% actually do so.30

Driving our materialism to new depths is the concept of conspicuous virtue –

the idea that it is the perception of a good, rather than its functional value,
that drives the consumption of that good. An example of this might be a con-
sumer who drives a Prius, primarily because they want to convey to others
their concern for the environment. This focus on perceptions can rise to the
82 Only business can save the planet
point where it overrides the actual benefit to the environment that driving a
Prius offers.31 This idea also has parallels with what economists call a Veblen
good – “a product that is valued and desirable simply for being more expen-
sive.” The idea of a Veblen good was introduced by Thorstein Veblen in
1899 in a sociological paper titled “Theory of the Leisure Class,” which
introduced the idea of conspicuous consumption. This idea can be twisted to
highlight the idea of conspicuous virtue:

Conspicuous consumption stays with us today. But increasingly, it seems

[that] many consumers are not seeking an outright demonstration of
wealth. Instead, they consume to demonstrate their innate goodness.
They spend not to suggest the deepness of their pockets but the deepness
of their hearts. We inhabit, to update Veblen, an age of conspicuous
virtue.32

Conspicuous virtue arises when consumers purchase “virtuous goods” largely

in order to demonstrate their virtuousness, rather than for the instrumental
value of the goods themselves. The goal is “to make a statement. It is not
only to do right, whatever that might mean, but to announce that you are
doing so.”33 Cynics suggest that this idea of conspicuous virtue helps explain
the popularity of goods such as the Livestrong yellow wristband34 that, simul-
taneously, raised money for cancer research, while allowing the donor (who
only needed to donate a small amount) to demonstrate to the world that they
support the cause:

No doubt some wear the bands in solidarity, or for inspiration – but, that
said, the wristband conceit was simply ingenious. It allowed people to
make a show of their virtue. They could give to a good cause, and they
could advertise their caring to everyone else.35

Related to this issue of conspicuousness is the idea that the visibility of

something (rather than the actual harm being done) determines our reaction
to it. This phenomenon, discussed in terms of consumption here, has an
important application to the debate around sustainability and was most for-
cibly brought home during the Deepwater Horizon oil spill, the largest
environmental disaster to have occurred in the U.S. and the largest ocean oil
spill anywhere, ever.36 While the Deepwater spill deservedly prompted
public outrage, there is a much more serious and long-lasting form of pollu-
tion in the Gulf of Mexico that continues, but is routinely ignored. It is
caused by the phosphate/nitrogen run-off from fertilizers used in farms along
the Mississippi river. The excess runs off into the river and then flows down
to the Gulf, causing a “dead zone” that is much bigger and damaging than
the Deepwater Horizon oil spill. Because we cannot see it (and because of
the strength of the farm lobby in Washington DC), however, it does not
garner much media attention and even less public concern.37 Similarly, while
 Only business can save the planet 83
we get angry about rivers catching fire,38 we cannot see the build-up of
carbon dioxide (and many other pollutants) in the atmosphere, which helps
explain why more people are not as outraged about the problem and motiv-
ated to act.

Scale
In order to quantify the scale of the challenge humanity faces in creating a
more sustainable economic system, it is instructive to understand not only the
extent of the damage done to date but, perhaps more importantly, the pace at
which we continue to do harm:

Everyone knows what must be done about climate change, but no one is
doing anything about it. More than two decades of speeches and sum-
mitry have failed to thin out emissions of greenhouse gases. In fact, emis-
sions are accelerating: a quarter of all the carbon dioxide pumped into the
air by humans was put there in the decade between 2000 and 2010. It
will hang around for centuries, meaning that the future is sure to be
hotter, even if all greenhouse-gas emissions cease overnight. The official
ambition of limiting the global temperature rise to 2ºC looks increasingly
like a bad joke.39

As a result of the enormity of the challenge, a large-scale response is required.

Large scale, however, is not currently where we are at as a society:

Like recycling, re-using carrier bags has become something of an iconic

“sustainable behaviour.” But whatever else its benefits may be, it is not,
in itself, an especially good way of cutting carbon. Like all simple and
painless behavioural changes, its value hangs on whether it acts as a cata-
lyst for other, more impactful, activities or support for political changes.40

Although changes such as recycling aluminum cans, or using reusable shop-

ping bags, or buying fairtrade coffee, or changing lightbulbs at home make us
feel like we are taking action; in reality, we are not even scratching the
surface of the problem. For the overall effect to be meaningful, the positive
environmental actions need to outweigh the negative, need to do so world-
wide, and need to touch all aspects of our lives. Unfortunately, we are far
from achieving this. The danger, of course, is that, if we convince ourselves
we are doing something, it provides us with the moral license to avoid making
the difficult decisions necessary to generate meaningful reform. The solution,
as with all the ideas discussed in this book, depends on stakeholders demand-
ing change and then being willing to enforce that change:

Clearly, economic systems do not overhaul themselves – and in a demo-

cracy, majority support is a prerequisite for any significant societal shift.
84 Only business can save the planet
Politicians do not take risks if they don’t think the electorate will support
them. And civil society cannot function without a diverse supporter-
base.41

The issues discussed in Principle 8 (and indirectly throughout the book) rely
on the assumption that society today owes an obligation to future generations
to leave them a planet that is functional. If we accept this broad, inter-
generational obligation, the question then becomes: How much should we be
willing to pay today to minimize the future costs of our current actions? Long ago,
Howard Bowen was thinking about “the responsibilities of a business toward
future generations as distinct from the present generation” and the difficult
tradeoffs involved:

How rapidly and in what manner should it utilize nonreplaceable natural

resources? What provision should be made for replacement of timber,
fish, and other reproducible natural resources? Is the destruction of arable
land through strip mining ethically defensible? These are extremely diffi-
cult questions because there are no clear principles to determine precisely
how the interests of future generations should be balanced against those
of present generations, or to what extent private business should be called
upon to look out for future generations.42

This issue is particularly relevant in terms of issues such as climate change, but
relates also to the broader issue of how to value future benefit against present-
day cost. One attempt to do that was the influential Stern report on climate
change,43 which argued that society must “value the welfare of all present and
future citizens equally and give no special preference to current voters.”44 The
difficulty is, of course, how to account for the possibility of unknowns such
as technical innovation and the greater wealth of future generations and, as a
result, avoid exaggerating the immediate cost implications of climate change
(and causing unnecessary present-day suffering). Getting this balance between
current and future obligations correct is crucial if we are to ensure an effective
and realizable response to this hugely important issue:

The problem of weighting the present and the future equally is that there
is a lot of future. The number of future generations is potentially so large
that small but permanent benefit to them would justify great sacrifice
now. If we were to use this criterion to appraise all long-term invest-
ment, the volume of such investment would impoverish the current
population. … The burden of caring for all humanity, present and future,
is greater than even the best-intentioned of us can bear.45

While it appears that our capacity for altruism toward future generations is
limited, perhaps we can act to save ourselves. The speed at which climate
change is occurring suggests we will see dramatic consequences in our
 Only business can save the planet 85
lifetime. If so, sustainability increasingly represents a present-day imperative.
Although all the warnings may motivate us to act, however, human nature
suggests that meaningful change will most likely occur only in the face of
impending doom. At that time, it will require more dramatic change in a
shorter timeframe at a much higher cost (if it is possible at all). Given the
radical changes in behavior that will be required of people in both developed
and developing countries, even if we start seriously today, it is therefore pre-
ferable that buy-in is secured as quickly as possible and large corporations are
recruited to help us respond:

Here’s a question. Which trio of companies has done more for the
environment … Patagonia, Starbucks and Chipotle? Or Walmart, Coca-
Cola and McDonald’s? … Patagonia, Starbucks and Chipotle have been
path-breaking companies when it comes to sustainability, but Walmart,
Coca-Cola and McDonald’s are so much bigger that, despite their glaring
flaws, and the fundamental problems with their business models, they will
have a greater impact as they get serious about curbing their environ-
mental footprint, and that of their suppliers.46

While provocative, the answer to the question is intuitive. That is not to say
that the question isn’t an important one to ask. Perhaps, for the CSR/sustain-
ability community, it is the only one worth asking. Ultimately, the core ques-
tion is: Are we interested in ideal possibilities or meaningful change? If change is
what we want, then Walmart, Coca-Cola, and McDonald’s need to be the
source. That is not to diminish the wonderful business models of other
smaller companies, especially Patagonia and Starbucks. If anything, they are
the roadmap for what larger firms also need to accomplish. But, unless the
largest firms are fully invested in Sustainable Value Creation (SVC), we will
only be working at the periphery of the progress that needs to be made.
This conundrum plays out at a micro level whenever we make the effort
to recycle a plastic bottle or aluminum can – it is still the environmentally
responsible thing to do, even though we know the effect on the planet’s
future is limited, especially in light of the huge amount of resources that are
wasted elsewhere in our economic system every day. It is not even clear that
the item will be recycled47 and, if it is, it is not clear that recycling results in
less environmental impact. Just as building more roads encourages more
people to drive and we know that “recycling programs do increase recycling
rates, studies have shown that they also increase total consumption.”48
For-profit firms are the most valuable organizational form because it is
only these organizations that can act with the efficiency required on the scale
necessary to implement meaningful reform in the timeframe within which
change is needed. Yet, in order for this to occur, we need to ask firms to take
on this task. The for-profit firm is simply a tool we have devised to solve a
specific problem – how to allocate scarce and valuable resources to achieve
optimal outcomes (a problem that has challenged humanity throughout our
86 Only business can save the planet
existence). The best solution we have found to date is for-profit firms operat-
ing within a market-based, democratic form of capitalism. Once you under-
stand firms are merely a tool, however, you understand that they will do what
we ask of them. If we ask them to pollute the planet (as we are, at present),
they will do that, very efficiently. Equally, if we ask them to preserve the
planet, they will find the most efficient means of achieving that goal. They
will do what we want them to do – they reflect our collective set of values.
Yet, within the vast group of organizations labeled for-profit firms, there are
clearly some that contain vastly more potential for significant impact. Massive
firms have a disproportionate impact on our daily lives. The market capitali-
zation of the Top 10 global firms alone is $6.5 trillion.49 What these large
firms do in the near future, therefore, will do more to influence our lifestyles,
standard of living, and future security than all of the smaller firms combined.
As Jason Clay states in his TED talk on how big brands can save biodiversity:

100 companies control 25% of the trade of all 15 of the most significant
commodities on the planet. … Why is 25% important? Because if these
companies demand sustainable products they will pull 40–50% of
production.50

According to Clay, it is all about the B2B supply chain. Suppliers are as
important a stakeholder to the firm as the customer. Large companies pushing
other large companies will achieve change much faster and on a scale that
actually matters than waiting for consumers, one-by-one, to wake up to the
global consequences of their consumption decisions.

Summary
Principle 8 states that Only business can save the planet. The core argument rests
on the idea that, in order to solve the climate crisis, scale and speed are essen-
tial – that the problem has reached a point where only radical and rapid
change will produce meaningful effects and help avert the catastrophic
outcome we are hurtling toward. In this light, while for-profit firms are the
main cause of the environmental mess we face, they are also the main hope
for a solution, as long as we ask them to tackle the task. There is much work
to do, both in terms of production and consumption, in order to create a
truly sustainable economic system.
Principle 9
Value creation is not a choice

Key takeaway: SVC is a philosophy of management that infuses the firm,

incorporating all aspects of business. Value creation is, therefore, not something
firms can choose to do. By definition, they are already doing it, at least to some
degree; it is just that some do it better than others.

As indicated in Principle 8, fundamental change on a massive scale (and

quickly) is necessary if we are to build a more sustainable economic system.
Sustainable Value Creation (SVC) provides an actionable solution to this
problem, but only if the radical nature of this managing philosophy is prop­
erly understood. Value creation is not a peripheral activity; it is central to
everything the firm does. As such, it is not something firms can choose to do.
All firms already create value for at least some of their stakeholders, some of
the time. The goal is for more firms to do it for more of their stakeholders,
more of the time.

Not philanthropy, but core operations

SVC, unlike contemporary CSR, is not about philanthropy,1 but day-to-day
operations. If any money is being spent by the firm on areas not directly
related to core competencies, it is likely not the most efficient use of that
money. If, however, the main justification for an expenditure is brand aware­
ness and the firm feels there is value in being associated with a particular
charity or good cause (in other words, if the values underpinning the cause
align with those of the firm’s stakeholders), then that investment should be
made, but responsibility for it should be placed where it belongs, in the mar­
keting department. That functional area contains experts who know best how
to manage the brand. If, however, there are other business-related reasons for
the firm to donate money to a specific cause, such as to motivate employees,
then responsibility for that decision should lie with the relevant functional
area – it should be part of the firm’s core functions so that the relevant exper­
tise can be applied for optimal, value-added effect:
88 Value creation is not a choice
Consider Subaru of America. In the first nine months of this year, 512
employees have volunteered their time for 105 events for 46 different
organizations. Seventy-four employees donated 500 hours to build three
Habitat for Humanity homes in Camden, N.J., a poor city a few minutes
from Subaru’s headquarters in Cherry Hill. On the West Coast, 88
employees have donated 270 hours to assemble wheelchairs that were
donated to veterans. Employees have filled 2,000 backpacks for school­
children. For a company like Subaru, with a brand image of being out­
doors, dependable, inclusive and kind, those metrics help attract great
employees. They also help the company’s marketing campaign.2

The connection between value creation and philanthropy is tangential, at

best. Although there are specific tax advantages associated with donations, the
main business-related reason for making the payment is the potential market­
ing benefits, if employed strategically. Unless there is a direct connection to
operations, the argument for firms donating large sums in areas in which they
have low levels of expertise is difficult to make. One reason for this is that,
not only is philanthropy likely inefficient if it is unrelated to core operations,
but it can also go largely unrewarded (or even unrecognized) by the stake­
holders it is sometimes designed to placate:

Walmart is extremely generous, giving away over $1bn in cash and

product annually – but it’s still viewed by the public as one of the least
responsible companies on the planet, and is a continual target of boycotts
and protests.3

What if corporate America was willing to take the more than $18bn it
donates annually4 and, instead, invest it in what it does best – operating its
business? For-profit firms should focus on identifying those problems for
which there is a clear market-based solution and then deliver that solution in
an efficient and socially responsible manner. The idea of SVC as a managing
philosophy focuses on firms’ areas of expertise throughout all aspects of oper­
ations and de-emphasizes actions that stray outside that expertise for which
there either is not a market solution, or the firm is not well-equipped to
deliver that solution. That is how value is optimized over the medium to
long term – by operating in a way that seeks to meet the needs and demands
of the firm’s stakeholders, broadly defined. In other words, the focus of busi­
ness remains the same; it is the way the organization goes about it that is
different with an SVC perspective.

Not caring capitalism, but market capitalism

In recent years, there have been growing calls to reinvent capitalism – with
some going as far as to advocate for the introduction of socialism.5 High-
profile actors, such as Bill Gates of Microsoft (“caring capitalism”) and
 Value creation is not a choice 89
Muhammad Yunus of Grameen Bank (“social business”), have sought
to reform the underlying principles of capitalist ideology by urging firms to
adopt goals beyond a focus on profit. More recently, work has begun to
develop the concept of “inclusive capitalism, which is the idea that those with
the power and the means have a responsibility to help make society stronger
and more inclusive for those who don’t.”6
As discussed throughout this book, SVC rejects these attempts as not only
futile, but counter-productive. It is not the ends of capitalism (profit) that
matter so much as the means by which the ends are pursued.7 Although efforts
to deter firms from the pursuit of profit are delivered with the best of inten­
tions, the difficulty in implementation quickly becomes apparent when these
ideas are investigated in greater detail. Bill Gates, for example, launched his
manifesto for a “new system” of capitalism in a speech at the World Eco­
nomic Forum at Davos in 2008:

I like to call this new system creative capitalism – an approach where

governments, businesses, and nonprofits work together to stretch the
reach of market forces so that more people can make a profit, or gain
recognition, doing work that eases the world’s inequities.8

While appealing at first glance, it is not clear what Gates actually means by
“creative capitalism” and how it is to be realized in practice. For example, it
is easy to say that:

I hope corporations will consider dedicating a percentage of your top

innovators’ time to issues that could help people left out of the global
economy. … It is a great form of creative capitalism, because it takes the
brainpower that makes life better for the richest, and dedicates it to
improving the lives of everyone else.9

But, in reality, how is a firm to decide which issue it should prioritize and
devote its most valuable resources? How much value is compromised because
these “top innovators” are working on a philanthropic problem (that may or
may not be suited to their particular skillset) instead of one based on market
demand? How are firms to determine exactly which projects are appropriate
and which are not? Do firms need to calculate a certain level of potential
social welfare in advance? If so, how would they do that? What if it is not
realized? None of these questions are addressed sufficiently, with Gates
weaving back-and-forth between an argument based on market forces and
one based on an appeal to firms’ altruism without any clear guidance as to
how priorities among competing claims should be set. As one supportive
commentator noted:

In Gates’ vision, private companies should be encouraged to tweak their

structure slightly to free up their innovative thinkers to work on solutions
90 Value creation is not a choice
to problems in the developing world. It’s gung-ho, rather than hairshirt,
philanthropy. … While companies or individuals may ultimately profit
from this work in developing nations, the reward primarily comes in the
form of recognition and enjoyment.10

On an individual/micro level, such arguments are appealing, romantic even;

but, at a macro level, they quickly fall apart. In contrast, this book argues that
the market, while imperfect, remains the best means society has for allocating
scarce resources. As noted by a critic of caring capitalism:

there is a stronger argument to be made against “creative capitalism,” and

it is that profits come from serving society. The larger the profits, the
better job the company tends to have done. Profit maximization is a
worthy goal by itself.11

Put more bluntly, SVC, implemented throughout the firm via a stakeholder
perspective and a focus on medium- to long-term value creation, optimizes
performance:

Sure, let those who have become rich under capitalism try to do good
things for those who are still poor, as Mr. Gates has admirably chosen to
do. But a New-Age blend of market incentives and feel-good recogni­
tion will not end poverty. History has shown that profit-motivated capit­
alism is still the best hope for the poor.12

Similar criticisms can be leveled against Muhammad Yunus, the 2006 winner
of the Nobel Peace Prize, whose concept of “social business” touches on
ideas similar to those expressed by Gates.13 In reality, what both men are
expressing is a form of social entrepreneurship, which demands that firms
replace profit-seeking with something that amounts to altruism:

“Social business” marks a transition from the imaginative to the quixotic,

envisaging a new sector of the economy made up of companies run as
private businesses but making no profits. These would focus on products
and services that conventional companies do not find profitable, such as
healthcare, nutrition, housing and sanitation for the poor. It is predicated
on the view that investors will be happy to get zero return as long as they
can see returns in social benefits.14

Such business models have limited market appeal – while some consumers are
willing to pay the associated price premiums, the evidence suggests that such
charitable motivations cannot be assumed market-wide. In advocating such a
philosophy, Yunus is turning his back on the sound business model for which
he won his Nobel Prize. Microfinance (and Grameen Bank, the organization
founded by Yunus to deliver microloans to individuals who cannot secure
 Value creation is not a choice 91
them from mainstream financial institutions) was effective because it extended
the market to consumers whose demand was thought to be insufficient for
traditional finance models. All it took was a product tailored to the specific
needs of a specific segment of the market. While microfinance is an industry
that is grounded in business fundamentals, however, it is not clear how Yunus
expects altruism to constitute sufficient incentive to mobilize the private
sector as a whole:

The genius of microfinance was in getting the profit motive to work for
the very poorest. The drawback of social business is that it depends on
the kindness of strangers.15

Not sharing value, but creating value

The ideas of “caring capitalism” and “social business” present leaps of faith
and logic that are similar to those generated by the idea of “shared value.”
Similar to Gates and Yunus, Michael Porter and Mark Kramer have enjoyed
a significant amount of publicity for their idea, which also attempts to over­
turn centuries of economic theory and practice to reinvent the firm:

The purpose of the corporation must be redefined as creating shared

value, not just profit per se.16

On the surface, Porter’s shared value (or caring capitalism) and SVC can
appear to produce similar behavior. The motivating force is different,
however, and this is important because it will lead to different outcomes in
terms of the venture’s ultimate success or failure. The difference comes down
to the focus of the firm and the relevance to core operations of the issue at
hand. Starbucks, for example, should not form partnerships with shade-grown
coffee farmers in Guatemala because it recognizes those farmers face an uncer­
tain future with an insufficient welfare net to support them if their businesses
fail (a non-operational goal), but because Starbucks needs to secure a stable
supply of high-quality coffee beans and supporting these farmers in a sustain­
able manner is the best way to guarantee that supply (an operational goal). In
other words, Starbucks should form stable and lasting partnerships with these
key suppliers not because it is seeking to fill a charitable social need; the firm
should do it because these farmers produce a raw material that is essential to
its business. Starbucks is incentivized to protect the raw material in a sustain­
able way, rather than ruthlessly exploit it. If those Guatemalan farmers are not
producing a product that is in demand (i.e., if the business logic for a rela­
tionship is not there), the argument that Starbucks should get involved is dif­
ficult to make.
Ultimately, although for-profit firms can help with the first perspective
(caring capitalism), they are much better suited to the second perspective
(market capitalism). Ideally, it is the role of governmental and nonprofit
92 Value creation is not a choice
sectors to focus on those problems that the market ignores or cannot solve. In
contrast, Porter and Kramer argue that charitable goals should be considered
equally with operational goals and firms should then utilize their market-
based skills and expertise to solve both kinds of problem – in other words,
that they should become less like for-profit firms and more like nonprofit
organizations or government agencies. But, the challenges with this notion
again quickly become apparent when a firm tries to implement these ideas in
practice. To turn back to the Starbucks example, above – because Starbucks
is forming ties with Guatemalan coffee growers due to their value to the
firm’s core business, the way they structure their proposed solution is different
than if they were forming the ties for other, more altruistic reasons. As it is,
Starbucks provides the farmers with financial security (by providing long-
term contracts and guaranteeing an above-market price for their beans) but,
in return, secures guarantees of quality and the right (and incentive) to be
directly involved in training the farmers to ensure the coffee is prepared in
exactly the way the firm needs it to be. In other words, the motivation for
the engagement is central to the value of the solution provided. Encouraging
firms to adopt altruistic motivations is not an effective plan for “how to fix
capitalism” but, instead, represents a misunderstanding of what profit is and
how it is generated. As suggested by other critics of these attempts to reinvent
capitalism:17

Rosabeth Moss Kanter warned of the pitfalls for companies that make
“social commitments that do not have an economic logic that sustains the
enterprise by attracting resources.” More companies are learning to reap
commercial benefits from strategies that have a wider social value. That’s
great. But the basic job of coaxing capitalism in the right direction is the
same as it always has been: find ways to harness society’s needs to com­
panies’ self-interest and hope the two stay together.18

It is naive to suggest that companies should exist primarily to solve problems

motivated by altruism. Business is the solution to market problems/opportun­
ities that create value as a direct consequence. Firms optimize value, broadly
defined, by combining scarce and valuable resources to meet market needs,
while considering the interests of a broad range of stakeholders and seeking to
provide sustainable shareholder returns over the medium to long term. Firms
can often use their expertise to assist in meeting non-operational goals, but
this should not be their primary concern. Instead, governments and nonprof­
its exist to meet social needs where gaps in the market occur.
The difference between a firm with SVC integrated fully throughout the
organization (encompassing strategic decision-making and all aspects of day-
to-day operations) and a firm that ignores the ideas discussed in this book is
not whether its CEO donates to charity, but is reflected in the way the firm
operates the core aspects of its business. There is a better way to create more
value for the firm’s suppliers, to pay your employees, to comply with laws,
 Value creation is not a choice 93
for example, and there is a worse way to create less value for these key con­
stituents. Those firms that seek to implement SVC through core operations
will add more value than any amount of philanthropy can achieve.
The consequence of internalizing the discussion above is the realization
that Value creation is not a choice. It is not a choice because SVC is not about
philanthropy and is more than brand insurance;19 it is not about “caring capit­
alism” and is not about “sharing value.” SVC is about the firm’s core opera­
tions – creating value for stakeholders, broadly defined, by focusing on the
firm’s areas of expertise to solve market-based problems. Because the scale
and scope of SVC is so thoroughly embedded in core operations, it is not
something the firm can choose to do; it is the way business is conducted.
When a firm hires an employee, engages with a supplier, responds to a regu­
lator, sells a product, or does any one of the many hundreds of things it does
every day, it is creating value. All of these business decisions have economic,
social, moral, and ethical dimensions, and they touch on all of the firm’s
stakeholders at least some of the time. As such, SVC is not something that
can be ignored or relegated in importance – it is what firms do; it is just that
some firms do it better and more deliberately than others. Vigilant and
informed stakeholders who engage with firms to promote their values will
ensure that this measure of performance will increasingly become a predictor
of market success.
Once firms understand that they are embedded in complex stakeholder
relations and that they need to manage these relations effectively if they are to
survive and thrive over the medium to long term in today’s global business
environment, then strategic planning and daily operations represent the means
to manage the messy tradeoffs and priority-setting. Certainly, firms are either
better or worse at managing these relationships and they draw the lines of key
stakeholders narrowly (at shareholders alone) or more broadly (in terms of a
wider group of constituents). Either way, creating value is not an option, it is
the way that business is conducted. Understanding and applying the underlying
principles detailed in this book will help firms be more effective at creating
value and building an organization that is both competitive and sustainable.

Summary
Principle 9 states that Value creation is not a choice. SVC is a management philo­
sophy that is intricately woven into every decision the firm makes. It is not
about peripheral activities, such as philanthropy, but about how the firm
treats its employees and suppliers and customers, and all of its stakeholders. It
is not about being compassionate or sharing value; it is about a firm doing
what it does best – applying its technical expertise to build a competitive
advantage to solve a market-based problem (from which society benefits). As
such, SVC is not a choice; it is integral to all aspects of operations. There is
simply no choice to be made. All firms create value (like all firms do strategy,
marketing, and so on) – it is just that some do it better than others.
Principle 10
The business of business is business

Key takeaway: Milton Friedman believed that firms should prioritize eco-
nomic success. Similarly, SVC is all about strategy, day-to-day decisions, and
core operations. The pursuit of profit and value creation are synonymous. Busi-
ness serves society best when it focuses primarily on business.

As presented in Principle 9, Sustainable Value Creation (SVC) is not about issues

that are peripheral to the firm and is not about reinventing capitalism. Rather,
it is about improving day-to-day decisions supporting strategy and core opera-
tions to create value for stakeholders, broadly defined. As a result, I believe that
SVC, as a management philosophy, is fully compatible with Milton Friedman’s
belief that business serves society best when it focuses primarily on business.

Milton Friedman
Milton Friedman was right – the social responsibility of business is business. In
Friedman’s own words, what he meant by this is that:

In a free-enterprise, private-property system, a corporate executive is an

employee of the owners of the business. He has direct responsibility to
his employers. That responsibility is to conduct the business in accord-
ance with their desires, which generally will be to make as much money
as possible while conforming to the basic rules of the society, both those embodied
in law and those embodied in ethical custom. (emphasis added)1

Friedman argued, essentially, that conducting business in a way that produces

the best possible outcomes for the firm’s shareholders, over the long run,
involves playing by the rules of the game. And, although he did not say it
directly, it is implicit in his argument that it is the firm’s stakeholders, collec-
tively, who determine those rules. SVC supports this economic view.
Stakeholders have always shaped the rules by which society operates, con-
sciously or otherwise, and they will continue to do so. The questions that are
 The business of business is business 95
essential for any manager to ask, therefore, is What are the rules today? and
What are they likely to be tomorrow? The rules are always changing, but the
aggregate effect of millions of people making millions of decisions everyday
determines the overall context in which firms must act. Corporations cannot
force consumers to buy their products, as long as consumers are willing to
make their purchase decisions based on something other than convenience or
the lowest price. Similarly, corporations cannot prevent the enactment of
legislation, as long as politicians are willing to prioritize governing over cam-
paign contributions and lobbying pressures. And corporations cannot force
employees to work for abusive pay levels, as long as workers ensure they have
the skillset to demand higher pay and better conditions. Each of these deci-
sions is a value judgment made by one of the firm’s stakeholders. Managers,
therefore, need to understand the values that underpin these decisions at any
given point in time because they have operational consequences for the firm.
Those managers that understand the rules most completely are best placed to
help their firm succeed by aligning the firm’s actions with the underlying
values of its stakeholders.
While the business of business is business, the goal of this book has been to
build the argument that how this business is conducted matters. The concept
of SVC, therefore, constitutes a roadmap for the manager seeking to conduct
business successfully in the twenty-first century because, rather than obsess
about what the firm does (generate profits), SVC is more focused on how the
firm does it. In other words, framing the argument is key, and policies or
practices that lower costs and/or raise revenues over the medium to long
term are of primary importance. In order to illustrate this, let’s return to the
debate between a living wage and a minimum wage: Does a firm pay its
employees a living wage because it feels that they deserve something better;
or does it pay them a living wage because it understands that the investment
raises morale and loyalty, increases productivity, and decreases the recruit-
ment and training costs that are associated with higher turnover? As Paul
Polman, the ex-CEO of Unilever puts it:

To pay a textile worker in Pakistan 11 cents an hour doesn’t make good

business sense. … [Before I became CEO] We had a lot of contingent
labour or we outsourced it and we looked at that as a cost item but we
had a tremendous amount of turnover. Now we pay more and we have
greater loyalty, more energy and higher productivity.2

Similarly, as discussed in Principle 9: Does Starbucks pay its suppliers of high-

quality, shade-grown Arabica beans an above-market price because it feels
morally or ethically responsible for farmers who do not earn sufficient wages
in a country with an inadequate welfare safety-net, or does it pay those fair
trade prices because it needs to secure a guaranteed supply of its most essential
raw material? Whatever you think about Starbucks’ coffee, Starbucks thinks it
makes great coffee. As such, the firm risks its core business (whether you see
96 The business of business is business
Starbucks as a café or as a “third place” between home and work) if it loses
access to high-quality beans. It is therefore in the firm’s best strategic interest
to ensure the producers of its most highly prized raw material are incentivized
to remain in business and continue to supply the firm over the long term.
These ideas and the underlying philosophy that drives them are wholly con-
sistent with Friedman’s work.

The purpose of the firm

Although Milton Friedman wrote many books and articles in his career,
perhaps the one for which he is best known (and most widely cited) within
the CSR community is the article he published in The New York Times in
1970, “The Social Responsibility of Business is to Increase its Profits.”3 In the
article, in which the economist is at his inflammatory best, Friedman argues
that profit, as a result of the firm’s actions, is an end in itself. He believes
strongly that a firm need not have any additional justification for existing and
that, in fact, social value is optimized when firms focus solely on pursuing
their self-interest by attempting to generate profit:

I share Adam Smith’s skepticism about the benefits that can be expected
from “those who affected to trade for the public good.” … in a free
society, … “there is one and only one social responsibility of business – to
use its resources and engage in activities designed to increase its profits.”4

Friedman’s article is often contrasted against a 2002 article in Harvard Business

Review, titled “What’s a Business For?” by the influential British management
commentator, Charles Handy.5 In contrast to Friedman, Handy presents a
much broader view of the purpose of business in society. For Handy, it is not
sufficient to justify a firm’s profit as an end in itself. For Handy, a business has
to have a motivation other than merely making money to justify its existence
– profit is merely a means to achieve a larger end. A firm should not remain
in existence just because it is profitable, but because it is meeting a need that
society as a whole values:

It is salutary to ask about any organization, “If it did not exist, would we
invent it? Only if it could do something better or more useful than
anyone else” would have to be the answer, and profit would be the
means to that larger end.6

On the surface, the positions taken by Friedman and Handy appear irrecon-
cilable, and that is how they are often treated by the CSR community.
Indeed, Friedman seems to go out of his way to antagonize CSR advocates
by arguing that socially responsible behavior is a waste of the firm’s resources,
which legally (in his view, cf. Principle 2) belong to the firm’s shareholders
and not the firm’s managers:
 The business of business is business 97
That is why, in my book Capitalism and Freedom, I have called [social
responsibility] a “fundamentally subversive doctrine” in a free society.7

But, on closer analysis, their arguments are not nearly as far apart as they ini-
tially appear. Incorporating the ideas underpinning SVC narrows the gap
between the two positions considerably. First, it is necessary to ask: If the
purpose of the firm is to meet a need that society values as a whole (as Handy
argues), what is the best means we have of quantifying that value? As discussed
in Principle 6, profit is by far the most accurate method we have of capturing
total value – not perfect, but it is difficult to imagine a more complete (or
more elegant) measure. If true, then surely the most profitable firms are adding
the most value (as Friedman argues). Again, the correlation is imperfect but, as
a general rule, the relationship between profit and value holds.
Second, for additional consideration that Friedman and Handy are not as
far apart as many believe, consider the following two questions:

• Does it make sense for a large financial firm to donate money to a group
researching the effects of climate change because the CEO believes this is
an important issue?
• Does it make sense for an oil firm to donate money to the same group
because it perceives climate change to be a threat to its business model
and wants to mitigate that threat by investigating possible alternatives?

The action, a large for-profit firm donating money to a nonprofit group, is

the same. The difference is the relevance of the nonprofit’s activities to the
firm’s core operations. Most level-headed CSR advocates would at least ques-
tion the first action as a potential waste of money (incorporating Friedman’s
argument that the actions represent an inefficient, and potentially fraudulent,
allocation of resources in an area in which the firm has no expertise), while
the second action is a strategic question for a firm that needs to address issues
that are important to key stakeholder groups in its operating environment.
Taking the arguments of Friedman and Handy in their entirety, therefore,
a more insightful interpretation suggests that, to the extent that it is in a firm’s
interests to meet the needs of its key stakeholders (who determine their own
positions and actions based on a complicated mix of ethics, values, and self-
interest), the firm should do so. And, perhaps more importantly, by doing so,
the firm can deliver the greatest value to the widest range of its stakeholders.
From Handy’s perspective, this point is easy to argue, but Friedman also
recognizes this. He qualifies his statement that a manager’s primary responsib-
ility is to the shareholders of the enterprise, who seek “to make as much
money as possible,” for example, by noting that this pursuit must be tem-
pered “while conforming to the basic rules of the society, both those embodied
in law and those embodied in ethical custom.” In addition, a firm’s actions are
acceptable, only as long as it “engages in open and free competition without
deception or fraud”8 (emphasis added).
98 The business of business is business
In qualifying his statements in this way (leaving a loophole in his argument
big enough to drive any ethical or moral bus through), Friedman clearly out-
lines a duty for business to conform to society’s expectations. And, in contrast
to the inflammatory rhetoric he often used to convey his points, he is allow-
ing for those societal expectations that are expressed both formally, in law,
and informally, in norms and everyday conventions. Most people normally
read the first half of Friedman’s sentences and get annoyed but, in the
examples provided above, it is the second half that provides the context in
which the total sentence should be interpreted. Given that the ends of the
organization that Handy portrays are to reinforce the values of the societies in
which it operates, the similarities between the two men become even more
apparent. This overlap was also noted by Archie Carroll, one of the most
important thinkers on CSR, in his pivotal 1991 Business Horizons article that
details his idea of the four corporate responsibilities in the Pyramid of CSR:

Economist Milton Friedman … has argued that social matters are not the
concern of business people and that these problems should be resolved by
the unfettered workings of the free market system. Friedman’s argument
loses some of its punch, however, when you consider his assertion in its
totality. … Most people focus on the first part of Friedman’s quote but
not the second part. It seems clear from this statement that profits, con-
formity to the law, and ethical custom embrace three components of the
CSR pyramid – economic, legal, and ethical. That only leaves the phil-
anthropic component for Friedman to reject. Although it may be appro-
priate for an economist to take this view, one would not encounter many
business executives today who exclude philanthropic programs from their
firms’ range of activities.9

Rather than the result of this softening being presented as a reason for Fried-
man’s argument to lose “some of its punch,” however, I would argue that it
reinforces the importance of incorporating Friedman’s ideas within the intel-
lectual framework underpinning SVC. As long as an argument can be made
that any particular decision is in the best business interests of the firm, then I
believe that is something that Milton Freidman would agree lies within the
definition of business. In other words, while this book does not represent any
kind of endorsement of Friedman’s complete economic perspective (at a bare
minimum, he mischaracterized the legal relationship between a firm and its
shareholders), it does argue that SVC is compatible with the economic
rationale that all of a firm’s actions should reinforce its economic interests. As
such, SVC, built on a foundation of iterative, long-term ties to all of the
firm’s stakeholders, offers managers a roadmap to survive and thrive in today’s
complex, dynamic business environment.
To be sure, the philosophy of SVC is demanding. It requires engagement
– the idea that stakeholders must act in order to shape society in their col-
lective interests. It also requires firms to respond to these demands and, where
 The business of business is business 99
possible, to anticipate them. But, again, as long as stakeholders are willing to
enforce their values and beliefs, conforming to those expectations is in the
firm’s economic interest. SVC is not a passive philosophy; it is proactive, but
the result is a society that is shaped, rather than one that forms. If stakeholders
are motivated to change the rules in a way that promotes value, broadly
defined, then for-profit firms are the best means we have of interpreting those
new standards and responding more rapidly and efficiently than any other
organizational form in any other economic system.

Summary
Principle 10 states that The business of business is business. It argues that SVC is
not about issues peripheral to the firm, but instead focuses on day-to-day
decisions, strategic planning, and core operations. Equally important, it does
so in a way that accounts for the complex, dynamic business environment in
which firms must operate. As such, SVC is a philosophy of management
designed to generate business success. And, because this success (i.e., profit)
optimizes value when the firm meets the needs and demands of its broad
range of stakeholders, it is compatible with Milton Friedman’s arguments that
firms benefit society the most when they focus on business.
Conclusion
Sustainable Value Creation

The ideas detailed in this book revolve around the ten principles that define
Sustainable Value Creation (SVC). That is, in a dynamic environment defined
by the actions and decisions of a firm’s broad set of stakeholders, value is
optimized when the firm’s stakeholders are willing to convey and enforce
their needs, while the firm is willing to respond and, where possible, antici­
pate those changing needs. Thus, these economic and social exchanges, at
their most fundamental, are interactions formed around the collective set of
values prevalent in society at any given point and are best measured by the
profit the firm is able to generate.

The Ten Defining Principles of Sustainable Value Creation

Principle 1 Business is social progress: There is a direct correlation
between the amount of business in a society and the extent of progress enjoyed
by that society. For-profit firms are the most effective means of achieving that
progress.
Principle 2 Shareholders do not own the firm: Contrary to popular
myth, shareholders are not the legal owners of the firm. Similarly, managers do
not have a fiduciary responsibility to maximize shareholder value. Instead, the
firm is an independent legal entity that should be run in the interests of its
broad set of stakeholders.
Principle 3 Prioritizing competing stakeholder interests is difficult:
Implementing SVC requires the firm to operate in the interests of its stake­
holders, broadly defined. While identifying these stakeholders is easy, however,
stakeholder theory will only be of practical value when it helps managers prior­
itize among competing stakeholder interests.
Principle 4 CSR is a stakeholder responsibility: CSR will only work if
firms are rewarded for acting and punished for failing to act. As such, while
CSR includes a responsibility for a firm to meet the needs and demands of its
stakeholders, the stakeholders themselves have an equal, if not more important,
responsibility to hold the firm to account.
Principle 5 Market-based solutions are optimal: In general, market forces
generate superior outcomes than alternative means of allocating scarce and
valuable resources, such as government mandate. While stakeholders have an
 Sustainable Value Creation 101
interest in shaping the behavior of firms, the mechanism by which this occurs
most effectively is the market.
Principle 6 Profit = total value: In essence, a firm’s profit represents the
ability to sell a good or service at a higher price than what it costs to produce.
Production and consumption, however, are more than merely technical deci­
sions. They encapsulate the total value (to all stakeholders) that is added by
the firm.
Principle 7 The free market is not free: The free market is an illusion. It
encourages firms to externalize costs that are borne by society rather than con­
sumers; it is rife with subsidies and quotas that favor some firms and industries
over others. The result is an economic system that is distorted and, as a result,
unsustainable.
Principle 8 Only business can save the planet: The environmental crisis
has reached the point where individual-driven change is insufficient. While
for-profit firms were the main cause of the problem, they are also the main
hope for a solution. Scale is vital and large firms must do much more if we are
to build a sustainable economy.
Principle 9 Value creation is not a choice: SVC is a philosophy of man­
agement that infuses the firm, incorporating all aspects of business. Value cre­
ation is, therefore, not something firms can choose to do. By definition, they
are already doing it, at least to some degree; it is just that some do it better than
others.
Principle 10 The business of business is business: Milton Friedman
believed that firms should prioritize economic success. Similarly, SVC is all
about strategy, day-to-day decisions, and core operations. The pursuit of profit
and value creation are synonymous. Business serves society best when it focuses
primarily on business.

In conclusion, therefore, given the discussion of ideas and concepts in this

book, how can we combine these ten core principles into a succinct defini­
tion of SVC?

Defining SVC
The goal of this book has been to frame SVC (CSR, redefined) in terms of a
set of principles that differentiate it from existing definitions of CSR, and
from related concepts such as sustainability and business ethics. While sustain-
ability relates to issues of ecological preservation and business ethics seeks to
construct normative prescriptions of right and wrong, SVC is a pragmatic
philosophy grounded in the strategic planning and day-to-day operations of
the firm. As such, SVC is central to the firm’s value creating activities and,
ultimately, its business success.
In constructing a working definition of SVC that draws upon the ten
underlying principles, five components are essential: First, that a firm incorp­
orates a CSR perspective within its culture and strategic planning process;
second, that any actions it takes are directly related to core operations; third,
102 Sustainable Value Creation
that it seeks to understand and respond to the needs of all of its stakeholders;
fourth, that it aims to optimize value created; and fifth, that it shifts from a
short-term perspective to managing its resources and relations with key stake­
holders over the medium to long term.1

Sustainable Value Creation

The incorporation of a holistic CSR perspective within a firm’s strategic planning
and core operations so that the firm is managed in the interests of a broad set of
stakeholders to optimize value over the medium to long term.

Essential to any definition of SVC is the idea that a firm should incorporate a
CSR perspective, as redefined in this framework, within its culture and stra­
tegic planning process. This CSR perspective presupposes an iterative rela­
tionship between the firm and all of its stakeholders, with equal responsibilities
to convey needs and respond to those needs whenever possible (Principle 4).
An important tool that helps the firm do this is a stakeholder filter integrated
into the firm’s operational decision-making processes. This filter is defined as
a conceptual screen through which strategic and tactical decisions are evalu­
ated for their impact on the firm’s various stakeholders.2 Embedding the
profit incentive within a framework of guiding values further enables man­
agers to implement SVC throughout all aspects of operations (Principle 10).
The second component of SVC is that any action a firm takes should be
directly related to core operations. In short, the same action will differ from
firm-to-firm in terms of whether it can be classified as value creation,
depending on the firm’s expertise and the relevance of the issue to the organ­
ization’s vision and mission (and, therefore, to its stakeholders). SVC is not
about activities peripheral to the firm, such as philanthropy; it is also not
about redefining or reinventing capitalism; it is about the operational deci­
sions the firm makes day-in and day-out (Principle 9). All aspects of business
involve economic, social, moral, and ethical considerations and the primary
role of the manager is to balance these considerations in prioritizing the
diverse set of interests that have a stake in the firm’s operations (Principle 1
and Principle 3).
The third component of SVC is that firms incorporate a stakeholder per­
spective throughout the firm. A barrier to the implementation of a stake­
holder perspective, however, is the primary emphasis currently given by
many corporations to the interests of its shareholders. Firms need to expand
their view of stakeholders beyond shareholders (who neither own the firm,
nor deserve any special attention from management and the Board), to
include all of the firm’s stakeholders who, collectively, define the firm’s
operating environment (Principle 2). In so doing, however, the firm has
a responsibility not only to respond to stakeholder concerns, but also to
anticipate these concerns whenever possible (Principle 3). For their part,
 Sustainable Value Creation 103
stakeholders should be willing to enforce their needs onto firms by actively
discriminating in favor of those firms that best meet expectations (Principle 4).
By managing the firm in the interests of its broad range of stakeholders, the
firm increases its chances of building a sustainable competitive advantage.
The fourth component of SVC relates to the drive to optimize (as opposed
to maximize) value, broadly defined (Principle 6). In essence, the goal is to
balance the production and consumption activities in society in order to build
a standard of living that meets the needs of the collective (Principle 5). The
production component includes incorporating costs that firms currently seek
to externalize, while the consumption component includes incorporating costs
that society currently seeks to avoid (Principle 7). If we can achieve this
balance and spread both the benefits and the costs over a wide range of stake­
holders, we will be significantly closer to optimizing value throughout society.
The final, and perhaps most important, component of SVC is the shift
from a short-term perspective when managing the firm’s resources and stake­
holder relations to a medium- or long-term perspective. If managers alter
their horizons from the next quarter or next season to the next decade or
beyond, they immediately alter the priorities by which they manage and, as a
result, automatically change the nature of the decisions they make today
(Principle 2 and Principle 8). If a CEO is only interested in the next quarter,
it is difficult to make the case for SVC. But, if the CEO is concerned with
the continued existence of the firm 5, 10, or 20 years from now, the value of
building lasting, trust-based relationships with key stakeholders increases
exponentially.
These five components combine the ideas contained in the ten principles
and define SVC. In short: Principle 1 identifies the for-profit firm as the most
important organizational form in driving societal progress; Principle 2 locates
stakeholder theory as central to operations; Principle 3 recognizes the prac­
tical importance for managers of being able to prioritize stakeholder interests;
Principle 4 establishes the importance of stakeholders holding the firm to
account; Principle 5 reminds us of the preeminent role of the market in pro­
ducing optimal outcomes; Principle 6 notes that economic value and other
kinds of value are not independent of each other; Principle 7 argues that,
while the market is imperfect, it is more effective than all other organizing
systems; Principle 8 highlights the importance of scale to achieving sustain-
ability; Principle 9 states that all firms already create value, to varying degrees;
and Principle 10 reaffirms the idea that business best serves society when it
focuses on business, as illustrated by the previous nine principles.
Combining these ten principles, the five components of SVC are realized
through a series of three conscious shifts that the firm’s management team
must make:

1 Shift from the periphery to the core. As indicated above, SVC is

not about philanthropy; it is about core operations. As such, SVC must
be applied to every major decision the firm takes. Culture is key, along
104 Sustainable Value Creation
with leadership from the top. As long as the CEO understands that
responding to stakeholder needs is central to the firm’s ability to create
value, then it immediately becomes central to what they do, every day.
2 Shift from an externally oriented justification to an internally
oriented justification. The main value of SVC comes from its opera­
tional implications, not any reputational benefits. In particular, to inter­
nalize the ten principles of SVC is to understand that firms optimize
value creation by responding to stakeholder needs. In terms of an organ­
izing principle of the firm, all decisions made should be justified in terms
of the value they create for stakeholders. If there is no value for anyone,
the action should not be taken.
3 Shift from short-term to long-term decision-making. It matters
intensely whether senior executives are building the firm for the long
term versus aiming to meet analysts’ quarterly projections. It is very diffi­
cult to justify SVC over the short term. Seeking to establish long-term,
trust-based relations with all stakeholders, however, automatically changes
the overriding priorities and the decisions the firm makes today. If the
firm’s executives change nothing else, they should aim to be “long-term
greedy.”3

Enlightened management
SVC delivers an operational and strategic advantage to the firm. As such, it is
central to the goal of value creation, which is the primary purpose of the
firm. In some ways, SVC is a subtle tweak of our economic model; in other
ways, it is a radical transformation. It will increasingly become the most
effective way for firms to create value in the business environment.
In essence, SVC represents an enlightened approach to management that
retains the focus on adding value that is emphasized by a traditional bottom-
line business model. Importantly, however, SVC incorporates a commitment
to meet the needs and demands of the firm’s broad range of stakeholder
groups; it also recognizes the essential role stakeholders play in holding the
firm to account for its actions. Equally important, in order to implement SVC
comprehensively, the focus of the firm has to be on optimizing value over
the long term by acting in areas in which it has expertise (related to core
operations).
This focus on long-term added value is the principal difference between a
traditional shareholder-focused business model and one based on SVC integ­
rated throughout operations. This shift in perspective (from short to long
term) is relatively easy to envision, but much more difficult to implement
firm-wide. Nevertheless, this shift alone brings a firm significantly closer to
building a competitive advantage that is truly sustainable. SVC, therefore, is
as simple (and as complex) as conducting all aspects of business operations in a
responsible manner – responding to those needs that stakeholders are willing to
convey and enforce, with an emphasis on the medium to long term.
 Sustainable Value Creation 105
SVC focuses on evolution, not revolution, working within what we know
about human psychology and economic exchange. As such, SVC encapsulates
the way humans behave and business is conducted. It does not alter the goals of
the firm (profit, except to say that a short-term focus is counter-productive)
and it does not alter our understanding of fundamental economic theory (actors
pursuing their self-interest can optimize value, broadly defined). What it does
do, is alter the perspective from which operational and strategic decisions are
made. For example, do the managers of the firm believe they can optimize per­
formance by paying the firm’s employees a minimum wage (because there is suf­
ficient unemployment that, if one employee leaves, they can hire another one),
or do the managers believe that they can optimize performance by paying the
firm’s employees a living wage (because it raises morale and productivity, while
decreasing turnover rate and the hiring costs associated with replacing workers)?
These two positions are substantively different approaches to business. Good
arguments can be made in defense of both positions, but they are fundamentally
different. This is the arena in which SVC operates. It is a progressive, enlight­
ened approach to management that places the interests of a wide range of stake­
holders within the decision matrix of the firm.4
The essential difference between those firms that do SVC well and those
that do it badly, therefore, is a greater sensitivity to the needs and concerns of
the firm’s broad range of stakeholders. This provides the firm with an acute
ability to understand when the (stakeholder-defined) rules that define the
firm’s operational context have changed, and a framework within which to
apply that knowledge to the firm’s strategic advantage. Those firms that can
respond to (and, ideally, anticipate) those changes are better placed to survive
and thrive in a dynamic business environment. Also, in striving to meet the
needs and concerns of their stakeholders, those firms that engage in these
activities in a more genuine, authentic way will find that the associated bene­
fits are sustained because the effort is more effective and valued.
A short-term focus, driven by quarterly earnings guidance to investors
with little long-term interest in the organization’s survival, is of little concern
(and is most likely detrimental) to firms committed to implementing SVC.
Similarly, while economic value and other kinds of value (social, moral,
ethical) cover similar ground, the overlap is not perfect. Externalities and
transgressions are the result. Values help fill the gap and aid the SVC decision-
making process.5 To this end, a stakeholder filter is the tool the firm can use
to apply its values to identify both potential opportunities and potential prob­
lems. The firm retains the societal legitimacy to remain an ongoing entity by
seeking to implement its strategic plan and conduct operations while con­
sidering the needs and concerns of a broad array of stakeholders. The result is
that, rather than profit maximization through a short-term focus, profit optimi­
zation emphasizes the importance of meeting the needs of these stakeholders
over the medium to long term.
SVC, therefore, refines the economic system in which capitalism drives
social and economic progress. The effects enhance the magnificent potential
106 Sustainable Value Creation
of business to alter our lives that has been summarized by some of the greatest
business minds of our time:

Profit for a company is like oxygen for a person. If you don’t have
enough of it, you’re out of the game. But if you think your life is about
breathing, you’re really missing something.
Peter Drucker6

Being the richest man in the cemetery doesn’t matter to me. … Going to
bed at night saying we’ve done something wonderful … that’s what
matters to me.
Steve Jobs7

In short, SVC equals value creation in today’s complex and dynamic business
environment – sustainable value creation. What does this mean in practice?
Primarily, it means that those firms that “get” SVC will be able to create
more value over a longer period of time than those firms that either do not
understand the strategic value of this perspective, or ignore it altogether.

Final thoughts
As noted many years ago by Howard Bowen, the process of re-orienting
capitalism to better suit the interests of society, broadly defined, is a complex
process “which goes to the very root of our basic social and economic philo­
sophy.”8 As a result, this task will not be achieved overnight. Given that we
are working to reform a system that is already well-equipped to generate
phenomenal economic and social progress, however, the task is also not
unimaginable:

The development of a moral code for business that can win wide accept­
ance and social sanction necessarily involves somewhat the same
evolutionary process as characterizes the development of the law. … We
should not assume, however, that we are starting in this process from zero.
Even under laissez faire, there was a system of moral rules for business.9

Much of what makes capitalism such a successful system already accom­

modates the complex web of norms, customs, and practices that are shaped
by the values we share as a progressive, democratic society. Since Bowen
wrote these words in 1953, these core moral values have been the source of a
vast literature detailing the social responsibilities of corporations and the man­
agers who run them. The concept of SVC is designed to contribute to this
discussion and, hopefully, advance the debate toward the outcome that all
those involved in the battle of ideas to improve our society wish to see.

–––––––––– « » ––––––––––
About the author

David Chandler ([email protected]) is Associate Professor of

Management at the University of Colorado Denver Business School. His
research focuses on the dynamic interface between the firm and its institu­
tional environment. This research has been published in Administrative
Science Quarterly, Academy of Management Journal, Organization Science, Acad­
emy of Management Review, Journal of Management, and Strategic Organization.
Additional related publications include the textbook Strategic Corporate
Social Responsibility: Sustainable Value Creation (5e, Sage Publications, Inc.,
2020). He received his Ph.D. in Management from The University of
Texas at Austin in 2011.
Notes

Epigraph
1 Milton Friedman, Capitalism and Freedom, University of Chicago Press, 1962,
Chapter VIII, p. 133.

Foreword
1 This Foreword appeared in the first edition of this book: David Chandler, Corporate
Social Responsibility: A Strategic Perspective, Business Expert Press, 2015. Lynn Stout
passed away in April 2018.

Introduction: Corporate Social Responsibility

1 Aneesh Raghunandan and Shiva Rajgopal, “Is There Real Virtue Behind the
Business Roundtable’s Signaling?” The Wall Street Journal, December 3, 2019,
p. A15.
2 August 19, 2019, https://opportunity.businessroundtable.org/ourcommitment/
3 Klaus Schwab, “Davos Manifesto 2020: The Universal Purpose of a Company in
the Fourth Industrial Revolution,” World Economic Forum, December 2, 2019,
www.weforum.org/agenda/2019/12/davos-manifesto-2020-the-universal-purpose­
of-a-company-in-the-fourth-industrial-revolution/
4 The beginning of the modern CSR movement is often attributed either to Frank
W. Abrams in 1951 (“Management’s Responsibilities in a Complex World,”
Harvard Business Review, Vol. 29, Issue 3) or to Howard R. Bowen in 1953 (Social
Responsibilities of the Businessman, Harper & Brothers).
5 Brad Plumer, “Carbon Dioxide Emissions Hit a Record in 2019, Even as Coal
Fades,” The New York Times, December 3, 2019, www.nytimes.com/2019/12/03/
climate/carbon-dioxide-emissions.html
6 Milton Friedman, Capitalism and Freedom, University of Chicago Press, 1962,
Chapter VIII, p. 133.
7 In his well-known 1970 New York Times Magazine article in which he declared
CSR to be a “fundamentally subversive doctrine,” Milton Friedman built part of
his argument around the idea that “Only people can have responsibilities. …
‘business’ as a whole cannot be said to have responsibilities.” Putting aside the idea
that a for-profit firm in our society can have rights (which Friedman recognizes
and is not generally disputed) but not responsibilities (which Friedman dismisses and
is disputed), in this book, the organization is the actor of primary focus. As such, I
will refer to firms as entities that, for example, can “act in their own best interest.”
While I do not seek to anthropomorphize corporations, in order to discuss their
 Notes 109
ability to create value it is necessary to separate the collective (the company) from
the individuals who act on its behalf (executives, directors, and employees).
8 Christine Bader, “Why Corporations Fail to Do the Right Thing,” The Atlantic,
April 21, 2014, www.theatlantic.com/business/archive/2014/04/why-making­
corporations-socially-responsible-is-so-darn-hard/360984/
9 Alexander Dahlsrud, “How Corporate Social Responsibility is Defined: An
Analysis of 37 Definitions,” Corporate Social Responsibility and Environmental Man­
agement, Vol. 15, 2008, p. 1.
10 Timothy M. Devinney, “Is the Socially Responsible Corporation a Myth? The
Good, the Bad, and the Ugly of Corporate Social Responsibility,” Academy of
Management Perspectives, Vol. 23, 2009, p. 44.
11 See: Alexander Dahlsrud, “How Corporate Social Responsibility is Defined: An
Analysis of 37 Definitions,” Corporate Social Responsibility and Environmental Man­
agement, Vol. 15, 2008, pp. 1–13.
12 Mallen Baker, “PUMA Plucks Numbers Out of the CO2,” May 17, 2011, www.
mallenbaker.net/csr/post.php?id=394 (no longer available online).
13 The climate crisis has now reached the point where scientists believe we must
declare a new geological age – the Anthropocene. This period is so-named because
“humans, or rather, the industrial civilization they have created, have become the
main factor driving the evolution of Earth.” In: “Stopping a Scorcher,” The
Economist, November 23, 2013, p. 81. See also: Damian Carrington, “The Anthro­
pocene Epoch: Scientists Declare Dawn of Human-influenced Age,” The Guardian,
August 29, 2016, www.theguardian.com/environment/2016/aug/29/declare­
anthropocene-epoch-experts-urge-geological-congress-human-impact-earth
14 Fleming and Jones refer to CSR as the “opium of the people” for the intoxicating,
but in their eyes misleading, prospect this idea holds for meaningful change within
the current economic system. See: Peter Fleming and Marc T. Jones, The End of
Corporate Social Responsibility: Crisis & Critique, Sage Publications, Inc., 2013, p. 67.
15 In December 2013, the American Customer Satisfaction Index released data
correlating firms’ customer service scores with their subsequent stock market
performance, “suggesting that the most-hated companies perform better than
their beloved peers. … there’s no statistical relationship between customer-service
scores and stock-market returns. … If anything, it might hurt company profits
to spend money making customers happy.” Quoted in: Eric Chemi, “Proof that
it Pays to be America’s Most-hated Companies,” Bloomberg, December 17,
2013, www.bloomberg.com/news/articles/2013–12–17/proof-that-it-pays-to-be­
americas-most-hated-companies
16 Timothy M. Devinney, “Is the Socially Responsible Corporation a Myth? The
Good, the Bad, and the Ugly of Corporate Social Responsibility,” Academy of
Management Perspectives, Vol. 23, 2009, pp. 51, 52.
17 For examples of studies analyzing the relationship between CSR and firm per­
formance, see Herman Aguinis and Ante Glavas, “What We Know and Don’t
Know About Corporate Social Responsibility: A Review and Research Agenda,”
Journal of Management, Vol. 38, Issue 4, 2012, pp. 932–968.
18 See the Sustainability Accounting Standards Board (www.sasb.org/), the Carbon
Development Project (www.cdp.net/), and the Global Reporting Initiative
(www.globalreporting.org/).
19 See “ESG 101: What is ESG Investing?” MSCI, www.msci.com/esg-investing/
20 “In the Thicket of It,” The Economist, July 30, 2016, p. 52.
21 “On Purpose,” The Economist, November 30, 2019, p. 59.
22 Alex Davidson, “What’s a ‘Good’ Company, Anyway?” The Wall Street Journal
Report: Investing in Funds & ETFs, April 4, 2016, p. R12.
23 James Mackintosh, “Social, Environmental Investment Scores Diverge,” The Wall
Street Journal, September 18, 2018, p. B10.
110 Notes
24 James Mackintosh, “Social, Environmental Investment Scores Diverge,” The Wall
Street Journal, September 18, 2018, p. B10.
25 The work Walmart (and other retailers) is doing to create a standardized “sustain­
ability index” enabling comparisons of the ecological footprint across all its prod­
ucts carries the potential to revolutionize the way we measure social and
environmental impact. See: The Sustainability Consortium: www.sustainability
consortium.org/
26 See: Timothy M. Devinney, “Is the Socially Responsible Corporation a Myth?
The Good, the Bad, and the Ugly of Corporate Social Responsibility,” Academy of
Management Perspectives, Vol. 23, 2009, pp. 44–56.
27 See: David Grayson and Adrian Hodges, “Corporate Social Opportunity! Seven
Steps to Make Corporate Social Responsibility Work for Your Business,” Green-
leaf Publishing, July 2004.
28 F. Ernest Johnson, “Commentary on the Ethical Implications of the Study,” in:
Howard R. Bowen, Social Responsibilities of the Businessman, Harper & Brothers,
1953, p. 256.
29 “Subterranean Capitalist Blues,” The Economist, October 26, 2013, p. 13.
30 Floyd Norris, “The Islands Treasured by Offshore Tax Avoiders,” The New York
Times, June 6, 2014, p. B1.
31 For insight into the futility of misaligned incentives that seek to subvert human
nature, see: Steven Kerr, “On the Folly of Rewarding A, While Hoping for B,”
Academy of Management Journal, Vol. 18, No. 4, 1975, pp. 769–783.
32 See also: David Chandler (5th edition), Strategic Corporate Social Responsibility: Sus­
tainable Value Creation, Sage Publications, Inc., 2020.
33 R. Edward Freeman, Jeffrey S. Harrison, Andrew C. Wicks, Bidhan L. Parmar,
and Simone de Colle, Stakeholder Theory: The State of the Art, Cambridge Univer­
sity Press, 2010, p. 235.
34 R. Edward Freeman, Jeffrey S. Harrison, Andrew C. Wicks, Bidhan L. Parmar,
and Simone de Colle, Stakeholder Theory: The State of the Art, Cambridge Univer­
sity Press, 2010, p. 235.
35 Howard R. Bowen, Social Responsibilities of the Businessman, Harper & Brothers,
1953, p. 52.
36 For a discussion on this issue, see: R. H. Coase, “The Problem of Social Cost,”
Journal of Law and Economics, Vol. 3, Issue 1, 1960, pp. 1–44.
37 For an understanding of this concept as originally constructed, see: Jean Jacques
Rousseau, “The Social Contract: Or Principles of Political Right,” public domain,
1762 (translated in 1782 by G. D. H. Cole).

Principle 1: Business is social progress

1 John Micklethwait and Adrian Wooldridge, The Company: A Short History of a
Revolutionary Idea, The Modern Library, 2003, p. xx.
2 It is interesting to speculate about where organizations founded by social entrepren­
eurs fit within this taxonomy. The emergence of benefit corporations (and certified
B Corps) further confuses traditional definitions of organizational forms. While CSR
advocates often seek to place such organizations (which describe themselves as
meeting social goals via business practices) as a hybrid that is best described as a
“fourth type” of organization, my sense is they are no different from a for-profit. All
companies exist to solve some social problem. In this sense, a supermarket is as
much a social enterprise as TOMS Shoes; equally, they are both for-profit firms.
3 Jo Confino, “Interview: Unilever’s Paul Polman on Diversity, Purpose and
Profits,” The Guardian, October 2, 2013, www.theguardian.com/sustainable­
business/unilver-ceo-paul-polman-purpose-profits
 Notes 111
4 Timothy M. Devinney, “Is the Socially Responsible Corporation a Myth? The
Good, the Bad, and the Ugly of Corporate Social Responsibility,” Academy of
Management Perspectives, Vol. 23, 2009, p. 44.
5 John Micklethwait and Adrian Wooldridge, The Company: A Short History of a
Revolutionary Idea, The Modern Library, 2003, p. xv.
6 Paul Polman, “Business, Society, and the Future of Capitalism,” McKinsey
Quarterly, Commentary, May 2014, www.mckinsey.com/business-functions/
sustainability/our-insights/business-society-and-the-future-of-capitalism
7 For more on this, see “Business as a Moral Endeavor,” September 7, 2014,
https://youtu.be/EseNAh9UwjI
8 Howard R. Bowen, Social Responsibilities of the Businessman, Harper & Brothers,
1953, p. 4.
9 Sally E. Blount, “Yes, the World Needs More MBAs. Here’s Why,” Bloomberg,
May 13, 2014, www.bloomberg.com/news/articles/2014–05–13/yes-the-world­
needs-more-mbas-dot-here-s-why
10 This debate is heavily influenced, of course, by the ultimate goal that the
minimum wage seeks to achieve. Is its primary purpose to price labor (an eco­
nomic function) or is it to reduce poverty (a social welfare function)? If the under­
lying goal is to reduce poverty, most economists agree that policies such as the
earned income tax credit (a negative income tax for workers on low pay) is a
much more effective means of achieving that outcome.
11 Walmart is often criticized for paying below market wage rates. In reality,
however, the firm routinely receives applications that are many multiples the
number of job openings available (which indicates above market wages). At the
extreme, for example, in 2013, when the firm opened a store in Washington DC,
it received more than 23,000 applications for the 600 positions it was advertising –
an acceptance rate of 2.6% which, it was noted, is “more difficult than getting
into Harvard [which] accepts 6.1% of applicants.” In: Ashley Lutz, “Applicants for
Jobs at the New DC Walmart Face Worse Odds than People Trying to Get into
Harvard,” Business Insider, November 19, 2013, www.businessinsider.com/
wal-mart-receives-23000-applications-2013–11
12 Bo Burlingham and George Gendron, “The Entrepreneur of the Decade: An
Interview with Steven Jobs,” Inc., April 1, 1989, www.inc.com/magazine/
19890401/5602.html

Principle 2: Shareholders do not own the firm

1 It is commonly understood that the original purpose of incorporation (by crown
charter) was to accomplish continuity of life (beyond that of the original mix of an
organization’s investors). Limited liability was achieved over time by a legal sleight
of hand, redrafting investor obligations in relation to calls for additional capital. If
a bankrupt company had an enforceable right to call in capital from investors, for
example to shore up the continued viability of an enterprise, creditors could claim
that right as an asset of the firm and pursue the call (by right of subrogation).
Gradually, lawyers began excluding these obligations, with the result that there
was no legal claim for creditors to use, thus, by definition, limiting the investors’
liability. Once established and accepted, limited liability gained its own legitimacy
as an inducement to investors to support entrepreneurs in the value creation
process.
2 Subhabrata Bobby Banerjee, “Corporate Social Responsibility: The Good, the
Bad and the Ugly,” Critical Sociology, Vol. 34, Issue 1, 2008, p. 53.
3 For a thorough discussion of the founding of the modern-day corporation and,
in particular, the construction of the concept of limited liability, see: John
112 Notes
Micklethwait and Adrian Wooldridge, The Company: A Short History of a Revolu­
tionary Idea, The Modern Library, 2003.
4 John Micklethwait and Adrian Wooldridge, The Company: A Short History of a
Revolutionary Idea, Modern Library, 2003, pp. 43, 46.
5 It is important to note that this discussion relates primarily to the ownership and
purpose of publicly traded corporations in the U.S. Although there are similarities,
corporate law naturally varies across countries and cultures. And, even in the U.S.,
legal precedent governing firms differs among states, and whether they are private
or closely held. This can be seen in Revlon Inc. v. MacAndrews & Forbes Holdings,
Inc., 506 A.2d 173 (Del. 1986), a case of limited application in which the Dela­
ware Supreme Court announced, “where the company was being ‘broken up’ and
shareholders were being forced to sell their interests in the firm to a private buyer,
the board had a duty to maximize shareholder wealth by getting the highest pos­
sible price for the shares.” See: Lynn A. Stout, “Why We Should Stop Teaching
Dodge v. Ford,” Virginia Law & Business Review, Vol. 3, No. 1, 2008, p. 172.
6 Martin Lipton and William Savitt, “The Many Myths of Lucian Bebchuk,” Vir­
ginia Law Review, Vol. 93, Issue 3, 2007, p. 754.
7 “March of the Machines,” The Economist, October 5, 2019, p. 19.
8 “Fast Times,” The Economist, April 5, 2014, p. 73.
9 For a detailed exposition of how high-frequency traders utilize technology to
exploit arbitrage opportunities in the market and trade on the intentions of other
investors, see: Michael Lewis, Flash Boys: A Wall Street Revolt, W. W. Norton &
Company, 2014. In essence: “High-frequency trading firms would post the ‘best
price’ for every stock and then when hit with a trade, knowing there was a buyer
in the market, take advantage of the fragmentation of exchanges and dark pools
and latency (high-frequency traders can get to an exchange faster than you) to buy
up shares from other HFTs or from Wall Street dark pools, and then nudge the
price up and sell those shares. In other words, front run the customer. … It’s
sleazy and maybe even illegal, akin to nanosecond-scale insider trading.” In: Andy
Kessler, “High-frequency Trading Needs One Quick Fix,” The Wall Street Journal,
June 16, 2014, p. A15.
10 “Fast Times,” The Economist, April 5, 2014, p. 73.
11 “Stealth Socialism,” The Economist, September 17, 2016, p. 73.
12 Rachel Evans, Sabrina Willmer, Nick Baker, and Brandon Kochkodin, “Black-
Rock and Vanguard Are Less Than a Decade Away from Managing $20 Trillion,”
Bloomberg, December 4, 2017, www.bloomberg.com/news/features/2017–12–04/
blackrock-and-vanguard-s-20-trillion-future-is-closer-than-you-think
13 Robin Wigglesworth, “A Vast Money Machine Splutters,” Financial Times,
October 21/22, 2018, p. 9. While BlackRock is the largest asset manager in the
world, Vanguard is “the largest U.S. provider of mutual funds and exchange-
traded funds by assets and the second-largest money manager in the world.” In:
Sarah Krouse, “Vanguard ‘Just Getting Started’,” The Wall Street Journal, January
5, 2018, p. B1.
14 See John Authers and Chris Newlands, “Taking Over the Markets,” Financial
Times, December 6, 2016, p. 9.
15 John Maynard Keynes, The General Theory of Employment, Interest and Money, New
York: Harcourt Brace and Co., 1936, p. 156.
16 Paul Krugman, “Now That’s Rich,” The New York Times, May 9, 2014, p. A25.
17 Howard R. Bowen, Social Responsibilities of the Businessman, Harper & Brothers,
1953, p. 34.
18 https://en.oxforddictionaries.com/ (accessed October 2018).
19 While a number of U.S. state corporate codes contain language that defines a
shareholder as the owner of shares, which are “the units into which the proprietary
interests in a corporation are divided” (e.g., Colorado Corporation Code, Section
 Notes 113
7–101–401, clause 31), Delaware, “the single most important [U.S.] state for cor­
porate law purposes … does not define the term stock or otherwise say what it
represents. … The Delaware statute is simply silent on the issue of ownership.”
Julian Velasco, “Shareholder Ownership and Primacy,” University of Illinois Law
Review, Vol. 2010, No. 3, 2010, pp. 929–930. Due to this inconsistency in statu­
tory law, it is fair to conclude that the essence of ownership lies in how corporate
law is enforced (i.e., what it means in reality) and, in particular, how it is enforced
in Delaware. In other words, how courts (particularly Delaware courts) interpret
the relationship between corporations and shareholders, and apply that interpreta­
tion, is the ultimate determinant of who legally owns the corporation.
20 Luh Luh Lan and Loizos Heracleous, “Rethinking Agency Theory: The View
from Law,” Academy of Management Review, Vol. 35, No. 2, 2010, p. 301.
21 For related work that builds on the argument that the firm has obligations to its
stakeholders, broadly defined, see: James E. Post, Lee E. Preston, and Sybille
Sachs, Redefining the Corporation: Stakeholder Management and Organizational Wealth,
Stanford Business Books, 2002 and Sybille Sachs and Edwin Ruhli’s book, Stake­
holders Matter: A New Paradigm for Strategy in Society, Cambridge University
Press, 2012.
22 Martin Wolf, “AstraZeneca is More than Investors’ Call,’ Financial Times, May 8,
2014, www.ft.com/content/6fe31054-d691–11e3-b251–00144feabdc0
23 Eugene F. Fama, “Agency Problems and the Theory of the Firm,” Journal of Polit­
ical Economy, Vol. 88, 1980, p. 290.
24 Luh Luh Lan and Loizos Heracleous, “Rethinking Agency Theory: The View
from Law,” Academy of Management Review, Vol. 35, No. 2, 2010, p. 301.
25 “And what was particularly grotesque about this was that the Fourteenth amend­
ment was passed to protect newly-freed slaves. So, for instance, between 1890 and
1910, there were 307 cases brought before the Court under the Fourteenth
amendment – 288 of these brought by corporations; 19 by African-Americans. [As
a result of the Civil War] 600,000 people were killed to get rights for people and
then, with strokes of the pen over the next 30 years, judges applied those rights to
capital and property, while stripping them from people.” See: The Corporation
documentary, 2003, www.thecorporation.com/
26 In reality, the detail of which rights and responsibilities should be legally ascribed
to corporations and which should be reserved for humans alone is an ongoing
constitutional debate. As a result, corporations are neither fully fledged individuals,
nor are they artificial entities devoid of rights – legal precedent has determined
they fall somewhere in-between: “In the past, Supreme Court opinions have
recognized the need for differing approaches to the recognition (or not) of con­
stitutional rights of business corporations in various settings. For example, the
Court has decided that the constitutional protection against ‘double jeopardy’ for
an alleged crime covers organizational persons (such as a corporation), but the
right protecting against forcible ‘self-incrimination’ does not. Similarly, the Court
has recognized a right of political free speech for organizations in Citizens United,
but not ‘rights to privacy’ which have been reserved for individual human beings.
In other words, the Court finds some constitutional rights make sense to extend
to organizational persons, and it leaves others to cover only individual people.” In:
Eric W. Orts, “The ‘Hobby Lobby’ Case: Religious Freedom, Corporations and
Individual Rights,” Knowledge@Wharton, March 31, 2014, https://knowledge.
wharton.upenn.edu/article/hobby-lobby-case-religious-freedom-corporations­
individual-rights/
27 Jonathan R. Macey, “A Close Read of an Excellent Commentary on Dodge v.
Ford,” Virginia Law & Business Review, Vol. 3, No. 1, 2008, p. 180.
28 Jonathan R. Macey, “A Close Read of an Excellent Commentary on Dodge v.
Ford,” Virginia Law & Business Review, Vol. 3, No. 1, 2008, p. 190.
114 Notes
29 Joann S. Lublin and Theo Francis, “Where Majority Doesn’t Rule,” The Wall
Street Journal, May 12, 2014, p. B8.
30 Joann S. Lublin and Theo Francis, “Where Majority Doesn’t Rule,” The Wall
Street Journal, May 12, 2014, p. B8.
31 Joann S. Lublin and Theo Francis, “Where Majority Doesn’t Rule,” The Wall
Street Journal, May 12, 2014, p. B8.
32 HL Bolton (Engineering) v. TJ Graham and Sons Ltd. [1957] 1 QB 159 (Court of
Appeal), Denning LJ (p. 172).
33 Moreover, because investors are not one homogenous group with similar goals,
investment timeframes, or values (they include pension funds, day-traders, and
high-frequency computer algorithms), they cannot approximate the legal or actual
influence of a sole proprietor who owns 100% of a firm’s shares (or even a
majority owner).
34 See: The Modern Corporation, “Statement on Company Law,” clause 1, https://
themoderncorporation.wordpress.com/company-law-memo/
35 For example, see: Jacob M. Rose, “Corporate Directors and Social Responsibility:
Ethics versus Shareholder Value,” Journal of Business Ethics, Vol. 73, Issue 3, July
2007, pp. 319–331. This study reports that “directors … sometimes make deci­
sions that emphasize legal defensibility at the expense of personal ethics and social
responsibility. Directors recognize the ethical and social implications of their deci­
sions, but they believe that current corporate law requires them to pursue legal
courses of action that maximize shareholder value” (p. 319).
36 In the business school, faculty are largely oblivious to this debate that is occurring
in the academic corporate law community. For more information, see: https://
themoderncorporation.wordpress.com/company-law-memo/
37 Julian Velasco, “Shareholder Ownership and Primacy,” University of Illinois Law
Review, Vol. 2010, No. 3, 2010, p. 899.
38 The corporate legal scholars who authored the statement, the “Fundamental rules
of corporate law” at The Modern Corporation, https://themoderncorporation.
wordpress.com/company-law-memo/, argue that this absence of a fiduciary
responsibility of directors is “applicable in almost all jurisdictions.”
39 For a detailed examination of the legal foundation (or lack of) for the idea that the
primary fiduciary responsibility of the firm’s executives and directors is to serve
the interests of the firm’s shareholders, see: Lynn Stout, The Shareholder Value
Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public. San
Francisco, CA: Berrett-Koehler Publishers, Inc., 2012.
40 See: The Modern Corporation, “Fundamental Rules of Corporate Law,” accessed
in April, 2014, http://themoderncorporation.wordpress.com/company-law-memo/
41 Luh Luh Lan and Loizos Heracleous, “Rethinking Agency Theory: The View
from Law,” Academy of Management Review, Vol. 35, No. 2, 2010, p. 300.
42 Dodge v. Ford Motor Company, 204 Mich. 459, 170 N.W. 668 (1919).
43 Lynn A. Stout, “Why We Should Stop Teaching Dodge v. Ford,” Virginia Law &
Business Review, Vol. 3, No. 1, 2008, p. 166.
44 “Dodge v. Ford is best viewed as a case that deals not with directors’ duties to max­
imize shareholder wealth, but with controlling shareholders’ duties not to oppress
minority shareholders. The one Delaware opinion that has cited Dodge v. Ford in
the last 30 years, Blackwell v. Nixon, cites it for just this proposition.” In: Lynn A.
Stout, “Why We Should Stop Teaching Dodge v. Ford,” Virginia Law & Business
Review, Vol. 3, No. 1, 2008, p. 168.
45 Lynn A. Stout, “Why We Should Stop Teaching Dodge v. Ford,” Virginia Law &
Business Review, Vol. 3, No. 1, 2008, pp. 163–176.
46 An indirect attempt to rebut Stout’s arguments was made by Leo E. Strine, Jr.,
Chief Justice of the Delaware Supreme Court, in an essay in the Columbia Law
Review (“Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the
 Notes 115
Dueling Ideological Mythologists of Corporate Law,” Vol. 114, Issue 2,
pp. 449–502). The essay is primarily a response to the idea of the firm as a
“shareholder-driven direct democracy” (p. 449), which advocates for wider share­
holder powers and more frequent shareholder votes to govern firm policy. In
arguing against this model, Strine also addresses the “skeptics [who] go so far as to
deny that boards of directors must, within the constraints of the law, make the
best interests of stockholders the end goal of the governance of a for-profit corpo­
ration” (p. 452). Unfortunately, however, Strine fails to acknowledge the near
impossible task of defining what those “interests” might be (given that the firm’s
stockholders include high-frequency traders holding positions for microseconds,
day-traders, and pension funds). He also bases his case on facts such as “only stock­
holders get to elect directors” (p. 453), as if that depicts ownership, without
acknowledging that, in reality, shareholders vote on the candidates nominated by
management and that additional legal rights are constrained because many votes
(e.g., shareholder resolutions) are non-binding. Most damagingly, by undermining
the idea of the direct democracy model (which would at least be more consistent
with the idea of shareholders as owners) by arguing that “the best way to ensure
that corporations generate wealth for diversified stockholders is to give the man­
agers of corporations a strong hand to take risks and implement business strategies
without constant disruption by shifting stock market sentiment,” Strine essentially
reinforces Stout’s case that the Courts tend to favor management over stock­
holders in any dispute (the business judgment rule).
47 Lynn Stout, The Shareholder Value Myth: How Putting Shareholders First Harms Inves­
tors, Corporations, and the Public, Berrett-Koehler Publishers, Inc., San Francisco,
CA, 2012, pp. 3–4.
48 Floyd Norris, “Companies That Lie Increasingly Win in Court,” The New York
Times, March 21, 2014, p. B1.
49 Loizos Heracleous and Luh Luh Lan, “The Myth of Shareholder Capitalism,”
Harvard Business Review, April, 2010, p. 24. See also: Luh Luh Lan and Loizos
Heracleous, “Rethinking Agency Theory: The View from Law,” Academy of
Management Review, Vol. 35, No. 2, 2010, pp. 294–314.
50 Although, most of us are shareholders in that we are invested in pension funds; in
reality, this relationship is indirect since these assets are managed by others on our
behalf. Most people would not describe themselves primarily as a shareholder and,
often, have a greater proportion of their total wealth invested in other assets, such
as property.
51 It is important to draw a distinction between rights and influence. If executives
believe shareholders own the firm, they will respond to their demands. This is
true whether or not shareholders actually own the firm. It is interesting to ask,
however, that: If shareholders have no legal power, how is this pressure mani­
fested or felt, especially if the firm is not seeking additional capital? One answer
highlights the extent to which executive compensation is increasingly tied to firm
performance, which is often measured by share price. While this effect helps align
the interests of executives and shareholders, it is not clear that the results benefit
the long-term interests of the firm. See: Justin Fox and Jay W. Lorsch, “What
Good Are Shareholders?” Harvard Business Review, July–August, 2012, pp. 49–57.
52 Danielle Chesebrough and Rory Sullivan, “What Can Companies Do about
Investor Short-termism?’ Ethical Corporation Magazine, November 26, 2013, www.
ethicalcorp.com/stakeholder-engagement/what-can-companies-do-about-investor­
short-termism
53 There are two ways that a firm can redistribute profits to its shareholders – share
buybacks or dividends. While both methods ultimately raise the firm’s share price,
buybacks raise it directly (by decreasing the number of shares outstanding), while
dividends do it indirectly (by making the shares a more attractive investment).
116 Notes
54 “Reform School for Bankers,” The Economist, October 5, 2013, p. 73.
55 As noted by Robert Pozen of Harvard Business School, “At present, most firms
distribute case bonuses and stock grants on the basis of the prior year’s results. This
approach does encourage top executives to favor short-term results over long-
term growth.” Robert C. Pozen, “The Misdirected War on Corporate Short-
Termism,” The Wall Street Journal, May 19, 2014, www.wsj.com/articles/
robert-pozen-rx-for-corporate-short-termism-1400530829
56 Gregory J. Millman, “Firms See Value Opportunity in Shareholder Base,” The
Wall Street Journal, May 22, 2014, https://blogs.wsj.com/riskandcompliance/2014/
05/22/the-morning-risk-report-companies-see-value-opportunity-in-shareholder­
base/
57 Julian Velasco, “Shareholder Ownership and Primacy,” University of Illinois Law
Review, Vol. 2010, No. 3, 2010, pp. 901, 902.
58 In game theory, this concept of the likelihood of repeat or future interactions has
been termed the “shadow of the future.” See: Robert Axelrod, The Evolution of
Cooperation, Basic Books, 1984.
59 An important step in the transition from shareholder to stakeholder focus is for the
firm to prioritize its stakeholders (see Principle 3). In the process, firms should
understand that a shareholder perspective and a stakeholder perspective are not
alternatives. Although many commentators talk in terms of a choice between
independent constructs; in reality, this is a forced dichotomy. Since shareholders
are also stakeholders, a shareholder perspective is actually just a stakeholder per­
spective with a narrow focus on one stakeholder (shareholders) instead of many.
60 Joseph L. Bower and Lynn S. Paine, “The Error at the Heart of Corporate
Leadership: Most CEOs and Boards Believe Their Main Duty is to Maximize
Shareholder Value. It’s Not,” Harvard Business Review, May–June, 2017, p. 52.
61 See: State of Delaware General Corporation Law, https://delcode.delaware.gov/
title8/c001/

Principle 3: Prioritizing competing stakeholder

interests is difficult
1 R. Edward Freeman, Strategic Management: A Stakeholder Approach, Pitman, 1984,
p. 46.
2 Frank W. Pierce, “Developing Tomorrow’s Business Leaders,” an address to the
Cincinnati Chapter of the Society for the Advancement of Management, Decem­
ber 6, 1945, quoted in: Howard R. Bowen, Social Responsibilities of the Business­
man, Harper & Brothers, 1953, p. 51.
3 Frank W. Abrams, “Management’s Responsibilities in a Complex World,”
Harvard Business Review, Vol. 29, Issue 3, 1951, pp. 29, 30.
4 Howard R. Bowen, Social Responsibilities of the Businessman, Harper & Brothers,
1953, pp. 41–42.
5 Eric Rhenman, Foeretagsdemokrati och foeretagsorganisation, S.A.F. Norstedt:
Företagsekonomiska Forsknings Institutet, Thule, Stockholm, 1964. See also: R.
Edward Freeman, Jeffrey S. Harrison, Andrew C. Wicks, Bidhan L. Parmar, and
Simone de Colle, Stakeholder Theory: The State of the Art, Cambridge University
Press, 2010, p. 48.
6 R. Edward Freeman, Strategic Management: A Stakeholder Approach, Pitman, 1984,
Chapter 2, pp. 31–51.
7 It is important to note that, while anyone who considers themselves a stakeholder
can be thought of as such, the firm also plays an important role in identifying
those stakeholders it considers important (as implied by the Freeman definition).
In other words, it is conceivable that there are stakeholders who might not
 Notes 117
consider themselves as such, but the company treats them as a stakeholder as a
result of its operations or strategic interests.
8 It is interesting to debate whether the natural environment, as a non-independent
actor, should be included as an identifiable stakeholder of the firm. Many argue
that it should and that, in fact, the environment has rights that should be protected
by law. Others, however, argue that it should not be included because it is not the
environment itself that speaks or feels or acts; rather, it is how the degradation of
the environment affects other stakeholder groups (e.g., NGOs or the government)
who then advocate on its behalf. One argument for including the environment as
one of the firm’s societal stakeholders is to reinforce the importance of sustain-
ability, while recognizing that the environment requires actors to speak and act on
its behalf in order to be protected. For example, see: Jeremy Lurgio, “Saving
the Whanganui: Can Personhood Rescue a River?” The Guardian, November
29, 2019, www.theguardian.com/world/2019/nov/30/saving-the-whanganui-can­
personhood-rescue-a-river
9 For a network-based stakeholder perspective, see: James E. Post, Lee E. Preston,
and Sybille Sachs, “Managing the Extended Enterprise: The New Stakeholder
View,” California Management Review, Vol. 45, Issue 1, 2002, pp. 6–28.
10 Howard R. Bowen, Social Responsibilities of the Businessman, Harper & Brothers,
1953, p. 102.
11 John Mackey, quoted in: April Fulton, “Whole Foods Founder John Mackey on
Fascism and ‘Conscious Capitalism’,” NPR, January 16, 2013, www.npr.org/
sections/thesalt/2013/01/16/169413848/whole-foods-founder-john-mackey-on­
fascism-and-conscious-capitalism
12 John Mackey quoted in: John Bussey, “Are Companies Responsible for Creating
Jobs?” The Wall Street Journal, October 28, 2011, p. B1.
13 Hedrick Smith, “When Capitalists Cared,” The New York Times, September 2,
2012, www.nytimes.com/2012/09/03/opinion/henry-ford-when-capitalists­
cared.html
14 Simon Zadek, “The Path to Corporate Responsibility,” Harvard Business Review,
December, 2004, pp. 125–132.
15 Simon Zadek, “The Path to Corporate Responsibility,” Harvard Business Review,
December, 2004, p. 127.
16 Simon Zadek, “The Path to Corporate Responsibility,” Harvard Business Review,
December, 2004, p. 128.
17 Jonah Sachs, “The Ultimate Missed Social-media Opportunity for Brands: Climate
Change,” The Guardian, March 12, 2014, www.theguardian.com/sustainable­
business/social-marketing-brands-coke-chevrolet-climate-change-environment
18 An important contribution to this debate, for example, was made by Mitchell,
Agle, and Wood’s framework of “stakeholder salience,” which helps greatly in
identifying the stakeholders that, potentially, pose a threat to the firm (see: Ronald
K. Mitchell, Bradley R. Agle, and Donna J. Wood, “Toward a Theory of
Stakeholder Identification and Salience: Defining the Principle of Who and
What Really Counts,” Academy of Management Review, Vol. 22, Issue 4, 1997,
pp. 853–886). Essentially, this model identifies the characteristics that render a
stakeholder more or less salient to managers (power, legitimacy, and urgency).
While important, stakeholder characteristics are only one of the factors that deter­
mine whether a firm should respond to a claim. Equally important are the charac­
teristics of the firm (i.e., strategic relevance) and the characteristics of the issue (i.e.,
emerging or institutionalized). Mitchell et al. address these factors somewhat with
their dimension of “urgency” (and also their idea of managers as a moderator of
salience), but are not very specific about why or when something would be
urgent. In reality, it is the intersection of all three factors (issue, stakeholder, and
organization) that provides a clearer roadmap for managers as to when the firm
118 Notes
should act. More specifically, Mitchell et al. never really talk about prioritizing
among competing interests. In other words, their model helps identify which
stakeholders are important, but provides no real guidance as to which stakeholder
the firm should support when interests conflict.

Principle 4: CSR is a stakeholder responsibility

1 For an extended discussion of this issue, see: T. M. Devinney, P. Auger, and G.
M. Eckhardt, The Myth of the Ethical Consumer, Cambridge University Press, 2010.
2 For an example of the dangers associated with being too socially responsible, the
story of Malden Mills and its Polartec line of clothing is instructive. See: Rebecca
Leung, “The Mensch of Malden Mills,” 60 Minutes, CBS, July 6, 2003, www.
cbsnews.com/news/the-mensch-of-malden-mills/. See also, Gretchen Morgen­
son, “GE Capital vs. the Small-town Folk Hero,” The New York Times, October
24, 2004, p. BU5.
3 The Merriam Webster dictionary, for example, defines the term responsibility as
“moral, legal, or mental accountability,” while the Oxford English Dictionary
defines it as “the state or fact of being accountable” (emphasis added, see: www.
merriam-webster.com/dictionary/ and www.oed.com/).
4 For a discussion on the cognitive constraints that limit stakeholders’ ability or will­
ingness to hold firms to account, see: Michael L. Barnett, “Why Stakeholders
Ignore Firm Misconduct: A Cognitive View,” Journal of Management, Vol. 40,
Issue 3, 2014, pp. 676–702.
5 See also: David Chandler, “Why Aren’t We Stressing Stakeholder Responsib­
ility?” Harvard Business Review Blog, 2010, https://hbr.org/2010/04/why-arent­
we-stressing-stakeho
6 Christine Bader, “Why Corporations Fail to Do the Right Thing,” The Atlantic,
April 21, 2014, www.theatlantic.com/business/archive/2014/04/why-making­
corporations-socially-responsible-is-so-darn-hard/360984/
7 Howard R. Bowen, Social Responsibilities of the Businessman, Harper & Brothers,
1953, pp. 139–140.
8 Forest Reinhardt, Ramon Casadesus-Masanell, and Hyun Jin Kim, “Patagonia,”
Harvard Business School, October 19, 2010, [9–711–020], p. 8.
9 While a reasonable response to this statement is that the relationship between
company and consumer is iterative (a sort of chicken and egg argument with an
unclear origin), given that firms are less able to predict market trends than they are
able to respond to those trends, it seems clear that the preeminent direction of
influence is from consumer to company (and not the other way around).
10 Howard R. Bowen, Social Responsibilities of the Businessman, Harper & Brothers,
1953, p. 111.

Principle 5: Market-based solutions are optimal

1 Alice Korngold, “Business Can Do What Governments Can’t: Solve the World’s
Biggest Problems,” The Guardian, January 7, 2014, www.theguardian.com/
sustainable-business/business-government-world-problems-davos-multinational
2 For an important historical and anthropological perspective on the role of the
market as a medium for economic exchange (as well as possible alternatives), see:
Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our
Time, Beacon Press, 1944.
3 Friedrich A. Hayek, The Fatal Conceit: The Errors of Socialism, Volume I of W. W.
Bartley III (Ed.), The Collected Works of Friedrich August Hayek, Routledge,
London, UK, 1988, p. 14.
 Notes 119
4 John Authers, “Today’s Liquid Markets Are Open to Hayekian Criticism,” Finan­
cial Times, December 23, 2013, p. 12.
5 Alice Korngold, “Business Can Do What Governments Can’t: Solve the World’s
Biggest Problems,” The Guardian, January 7, 2014, www.theguardian.com/
sustainable-business/business-government-world-problems-davos-multinational
6 Milton Friedman, interviewed on The Donahue Show, 1979, https://youtu.be/
GapXLpLoZBs
7 Joseph E. Stiglitz, “Inequality Is Not Inevitable,” The New York Times, June 29,
2014, p. SR7.
8 James Madison, “Federalist No. 51: The Structure of the Government Must
Furnish the Proper Checks and Balances Between the Different Departments,”
February 6, 1788.
9 “A recent groundbreaking study found that undetected insider trading occurs in a
stunning one-fourth of public-company deals.” In: Editorial, “The Hidden Cost
of Trading Stocks,” The New York Times, June 23, 2014, p. A18.
10 For two excellent social psychology sources that discuss the bounded rationality of
humans and the biases and heuristics that we apply in the absence of rationality,
see: Herbert A. Simon, Administrative Behavior: A Study of Decision-Making Processes
in Administrative Organization, The Free Press, 1976 and Daniel Kahneman, Think­
ing, Fast and Slow, Farrar, Straus and Giroux, 2011.
11 Quoted in: Steven Rattner, “Who’s Right on the Stock Market?” The New York
Times, November 15, 2013, p. A25.
12 Quoted in: Steven Rattner, “Who’s Right on the Stock Market?” The New York
Times, November 15, 2013, p. A25.
13 “Valuing the Long-beaked Echidna,” The Economist, February 22, 2014, p. 66.
14 “Valuing the Long-beaked Echidna,” The Economist, February 22, 2014, p. 66.
15 “The Colour of Pollution,” The Economist, May 24, 2014, p. 29.
16 For a detailed consideration of the limits of federal government in the U.S., see:
Peter H. Schuck, Why Government Fails So Often, Princeton University Press,
2014. For example, Schuck argues that, in order to be successful, “a public policy
has to get six things right: incentives, instruments, information, adaptability, cred­
ibility and management. The federal government tends to be bad at all of these.”
And, where government intervention has proved to be most successful, it was
generally because bureaucrats “did not try to manage success so much as establish
the circumstances for it.” In: Yuval Levin, “Open Door Policies,” The Wall Street
Journal, June 10, 2014, p. A13.
17 Howard R. Bowen, Social Responsibilities of the Businessman, Harper & Brothers,
1953, p. 26.
18 “The Logical Floor,” The Economist, December 14, 2013, p. 18.
19 John Tierney, “When Energy Efficiency Sullies the Environment,” The New York
Times, March 8, 2011, p. D1.
20 John Tierney, “When Energy Efficiency Sullies the Environment,” The New York
Times, March 8, 2011, p. D1.
21 See: http://strategiccsr-sage.blogspot.com/2012/09/strategic-csr-prius-fallacy.html
22 For more on the human tendency to make rapid moral judgments and then
rationalize them post hoc, see Jonathan Haidt, “The Emotional Dog and Its
Rational Tail: A Social Intuitionist Approach to Moral Judgment,” Psychological
Review, Vol. 108, Issue No. 4, pp. 814–834, 2001.
23 John Tierney, “When Energy Efficiency Sullies the Environment,” The New York
Times, March 8, 2011, p. D1.
24 David Kestenbaum, “Pop Quiz: How Do You Stop Sea Captains from Killing
Their Passengers?” NPR, September 10, 2010, www.npr.org/sections/money/
2010/09/09/129757852/pop-quiz-how-do-you-stop-sea-captains-from-killing­
their-passengers
120 Notes
25 Tomasz Obloj, “Financial Incentives and Bonus Schemes Can Spell Disaster for
Business,” The Guardian, December 11, 2013, www.theguardian.com/sustainable­
business/financial-incentives-bonus-schemes-lloyds-fine
26 “Of Bongs and Bureaucrats,” The Economist, January 11, 2014, p. 11.
27 “The Logical Floor,” The Economist, December 14, 2013, p. 18.
28 David Sainsbury, “The Enabling State,” RSA Journal, Spring, 2013, pp. 42–45,
www.thersa.org/globalassets/pdfs/journals/spring-2013.pdf
29 Adam Smith, The Wealth of Nations, 1776, pp. 11–12.
30 Adam Gopnik, “Market Man,” The New Yorker, October 18, 2010, Vol. 86, Issue
32, p. 82.
31 Daniel Kahneman, Thinking, Fast and Slow, Farrar, Straus and Giroux, New
York, 2011.
32 Daniel Kahneman, Thinking, Fast and Slow, Farrar, Straus and Giroux, New York,
2011, pp. 411–412.
33 Richard H. Thaler and Cass R. Sunstein, Nudge: Improving Decisions About Health,
Wealth, and Happiness, Penguin Books, 2009.
34 “Nudge, Nudge, Think, Think,” The Economist, March 24, 2012, p. 78.
35 “Nudge, Nudge, Think, Think,” The Economist, March 24, 2012, p. 78.
36 David Brooks, “The Unexamined Society,” The New York Times, July 8, 2011,
p. A21.
37 Brian Wansink, David R. Just, and Joe McKendry, “Lunch Line Redesign,” The
New York Times, October 22, 2010, p. 35.
38 Donald J. Boudreaux, “Thank You for Smoking,” The Wall Street Journal, April
24, 2013, p. A13.
39 Richard H. Thaler and Cass R. Sunstein, Nudge: Improving Decisions About Health,
Wealth, and Happiness, Penguin Books, 2009.
40 Donald J. Boudreaux, “Thank You for Smoking,” The Wall Street Journal, April
24, 2013, p. A13.
41 Donald J. Boudreaux, “Thank You for Smoking,” The Wall Street Journal, April
24, 2013, p. A13.
42 William C. Frederick, “The Growing Concern Over Business Responsibility,”
California Management Review, Vol. 2, Issue 4, 1960, p. 60.
43 N. Gregory Mankiw, “When the Scientist Is Also a Philosopher,” The New York
Times, March 23, 2014, p. BU4.

Principle 6: Profit = total value

1 Howard R. Bowen, Social Responsibilities of the Businessman, Harper & Brothers,
1953, p. 48.
2 Howard R. Bowen, Social Responsibilities of the Businessman, Harper & Brothers,
1953, p. 146.
3 Michael C. Jensen, “Value Maximization, Stakeholder Theory, and the Corporate
Objective Function,” Business Ethics Quarterly, Vol. 12, No. 2, 2002, p. 239.
4 Jennifer M. George, “Compassion and Capitalism: Implications for Organizational
Studies,” Journal of Management, Vol. 40, No. 1, January 2014, p. 5.
5 Edward Wyatt, “U.S. Struggles to Keep Pace in Delivering Broadband Service,”
The New York Times, December 30, 2013, p. B1.
6 Howard R. Bowen, Social Responsibilities of the Businessman, Harper & Brothers,
1953, p. 146.
7 Howard R. Bowen, Social Responsibilities of the Businessman, Harper & Brothers,
1953, pp. 89–90.
8 A control group is a separate group that undergoes the same experiment and is,
essentially, exactly the same as the test group, apart from one variable (which is
 Notes 121
the variable of interest to the researcher – in this case, it would be the policy or
practice that the executive believes “maximizes” performance).
9 Robert Skidelsky, “4 Fallacies of Fiscal Austerity Debunked,” The Japan News by
The Yomiuri Shimbun, November 25, 2013, p. 9.
10 Howard R. Bowen, Social Responsibilities of the Businessman, Harper & Brothers,
1953, p. 114.
11 Michael C. Jensen, “Value Maximization, Stakeholder Theory, and the Corporate
Objective Function,” Business Ethics Quarterly, Vol. 12, No. 2, 2002, p. 245.

Principle 7: The free market is not free

1 “The Gated Globe,” The Economist, October 12, 2013, p. 13.
2 Mitsuru Obe, “TPP Deal Expected to Shake Up Japan’s Agriculture Sector,” The
Wall Street Journal, October 6, 2015, https://blogs.wsj.com/japanrealtime/2015/
10/06/tpp-deal-expected-to-shake-up-japans-agriculture-sector/
3 “Scrap them,” The Economist, June 14, 2014, p. 14.
4 Umair Irfan, “Fossil Fuels Are Underpriced by a Whopping $5.2 trillion,” Vox, May
17, 2019, www.vox.com/2019/5/17/18624740/fossil-fuel-subsidies-climate-imf
5 While excessive government intervention usually undermines the market, an
important exception is antitrust law, which is designed to prevent the consolida­
tion of firms seeking monopolistic power. In the U.S. over the past several
decades, therefore, it is the failure of government to intervene in multiple indus­
tries that has led to excessive concentration and a lack of competition. For
example, “Americans have a choice between only two internet providers. The
airline industry is dominated by four large carriers. Amazon, Apple, Facebook and
Google are growing even larger. One or two hospital systems control many local
markets. Home Depot and Lowe’s have displaced local hardware stores. Regional
pharmacy chains like Eckerd and Happy Harry’s have been swallowed by national
giants.” In David Leonhardt, “Big Business Is Overcharging You,” The New York
Times, November 11, 2019, p. A23.
6 From 2009–2011, for example, the U.S. federal government “issued 106 new reg­
ulations,” each of which is “expected to have an economic impact of at least
$100m a year.” See: ‘Schumpeter, “Not Open for Business,” The Economist,
October 12, 2013, p. 78.
7 Michael J. Ybarra, “Free to Choose, and Conserve,” The Wall Street Journal, June
11, 2012, p. A11.
8 Adam Smith published The Wealth of Nations in 1776, but it is his book, The Theory
of Moral Sentiments (first published in 1759), that leads many observers to describe
Smith as a moral philosopher, rather than an economist. For example, see: James R.
Otteson, “Adam Smith: Moral Philosopher,” Foundation for Economic Education,
November 1, 2000, https://fee.org/articles/adam-smith-moral-philosopher/
9 Nathan M. Jensen, “Do Taxpayers Know They Are Handing Out Billions to
Corporations?” The New York Times, April 24, 2018, www.nytimes.com/2018/
04/24/opinion/amazon-hq2-incentives-taxes.html
10 Paul Krugman, “Here Comes the Sun,” The New York Times, November 7, 2011,
p. A21.
11 Paul Krugman, “Here Comes the Sun,” The New York Times, November 7, 2011,
p. A21.
12 Gernot Wagner, “Going Green but Getting Nowhere,” The New York Times,
September 8, 2011, p. A25.
13 John Maynard Keynes, A Tract on Monetary Reform, Macmillan Publishers, 1923,
pp. 79–80.
122 Notes
14 Al Gore and David Blood, “For People and Planet,” The Wall Street Journal,
March 28, 2006, p. A20.
15 Jason Clay, “How Big Brands Can Save Biodiversity,” TEDGlobal 2010, July, 2010,
www.ted.com/talks/jason_clay_how_big_brands_can_help_save_biodiversity
16 See Elien Blue Becque, “Elon Musk Wants to Die on Mars,” Vanity Fair, March
10, 2013, www.vanityfair.com/news/tech/2013/03/elon-musk-die-mars
17 Nathaniel Rich, “Earth Control,” The New York Times Book Review, October 13,
2013, p. 18.
18 Charles Eisenstein, “Concern About Overpopulation is a Red Herring; Con­
sumption’s the Problem,” The Guardian, March 28, 2014, www.theguardian.com/
sustainable-business/blog/concern-overpopulation-red-herring-consumption­
problem-sustainability
19 For more information on how humans are the only species that creates “toxic
waste,” see: Paul Hawken, The Ecology of Commerce: A Declaration of Sustainability,
HarperCollins Publishers, 1993.
20 The advances made by firms such as Interface Carpets demonstrate the efficiencies
that are open to firms that understand waste as a commodity, rather than a cost.
See: www.interface.com/SEA/en-SEA/sustainability/our-journey-en
21 Paul Hawken, The Ecology of Commerce: A Declaration of Sustainability, Harper-
Collins Publishers, 1993, p. 13.
22 A related concept to lifecycle pricing is the circular economy. While lifecycle pricing
focuses on ensuring all costs of production and consumption are included in the
price charged for a product, the circular economy focuses on eradicating waste by
improving the design of products to either be easily repaired, re-used, or recycled.
For more information, see: www.theguardian.com/sustainable-business/series/
circular-economy
23 A Pigovian tax is an instrument designed to remedy a market imperfection by
taxing a behavior that generates third-party costs (i.e., an externality) that are
otherwise unaccounted for in the market price for the product, such as a carbon
tax. For more information about Pigovian taxes, see: R. H. Coase, “The Problem
of Social Cost,” The Journal of Law & Economics, Vol. III, October 1960, pp. 1–44
and William J. Baumol, “On Taxation and the Control of Externalities,” The
American Economic Review, Vol. 62, June 1972, pp. 307–322.
24 For an early discussion of the challenges inherent in adopting a lifecycle manage­
ment program within the firm, see: Mark Sharfman, Rex T. Ellington, and Mark
Meo, “The Next Step in Becoming ‘Green’: Life-cycle Oriented Environmental
Management,” Business Horizons, May–June, 1997, pp. 13–22.
25 Andrew Martin, “How Green Is My Orange?” The New York Times, January 21,
2009, www.nytimes.com/2009/01/22/business/22pepsi.html
26 Usman Hayat, “Future Challenges for Sustainable Investing,” Financial Times
(FTfm), February 7, 2011, p. 12.
27 Marc Gunther, “Natural Capital: Breakthrough or Buzzword?” The Guardian,
March 6, 2014, www.theguardian.com/sustainable-business/natural-capital-nature­
conservancy-trucost-dow
28 Sissel Waage, “How Can the Value of Nature Be Embedded in the World of
Business?” The Guardian, March 31, 2014, www.theguardian.com/sustainable­
business/finance-nature-no-value-natural-capital
29 “PUMA Completes First Environmental Profit and Loss Account which values
Impacts at €145 million,” PUMA, November 16, 2011, https://about.puma.com/
en/newsroom/corporate-news/2011/11-16-11-first-environmental-profit-and­
loss. See also: Richard Anderson, “Puma First to Publish Environmental Impact,”
BBC News, May 16, 2011, www.bbc.co.uk/news/business-13410397
30 Andrew Ward, “Exxon Backs Serious Climate Change Action,” Financial Times,
October 20, 2016, p. 16.
 Notes 123
31 “Low-carb Diet,” The Economist, January 13, 2018, p. 58.
32 “Low-carb Diet,” The Economist, January 13, 2018, p. 58.
33 See: “Ray Anderson: Mount Sustainability,” WatchMojo.com, October 8, 2009,
https://youtu.be/l_P_V0jk3Ig
34 Ray Anderson, “The Business Logic of Sustainability,” TED2009, February,
2009, www.ted.com/talks/ray_anderson_the_business_logic_of_sustainability
35 While the CSR community has done a reasonable job of holding firms responsible
for their supply chain, the group seems less willing to apply the same standards to
firms further up the distribution chain. Why are extraction firms, for example, not
held accountable for subsequent uses of the raw materials they take out of the
ground? While there has been some discussion of conflict diamonds/minerals, respons­
ibility for the supply chain appears to rest with the firm that sells the finished
product, rather than the firm that sold the raw materials or component parts. This is
an issue that has yet to emerge for distributors, but it is not difficult to imagine a day
when that happens. Rather than hold GAP, Nike, and Walmart responsible for the
actions of other firms far removed from them closer to source, it surely makes more
sense to hold the extraction firms themselves responsible for their own actions.
36 For a discussion about the limits of our current economic model based around
growth and consumption, see: Tim Jackson, “New Economic Model Needed
Not Relentless Consumer Demand,’ The Guardian, January 18, 2013, www.the
guardian.com/sustainable-business/blog/new-economic-model-not-consumer­
demand-capitalism

Principle 8: Only business can save the planet

1 For a more detailed discussion of the environmental consequences of an expand­
ing population and a static resource base, see: Garrett Hardin, “Tragedy of the
Commons,” Science, Vol. 162, No. 3859, December 13, 1968, pp. 1243–1248,
https://science.sciencemag.org/content/162/3859/1243.full
2 Michael Pollan, “Why Bother?” The New York Times, April 20, 2008, p. 19.
3 Brad Plumer, “Carbon Dioxide Emissions Hit a Record in 2019, Even as Coal
Fades,” The New York Times, December 3, 2019, www.nytimes.com/2019/12/03/
climate/carbon-dioxide-emissions.html
4 Paul Hawken, The Ecology of Commerce: A Declaration of Sustainability, Harper-
Collins, 1993, pp. 4, 5.
5 “Our Common Future, Chapter 2: Towards Sustainable Development,” UN
Documents, www.un-documents.net/ocf-02.htm
6 In defining the term sustainability, it is useful to distinguish between the use of
sustainability as a noun and sustainable as an adjective. Although, grammatically, the
two words clearly share the same etymology; in practical terms, there is a differ­
ence. In most uses of the term sustainability, such as by the media, for example, the
intended reference is almost always to the environment. When sustainable is being
used to qualify the word business, however (i.e., a sustainable business; a term that
can be used interchangeably with Sustainable Value Creation), the meaning con­
veyed is closer to the original, broad meaning of a business that is self-sustaining.
7 In the U.S., for example, when survey respondents were asked what words they
most closely associate with sustainability, the most common responses were
“‘environmentally friendly,’ ‘natural,’ ‘organic,’ ‘green,’ ‘recycle’ and ‘renewable.’
… Meanwhile, words such as ‘ethical,’ ‘trust,’ ‘trustworthy,’ ‘collaboration,’
community’ and ‘transparency’ ranked low in their perceived relationship to
sustainability.” See: “Open Thread: What Does ‘Sustainable’ Mean to You?”
The Guardian, February 3, 2014, www.theguardian.com/sustainable-business/
sustainable-green-meaning-consumer-open-thread
124 Notes
8 Bill Baue, “Brundtland Report Celebrates 20th Anniversary Since Coining Sus­
tainable Development,” Social Funds, June 11, 2007, www.socialfunds.com/news/
article.cgi/article2308.html (no longer online).
9 Nathaniel Rich, “Losing Earth: The Decade We Almost Stopped Climate
Change,” The New York Times Magazine, August 5, 2018, www.nytimes.com/
interactive/2018/08/01/magazine/climate-change-losing-earth.html
10 “Global Greenhouse Gas Emissions Data,” U.S. Environmental Protection Agency,
January, 2020, www.epa.gov/ghgemissions/global-greenhouse-gas-emissions-data
11 Danielle Wiener-Bronner, “Forget Plastic Straws, Starbucks Has a Cup Problem,”
CNN Business, February 27, 2019, https://edition.cnn.com/interactive/2019/02/
business/starbucks-cup-problem/index.html
12 “Made to Break: Are we Sinking under the Weight of our Disposable Society?”
Knowledge@Wharton, August 9, 2006, https://knowledge.wharton.upenn.edu/
article/made-to-break-are-we-sinking-under-the-weight-of-our-disposable-society/
13 “Talking Trash,” The Economist Technology Quarterly, June 2, 2012, p. 12. See also:
‘Municipal Waste,’ OECD Data, https://data.oecd.org/waste/municipal-waste.htm
14 Brook Larmer, “The World’s Fastest-growing Trash Stream, e-Waste, Offers Eco­
nomic Opportunity as Well as Toxicity,” The New York Times Magazine, July 8,
2018, p. 12.
15 Brook Larmer, “The World’s Fastest-growing Trash Stream, e-Waste, Offers Eco­
nomic Opportunity as Well as Toxicity,” The New York Times Magazine, July 8,
2018, p. 12.
16 Annie Leonard, “Our Plastic Pollution Crisis is Too Big for Recycling to Fix,”
The Guardian, June 9, 2018, www.theguardian.com/commentisfree/2018/jun/09/
recycling-plastic-crisis-oceans-pollution-corporate-responsibility
17 Lucy Siegle, “Yes, Plastic is an Eco Nightmare. But it’s Also Tired, Old Techno­
logy,” The Guardian, July 21, 2018, www.theguardian.com/commentisfree/2018/
jul/21/yes-plastic-is-an-eco-nightmare-but-its-also-tired-old-technology
18 Mike Ives, “On Thai Beach, Grim Symbol of the Rise in Plastic Pollution,” The
New York Times, June 5, 2018, p. A4.
19 Joseph Curtin, “Let’s Bag Plastic Bags,” The New York Times, March 4, 2018,
p. SR10.
20 Lee Scott, “Twenty First Century Leadership,” October 23, 2005, https://corporate.
walmart.com/_news_/executive-viewpoints/twenty-first-century-leadership
21 Lee Scott, “Twenty First Century Leadership,” October 23, 2005, https://corporate.
walmart.com/_news_/executive-viewpoints/twenty-first-century-leadership
22 See https://corporate.walmart.com/our-story/our-business
23 “Wal-Mart Completes Goal to Sell Only Concentrated Liquid Laundry Deter­
gent,” May 29, 2008, https://corporate.walmart.com/newsroom/2008/05/29/
wal-mart-completes-goal-to-sell-only-concentrated-liquid-laundry-detergent
24 For more detail, see the Sustainability Consortium (www.sustainabilityconsortium.
org/) and Walmart’s webpage on the Sustainability Index, www.walmartsustain
abilityhub.com/sustainability-index
25 As individuals, companies, and nation states, our massive levels of debt continue
to threaten our economic stability. For example, see William D. Cohan, “The
Debt Crisis Is Coming,” The New York Times, September 1, 2019, p. SR2.
26 Avis Cardella, “Attention, Shoppers,” The New York Times Book Review, February
10, 2013, p. 21.
27 Avis Cardella, “Attention, Shoppers,” The New York Times Book Review, February
10, 2013, p. 21.
28 Avis Cardella, “Attention, Shoppers,” The New York Times Book Review, February
10, 2013, p. 21.
29 See: T. M. Devinney, P. Auger, and G. M. Eckhardt, The Myth of the Ethical Con­
sumer, Cambridge University Press, 2010. Also, this effect is enhanced when
 Notes 125
action involves change because humans instinctively value the status quo and fear
the unknown: “According to a study of referendums worldwide, voters almost
always reject change: if the campaign starts with opinion evenly balanced, the
status quo wins in 80 per cent of cases.” Rachel Sylvester, “Voters Always Know
Best, That’s Why it Pays Not to Ask Them,” The Times in The Daily Yomiuri,
October 21, 2012, p. 8.
30 Katherine White, David J. Hardisty, and Rishad Habib, “The Elusive Green Con­
sumer,’ Harvard Business Review, July/August, 2019, https://hbr.org/2019/07/the­
elusive-green-consumer
31 For example: “Pound for pound, making a Prius contributes more carbon to the
atmosphere than making a Hummer, largely due to the environmental cost of the
30 pounds of nickel in the hybrid’s battery. … If a new Prius were placed head-
to-head with a used car, would the Prius win? Don’t bet on it. Making a Prius
consumes 113 million BTUs. … A single gallon of gas contains about 113,000
Btus, so Toyota’s green wonder guzzles the equivalent of 1,000 gallons before it
clocks its first mile. A used car, on the other hand, starts with a significant
advantage: The first owner has already paid off its carbon debt. Buy a decade-old
Toyota Tercel, which gets a respectable 35 mpg, and the Prius will have to drive
100,000 miles to catch up.” In: “Inconvenient Truths: Get Ready to Rethink
What It Means to Be Green,” Wired, May 19, 2008, www.wired.com/2008/05/
ff-heresies-intro/
32 Joseph Rago, “Conspicuous Virtue and the Sustainable Sofa,” The Wall Street
Journal, March 23, 2007, p. W13.
33 Joseph Rago, “Conspicuous Virtue and the Sustainable Sofa,” The Wall Street
Journal, March 23, 2007, p. W13.
34 See: Wesley Morris, “Tie a Yellow Bracelet,” Grantland, August 28, 2012,
https://grantland.com/features/livestrong-founder-lance-armstrong-was-never­
really-cycling/
35 Joseph Rago, “Conspicuous Virtue and the Sustainable Sofa,” The Wall Street
Journal, March 23, 2007, p. W13.
36 In April 2010, an oil well owned by Transocean and operated by BP (with
support from Halliburton) exploded killing 11 men and releasing “approximately
168 million gallons of oil in the Gulf of Mexico.” In “Oil Spills Fast Facts,” CNN
Library, April 22, 2019, https://edition.cnn.com/2013/07/13/world/oil-spills­
fast-facts/index.html
37 NOAA, “Gulf of Mexico ‘Dead Zone’ Predictions Feature Uncertainty,”
ScienceDaily, June 21, 2012, www.sciencedaily.com/releases/2012/06/12062111
3419.htm
38 The Cuyahoga River in Ohio is famous for catching fire numerous times in the
1950s and 1960s. The river was the focus of a 1969 Time Magazine report about
the levels of pollution in many U.S. rivers, being described as a river that “oozes,
rather than flows.” The report prompted public outrage and helped build support
for the nascent environmental movement. One outcome was the establishment of
the Environmental Protection Agency (a U.S. federal government agency) by
President Richard Nixon in 1970. See “America’s Sewage System and the Price
of Optimism,” Time Magazine, August 1, 1969, http://content.time.com/time/
magazine/article/0,9171,901182,00.html
39 “Stopping a Scorcher,” The Economist, November 23, 2013, p. 80.
40 Adam Corner, “‘Every Little Helps’ Is a Dangerous Mantra for Climate Change,”
The Guardian, December 13, 2013, www.theguardian.com/sustainable-business/
plastic-bags-climate-change-every-little-helps
41 Adam Corner, “‘Every Little Helps’ Is a Dangerous Mantra for Climate Change,”
The Guardian, December 13, 2013, www.theguardian.com/sustainable-business/
plastic-bags-climate-change-every-little-helps
126 Notes
42 Howard R. Bowen, Social Responsibilities of the Businessman, Harper & Brothers,
1953, p. 227.
43 For background about this report, see Stern Review on the Economics of Climate
Change, HM Treasury, 2006, https://webarchive.nationalarchives.gov.uk/+tf_/
www.hm-treasury.gov.uk/sternreview_index.htm
44 John Kay, “Climate Change: The (Groucho) Marxist Approach,” Financial Times,
November 28, 2007, p. 11.
45 John Kay, “Climate Change: The (Groucho) Marxist Approach,” Financial Times,
November 28, 2007, p. 11.
46 Marc Gunther, “Sustainability at McDonald’s. Really,” September 24, 2013,
www.marcgunther.com/sustainability-at-mcdonalds-really/ (no longer available
online). See also: Marc Gunther, “Coffee and the Consumer: Can McDonald’s
Mainstream Sustainability?” The Guardian, September 24, 2013, www.theguardian.
com/sustainable-business/mcdonalds-coffee-sustainability
47 Livia Albeck-Ripka, “Your Recycling Gets Recycled, Right? Maybe, or Maybe
Not,” The New York Times, May 29, 2018, www.nytimes.com/2018/05/29/
climate/recycling-landfills-plastic-papers.html
48 Erica Grieder, “One Man’s Trash Is Another’s Trade,” The Wall Street Journal,
December 21–22, 2013, p. C9.
49 Luca Ventura, “World’s Largest Companies 2019,” Global Finance Magazine,
August 29, 2019, www.gfmag.com/global-data/economic-data/largest-companies
50 Jason Clay, “How Big Brands Can Save Biodiversity,” TEDGlobal 2010, July, 2010,
www.ted.com/talks/jason_clay_how_big_brands_can_help_save_biodiversity

Principle 9: Value creation is not a choice

1 Paul C. Godfrey, “The Relationship between Corporate Philanthropy and Share­
holder Wealth: A Risk Management Perspective,” Academy of Management Review,
Vol. 30, Issue 4, 2005, pp. 777–798.
2 Paul Sullivan, “Firms Learn as They Help Charities, They Also Help Their
Brands,” The New York Times, November 6, 2017, www.nytimes.com/2017/
11/06/business/corporate-philanthropy.html
3 Graham McLaughlin, “Why Brands Should Focus on Social Change, Not Philan­
thropy,” The Guardian, January 17, 2014, www.theguardian.com/sustainable­
business/responsibility-good-business-long-term
4 “The Ultimate List of Charitable Giving Statistics for 2018,” Nonprofit Source,
https://nonprofitssource.com/online-giving-statistics/
5 Warren A. Stephens, “Why Do the Young Reject Capitalism?” The Wall Street
Journal, June 1, 2017, p. A17. More specifically, “A Recent YouGov Poll Found
that the Share of 18-to-29 Year Olds with a Favorable View of Capitalism Slipped
to 30% in 2018 from 39% in 2015,” in Edward Glaeser, “The Commercial
Republic,” The Wall Street Journal, October 20–21, 2018, p. C9.
6 Mark Boleat, “Inclusive Capitalism: Searching for a Purpose beyond Profit,” The
Guardian, May 27, 2014, www.theguardian.com/sustainable-business/inclusive­
capitalism-purpose-beyond-profit
7 In this sense, the work of C. K. Prahalad and Stuart Hart on delivering goods and
services to consumers at the bottom-of-the-pyramid is instructive because the
conceptualization of the developing world as an under-served market (rather than
a charitable cause) speaks to the power of business to deliver market-based solu­
tions that address some of society’s most intractable problems. See: C. K. Prahalad,
The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits, Wharton
School Publishing, 2004 and Stuart L. Hart, Capitalism at the Crossroads: The
 Notes 127
Unlimited Business Opportunities in Solving the World’s Most Difficult Problems,
Wharton School Publishing, 2005.
8 A transcript of Gates’ remarks, together with a link to a video of his January 24,
2008 speech, can be found at: www.gatesfoundation.org/media-center/speeches/
2008/01/bill-gates-2008-world-economic-forum
9 A transcript of Gates’ remarks, together with a link to a video of his January 24,
2008 speech, can be found at: www.gatesfoundation.org/media-center/speeches/
2008/01/bill-gates-2008-world-economic-forum
10 Michael Kanellos, “On ‘Creative Capitalism,’ Gates Gets It,” CNET, January 25,
2008, www.cnet.com/news/on-creative-capitalism-gates-gets-it/
11 Declan McCullagh, “Gates Misses the Point On ‘Creative Capitalism’,” CNET,
January 25, 2008, www.cnet.com/news/gates-misses-the-point-on-creative­
capitalism/
12 William R. Easterly, “Why Bill Gates Hates My Book,” The Wall Street Journal,
February 7, 2008, p. A18.
13 See: Muhammad Yunus, Creating a World Without Poverty: Social Business and the
Future of Capitalism, Public Affairs, 2008.
14 Alan Beattie, “Poor Returns,” Financial Times, February 2, 2008, p. 33.
15 Alan Beattie, “Poor Returns,” Financial Times, February 2, 2008, p. 33.
16 Michael E. Porter and Mark R. Kramer, “Creating Shared Value,” Harvard Busi­
ness Review, 2011, Vol. 89, p. 64.
17 For additional commentary on Porter and Kramer’s ideas, see: Tobias Webb,
“Does Michael Porter Understand Sustainable Business?” January 21, 2011,
http://sustainablesmartbusiness.com/does-michael-porter-understand/
18 Andrew Hill, “Society and the Right Kind of Capitalism,” Financial Times, Febru­
ary 22, 2011, p. 14.
19 See: William B. Werther and David Chandler, “Strategic Corporate Social
Responsibility as Global Brand Insurance,” Business Horizons, Vol. 48, issue 4, 2005,
pp. 317–324.

Principle 10: The business of business is business

1 Milton Friedman, “The Social Responsibility of Business is to Increase its Profits,”
The New York Times Magazine, September 13, 1970, www.nytimes.com/1970/
09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html
2 Jo Confino, “Interview: Unilever’s Paul Polman on Diversity, Purpose and
Profits,” The Guardian, October 2, 2013, www.theguardian.com/sustainable­
business/unilver-ceo-paul-polman-purpose-profits
3 Milton Friedman, “The Social Responsibility of Business is to Increase its Profits,”
The New York Times Magazine, September 13, 1970, www.nytimes.com/1970/
09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html
4 Milton Friedman, “The Social Responsibility of Business is to Increase its Profits,”
The New York Times Magazine, September 13, 1970, www.nytimes.com/1970/
09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html
5 Charles Handy, “What’s a Business For?” Harvard Business Review, December,
2002, pp. 49–55.
6 Charles Handy, “What’s a Business For?” Harvard Business Review, December,
2002, p. 52.
7 Milton Friedman, “The Social Responsibility of Business is to Increase its Profits,”
The New York Times Magazine, September 13, 1970, www.nytimes.com/1970/
09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.
html
128 Notes
8 Milton Friedman, “The Social Responsibility of Business is to Increase its Profits,”
The New York Times Magazine, September 13, 1970, www.nytimes.com/1970/
09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html
9 Archie B. Carroll, “The Pyramid of Corporate Social Responsibility: Toward the
Moral Management of Organizational Stakeholders,” Business Horizons, July–August,
1991, p. 43.

Conclusion: Sustainable Value Creation

1 See also: David Chandler (5th edition), Strategic Corporate Social Responsibility: Sus­
tainable Value Creation, Sage Publications, Inc., 2020.
2 If there was one single change I would make to implement the ideas contained in
this book in any publicly traded firm, it would be to change the existing Investor
Relations Department into a Stakeholder Relations Department with the expanded
mandate this title implies.
3 “Reform School for Bankers,” The Economist, October 5, 2013, p. 73.
4 For additional discussion around the idea that SVC represents progressive manage­
ment, see: Thomas E. Graedel and Braden R. Allenby, Industrial Ecology and Sus­
tainable Engineering, Prentice Hall, 2009. The authors are industrial ecologists who
argue that there is no such thing as green management, only good management.
5 Firms that understand the powerful motivating force of a values-based business
include Zappos, Nike, Whole Foods, and Patagonia. Inspiring people, however, is
difficult and expensive. As such, it appears most firms prefer a thin veil of values
to bolster their compliance and avoid alienating anyone (a neutral approach). The
difference is between firms that understand the powerful and radical consequences
of implementing SVC and those that do not.
6 Innovation & Design, “Peter Senge’s Necessary Revolution,” Bloomberg, June 11,
2008, www.bloomberg.com/news/articles/2008–06–11/peter-senges-necessary­
revolutionbusinessweek-business-news-stock-market-and-financial-advice
7 G. Pascal Zachary and Ken Yamada, “What’s Next? Steve Job’s Vision, So on
Target at Apple, Now Is Falling Short,” The Wall Street Journal, May 25, 1993,
www.wsj.com/articles/SB10001424052970203476804576614371332161748
8 Howard R. Bowen, Social Responsibilities of the Businessman, Harper & Brothers,
1953, p. 228.
9 Howard R. Bowen, Social Responsibilities of the Businessman, Harper & Brothers,
1953, p. 193.