BUS604: Innovation and Sustainability

"The financial crisis finds its origin in 'self-interest'. The financial world and the business community had created their own world. They forgot that they were part of a larger whole. They forgot that 'shareholder value' and 'profit' are only means to reach societal goals (...) Short-term profit was at the expense of long-term sustainability (...) Perhaps the most devastating development was a new split between the public and the private. The public sector became responsible for the common goods and so the private sector could narrow its focus to individual needs. This new split made the public sector into a 'cost area' and the private sector a 'profit area'. All the problems in the field of common goods (social security, healthcare, environment) can only be solved by cooperation between the public and the private sectors". – Paul Baan

"There is a big difference between enterprises quoted on the stock exchange and enterprises that are owned by families. Generally, the former have a short- term orientation and the latter a long-term orientation". – Pieter de Rijcke

How should we understand the problems in the financial world? Are they limited to this sector or are they a symptom of a wider problem? There is a lot of evidence that the problems of the financial sector are not an isolated incident but a symptom of a more general societal problem. We noted that the financial crisis was preceded by a number of accounting scandals in the industry, revealing that fraud, violation of laws and the disregard of the justified interests of stakeholders were widespread. Another signal is the large number of environmental disasters caused by major companies who had cut corners on safeguards, such as the Gulf of Mexico oil spill (BP), the Niger Delta (Shell), Bhopal (Union Carbide), Love Canal (Hooker Chemical), Minamata Bay (Chisso Corporation), Exxon Valdez (Exxon), and Three Mile Island (General Public Utilities Corporation). Although every scandal, fraud and disaster has its own characteristics, analysis shows that in nearly every case maximizing short-term profit while neglecting the justified interests of stakeholders can play a dominant role.

Critical scholars warn that the ideology of a market economy penetrates other sectors of our society. For example, in What Money Can't Buy: The Moral Limits of Markets, Michael Sandel argues that market values are penetrating every aspect of our lives. He illustrates by a number of examples how personal and social goods like health, education, family life, nature, art and civic duties, as well as national security and public safety, are being turned into commodities that can be priced and traded, corroding their intrinsic meaning and value. He signals that Western society "drifted from having a market economy to being a market society".

Sandel's warning is confirmed by Michael Porter and Elizabeth Olmsted Teisberg in the field of healthcare. In Redefining Health Care: Creating Value-Based Competition on Results (2006), they present an analysis of the healthcare system in the USA. They note that healthcare has lost its primary calling: it is not focused on value for patients. Further, they show that healthcare institutions concentrate on their own financial outcomes instead of the interests of all stakeholders involved. Consequently, they plead for a radical reorientation of healthcare. They write: "Ironically, the solution to the crisis lies in refocusing the healthcare system on health".

The problems in the financial sector are not an isolated incident but a symptom of a wider societal problem in which people are viewed instrumentally. If people are not considered ends in themselves, but only as a means to profit or prestige, then it leads to the three fundamental problems that underlie the financial crisis: a loss of the primary calling of businesses to provide excellent goods or services; a loss of societal embedment; and a loss of non-financial values.

To return to Plato's example of the physician: the loss of his primary calling will reduce the role of the physician to that of technician and moneymaker, in which the patient is a means to serve the doctor or the business that is the hospital. In a sense, this instrumental treatment of the patient also leads to a loss of identity of the physician, who would have ceased to focus on the inherent excellence of the art of medicine. In the case of businesses, the sacrifice of excellence for short-term profit can lead to indifference, a loss of identity of the company, and ultimately to collapse.

If companies lose the connection to the society in which they are embedded, they will neglect their responsibility to all stakeholders except the share-holder. Banks judge people by abstractions without knowing them; companies are indifferent to the wider society in which they operate, and do not see the connection between their own profitability and the wider social and public good of a prosperous society.

These are related to the third problem: the loss of non-financial values, when the drive for profit erases any sense of justice. In other words, the financial values that govern the economy (economic prosperity) and the social values that build society (public good) are disconnected. These three losses are the long-term moral causes of the financial crisis and accountancy scandals that we have described above.

In the next section, I consider six initiatives by social enterprises and impact investors, who are driven by a concern for the public good and combine business objectives with the aim of a sustainable social impact. The objective is to investigate whether these initiatives and organizations provide a fundamental solution to the problems revealed by the financial crisis.