Business & Society – PiggyBank

One great discussion topic and area of study has to do with defining exactly what a business is and what its obligations are to society at large and to the many stakeholders (customers, shareholders, employees, suppliers and policy makers) participating in the business environment. For most businesses, the focus has been first and foremost on serving the customer. For others, the focus is on the shareholder. More recently, we have seen a broadening of the discussion to recognize the importance of multiple stakeholders and the need to promote social, environmental, and financial value.  In 1970, Milton Friedman argued that the only social responsibility of business was to maximize profits. Levitt (1958) captured this perspective succinctly when he wrote, “the business of business is profits.” However, in the real world, there is a lot of failure in the delivery of public goods, schools, infrastructure and healthcare. As a result, corporations are being required to participate in broader societal advancement not only by regulators but by investors and other stakeholders— employees, customers and communities. Piggy believes that most business leaders must navigate this line, making sure companies remain profitable enough to fund R&D, innovation and future proofing—while making the world a better place.

A practical example was the outbreak and spread of the Covid-19 pandemic. Globally, it turned out to be a race between injections and infections as governments focussed on vaccination programmes. In Zimbabwe, the government ramped up vaccination programmes and the business community were engaged in a bid to mobilise resources to acquire more vaccines to cover the entire country. The important question is whether there is any value for businesses in Zimbabwe to fund or support such programmes? While the business of business is indeed business, it appears that there are compelling reasons companies should seize initiatives to drive social and business benefits. In an interconnected world facing unprecedented environmental and social constraints, society will demand it. Increasingly, a basic expectation among customers, governments, and communities will be that the companies they do business with provide a significant net positive return for society at large, not just for investors.

Delta Corporation Corporate Social Responsibility Campaign

Picture: Delta employees volunteered to participate in the National Clean-Up Campaign launched by His Excellency the President of the Republic of Zimbabwe on the first Fridays of the month as part of the Delta

But can firms do well by doing good? There are numerous research papers that try to estimate the effect of corporate social responsibility on financial performance. However, the results are mixed. The more recent work of Nyborg and Zhang (2013) shows that firms with a strong reputation for social responsibility pay 38% less than firms with a weak reputation for CSR. Hong and Kacperczyk (2009) contend that companies involved in the production of alcohol, tobacco and gaming have higher expected returns than otherwise comparable stocks, suggesting that investors pay a financial price for a higher social return. A meta-study by Margolis et al. (2007) covering 167 papers concludes that corporate social responsibility has a small, positive effect on financial performance.

Overall, while CSR initiatives do not immediately affect a firm’s profitability through higher product revenues or lower costs, there are other reasons why it might increase value. Corporate social responsibility can be a strategic asset that firms use to build a reputation with key stakeholders. Firms invest in CSR to purchase a form of insurance against negative firm events. The idea is that by engaging in CSR, firms create a reputation for behaving in line with other actors and this creates “moral capital” that the firm can draw upon in times of adversity. For example, companies like Delta Corporation and BAT Zimbabwe are affected by tax policies and regulations related to the marketing and distribution of products. There is indeed a strategic logic in maintaining a good relationship with the government. This, however, calls for a shift to long-term strategic thinking amongst business leaders. Piggy has consistently insisted investors on our market to gain exposure in companies with solid business models and proven management teams. Based on  leadership assessments, Piggy remains a long-term bull on Delta Corporation, Old Mutual Zimbabwe Limited and NMBZ Holdings. Get more tidbits on the stock market by joining a PiggyBankAdvisor Telegram Group (+263 78 358 4745).

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