Looking beyond profit maximisation

Krishna Tanuku | Updated on February 15, 2012

Krishna Tanuku


The fundamental doctrines of business, such as that proposed by Adam Smith and Milton Friedman, based on the premise that the private search for profit indeed advances the public interest, have been endlessly interpreted and debated.

Barring a few exceptional cases of truly virtuous businesses, many still believe in profit maximisation as the paramount goal of their existence. In a recent survey conducted by Edelman, an American firm, more than 60 per cent of informed public of India agreed with the dictum that the only social responsibility of a business was to increase its profits.

Akin to this notion, many businesses see ethical and responsible behaviours as necessary evils at best. Only a few have come to realise that such a behaviour is not tangential to sustainable economic value creation, and is in fact imperative to sustainable competitive advantage.

Looking at how the mindset towards ethics and responsibility is evolving since last two decades, one could perhaps see an analogy in how quality was perceived by businesses over the last half century.

Beginning with denial of responsibility for ensuring quality of their offerings, the businesses had to pay the price for customer dissatisfaction. Later, owing to increasing customer pressures, businesses unwillingly resorted to compensation strategy for defective offerings.

But when the economic cost of such a practice was found to be unreasonable, the businesses realised the value add of quality control and eventually quality assurance.

It was only after decades that the total quality management was adopted as an integrative management philosophy and strategic means to competitive advantage. Perhaps, the recent trends lend an impetus for a similar evolution of mindset towards responsible entrepreneurship.

A new future order

That the enterprises, irrespective of their size, to survive in the long run need the capability to harness superior know-how across their boundaries is propounded by Henry Chesbrough's Open Innovation and Raymond Miles' Collaborative Entrepreneurship concepts. With paradigms such as open source already having gained significant momentum, it is not hard to perceive that a new model of value co-creation is the inevitable future order of things. It is in this future order that the principles of responsible entrepreneurship become critical to operational sustainability.

But what indeed is responsible entrepreneurship? What makes a start-up or a small and medium enterprise (SME) truly responsible? Is such a behaviour towards stakeholders necessarily in conflict with underlying economic rationale of shareholder value maximization?

Can such a new frame of thinking be realistically nurtured by academia? How can a new breed of entrepreneurs prepared to embrace responsibility be promoted by industry? At this juncture in India's growth where, by the end of this decade, $600-800 billion of economic contribution is expected to come from new enterprises and greater growth of existing SMEs, these questions are momentous.

In this age of new possibilities, an opportunity presents itself to reflect on the dogmas of self-centeredness, and evolve new systems of intra-enterprise and inter-enterprise governance.

The United Nations Global Compact, with no regulatory instrument, provides an example of evolving a principle based framework that enables enterprises to collaborate not just on the terms of complementary economic value, but also common organisational values. Interestingly, the constructs that drive the software world - such as interfaces, standards and protocols – also provide a sense for designing a collaborative entrepreneurial economy that is self-governing.

Looking forward

Towards this end of building the foundations for a new economy, the stakeholders of ecosystem can also adopt small but critical changes with potentially large effects. For example, incubators and financial institutions could define a set of core principles that essentially underlie all the enterprises they extend support to.

Mentors and educators could explore approaches that foster a new frame of thinking and build the necessary and responsible leadership skills.

Academic research too has a key role to play in advancing the knowledge base. Exploring new metrics, and cases of ethical reconciliations and leveraging responsible practices towards competitive advantage will advance not just the theory, but practice in the field. Porter's concept of Creating Shared Value is one such seminal academic contribution that provides insights into how enterprises can build a sustainable competitive advantage by re-conceiving their relation to society.

Recent uprisings questioning the undue influence and behaviour of the private enterprises could be mere flash in the pans.

The real change in the norm comes when the enterprises realise that continuing to operate in a way that is negligent of responsible behaviour does not even make a pure economic sense, let alone moral sense.

( The author is Executive Director, Wadhwani Centre for Entrepreneurship Development, ISB)

Published on January 08, 2012

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