THE PAST five years have brought disrepute to the business of doing business. Not only has the world been in a prolonged recession, but it has also been a period marked by revelations of insider trading, corporate malpractice, political corruption and acts of mindless environmental degradation. Even if one ignores fringe groups like Occupy Wall Street, it cannot be denied that there is a palpable sense of general public anger towards the business (and political) elite. This is true of virtually every country in the world. This brings us to a fundamental question: What is the Business of Business?

In the pre-Crisis era, the mantra was that the business of business was to maximise “shareholder value”. However, it turned out that such a narrow definition of success raised many questions: Over what time frame should businesses maximise shareholder value? After all, many activities may push up share prices and profits in the short run but prove disastrous in the long run. Is it alright for a business to engage in an unethical practice even it is legally allowed? To what extent should businesses be judged for the environmental and social externalities they impose on the rest of the world?

Fundametally, business is a good thing even if we ignore all CSR activity. CSR can be the icing but it is not the cake

All of these issues are central to creating a more ethical and sustainable business environment but, unfortunately, the focus of the debate has drifted in a totally different direction. On one hand, vociferous activists seem to argue that profit-maximisation by businesses, especially big business, is somehow disreputable. On the other, companies have responded by highlighting their Corporate Social Responsibility (CSR) activities. In other words, we have gone back to the world of the old Tata Steel advertisement “We Also Make Steel”. But, does this approach resolve anything?

My fundamental objection to the “we also do business” approach is that it is apologetic about the fact that private entrepreneurship is the bedrock of any economy. It produces goods/services, creates innovation, employs people and pays taxes. The public sector is not a substitute for profitable business. Anyone who disagrees with this should visit North Korea. Thus, business is fundamentally a good thing even if we ignore all CSR activity. CSR can be the icing but it is not the cake. Therefore, the issue is ultimately about how a society encourages “good” entrepreneurial behaviour and discourages “bad” rent-seeking.

This is not the place for a philosophical discussion on what constitutes “good” or “bad” behaviour. However, at a minimum, any judgment requires transparency and an accurate representation of the activities of a business. In other words, rather than decry profit-maximisation, society needs to know how the profits were generated and measured.

Discussions on transparency are usually about how government contracts were awarded, and national assets (such as minerals) are auctioned. However, we need equal transparency on how profits are measured. This is not just a problem for the tax authorities but a much more fundamental problem about how the “value addition” of a company is measured and distributed. One of the major causes of the current crisis was, after all, the mispricing of financial assets and profits.

The problem is that our measures of success are so deeply entrenched that we no longer question them. Take for example, the almost exclusive use of GDP as a measure of human progress despite all its well-known flaws. Similarly, there is an assumption that profitability and corporate earnings can only be defined in one way. Yet, the way we define GDP and corporate profits are both the artifacts of the informational limitations of the mid-twentieth century. Those who defined these measures could never have imagined the wealth of information that we can now draw upon.

To conclude, the business of business is business — but with greater transparency on how business is done and how success is measured. The good news is that public pressure and regulatory requirements are forcing greater transparency. Similarly, some of the old measures are at last being challenged. New standards are being put in place to measure GDP in ways that better reflects changes in social and environmental capital. This will hopefully become the new standard over the next decade. Similarly, a new global initiative — “TEEB for Business Coalition” has been established recently in Singapore in partnership with leading companies, governments and international agencies. Its mandate is to create a new framework for corporate accounts that provides greater transparency as well as directly price social/environmental impact of business activity. This may not resolve all the issues but is an important step forward.