PUBLIC VALUE AND BUSINESS LEGITIMACY

Timo Meynhardt, Professor for Business Psychology and Leadership at the HHL Leipzig Graduate School of Management and a Member of the Advisory Council of Your Public Value, argues that public value brings legitimacy to business.

The numerous scandals related to the Paradise Papers made it very clear: The fact that a business operation is legal doesn’t necessarily make it legitimate. If only a few thought leaders were earlier referring to the need to bring integrity back to the core of corporate strategies, the outcry of society that followed the publication of the Paradise Papers in so many countries has shown the role that corporations play in shaping society. It is time to reconsider the social function of business and its legitimacy. It is time to acknowledge that every business is anchored in society and therefore plays the role of a social actor, exactly as citizens do.

As social beings, citizens depend on an environment in which they can develop as individuals and where they experience acknowledgement and support. In a functioning society, public value is the bond. It holds the community together. It offers guidelines for solving conflicts and serves as a resource for individual growth. Public value always embodies a concept of what should be common to all. Public value focuses on how citizens perceive their social environment, as it is individuals who evaluate the community. In a modern society, a variety of organizations and corporations significantly influence community experience. Thus, corporations “make” society as they shape and drive the production and reproduction of our social fabric.

A public value for each company

Since Peter Drucker, the father of modern management who was known for his interdisciplinary thinking, it is now usual to consider that business primarily fulfill a social function. Society provides corporations with the mandate (“license to operate”) to exist in exchange for a positive contribution. Contributing to society becomes not only the responsibility of any company or corporation, but also a pre-condition for profit and ultimately for legitimacy and long-term survival.

Value is defined by what society considers to be valuable. Public value is the technical term for the societal contribution any corporation or company makes through its core business. Developed at the University of St. Gallen and the HHL Leipzig Graduate School of management, the concept of public value for business is increasingly finding its way into managerial practice. More and more companies recognise the importance of public value for their decisions and success and try to measure and manage it in multiple ways. Increasingly, start-ups include the concept of public value in their corporate strategies.

Public value is created only when companies’ activities are translated into positive individual perception and when it reaches the minds and hearts of people. Its impact therefore depends on the societal and cultural background of companies and obviously varies from region to region and from industrial sector to companies’ reach and influence. But what is common to all businesses is the need for societal value creation, a public value contribution that becomes an important output and outcome variable for management.

Creating value for the common good

The debate on public value has spurred a new ‘common good’ discourse, both in academia and practice alike. The concept of common good is connected to individual experiences via basic human needs and translated in the realm of everyday life. The relevance of making a common good contribution is connected to long-term success and survival of corporations or companies. And common good or public value can also be destroyed, when corporations cause social harm in the eyes of the general public.

Contributions to the common good made by companies become noticeable when experience with them leads to changed perceptions with regard to social needs. Each corporation creates (or destroys) value for society in the sense that its actors shape social reality and change living conditions by means of their actions. Indeed, companies not only reflect society; they also shape society and actively help produce and reproduce it. The formula is simple: more social needs fulfilled = more common good.

The debate has grown in academia to determine whether corporate social responsibility (CSR) and public value are complementary, mutually exclusive or inclusive. Although CSR is an essential part of any corporate strategy, we should not overestimate its impact as it is often limited to local social impact, rather than to genuine societal needs, and too often depends on corporations’ opportunities and marketing strategies. As an answer to societal and environmental needs, public value is a larger concept as goes beyond integrity and embraces aesthetics, politics and culture. We should consider CSR as part of public value. To build legitimacy, business needs to measure value creation for the common good.

Public Value Scorecard

As we were focusing on how to measure the public value creation for any corporation or company, we developed the Public Value Scorecard – an instrument to measure societal impacts of any corporation, initiative or product. It measures a five dimensional space and is quite innovative on numerous aspects. First, it combines financial and non-financial criteria in one instrument. Second, it has no hierarchy of values: Aesthetics, integrity, and economics interact with no hierarchy of the profit’s motif. The innovation of the Public Value Scorecard precisely lies in how it interrelates different value fields to each other.

Our methodology combines qualitative and quantitative approaches. We rely on surveys, in-depth interviews, workshop methods and social media analysis to define the five universal dimensions of psychology:

  • The self: What being human is like – human rights, dignity, respect (Moral-ethical)
  • The social aspect: We need each other to develop, bounding feeling (Political-social)
  • The hedonistic principle: The aesthetical and positive space, stimulations (Hedonistic-aesthetical)
  • The usefulness: We strive to understand and control our environment (Instrumental-utilitarian)
  • The economic dimension: The means to achieve an end (Instrumental-utilitarian)

Answering questions on each of these dimensions leads to a spider web that describes public value in any specific environment. This instrument can be used on all continents as it refers to the universality of psychology. It is a compass for companies to anticipate the potential impacts –both positive and negative- of any product or initiative they have in their planning. The usefulness of the Public Value Scorecard is that it can be used in planning phases, as a stress test, to appreciate the public value impact of the initiative, and goes far beyond the usual impact appreciation of already existing initiatives or products.

Incorporating public value dimensions into the reporting and accounting framework of any company is a safe bet in times of growing complexity and distrust towards business. It is a natural step forward for companies engaged in stakeholder dialogue and preparing a materiality matrix. As Nestlé explains when describing its materiality matrix, “A successful company cannot afford to ignore what the world thinks about it”. Public value is the right tool to define business legitimacy.

[Excerpts from Timo Meynhardt, “Public Value – the Contribution of Organizations and Companies to the Common Good]

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