Most of the capitalists
an FT journalist meets in 2019 sound
more like the protesting shirtmakers of the 1970s than the
Nobel-winning economist. Over the past year I have had business
leaders lament to me that no Wall Street analyst ever asks them
about their efforts to tackle climate change; I have seen companies
such as 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?”
Strikingly, their arguments have been
echoed by the world’s biggest investors, the very people who seem
most at risk in any shift from shareholders’ interests.
If Friedman’s article provided the
intellectual underpinning for the idea that a public company’s only
social responsibility was to increase its profits, the catalytic
text for the new era of purposeful capitalism was a
sent to chief executives a year
ago by BlackRock’s Larry Fink, who with $6.3tn of assets under
management counts as the biggest investor of them all.
With governments failing to prepare for
the future, he wrote, 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.
Fink is far from a lone voice in his
industry. Assets in US funds that aim to produce social or
environmental benefits alongside financial returns grew
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. That impulse has
presented fund managers shaken by the rise of
with an irresistible growth
opportunity.
Fink is now drafting his 2019 letter and
still sounds a little shocked, and pleased, at how much discussion
last year’s caused. The reaction was “90:10”, he says: a vocal
minority “hated it” but his message resonated with far more,
producing a step-change in the number of companies spelling out
their purpose in annual reports. “I believe the viral nature of the
letter was because I think society was asking for this,” Fink says.
“I can tell you not everybody agreed
with Larry’s letter,” adds David Abney, chief executive of the
parcel delivery company UPS, “but I’d say there’s more people
leaning in Larry’s direction, or at least they say they are.”
If there is a hint of caution in Abney’s
last remark, it may be because we have heard companies pay lip
service to social virtues before now. Any regular on the CEO
conference circuit already knows their triple bottom line from their
circular economy and can talk fluently about impact and inclusive
capitalism.
The acronyms have changed, from CSR
(corporate social responsibility) to
(environmental, social and governance), but the desire to convince
the world that business cares about more than the bottom line is
nothing new. Even Lehman Brothers had a page on sustainability in
its 2007 annual report, hailing its role as an environmentally
conscious “global corporate citizen”.
A
decade after Lehman’s
collapse, only a
of Americans have a positive view
of capitalism (among those aged 18 to 29, socialism is winning).
Will they be getting their hopes up about capitalists making the
world a better place? And with no shortage of corporate scandals,
from
to Facebook’s intrusions into its
,
can society trust finance or business to decide what is best for
society?
One answer, Fink contends, is that
governments are even less trusted. His 2018 letter was inspired, he
says, by the breakdown of globalisation and multilateralism, and
what he perceived as growing global frustration that governments are
doing less for voters.
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
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.
![](FT%2020190104%20image2%20x40.png)
A Gays Against
Guns protest poster outside BlackRock’s New York headquarters in 2016 ©
Bloomberg |
Institutional investors are becoming
and the concept of the activist chief
executive no longer sounds like an oxymoron. With many governments
in disrepute, leaders of finance and business have — improbably —
been handed an
opportunity to
lead on
some of
society’s most
pressing issues.
Will they
take it?
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,
.
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.
Mayer’s manifesto recasts the company’s
place in society, arguing alliteratively that its purpose is “producing
profitable solutions to
problems of
people and
planet.” Profit,
in other words, flows from the pursuit of a broader social
purpose.
As Harvard Business School’s Joseph Bower and Lynn Paine have
, different businesses will define their purpose in different
ways, but the model that replaces Friedman’s framework must recognise that all companies “are embedded in a political and
socioeconomic system whose health is vital to their sustainability”.
It is an attractive vision,
but it already has its doubters. According to Anand Giridharadas, a
former fellow of the Aspen Institute think-tank, corporate do-gooding
is nothing more than “an elite charade” that allows plutocrats to
feel better about themselves while dodging any real challenge to the
system that made them rich. “The Aspen
Consensus, in a
nutshell, is this,”
he wrote
in a
2015 speech
that provided
the spark for his
2018
Winners Take All.
“The winners of our age must be challenged to do more good. But
never, ever tell them to do less
harm.”
To sceptics such as Giridharadas, asking
corporate philanthropists to solve society’s problems is a recipe
for the unfettered paternalism that took hold in America’s Golden
Age. Andrew Carnegie, the union-breaking steel magnate, argued in
his 1889 essay “The Gospel of Wealth” that the concentrations of
corporate power and wealth that characterised that earlier unequal
era were natural, even welcome: what mattered more was how the
wealthy distributed their surplus riches for the common good. Don’t
question the getting, in other words, if it is followed by giving.
Some of those who have argued longest
for business to serve a social purpose argue that it cannot do so
within the current system. “The global financial crisis has woken
people up in the streets and in boardrooms around the world to say
we need to look at the system design flaws that produced that
outcome,” says Jay Coen Gilbert. “The height of lunacy is to seek
different outcomes while doing the same thing over again.”
Gilbert is a founder of B-Lab, which in
2007 began certifying a new type of company called a
,
with a mandate to benefit all stakeholders and a commitment to
submit to regular tests of its social and environmental impact. As
the corporate mainstream becomes more mission-driven, larger
multinationals are now showing interest, from banks to energy
companies. Danone North America became a B Corp last April, joining
2,600 others including Patagonia, Gap subsidiary Athleta, and the
Unilever- owned Seventh Generation and Ben &
Jerry’s.
The B Corp model has also inspired
Elizabeth Warren, the Massachusetts senator who
in August proposed an that would oblige companies with
revenues over $1bn to consider the interests of employees, customers
and their communities alongside those of investors. With Warren this
week announcing a run for the Democrats’ 2020 presidential
nomination, the shareholder supremacy debate could soon be thrashed
out on primetime
television.
Even those supporters
of purposeful capitalism who would
rather rebalance companies’ priorities within the current system
admit that hurdles stand in the path of reform. 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.
Metrics are “the soft underbelly of the
ESG movement,” warns Martin Whittaker, chief executive of JUST
Capital, which ranks US companies on whether they are creating jobs,
paying fair wages and contributing to the health of their
communities and planet. (Friedman fans should note that JUST’s
rankings are based on a poll of the public’s priorities for business
that ranks shareholders dead last.)
![](FT%2020190104%20image3%20x40.png)
Larry Fink, BlackRock’s chief executive, who
warned companies in January 2018 that they must contribute to society and
deliver financial performance. Without a social purpose, he argued, companies
fail to make the investments needed for long-term growth © Bloomberg
![](FT%2020190104%20image4%20x40.png)
Paul Polman, chief executive of Unilever
(second from right), and Singapore's deputy prime minister Tharman
Shanmugaratnam (far right) take part in a panel discussion at the Confederation
of Danish Industries in Copenhagen in October, part of a summit focused on
sustainable growth © Reuters |
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.
If a company misses its earnings target, investors, journalists and
even algorithms know how to respond. But how should they react if it
falls short of its stated purpose?
For as long as activist investors and
opportunistic bidders are waiting to pounce on underperformers, no
board will neglect the metric that most drives its stock. And while
the purpose-before-profit movement has gathered momentum in a rising
market, we do not know how it will fare in the next recession.
“Inevitably a downturn won’t help,” says
Clare Chapman, co-chair of the UK’s Purposeful Company Task Force.
She notes, however, that within companies that had focused on the
environment, diversity and other social responsibilities before the
financial crisis, those priorities survived because “quite simply,
running a business short-term is a fast way of running it into the
ground."
Fink and Polman have become influential
champions for the purpose-driven model, but they are on a short list
of names that tend to come up in most discussions of this movement.
If corporate purpose remains the preserve of a small group of
western chief executives on the Davos circuit, it will fall short.
“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.”
Even those inside the echo chamber know
that some of the smaller businesses they deal with are not fully on
board. One chief executive, who would not go on the record saying
this, remarked drily: “Almost all of our customers are interested in
what we can do to clean the environment and other stuff. You can
tell it’s one of their core values ... until you get to price.”
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.
Critics such as Giridharadas would
rather society concentrate on restoring politics as the forum
through which we address its challenges. But for as long as
politicians are viewed with more suspicion than chief executives and
investors, the purposeful capitalists may be our best hope.
Consumers, employees and campaigners are
already learning how effective they can be in pushing companies to
balance other stakeholders’ concerns with their returns to
shareholders. Companies, in turn, have discovered that doing so can
improve their reputations, persuade investors that they have a
sustainable strategy and, ultimately, benefit their bottom line.
When corporate America is paying chief
executives as much as the median employee,
the windfall from a historic tax
cut to options-boosting buybacks and consolidating into ever larger groups,
executives claiming to be solving society’s ills can expect pushback.
The pursuit of purpose will not end the
questions over how much chief executives should earn, what wages and
taxes companies should pay or how much corporate power society will
tolerate. Nor will investors stop judging chief executives by their
share prices. But 50 years of putting shareholders first left
corporations little trusted by non-shareholders and many are ready to
try something different.
As companies’ self-interest converges with
the interests of other stakeholders, those who would improve the world
have a chance to get some of the world’s most powerful instruments for
change onside. They should grasp the opportunity business’s moral
money moment has given them.
Andrew Edgecliffe-Johnson
is the FT’s US business editor