**4. The productivity of business enterprises**

What has been especially characteristic of business enterprises is their productivity. They are and they become "productive" to the degree that they utilize given natural and human resources to add economic value to societies. They do so in

multiple ways. For example, whether they be farms producing food, manufacturers producing mobile phones, or real estate firms helping people to buy and sell houses, business enterprises add value to society through the goods and services they produce. To the extent that they meet the needs and wants of people, these goods and service are paid for and valued. At the same, business enterprises add economic value to society both through the wages and salaries paid workers employed to produce these goods and services and through earnings paid to suppliers who supply the resources and tools businesses use to provide these products. Furthermore, business enterprises add economic value to society through the taxes they pay, the profits they generate, the returns they make to creditors, and rents they may pay. The productivity of businesses grows out of the multiple interactive relationships by which each business enterprise engages in its particular business.

In this essay I am primarily gauging the productivity of enterprises in relation to the economic values they generate rather than in relation to social values. The latter are significant and must be taken into account, in relation both to values added and values eroded. After all, as a whole businesses enterprises have operated to create many of the goods and services that have functioned to enhance life conditions in modern societies. In addition, businesses provide workers not only sources of income but also jobs. The latter have often been associated with a wide range of social benefits including opportunities to experience agency, routines, valued social relations, and play-like opportunities to compete in addition to social costs, which have often been noticed, like experiences of drudgery and oppressive supervisors. Businesses have often fostered feelings of community among workers and with the locales in which they are located. In addition, in ways most famously noticed by the sociologist Emile Durkheim, modern business enterprises as the nexus value-creating interactions help to bring into being a larger sense of social inter-relatedness Durkheim referred to as organic solidarity [18]. However, while I think it is indeed very important overtly to acknowledge these and other social values of business enterprises, I am primarily analyzing in this essay the ways economic value of firms have been too narrowly understood by the financial model. This model not only fails to appreciate the wide range of ways business enterprises add economic value to society but it fails appropriately to acknowledge the economic costs it imposes on many of its stakeholders, the larger society, and the Earth [19, 20].

Over time, business enterprises have become more productive. They have increased the several different economic values they generate as a result of a number of noteworthy developments. These include finding and utilizing more effective sources of energy, developing cleverer and more effective tools, organizing business operations in ways that better facilitate working arrangements [21] and utilizing more effective means for storing and communicating information. In all of its different forms, productivity takes place and increases as business enterprises find ways of utilizing natural and human resources more effectively. Correspondingly, productivity is best measured by calculating the overall value that their productive process add to the basic natural and human resources they utilize, taking into account at the same time the costs incurred in accessing and utilizing these resources.

These costs assume many different forms. For example, if a business enterprise needs funds, it must be ready to pay interest on loans and/or profits to investors. They must also operate in ways so that investors remain confident that they will earn a fair return on their investments. There are, to be sure, costs involved in how businesses operate in order to gain and maintaining that confidence. In order to acquire the supplies they need, businesses have to develop reliable relationships with all sorts of suppliers, always seeking to find the best quality and most reliable supplies accessed at the most reasonable prices. All these are comparatively

#### *What is the Business of Business? Time for Fundamental Re-Thinking DOI: http://dx.doi.org/10.5772/intechopen.94482*

straight-forward, widely understood costs. Costs become less clearly defined and a bit more complex with respect to the utilization of natural resources. Costs here include not only the price to access these resources (that is, to extract and transport them) but also the often hidden costs incurred in so far as the process of accessing these resources in turn reduces the overall supply of these resources and/or degrades the environment from which businesses take these resources. Accordingly, in so far as the processes of accessing natural resources – whether these be agricultural and forestry goods, minerals, air, water, and energy sources – are not strictly environmentally sustainable, then these processes give rise to added costs. These added costs have typically not been borne by enterprises themselves but by the society at large, later generations, and the Earth itself. Many observers today argue that businesses must also take into account the less tangible benefits they enjoy from ecosystem services provided by the Earth, its climate, and its biosphere [22].

The overall costs incurred for obtaining an adequate and appropriately skilled supply of labor are also not so neatly defined. On the surface, it seems relatively simple. Enterprises seek workers through labor markets to work under certain terms and pay them at rates comparable to similar enterprises. In keeping with these terms, workers may work part time or full time; they may be paid by their output or time worked; and they may be paid a salary, wage and/or shares or bonuses. Many enterprises incur additional costs associated with recruiting and later training potential employees. However, from the perspective of the larger society, there are a number of other costs associated with labor markets. For example, societies incur the costs of educating potential workers, helping to develop basic skills of numeracy and literacy, skills at problem solving and communicating, as well as specialized skills associated with specific trades and professions. Societies face additional costs of providing unemployment insurance, pensions, and workmen's compensation to that extent needed when potential workers are unable to work.

Societies face a number of additional cost that emerge as they seek to develop physical, social, legal, and economic infrastructures that help to create the conditions so that businesses can engage in business. They must develop appropriate physical infrastructures – roads, rail lines, supplies of water, sewage systems, garbage collection, telephone lines, and supplies of electricity –without which businesses cannot do business. Businesses also require social infrastructures – systems for health care, policing, social welfare, and education, to which I have already referred. Business also counts on societies providing legal infrastructures, to protect their contracts and property, allow for negotiated exchanges, and the judicial review of conflicts. Businesses greatly benefit to the extent that particular societies are able to develop these legal infrastructures [23]. Although the systems vary, most business enterprises pay taxes in exchange for benefits they receive from the societies in which they operate. It is a matter of ongoing debate, whether the taxes businesses pay adequately reimburse governments for all the cost entailed in developing and maintaining these physical, social, and legal infrastructures.

If we are to measure the productivity of business enterprises adequately and accurately, then we are challenged to find ways of measuring the overall value these enterprises add to societies less the several different costs they occasion. Before we address the question of how businesses might in practical ways calculate these added values and attendant costs, it is useful to observe that this understanding of productivity differs significantly from that the typical taken-for-granted ways of understanding productivity. Typically, productivity is thought of as increases in the economic output in relation the amount of labor involved. Accordingly, if an enterprise can produce the same amount of goods and services using either fewer workers or the same number of employees working fewer hours, then these changes are regarded as representing increases in productivity. These changes might be

#### *Corporate Social Responsibility*

brought about by re-organizing patterns of work, improving the skill level of workers, and/or making greater use of technology. This view of productivity directly reflects assumptions built into the financial model of business enterprises. Thus, everything else being equal, enterprises are regarded as being more productive if their production of goods and services yields more value to owners and investors as labor costs are reduced.

Although this understanding of productivity is widely accepted, it is flawed in a number of ways. In the first place, productivity ought to be measured not just financially in relation to added value for investors but also in relation to earnings of laborers as well as benefits to other relevant stakeholders including suppliers and the larger society. As I have already noted, societies benefit from the productivity of businesses in many ways. In the second place, productivity should also take into account the various overt and hidden costs incurred by all stakeholders who contribute to the productive process. Much attention has been directed, for example, at the ways business enterprises have failed to pay the true costs of their uses and abuses of natural resources. In so far as business operations reduce or exhaust mineral and hydrocarbon resources, degrade soils, pollute the atmosphere or water systems, these are real costs that must be taken into account. If we accurately take account of these costs, we would realize that standard measures of productivity often in distorted ways overlook these costs. I think a case can also be made that while the standard way of gauging productivity with respect to the utilization of labor may often adequately represents the situation of individual enterprises, it misrepresents what is happening in labor markets for societies as a whole. It can be argued that well-functioning labor markets ought to help both enterprises find the workers they need and for workers to find the remunerative positions they seek. Sub-employment occurs when working age adults who would prefer to work find themselves unemployed, under-employed, or dropped out of the labor market. Because the costs for sub-employment are borne by these individuals, their households, and the larger society, individual enterprises do not typically take these costs into account when gauging their own productivity. Nonetheless, these represent real costs that must be considered when gauging the overall productivity of business activity.

Businesses enterprises are complex, productive organizations, whose productivity should be – and can be – measured in relation to the several ways they add economic value and occasion economic costs. Clearly, assessing the degree to which businesses add economic value to society by taking into account the value added with regard to the utilization of labor, societal resources, as well as natural resources, is a more complex, multi-dimensional exercise than assessing the value added strictly in financial terms. In order to realize this fuller objective, a number of initiatives have been undertaken to develop practical means for calculating these values and costs not only in relation to financial assets but also natural resources, labor assets, and social capital. In the mid-1990s, for example, Margaret Blair made the case for assessing the economic value of corporations in relation both to financial as well as human capital [24, 25]. Since the 1990s a number of international organizations like Social Accountability International, CERES, the United Nations Environmental Program, the UN's Global Compact, and the World Bank have developed multi-dimensional performance standards. These in turn have been used by thousands of businesses to evaluate in measurable terms the ways their operations add to or reduce economic values in relation not only to finance but also to workers and natural environments [26, 27]. Robert Eccles in particular has worked at developing practical measures for gauging the ways and degrees business add to or reduce economic value, broadly gauged, by their operations [28]. An increasing number of firms are now undertaking assessment of the non-financial

*What is the Business of Business? Time for Fundamental Re-Thinking DOI: http://dx.doi.org/10.5772/intechopen.94482*

ways businesses add to or erode economics values in relation to environmental, social and good governance standards (ESG). One of the most widely utilized method for assessing the overall ways business augment and erode economic value is that developed by the International Integrated Reporting Council (IIRC), which began its operation in 2011 [29]. The IIRC calls for business to undertake their regular accounting in relation to their utilization of six different forms of capital: namely, financial, manufactured, intellectual, human, social and relationship, and natural [13].

### **5. Governance reforms**

Thus far I have argued the business of businesses, as complex multi-dimensional organizations, lies in their productive capacity to add economic value to societies in multiple ways. I have observed the progress that has been made in the efforts to measure both the added economic values beyond financial values as well as the costs incurred in the process. If the current operations of business enterprises are to be less closely connected with the adverse environmental, social, and economic trends discussed earlier in this essay, then businesses must do more than measuring their performances in keeping with integrated accounting standards. They must also consider reforming their systems of governance -- that is, the way they deliberate and make authoritative decisions. The operations of many businesses have occasioned these adverse outcomes not only because they tended to measure their goals and costs largely in financial terms but also because characteristically decision-making processes were structured to assign greatest authority to those representing financial interests.

If we hope to encourage business enterprises to foster productivity, rightly understood, in ways that both benefit the enterprises as a whole as well as the larger society, and fittingly benefits all relevant stakeholders, we must consider reforms in governance practices of firms as well as legal changes that will create corresponding legal incentives.

The basic responsibility of businesses is to add economic value to society by making the most productive use of natural and human resources in relation to their particular purposes as particular kind of enterprises. To that end, governing processes must be structured and operate to protect and enhance the wellbeing of the enterprise as a whole. No particular group or constituency should be so positioned that it exercises undue influence in pursuit of its own interests. Accordingly, in recent years many of the initiatives aimed at reforming the governance practices of businesses have aimed at limiting the self-serving actions of senior executives [30–32]. Williamson warned about the dangers of opportunism and bureaucratization that occurred when governing boards failed to monitor and restrain the agendas of particular groups within the larger organization [33]. It is possible to point to examples, both actual and feared, where other particular stakeholders have exercised – or might exercise--excessive influence over authoritative decision-making within business enterprises. For example, many defenders of neo-liberal economics, while defending the financial model, have worried about the excessive influence of government regulators. They have feared – I think, excessively -- that regulations imposed by governments in pursuit of distant goals like the reduction of greenhouse gases or corporate social responsibility might undermine the productivity of businesses in ways that would be costly to businesses and society and especially to financial interests of investors. At times, many business people have felt that trade unions might exercise disproportionate power over particular companies and industries in ways that both limited their capacities to realize their purposes and

reduced their productivity. A case can be made that some huge enterprises have in practice acted like monopsonies with respect to their suppliers, setting strict limits on the prices they pay for purchases, in the process excessively limiting the productivity and, thereby, aggravating working conditions of the latter. In a book titled *Permanently Failing Organizations*, Meyer and Zucker studied a number of organizations that consumed greater value of resources than the values they generated but remained in business because in an unbalanced way they served the interests of particular stakeholders, in the case of their studies, community groups, employees, and consumers [34]. Accordingly, while recognizing the possibilities of imbalance caused by privileging particular stakeholders, boards ought to be structured and engage in their deliberations in ways that promote the good of the organization as a whole rather than any particular stakeholders.

In order to oversee and promote the wellbeing of enterprises as a whole, governing boards must be structured so that their self-interest as boards aligns with that objective. At present many governing boards operate primarily to promote a financially articulated agenda that especially functions to promote the interests of investors and owners. The financial model primarily regards business enterprises as property belonging to investors and owners, who as they seek to maximize the financial value of firms will, these supporters claim, promote the wellbeing of the enterprise as a whole. We know in fact that does not always happen. Most investors act primarily not as shared proprietors but as consumers of equities. As I have observed, following the financial model, governing boards have often acted in ways that aggravated environmental problems, reduced employment opportunities, and exacerbated wealth inequalities. In order better to promote the overall wellbeing of enterprises as a whole, governing boards must include among their members individuals who are both well acquainted with activities and interests of diverse stakeholders and committed to promoting the value of the enterprise as a whole. In order to realize this goal, most governing boards of business enterprises in Japan and Continental Europe have often included representatives from employees, creditors, community groups, as well as investors [35]. I think a case can be made that it might not be in the best interest of the enterprise as whole for board members to be formal representative of – and primarily answerable to -- diverse stakeholders. Such arrangements might significantly add to governing costs and render boards less focused on protecting and enhancing overall productivity and more given over to wrangles about benefits and costs assigned to particular constituencies [36]. Instead, several steps can be taken so that governing board members exercise the fiduciary loyalty to the enterprise as a whole and their legal responsibilities for due diligence and due care of enterprise resources while fairly respecting the interests of their several stakeholders [24, 37]. Accordingly, while still appointing their own members, governing boards can select individuals who are themselves members of particular constituencies and well-informed with respect to their concerns and interests. Governing boards should also have access to staff who can on an ongoing basis monitor the interactions with stakeholders so the boards remain well-informed.
