September 2, 2010
There is a perception out there that there is a tradeoff between social responsibility and financial responsibility. You can’t do both, people say. You can’t have your cake and eat it too. Well, very fortunately the data just doesn’t support that perception.
Can you actually be more socially responsible and increase shareholder value at the same time?
The Only Social Responsibility of a Company Is To Increase Profits for Shareholders
In 1970, Chicago-school economist Milton Friedman proclaimed in an article for New York Times Magazine that a company’s only social responsibility is to increase profits for its shareholders. In the 1980s Ronald Reagan, Margaret Thatcher, George Bush, and the Ayn Rand star-pupil Alan Greenspan turned this credo into de facto policy gospel.
There is passionate and meaty debate whether externalizing environmental damage and exploiting a work force is okay if there is no law or regulation against it. There is another debate whether these practices actually maximize long-term profits or the present value of future cash flows.
For a moment, let’s take this 1970 proclamation at face value and assume that an executive’s responsibility is to increase returns for company shareholders. Let’s agree that executives and board members do have a fiduciary responsibility to seek to gain a return on the capital invested in their organization, particularly if they work for a publicly-owned company or a company that is not a wholly-owned private corporation.
So this begs the question, can you do both–increase social return and increase financial return?
Can You Be More Socially Responsible & Financially Responsible?
Raj Sisodia, David Wolfe, and Jag Sheth recently published “Firms of Endearment: How World-Class Companies Profit from Passion and Purpose.” In the book, they share the results of a study in which they looked at companies that were especially socially responsible–they call these firms “Firms of Endearment” or FoEs. They compared the shareholder returns of these socially responsible firms with the S&P 500. What they found was that the firms that were socially responsible outperformed the S&P 500 by 9x.
These Firms of Endearment grew shareholder value 1025% in the last ten years while the S&P 500 returned 122%. Even when you compare the Firms of Endearment vs. the blue chip success stories profiled in Jim Collins’ Good to Great, the Firms of Endearment win. The firms profiled in Good to Great returned 316% while the FoE’s returned 1025%.” Here’s the graph from their web site.
Financial Returns of Socially Responsible Firms Vs. S&P 500 and Good to Great
Now, by no means does this data prove conclusively that more socially responsible firms create higher shareholder returns. The data show only correlation, not causation. The reality could simply be that firms that happen to be socially responsible happen to be in more profitable industries and so they can afford to give more to the community and create better work environments. But nonetheless, the point is clear– investing in being a socially responsible company certainly does not by definition go against shareholder interests and in many cases enhances shareholder returns.
iContact Case Study
Earlier today, I published a case study of social responsibility at iContact. In it, I shared the why and the how behind our social and environmental efforts at iContact over the past year including examples of how iContact has reduced costs and increased employee engagement through our efforts. As I wrote in the case, the benefits to date from our social responsibility efforts included:
- Vendor cost reductions of $40,000 driving estimated net savings of $19,000 per month.
- Increased employee engagement and excitement to be working at our company (which we believe will lead to greater passion in people’s work, additional discretionary effort from team members, increased productivity, lower regret employee turnover, and an increased ability to attract the best and the brightest).
- Increased customer acquisition and customer retention from customers who are coming to us and sticking with us because of our social responsibility programs.
- Additional press coverage from Entrepreneur, INC, and the Raleigh News & Observer that is helping us recruit the best and brightest and gain additional customers and partners.
So in fact, at least so far, we have been able to show both tangible and intangible benefits that connect the investment we are making in social responsibility with direct economic net benefits to our financial results and thus to the increase of shareholder value.
A False Tradeoff
While it would be nice to have even better data and employee surveys comparing before and after our work at iContact, there is substantial anecdotal evidence supporting a conclusion that in the case of iContact, increasing investment in social and environmental responsibility so far has increased profits, and will contribute very positively to increasing shareholder value in the many years to come.
So does increasing social and environmental responsibility always increase shareholder value? No, it does not. But in many cases it can and does and the Firms of Endearment study provides a fascinating basis for a likely connection between the most socially responsible firms and those who produce the highest return for shareholders. Investing in being a socially responsible company certainly does not by definition go against shareholder interests and in many cases enhances shareholder returns.
There does seem to be substantive and significant evidence showing there the tradeoff between social responsibility and financial responsibility is false and in fact social responsibility in many cases aligns with increasing financial profitability.
Thanks for reading. I’d love to know your thoughts in the comments on social responsibility, effective CSR programs, whether being more socially responsible helps or hurts a business, and whether your shopping decisions could be influenced by whether a company is responsible or not.
June 19, 2010
Session 10, Raj Sisodia on Conscious Capitalism
EO/MIT Entrepreneurial Masters Program
Year Two, June 19, 2010
I am getting so much value from this session by Raj Sisodia on Conscious Capitalism. Wow this was awesome!
Raj an annual conference on Conscious Capitalism called the International Research Conference on Concious Capitalism. The next one is coming up May 24-25, 2010. This is focused more on thought leadership than the C3- Catalyzing Conscious Capitalism in Lake Arrowhead October 19-22, 2010.
Here are my notes from the session…
Raj’s book is Firms of Endearment: How World-Class Companies Profit from Passion and Purpose with co-authors Jag Sheth and David Wolfe. I just ordered 8 copies for my senior team to read in July.
Double Bottom Line Means a Bigger Bottom Line
He has data showing companies get a better financial bottom line when you focus on getting a double bottom line (social and financial) and create an awesomely engaging work environment. Companies with humanistic profiles are outperforming the S&P by 9 to 1 over 10 years.
Example companies from the data set are: Google, Southwest, WholeFoods, Costco, CommerceBank, Amazon, Ebay, Johnson and Johnson, Timberland, UPS, Carmax, JetBlue, HarleyDavidson, CAT, Honda, Starbucks, Toyota, BMW
Good to Great companies that have suffered:
- Circuit City
- Fannie Mae (got involved in mortgage crisis)
- Phillip-Morris (this year 6 million people will die directly from tobacco and this is growing)
He says don’t define greatness only by financial performance, but by the net impact of the business on the world.
“The majority of the public believe that executives are bent on destroying the environment, cooking the books and lining their own pockets.” New York Times
There’s a collective price we pay for the cynicism and mistrust of business.
“The dogmas of the quiet past are inadequate to the stormy preset.” – Abraham Lincoln
The Case of Whole Foods
100 years ago: 16% on food and 8% on healthcare
Today: 8% on food and 18% on healthcare
Whole Foods have 1800% return to investors in 10 year period.
John Mackey, the CEO of Whole Foods, took salary down to $1 in 2006 and decided to donate future options to foundation. Signed letter ‘Much Love. Here’s the actual letter.
John Mackey wanted to build a business based on love not fear.
No one at Whole Foods gets paid more than 19x the average employee (average $40,000 highest $750,000). Typical ratio at publicly traded company in 500 to 1.
Make your employees live for the work week not just for the weekends.
You are most alive when you are in a state of flow. Create a work environment where the team can enter a state of flow.
Link your personal passion and your corporate purpose.
Get rid of people who infect an atmosphere with negativity.
At end of training at Zappos, they offer employees $2000 to quit if they don’t want to be there.
Business is more and more about caring. If you don’t care you won’t be in business.
- The Future of Management by Gary Hamel.
- Peak: How Great Companies Get Their Mojo by Chip Conley
- Delivering Happiness by Tony Hsieh
- Thank God’s It’s Monday by Roxeanne Emmerich
- It’s Not What You Sell, It’s What You Stand For, Why Every Extraordinary Business is Driven By Purpose by Roy Spence
- The Dream Manager by Matthew Kelly (class recommendation)
- Man’s Search for Meaning by Viktor E. Frankl
- The Theory of Moral Sentiments by Adam Smith
What is a Great Business?
A great business maximizes “total value created” on a sustained basis and distributes that value in an equitable and enlightened manner among all its stakeholders.
Be a company that is on the right side of society, that is good for the world.
Businesses create or and destroy many kinds of wealth.
What is Concious Capitalism?
It’s about a higher purpose (not just profits), stakeholder orientation (not just shareholders), conscious leadership (not command-and-control), and conscious culture (you can feel it/see it).
Be about mission and values and purpose. Why? Employee engagement.
Concious Capitalism is: relationship-driven, holistic, characterized by compassion, empathy, love, authenticity, and transparency, and reflective of more feminine energies and competencies.
Women are often better leaders. See this Atlantic piece on The End of Men.
From the Book ‘It’s Not What You Sell, It’s What You Stand For’ by Roy Spence
- Purpose is a definitive statement about the difference you’re trying to make in the world.
- It drives everything you do
- It matters to all stakeholders
- It is your reason for being that goes beyond making money
- Yet… it almost always results in making more money than you ever thought possible
Examples of Companies with Purpose
- Johnson & Johnson – Alleviate pain and suffering
- Southwest Airlines – Give people freedom to fly
- Whole Foods – Make people, the food system, and the planet more healthy
- Google – Organize the world’s information and make it accessible
- REI – Reconnect people with nature (kids spend 55 hrs per week in front of a screen and 1 hour per week out in nature)
Four Company Purpose Archetypes
- The Good – Service to other ethical evolved
- The True – Based on science, analytics
- The Beautiful – Excellence and perfection, aesthetics, delight
- The Heroic – Changing and improving the world
The Purpose Motive: Compensated engagement is going down, uncompensated effort going up, volunteer work is nourishing people in a way that paid work simply is not. Need to shift the focus from profit maximization to purpose maximization.
Be about doing something meaningful in the world.
The Search for Meaning
From ‘Man’s Search for Meaning’ by Viktor E. Frankl
“Happiness is the outcome of living a life that has meaning and purpose.
“Happiness cannot be pursued; it ensues from living a life of meaning and purpose.” – Viktor E. Frankl
Meaning comes from:
- Doing work that matters
- Selfless love
- Finding meaning in suffering
The formula: Despair = Suffering – Meaning
- “Leading by intimidation, by rank, or even by charisma alone is insufficiency because those who are supposed to follow are becoming self actualized and they won’t accept this outmoded style of leadership any more.
- The more self-actualized people become, the more we’ll need seal-realized leaders who demonstrate mastery at serving some higher purpose and choose the right action.
To Build a Conscious Culture
Make it tactile (visible and touchable). Transparency, authenticity, caring, trust, integrity, learning, empowerment.
Paraphrasing a video from Gary Hamel shown by Raj: The management model from the industrial age is outdated. Create an environment the preserves passion. This will drive value creation in the creative economy. The question is how to reinvent management to enable team members to bring passion to work. Create companies where employees can bring all of themselves to work. Build companies that are fit for human beings.
“You can’t command imagination, creativity, or passion!” – Gary Hamel
Stakeholder Acronym: SPICEE = Society, Partners, Investors, Customers, Employees, Environment
In our world, we are all in the same boat.
In the future, you will have to operate with all stakeholders in mind to be successful.
A Historical Look
1776 – Same year Wealth of Nations and Declaration of Independence published. For the first time in human history man was in charge of their own destiny within a world of law. Age of Empowerment.
1850 – Age of Industrialization
1900 – Technology breakthroughs. Einstein, electricity, Marconi, telephone, radio, television. The birth of modern marketing. Age of Knowledge.
1989 – Berlin Wall collapses, Tienanmen square, Exxon-Valdez spill, Fatwah against Salman Rusdie. Fukayama’s essay “The End of History” The debate was what type of free market, what type of democracy. A new cultural age has emerged in which the consuming focus on materialistic gain that marked the Age of Knowledge is ebbing. Now we are in the Age of Transcendence.
The Zeitgest is Shifting
The zeitgeist is shifting from the strong self-indulgent me orientation of the 20th century society toward a stronger sense of interdependence with others.
In USA, there are now more adults over 40 than under 40. The Internet was invested by Tim Berners-Lee in 1990, which has shifted balance of power and making the world more transparent.
We are moving up Maslow’s hierarchy from survival, to success, to meaning.
Why New Balance is growing faster than Nike. Nike appeals to self-centered masculine-dominated youth. New Balance appeals to self-actualized older more feminine oriented individuals.
Human beings are not a resource. Coal is a resource. Turned on, a human being is like the sun. A source of regenerating energy.
“I would not give a fig for simplicity on this side of complexity, but I would give my life for the simplicity on the other side of complexity.” – Oliver Wendell Holmes, Jr. US Supreme Court Justice.
Humanity is one spirit. Natural resources are finite. Our inner resources are infinite.