The idea that the sole purpose of business is to turn a profit has been credited to the economist Milton Friedman. In 1970, he proclaimed that the idea of a corporate executive “spending someone else’s money for a general social interest” was a heretical business concept, a “socialist view that political mechanisms, not market mechanisms” would be driving decision making. In Friedman’s view, acting “responsibly” meant maximizing profits for shareholders, not reducing or forgoing returns for a general social good. That, he said, was the province of government, not business. Corporate social responsibility as we know it today would be, by Friedman’s terms, “irresponsible.”
How times have changed. This would-be czar of capitalism would be astonished to find that 50 years later, market forces, not “political mechanisms,” are calling for a more expansive definition for business, one that goes far beyond the bottom line. Today, executives, professionals, employees, consumers, activists, and a majority of the public at large have formed a general consensus that business is now expected to operate by standards often summed up as ESG: environmental, social, and governance. The costs of pollution and the savings in increasingly cheaper renewable energy as well as the idea that a well-governed company is a profitable one are becoming conventional wisdom, and a major part of the valuation of a company. But while there is a widespread perception that values add value to business, setting the ROI in terms of the social good—the “S” in ESG—is still a work in progress.
How to quantify the impact of taking positions on, and acting on, the key social issues of the day is a question under scrutiny. The latest evidence shows two sides of the argument for a triple bottom line approach. It turns out that the best approach for the people-planet-profit formula is, intriguingly, a highly debatable subject.
Since beginning this newsletter in 2017, I’ve assumed that making the business case for a holistic definition of business is the strongest argument. Aligning a company’s CSR and sustainability initiatives with its mission seems to make obvious sense. A new report adds data and analysis to this belief. It comes, ironically, from a source that Milton Friedman would have presumably approved of: the Cato Institute, a public policy research organization dedicated to the principles of individual liberty, limited government, and free markets. “Thrive: How International Companies are Strengthening U.S. Communities,” written by Daniel Ikenson, an economist at the Cato Institute, and published by the Organization for International Investment, aims to quantify the impact of international companies on America’s economic prosperity, human capital development, and environmental sustainability. It’s a vote for socially aware globalism from a free market perspective (showing just how much traditional definitions are being radically revised in these tumultuous times).
“When a company that has succeeded in its home market expands into the United States, it brings with it much more than the capital needed to operate,” said OFII President and CEO Nancy McLernon. “International companies operating in the United States import world-class workforce training programs, industry know-how that propels U.S. innovation, and a tradition of being part of the communities in which they sustainably operate.”
The report looks at examples of how OFII member companies benefit American communities. Using data from the Morgan Stanley Capital International (MSCI) ESG indices, OFII quantified the relative ESG strength of its members, finding that:
Note the large disparity between domestic and international companies on the “S” in ESG.
On the other hand, there’s a contrary claim that values in business can derive power as much from a moral point of view as from a business case argument. “To Get Companies to Take Action on Social Issues, Emphasize Morals, Not the Business Case,” a recent Harvard Business Review article, starts with the premise that “some have questioned whether we always [my italics] have to make the business case.” The authors asked over 400 U.S. employees across several organizations whether they had ever “spoken up to management about an important ‘social issue’ to try to create a positive change that they thought would benefit others or society.” About half reported raising a social issue such as health, employee treatment, diversity, community issues, or sustainability to management, reports the study. The findings of the study were that “when employees used moral language and framed the social issue as part of the organization’s values and mission, they were far more successful. By tailoring the moral message to also fit with something perceived as legitimate—what the company stood for—it provided cover, license, and an impetus for the manager to put energy into working on the social problem.”
Note that aligning a social issue concern with an organization’s “values and mission” is a secondary step in this morality based approach.
The article references another HBR commentary, “We Shouldn’t Always Need a ‘Business Case’ to Do the Right Thing.” Author Alison Taylor, a veteran consultant, finds that “while there is a business case for integrity, an organization that embraces it must make a conscious decision to prioritize the long term, the intangible, and the existential over the specific and measurable.” She argues against the use of metrics in every decision related to values. “To drive change in organizations, of course we need to measure and understand the financial benefits and costs of ethical initiatives. But if we try to make a case for integrity solely [my italics] using these short-term operational planning tools, we miss a bigger opportunity.”
Taylor’s “bigger opportunity” includes better risk management, deeper employee engagement, reduced regulatory costs, public trust, and a lure to purpose-driven Millennials.” Some of these areas may be more amenable to metrics than others, Taylor explains, and ones that are not must not be pushed down the agenda in an increasingly metrics-dominated world.
Taking a position on any of the big social issues involves making judgements about values, and counting the cost of making a commitment for social good by any company is an important factor at the bottom line. In the future, look for more efforts to expansively define just what that ROI is when taking a stand. And just as companies cannot cost-cut their way to profitability, business cannot and will not only take positions by the numbers. The times demand more vision than short-term accountancy.
Image credit: Ervins Strauhmanis/Flickr
John Howell, Chief of Thought Leadership and Editorial Director, is a co-founder of 3BL Media, the parent company of Triple Pundit, begun in 2009. Howell oversees original editorial content procurement and creation. He is also the author of the weekly Brands Taking Stands Newsletter. He has written and edited for Elle, Artforum, High Times, the New York Times Magazine, and the LA Times. Howell is based in Wonalancet, NH.