This article was published by the NZ Herald on February 4, 2020.
This article was published by the NZ Herald on February 4, 2020.
This article was published in the NZ Herald on December 23rd, 2019.
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An article I wrote has been published in New Zealand Management – turns out it might be quite timely given the US Business Roundtable last week. Stop the debate and let’s see action.
There remains a strong widely-held belief among businessmen, entrepreneurs, and business students that the primary goal of a business is to maximise its profit.
Milton Friedman is often cited as the source of this view but they do a disservice to his 1970 paper “The Social Responsibility of Business is to Increase its Profits”.
First, the context. In the 1960s it had become popular for companies to support a range of charities – what was then termed Corporate Social Responsibility (CSR). Friedman argued that spending money on social causes unrelated to the core business was wrong and that instead the funds should be paid to shareholders as dividends who could then support charities of their choice, should they wish to. He was against such Corporate Philanthropy.
Perhaps CEOS thought they were following in the footsteps of great business philanthropists, such as Getty, Rockefeller, and Guinness. But mostly, these gentlemen gave away the money they had generated for themselves, their own money. Just as Bill Gates today gives away his own wealth and not Microsoft’s.
As Friedman says, in the article: “The situation of the individual proprietor is somewhat different. If he acts to reduce the returns of his enterprise in order to exercise his ‘social responsibility’, he is spending his own money, not someone else’s.”
Second, let’s look at the full quotation: “… 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.”
How many CEOs, who rely on this quote to justify their pursuit of profits, do so in “open and free competition without deception or fraud”? Certainly not the US and European financial institutions who led the world into the Global Financial Crisis nor the Australian ones whose behaviour was severely criticised by the Hayne Royal Commission.
As Andrew Cornell, writing in ANZ Blue Notes, states: “Critically, it is the ‘rules’ of the game which are complex and, long term, rely on a social licence as well as black-letter regulation. Understood more broadly, the ‘rules of the game’ are not just black letter law but those principles which govern behaviour – they are set by society, by providers of capital, by staff, by customers.”
Modern businesses are not engaging in CSR (first make a profit and then give some back to society) and are world’s apart from the corporate philanthropists of the 1960s. They start with a clear consumer (or societal) purpose.
These and others are embedding environmentally-friendly and sustainable practices into their day-to-day operations as described in a recently-published book.
“All In: The future of Business Leadership” by D Grayson, C Coulter & M LeePublisher: Greenleaf 2018.
Should be required reading for all C-suite executives!
In this series of three brief articles, Ron Ainsbury, Visiting Fellow at the Cranfield School of Management and Senior Fellow at the Research Centre Business Innovation at the Rotterdam University of Applied Sciences, sets out why and how New Zealand directors should be directing efforts to ensure that their businesses have a clear purpose and have the governance systems in place to ensure that the purpose is followed.
Perhaps, by focusing on purpose and embedding the culture and values to support that purpose, much of the unethical behaviour of corporations could be reduced and so much of the focus on the plethora of compliance rules, regulations and procedures minimised.
Questions for Leaders
These are the fundamental questions that a board (or the CEO) should be able to answer.
Q What is the purpose of this business or organisation?
Follow Simon Sinek’s directive – “Start with Why?”Why do we exist? A statement of purpose is not to be confused with a Mission Statement. The difference is neatly explained in an HBR article by Bruce Jones of the Disney Institute: “Purpose answers Why, Mission answers What”.
Is the purpose expressed in a simple, easy-to-understand way? There are now many examples of well-expressed purpose statements.
If the purpose is not clearly stated then the Board should work with the CEO to develop a meaningful purpose – one that is consistent with the operations of the business. There are several guides as to how to do this, for example, https://www.blueprintforbusiness.org.
Q Is the purpose supported by a set of values that define our organisation’s behaviour?
These should not be just words but should drive the way the business develops its strategy and manages its operations on a daily basis. Values can help drive the business. As Xerox CEO, Anne Mulcahy reported corporate values “helped save Xerox during the worst crisis in our history.”
New Zealand’s Z Energy has a clearly-explained set of values which provide a great example for others to follow.
Figure : Z Energy Values
Q. Does purpose underpin our current strategic plan and goals?
Does the CEO and the Senior Leadership team promote the purpose and values in the way they run the business or are these just mouthed? Does it drive strategy development? Underpin operations? The following slide was part of Unilever CFO Graeme Pitkethly’s presentation to investors in Singapore, December 2015 and is typical of many Unilever presentations to investors and shows how Unilever’s simple purpose statement underpins their business – resulting in returns to investors.
Figure: Unilever’s Strategy explained
Q Do we have a culture that is in synch with our purpose and values?
Sir Winfried Bischoff, Chairman, Financial Reporting Council states clearly that “establishing a company’s overall purpose is crucial in supporting the values and driving the correct behaviours. The strategy to achieve a company’s purpose should reflect the values and culture of the company and should not be developed in isolation.”
A key underpinning of art of the culture of the company will be the mindset that the Board and Leadership team adopts. Examples (not exhaustive) of mindset questions include:
Q. Am I satisfied that our board has sufficient oversight of these activities?
There are several different ways in which a board may exercise oversight, for example, appointing a sub-committee to be responsible, appointing a lead director, appointing a below board committee headed by a director. There are many guides available on line that will help the director, for example:
Q. Are we being open and transparent in what we do?
In our reporting are we making our customers, our people and our investors fully aware of our purpose, values and strategy to ensure that our activities are seen to be genuine and not just greenwashing or sustainability-washing?
The trend towards integrated reporting is developing with companies publishing just one report and not a ‘sustainability’ or ‘citizenship’ report separate from the financial report. See, for example Heineken’s 2017 Annual Report: “Through “Brewing a Better World”, sustainability is embeddedin the business and delivers value for all stakeholders.”
New Zealand leaders of businesses, large and small, need to put aside the “profitability first” philosophy that dominates businesses today.
By focusing their businesses on purpose and embedding the culture and values to support that purpose, much of the unethical behaviour of corporations could be reduced and so much of the focus on the plethora of compliance rules, regulations and procedures minimised.
Available at www.theheinekencompany.com
In this series of three brief articles, Ron Ainsbury, Visiting Fellow at the Cranfield School of Management and Senior Fellow at the Research Centre Business Innovation at the Rotterdam University of Applied Sciences, sets out why and how New Zealand directors should be directing efforts to ensure that their businesses have a clear purpose and have the governance systems in place to ensure that the purpose is followed. In this second article we look at the evidence that businesses that do embrace responsibility and sustainability outperform competitors.
The Business Case
Business leaders, seduced by the lure of shareholder value maximisation, often proffer multiple excuses for not taking more positive action on ESGissues, that they can’t afford it. Costs will go up. We are too small. Yes, we understand the triple bottom line – but for now it needs to be profit first, people and planet can come later, when we can afford it.
Yet, the evidence reveals these to be false arguments. Businesses that are embedding responsible and sustainable business practices show, lower costs, higher employee engagement and productivity and improved returns.
It may seem strange to have to set out a business case for being responsible and sustainable. Keith Weed, Unilever’s Chief Marketing Officer, has said “I’d love to see the business case for being unsustainable!”
The evidence is now conclusive. As the late Ray Anderson said – it is a better business model.
In 2010 Britain’s Business in the Community recognized a divide between those that “embrace sustainability-driven strategy and management, and those that don’t. These ‘embracers’ are the businesses that will survive and thrive”. BITC commissioned the Cranfield School of Managementto compile the business benefits for being a responsible business, “to help those currently at an earlier stage of the journey”. The studydemonstrated seven ways in which business benefits:
Since that study, several further research papers have highlighted the benefits. In 2011 a Harvard studyprovided “evidence that High Sustainability companies significantly outperform their counterparts over the long-term, both in terms of stock market as well as accounting performance.”
In 2014 a study by the Smith School at Oxford Universityand Arabesque Asset Managementshowed that Companies with strong sustainability scores show better operational performance and are less riskyand that Investment strategies that incorporate ESG issues outperform comparable non-ESG strategies.
In 2015 Project ROIbuilt on the 2010 BITC findings cited above and provided detailed economic analyses on business benefits:
The report concluded that a “more productive approach will be to develop business-aligned and integrated CR strategies.”
In January 2016 the Financial Times highlighted a reportby HBR Analytica and EY’s Beacon Institute that found “companies with a purpose beyond profit tend to make more money.”
In 2017 in a HBS Whiteboard session Andrew Winstonneatly summarises the arguments in “The Business Case for Sustainability.” No wonder then that so many leading global businesses are not just dabbling with ESG issues but going “All In”.
When Larry Fink, the CEO of the world’s largest investor, Blackrock, writes to the CEOs of companies he invests in and urges them to find their purpose and that the “board is essential to helping a company articulate and pursue its purpose” purpose – it is time for NZ Boards to sit up and take action.
Environmental, Social, and Governance issues.
The Business Case for being a responsible business” 2011 available on www.bitc.org.uk
The Impact of Corporate Sustainability on Organizational Processes and Performance by Robert G. Eccles, Ioannis Ioannou, and George Serafeim HBR Working Paper 2011
From the stockholder to the stakeholder:How sustainability can drive financial outperformance”by Smith School, Oxford Universityand Arabesque Asset Management 2014
Project ROI Defining the Competitive and Financial Advantages of Corporate Responsibility and Sustainability by IO Sustainability and Babson College 2015
“All In: The Future of Business Leadership” by David Grayson, Chris Coulter, Mark Lee Greenfield Publishing 2018