The social responsibility of business | Alex Edmans | TEDxLondonBusinessSchool

The reason businesses exist has long been debated: is it solely to earn profits, or is there a greater purpose at play? While the conventional view argues that profit maximization is the primary objective, the reality is less black and white and often intersects with societal interests.

Profit as a Byproduct of Purpose

Many people believe that businesses exist exclusively to earn profits. This notion, championed by economist Milton Friedman, posits that the social responsibility of businesses is to increase profits. But here's the catch: to achieve profits, companies must also care about society. They need to create high-quality products to satisfy customers and treat their employees well to retain their workforce. Environmental considerations are equally important, as neglecting them can tarnish a brand's image.

The Story of Marks and Spencer

A powerful illustration of this principle is found in the story of Simon Marks, former chairman of the UK retail giant Marks and Spencer. He mandated that top management frequently visit shop floors to see firsthand how customers and workers were treated. One day in the 1930s, Simon saw a shop assistant faint due to undernourishment. His immediate response was to provide nutritious meals for all staff at nominal prices. His decision wasn't driven solely by profit calculations but by a genuine desire to care for his employees. This commitment to employee well-being ultimately bolstered Marks and Spencer's reputation for quality, leading to greater profits.

Corporate Social Responsibility: A Broader Perspective

This leads us to another perspective known as Corporate Social Responsibility (CSR). While CSR proponents agree that profit is important, they argue it should be a byproduct of serving a greater purpose: improving customer lives, providing enriching workplaces for employees, and safeguarding the environment for future generations. Businesses can achieve higher profits naturally as they fulfill these roles.

Take the example of George MK, the former president of MK Pharmaceuticals, who focused on using science to save lives rather than simply maximizing profits. When he facilitated the mass production of penicillin during World War II, his efforts saved many lives, illustrating how purpose-driven initiatives can lead to substantial rewards.

Studying the Impact of Employee Well-Being

With growing interest in the relationship between socially responsible actions and business performance, I set out to investigate whether socially responsible firms indeed performed better. To assess social responsibility, I examined employee well-being using the “100 Best Companies to Work For” list published by Fortune Magazine. Analyzing data from this list from 1984 onward, I aimed to determine the relationship between employee well-being and future stock returns.

After controlling for various factors like industry, firm size, and past performance, I discovered that these best companies delivered stock returns that surpassed their peers by 2-3% per year over a lengthy 26-year period. This finding reveals that companies that prioritize employee welfare tend to outperform others financially.

The Costco Model: An Exemplary Case

Let’s consider Costco, an American supermarket chain that exemplifies the benefits of prioritizing employee well-being. Costco pays its employees nearly double the national average and provides extensive healthcare benefits. Despite an analyst’s comment that this approach could harm shareholder returns, Costco’s management believes that by paying better wages and fostering a positive environment, they can attract and retain efficient workers.

Like Marks, Costco’s approach reflects a commitment to its employees without sacrificing profitability: profits exceeded $2 billion in each of the past two years, even while choosing to close on Thanksgiving to allow workers time with their families.

Long-Term Value over Short-Term Gains

The findings from my research not only inform management practices but also affect investment strategies. Many investors believe that ethical investing necessitates sacrificing returns, but the data indicates otherwise. The Parnassus Endeavor Fund, for example, employs a strategy focused on employee well-being and has outperformed the market by 4% annually since its inception.

Investors often look at easily measurable financial metrics but should be aware of the qualitative aspects that contribute to a company’s long-term value. Corporate culture, customer loyalty, and innovative capability are among the crucial factors that financial statements may overlook.

The Future of Ethical Investment

As the market continues to favor short-term gains, it remains vital to consider long-term outcomes. Investing in companies dedicated to employee well-being may initially appear costly but yields greater benefits over time. Iconic firms like Unilever have shifted their focus to long-term sustainability, which has led to consistent dividend growth every year since 1967.

The resounding answer to the question of a business's existence is nuanced: it is both to earn profits and to serve a purpose. Businesses can achieve long-term profit by pursuing purposeful goals, ultimately leading to healthier partnerships with all stakeholders involved.

Conclusion: The Interconnectedness of Purpose and Profit

In conclusion, businesses exist not in a vacuum but rather in an intricate web that binds profit motives with social responsibility. By fostering a corporate culture that values employee welfare and societal contributions, organizations can unlock pathways to sustained profitability, demonstrating that purpose and profit go hand in hand.