By Bill Valentino
As the corporate sector increasingly faces the challenges of sustainability, it needs leaders who have the capacity to incorporate strategies for both sustainability and profitability into to their businesses to achieve value maximization in a more holistic way.

Business schools have an important role to play in building that capacity through MBA programs and executive training. This is aimed at developing competent individuals for responsible leadership positions that put them closer to the fundamentals that drive the real world of business today and the innovations that will shape tomorrow.

By giving them a better understanding of a bigger picture – a global perspective, and skills that will allow them to work effectively across disciplines and functions, CSR in the MBA Toolkit helps to create a blueprint for shaping tomorrow's business leaders that goes beyond just understanding finance, marketing, accounting, management and operations.

For business leaders and managers the fulfillment of economic responsibilities will always be the critical factor on which the survival of any company depends. This ultimately ensures the availability of sufficient resources to devote to other responsibilities. But with economic responsibility, the fundamental question arises, if the mission of a company should be restricted only to the creation of profit for shareholders at the cost of foregoing opportunities that are beneficial both for their companies and for society?

The swelling focus on corporate sustainability places increased emphasis on the long-term economic and social aspects of value maximization including above all stakeholders, and not just shareholders.

Value maximization is viewed as a scorecard that tells an organization how to assess their success in achieving a vision or in implementing a strategy. This has always been dependent on the short-term financial performance of an organization.

Harvard Business School Professor Michael C. Jensen writes about the "dilemma between a desire to maximize the value" of companies and "the demands of 'stakeholder theory' to take into account the interests of all the stakeholders in a firm" The solution he says “ lies in a new way of measuring value.”

Stakeholder theory identifies and models the groups, which are stakeholders of a corporation. It both describes and recommends methods by which management can address and integrate the interests of those groups to achieve value maximization and sustainable development through companies participating in networks with governments, NGOs and other stakeholders.

Stakeholders are defined as the individuals and constituencies that contribute, either voluntarily or involuntarily, to a company's wealth-creating capacity and activities, and who are therefore potential beneficiaries and/or risk bearers. This also includes groups and individuals who benefit from or are harmed by, and whose rights are violated or respected by, corporate actions.

Under this definition, stakeholder groups are constantly expanding to include a wide range of parties impacted by a company's operations. These can include among others the following: consumers, customers, employees, a host government, media and press, local communities, suppliers, partners, activists, advocacy groups, NGOs, competitors, educational institutions, research institutes and think tanks.

The special attention to stakeholders boils down to the simple fact that they can have a major impact on the value maximization of any company, especially if they represent rational or economic motives for a firm. Most notably there are the primary stakeholders without whose ongoing participation a corporation cannot survive as a going concern. These include shareholders, investors, employees, customers, suppliers, as well as governments and communities. There are also secondary stakeholders who can influence or affect companies but who are less essential for survival.

Very compatible with a CSR mindset, HBS Professor Michael C. Jensen, introduces the concepts of enlightened stakeholder theory and enlightened value maximization.

Jensen explains that in addition to the processes and audits to measure and evaluate a firm's management of its relations with all-important constituencies, "enlightened stakeholder theory adds the simple specification that the objective function of the firm is to maximize total long-term firm market value. In short, changes in total long term market value of the firm is the scorecard by which success is measured." He explains that long-term stock value is an important determinant of total long-term firm value. This long-term perspective of value creation gives management a way to assess the tradeoffs that must be made among competing stakeholders through stakeholder engagement and management.

The stakeholder-shareholder debate forms the basis for the differing views regarding the role of business in society. Ultimately, this dispute is about whether a company should maximize value just for shareholders or for stakeholders. This is basically what the business case for CSR is all about in the bigger picture.

The shareholder perspective supports the idea that the only responsibility of managers is to serve the interests of shareholders in the best possible way, using corporate resources to increase the wealth of the latter by seeking profits.

The stakeholder perspective on the other hand, is based on the premise that besides shareholders, other groups or stakeholders are affected by a company's activities and have to be considered in managers' decisions, possibly equally with shareholders.

Up to now, business thinking and education has not traditionally embraced a commitment to operating in an economically, socially and environmentally sustainable manner that is transparent and satisfying to stakeholders.

For many years business thinking has been based on traditional concepts of "value maximization" and "shareholder value" as being the only true company objective. This meaning maximizing company value leads to the increase of shareholders' wealth, which can later be invested, spent or saved at the discretion of the shareholder.

In 1970 Milton Friedman wrote that "there is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." This view simply stated, maintains that the only social responsibility a law-abiding business has is to maximize profits for the shareholders.

It is this thinking that has fueled the arguments against CSR which some would claim deprives shareholders of their property rights. It stresses that management has a fiduciary responsibility to maximize shareholder value; therefore, any activities that don't maximize shareholder value are violations of this duty.

The validity of this premise depends if the model of social responsibility adopted by a business is a philanthropic one. The starting point assumption here is that, through CSR, corporations simply give away money, which rightfully belongs to other people.

If CSR is understood as a process by which the business strategically manages its relationships with a variety of influential stakeholders who can have a real impact on issues such as the license to operate, a compelling business case becomes immediately apparent and the assumption is no longer valid.

When CSR starts becoming about building relationships with customers, about attracting and retaining talented staff, about managing risk, and about assuring reputation it is fundamentally about creating value. If CSR is about managing the demands and expectations of opinion formers, customers, shareholders, local communities, governments and NGOs, it is about managing risk and reputation. When it is about investing in community resources on which a company may later depend, this is clearly about value maximization for the company and as well as for its shareholders. Companies cannot create value without good relations with customers, employees, financial backers, suppliers, regulators, governments and communities. It is also important to note in this context that shareholders are also stakeholders!

Companies are doing more than ever to take on the sustainability challenge by recognizing their social responsibilities, reducing their environmental and social impacts, guarding against ethical compromises, creating governance transparency and becoming more accountable to their stakeholders.

CSR adds the concept of social responsiveness which tries to show, not how a company should respond to social pressures, but what the long-term role of a company should be strategically developed in a dynamic economic and social system.

Social responsibility in this context implies congruence of corporate behavior with prevailing social norms, values and expectations of performance. From this emerges a sort of “social activist” perspective which shares with stakeholder theory the notion that companies are accountable to other stakeholders beyond shareholders.

CSR is the concept used most widely to address the relationships between business and society. It can be understood as a two-way relationship, which involves recognition on the part of society both of CSR's growing significance and of the efforts made by companies to gain society's approval of their behavior.

Using it as a tool for managing the interdependencies that exist among a company and its stakeholders clearly recognizes that relationships rather than transactions are the ultimate sources of a company's wealth. It is the ability to establish and maintain such relationships within an entire network of stakeholders that determines a company's long-term survival and success.

Managing social responsibility and maximizing value is like managing any other aspect of a business. It can be done well or it can be done badly. Well-managed CSR supports the business objectives of a company, builds relationships with key stakeholders whose impact is critical for maximizing value and effectiveness. These relationships imply continuity and involve on-going conflict as well as collaborative elements resulting from stakeholders' expectations about corporate behavior that companies have to identify and try to behave in conformity with. This is a basic underlying concept of CSR in which stakeholder interests, engagement and management are transformed into drivers for higher-level goals, such as profit maximization, survival and growth.

CSR, corporate sustainability, corporate governance and stakeholder engagement are collectively shaping the identity of organizations today and are being increasingly integrated into the business strategy of successful corporations. Because of this, the field of responsible business strategy and practice in the form of CSR is becoming one of the most dynamic and challenging subjects corporate leaders and managers are facing today and possibly one of the most important ones for shaping the future of business and consequently the future of our world.

About the author:
Bill Valentino, continuously working for Bayer in China since 1987, holds a MBA from Thunderbird, the Gavin School of Management, and a MA in Technology and Communications from Columbia University, New York. He co-directs the Tsinghua-Bayer Public Health and HIV/AIDS Media Studies Program and is a Senior Guest Lecturer at the Center for International Communications at Tsinghua University. He is also currently the Chairman of the European Chamber's CSR Working Group and a long-standing member of the AmCham CSR Committee in Beijing.

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