Purposeful corporation [FT]
- Justin Jungwoo Lee
- Jan 6, 2019
- 3 min read
Milton Friedman argued that for a company to pursue anything other than (legal) profit would be “pure and unadulterated socialism”. The pursuit of returns to companies’ owners at the expense of other stakeholders has undoubtedly led to greater profits, generating enormous wealth for investors and the executives whose rewards have been increasingly tied to shareholder returns. But it has come at a cost to employees, customers and the environment; incentivised boards to pay less tax; diverted cash to earnings-flattering share buybacks rather than investment; and — among those outside the privileged club of equity owners — eroded the trust on which companies ultimately depend.
Therefore, the challenges to Friedman’s model have been gathering momentum, spreading a new worldview, shared by leading executives and investors and shaped by an unlikely alliance of consumers, employees, campaigners, academics and regulators. They offer a new model for capitalism based on the watchwords of purpose, inclusion and sustainability.
Business leaders:
Merck and Johnson & Johnson remind investors that their pre-Friedman founders believed profits would only flow if they attended to other priorities first; and I have heard Unilever’s outgoing CEO Paul Polman ask provocatively: “Why should the citizens of this world keep companies around whose sole purpose is the enrichment of a few people?”
Investors:
BlackRock’s Larry Fink, who with $6.3tn of assets under management sent a letter to its investors a year ago, saying that with governments failing to prepare for the future, people were looking to companies to deliver not only financial performance, but a positive contribution to society, benefiting customers and communities as well as shareholders. Without a social purpose, he contended, companies fail to make the investments in employees, innovation and capital expenditures needed for long-term growth — and above-par returns to the likes of BlackRock.
Assets in US funds that aim to produce social or environmental benefits alongside financial returns grew fourfold to $12tn over the past decade, driven in part by millennials who, surveys show, are twice as likely as older generations to want their pensions to be invested responsibly.
In the year before his last letter, he notes, US chief executives had spoken up for the Paris climate accord and quit White House business councils after Trump’s equivocating response to white supremacist violence in Charlottesville. Since then BlackRock has faced pressure over its holdings of gun company stocks after the Parkland school shooting. Like it or not, business is already being dragged into society’s thorniest debates, from immigration to LGBT rights, often by consumers and employees who find it easier to influence brands than elected officials.
Colin Mayer of Oxford’s Saïd Business School argues that they must, because the Friedman doctrine of concentrating on profit alone has acted as an unnatural constraint on the multiplicity of ways a company can serve all its constituencies. It is only over the past 50 years that we have witnessed “the retreat of the multi-purposed, publicly oriented corporation into a single-focused, self-interested entity,” the economist writes in an influential new book, Prosperity. Elevating shareholders’ interests above those of employees, the environment or communities may have made sense when financial capital was scarce, he says, but now finance is abundant while human, natural and social capital are in short supply.
However, the biggest is the challenge of how to measure something as vague as purpose, which can encompass anything from treating suppliers fairly to cutting carbon emissions.
Some see an opportunity in the need for better data: EY’s chief executive, Mark Weinberger, predicts that the task of assessing such metrics for clients will someday be as important a business for his Big Four accounting firm as financial audits are now. But nobody has yet devised a way to measure purpose that is as simple as the bottom line of a profit and loss account.
“China, India and others are absolutely not on the case at all,” says Elizabeth Littlefield, a US development veteran who chairs the Global Impact Investing Network’s investor forum: “It can’t just be an echo chamber of CEOs who have the luxury of being concerned about these things. I worry about how we make this a truly global movement.”
In sum, the purpose-first movement is still far from ubiquitous and lacking in reliable data, but is the pursuit of something beyond profit worse than Friedman’s singular focus on shareholder returns? Encouraging companies to have a clear mission, consider their communities and steer their innovative impulses to good ends may not add up to systemic change, but it is surely better than the alternative.
50 years of putting shareholders first left corporations little trusted by non-shareholders and many are ready to try something different.
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