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.
- Danone – to bring health through food to as many people as possible
- GSK – to help people do more, feel better, live longer
- Philips – to make the world healthier and more sustainable through innovation
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. 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:
- Brand value and reputation
- Employees and future workforce
- Operational effectiveness
- Risk reduction and management
- Direct financial impact
- Organisational growth
- Business opportunity.
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:
- Share price and market value
- Sales and revenue
- Reputation and brand
- Human resources
- Risk and license to operate.
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