Balancing social impact and creating shareholder value - Shared value creation

Milton Friedman famously proclaimed that the responsibility of a business is to create maximum shareholder value for its shareholder. Over the years, it has been empirically proven that it is not sustainable and can erode shareholder value in the long run.

This is especially true in today’s global economy where Gen-Z employees are actively looking to create a social impact through their work and hold their employers to the same high standard as discussed in BCG article “Twelve Forces That Will Radically Change How Organizations Work”.

Hence, societal impact that was once hard to internalize for companies as it related to various externalities has started to impact companies in ways that are critical to their business performance, talent acquisition and sustained competitive advantage. This is especially true for emerging technological frontiers like AI, quantum computing and advanced analytics where talent is scarce and hence enjoys leverage over their employers to a certain extent.

An example would be recent Google announcement that Google Cloud would not renew its contract with the United States Department of Defense which expires in 2019. It came because of huge internal dissent from Google employees who objected to the use of Google infrastructure for Project Maven that uses AI and image processing to improve targeting capabilities of military drones. The contract was worth upwards of worth USD 12 million but was viewed by Google as a potential market worth USD 4 billion. It marked a huge win for Google Cloud division which was struggling to find its footing in a market dominated by Amazon Web Services (AWS) and Microsoft Azure. What Google didn’t foresee was the huge pushback it received when upwards to 4,000 employees signed a letter calling that Google disassociate from the business of war. Many employees followed through on their threats through resignations and public appeals including leading AI researchers especially at Deep Mind. Eventually, Google yielded to the pressure and disassociated itself from the contract.

Another example that I saw was the recent tech fair when undergraduate students at CMU started an impromptu protest against university decision to allow weapons manufacturers to recruit students at CMU.  The CMU student body led protest was covered by tech press and eventually spread to other tech universities (Stanford, Cornell, MIT) that was an embarrassment to the weapons companies that were looking to hire talent from these universities. Since the pool of talent is very limited and connected, peer pressure acts as a major hindrance to students who might be willing to work for the companies but fear the social repercussion of such a decision when they can continue the same work at a somewhat lower pay at an emerging socially conscious tech firm.

Hence  as corporate dynamics evolve companies that once viewed negative externalities as a cost of doing business would need to internalize this aspect into their decision making as they can no longer be pigeon-holed into the Friedman doctrine of shareholder value instead of shared value as espoused in the article “Creating shared value” by Kramer and Porter.

References:

1.      http://thetartan.org/2018/10/1/news/sds-toc
2.    https://mashable.com/2018/06/02/google-defense-department-project-maven-contract-not-renewed/#urC.t6WSgPqk