“A business that does not show a profit at least equal to its cost of capital is irresponsible; it wastes society’s resources. Economic profit performance is the base without which business cannot discharge any other responsibilities, cannot be a good employer, a good citizen, a good neighbor. But economic performance is not the only responsibility of a business any more than educational performance is the only responsibility of a school or healthcare the only responsibility of a hospital. Every organization must assume responsibility for its impact on employees, the environment, customers, and whomever and whatever it touches. That is social responsibility.”
—Peter F. Drucker
As Peter Drucker asserts, wealth creation is the first responsibility of business. If it does not earn enough to pay its total cost of capital, it is not being socially responsible to its investors and lenders. In addition, sufficient profit is necessary to provide for future innovation.
But a business should also act in a socially responsible way by taking into account the requirements of all stakeholders, first and foremost its customers. Then, it must make sure it eliminates any negative impacts that it creates on society, such as pollution of the air and water, and unethical practices that jeopardize the general welfare.
If operating ethically puts a business at a competitive disadvantage, it should encourage the right kind of regulation of the entire industry. If it does not, it will almost certainly encounter the wrath of society, and pressure will build for government regulation that may well turn out to be overly and needlessly burdensome.
In recent years, this brand of leadership was sorely absent from executives who were knowledgeable about long-standing abuses in the mortgage and consumer-credit markets. The result was passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, an 848-page bill that has been widely criticized by business and by elected representatives as an example of over-regulation.
One of the differences between good capitalism and bad capitalism is the practice of socially responsible behavior. We have witnessed the damage irresponsible behavior can create. The challenge now before us is to change the attitude of influential executives toward the interest of society.