Wednesday, March 16, 2011

Japan's Earthquake: What's the role of business?

By Dr. Suhaib Riaz.

As the Japanese earthquake tragedy unfolds, much focus has inevitably been on the business side of the disaster. The nature of this focus raises several questions.

As early reports of the tragedy started pouring in, many in business media and even in regular mainstream media started focusing on the impact on business, revealing something about the nature of the world we live in: impact is increasingly measured in financial and business terms, and only peripherally or indirectly in other terms, such as human life and wellbeing. A counter argument would certainly be that business and finance do ultimately matter in human wellbeing – but the timing of concerns reveals our priorities in today’s world.
Financial and business pundits have been busy analyzing details of the impact on Japan’s economy, on the world economy, on specific industries (e.g. energy industry) and countries, etc.
Amidst these details, one question seems to have received hardly any attention: What is the role of business in this situation – in Japan’s earthquake in particular and natural disasters in general?

So far, the role of business can be summed up in one word: flee. All initial indications are that investors and businesses pulled the plug on Japan as fast as they could. But did they have any other responsibility, apart from avoiding uncertainty for investors/shareholders. What about other stakeholders, including those in Japan?

Perhaps it is instructive to look at a timely debate unfolding in the pages of the California Management Review (subscription required) on corporate social responsibility (CSR). Aneel Karnani of the Ross School of Business, University of Michigan, summarizes his views, some of which I’ve heard before at conferences and seen in other papers: CSR is a “grand illusion” and the role of business is to make profits. Period.

He claims that in an efficient market, a business fulfils its social responsibility simply by being profitable:
"In an efficient market, every profitable firm is doing good." 

However, what about market failures? Also, would one place natural disasters in ‘market failures’ – it seems the research on this topic is thin. Karnani argues that social roles in market failure conditions are to be fulfilled solely by the government or by individuals. He separates the roles of business and civil society when it comes to “doing well” (making profits) versus “doing good” (fulfilling social responsibility):
"People play multiple roles and behave differently in the context of each role…The point is that managers should do good in their capacity as citizens using their own money, not that of the shareholders. Berkshire Hathaway does well; Warren Buffet does good. Again, Microsoft does well; [Bill] Gates does good." 

Certainly, in the wake of natural disasters like Japan, individuals and governments are contributing in their own ways. However, in a time where corporate scandals at all levels reveal that some questioning of the roles of business in society is warranted, I wonder if some social responsibility by business in a natural disaster would be out of place.

Pietra Rivoli and Sandra Waddock argue back in favour of social responsibility, while recognizing the “grand misapprehension” against it:
"CR advocates would argue that “good” goes beyond economics to encompass wellbeing, health, equity, and sustainability, to name a few “goods.” That is, the societal perspective argues that things beyond (but including) economics are important goods for a wide variety of stakeholders, many of whom contribute to the wealth creation potential of firms (e.g., employees, customers, suppliers, and communities—in addition to investors)." 

It is perhaps too much to expect social responsibility from business in the context of a natural disaster. Yet, at least the question needs to be asked and the debate started. I wonder if other commentators will turn to this question at some point.

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