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Milton Friedman was wrong: movements towards social business are proof

It’s an inspiring time for those who believe altruism is good for business. The CEOs of almost 200 major American corporations have formally turned against stockholders in favor of stakeholders. Meanwhile Harvard Business Review just released a study on how a socially-engaged purpose is a major driver for today’s high-growth companies. Is economist Milton Friedman rolling in his grave?

 

Stockholder theory is dead…

For the past 50 years, Milton Friedman’s ‘Shareholder Theory’ has been the “biggest idea in business”. The Nobel Prize-winning economist argued that a company’s only social responsibility was to its stockholders. In other words: ‘Profit is Everything’ and ‘Greed is Good’.

His concept gave rise to the corporate raiders: disgruntled stockholders who would come in to make an organization ‘leaner’ and competitively meaner. Later, CEOs in the name of saving their own jobs against such raiders, would internalize this drive against ‘waste’ to rationalize massive cutbacks on everything from employees to pension plans.

It all seemed to make perfect sense – and was also strangely idealistic. More profits for the stockholders meant they had more money to pay taxes on and give to social causes. Call it trickle down charity. 

In 1997, the Business Roundtable, the most powerful lobbying group for the US’s largest companies (think Amazon, Apple, JP Morgan, Walmart and all the rest), even took on Stockholder Theory as a company’s driving purpose: “The paramount duty of management and of boards of directors is to the corporations’ stockholders.”

But last month, Friedman’s legacy got kicked in the teeth. Almost 200 chief executives from this same Business Roundtable backpedaled on who the corporation was responsible to: stockholders were now on equal footing with customers, employees, suppliers and communities.

 

Long live stakeholder theory?

In many ways, this purpose harkens back to the days before Friedman when corporations, while always after the bottom line, also acknowledged a wider web of stakeholders. For example, even in the early 1900s, Henry Ford saw the advantage of doubling worker’s pay in the name of retaining their skills over a lifetime. Later, era-defining corporations such as IBM and General Electric set up ambitious pension plans for their employees with a similar goal in mind. And certainly, most companies saw advantage in giving to local charities to ingrain themselves in the communities they were located in. 

Stockholder Theory always had its critics. For example, some said it's focus on quarterly earnings distracted from innovation, renewal and investment for the future. And the theory certainly did not have time for new age malarkey such as Corporate Social Responsibility.

But as noted in the fascinating podcast ‘What American C.E.O.s Are Worried About’, these CEOs are likely being less altruistic than it seems. They have not turned into hippies overnight but rather are finally responding to a decade-old event. 

 

Writing on the wall

The 2008/9 financial crisis highlighted that the market was not functioning correctly, that people had lost faith in business institutions, and that greed was in fact good for only a select few. And with the rise of Bernie Sanders and Elizabeth Warren, these social issues quickly became political issues. Danger lurked: the CEOs saw that they have to change their tune or an upcoming political system would do it for them – and soon. As noted in the podcast: “This is straight survival instinct.” 

So yes, this shift in purpose may be more about public opinion than altruism. But at least it’s starting a conversation…

True altruists arise

However if one reads the report ‘Put Purpose at the Core of Your Strategy’ on a recent study undertaken by the Harvard Business Review, one is confronted with case studies where an altruistic purpose has put certain high-growth companies at the forefront of their industries. And as we’ve learned at StrawberryFrog countless times: with a solid purpose, you can drive a movement.

“Companies have long been encouraged to build purpose into what they do. But usually it’s talked about as an add-on – a way to create shared value, improve employee morale and commitment, give back to the community, and help the environment. But as we worked with the high-growth companies in our study and beyond, we began to recognize that many of them had moved purpose from the periphery of their strategy to its core — where, with committed leadership and financial investment, they had used it to generate sustained profitable growth, stay relevant in a rapidly changing world, and deepen ties with their stakeholders.”

And the stories are inspiring. RISE is the purpose for one of India’s most powerful companies. It’s also the brand movement that changed and focused the corporate wide culture and established actions and a belief system based on the very lowest layers of employees right up to the very top of the corporate pyramid. Amazingly, the core principles of the movement, developed by StrawberryFrog, can be repeated by all employees in this massive organization: accept no limitations, use your ingenuity, drive positive change. Another example by applying its new purpose ‘Creating Responsible Choices Everyday’, the struggling Finnish oil-refining firm Neste could transform into a renewables leader and be rated by Forbes as the second most sustainable company in the world. 

The reason for this shift is primarily because consumers and employees and shareholders know that driving positive change is good for business. Moreover it’s an imperative for corporate relevance and moreover survival. And why not? The longer and healthier consumers and employees are more likely to buy from the company and dedicate their time to see it thrive.

Of the 28 companies covered in this study, all had a purpose that was essentially the opposite of ‘Greed is Good’. These are the companies that should be forming their own Business Roundtable.

Scott Goodson, Founder and chairman at StrawberryFrog.

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