The Profit vs. Purpose Fallacy
The ambition to create value by contributing to the welfare of society.
In September of 1970, Milton Friedman, the rockstar Economist of his time penned an article on what he believed to be the social responsibility of businesses. In this, he argued that the notion of asking businesses to contribute towards social objectives is counterintuitive to the definition of a free society and that “…there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits.”
Friedman’s view of business is an expiring philosophy of trade, whereby consumers accept rigid producers. Society is mounting expectations on organisations, in fact, 75% of consumers will prioritise purchasing from those companies that give back to society during the pandemic. This presents the modern day firm with the challenge to think creatively around their business models and how their capabilities serve a purpose to the big challenges of climate change, financial inclusion, prejudice and beyond.
Out with the old
For much of my time in business school and in the world of work I was indoctrinated with the shareholder supremacy ideology. The belief that in corporate governance, shareholder interests is the first priority relative to all other corporate stakeholders, including you — the customer. This theory hinges on laissez-faire fundamentalism and was further perpetuated across power structures by Reagan and Thatcher in the 1980s. I think it is fair to say that Friedman and his disciples see the market as an environment to maximise an individual man’s freedom to pursue self-interest, Capitalism is the means and self-preservation the end.
Friedman’s view of business assumes that social responsibility is merely an afterthought and that companies can only maintain binary objectives — profit or social goals, not both. Whilst that may have been acceptable in the past it isn’t today. Today’s business world is shifting towards more of what another famous economist John Maynard Keynes had predicted. He predicted that capitalism would last for approximately 450 years and by the year 2030, assumed humanity would have solved the problem of our needs and moved on to higher concerns. So, what does that look like?
Conscious Capitalism
Conscious Capitalism is defined as “a philosophy based on a simple idea that when practiced consciously, business innately elevates humanity. This philosophy is rooted in a set of guiding principles: the four tenets of higher purpose, stakeholder orientation, conscious leadership, and conscious culture.
Organisations who embody the principles of conscious capitalism, that is a delicate balance between profit and social goals — are also known as ‘Purpose-Led’. Christa Gyori, CEO and Co-Founder of Leaders on Purpose describes these companies as ‘organisations with an understanding that the role of business is beyond addressing the needs of just shareholder value — aligning organisations core competency with social need being met.’ According to Gyori, an example of the financial opportunity of adopting this revised way of trade is shown in the UN Sustainable Development Goals (SDGs), which present a $28tn business opportunity that could create 380m jobs.
Below are three examples of three organisations from three different industries embodying this movement:
- Chipotle — The organisation has responded to the farming challenges in America by altering it’s supply chain to increase local purchasing by 20%. This pivot also limits the scope for low quality produce upon arrival each day.
- CDC Group — A Development Finance Institution that invests in the private sectors of impoverished nations to stimulate their economies. The organisation sees at at least 3.5% per year over a ten-year period and has no incentive or expectation to exceed that rate of return which allows CDC to focus on the twin priority of maximising impact.
- People Of Color In Tech (POCIT) — Where I now work, shameless plug. A tech startup, telling the stories of Black and Latino talent in tech and connecting the POCIT community to tech companies for jobs.
Conclusion
I believe that businesses ability to deploy capital and resources to ‘improve’ our livelihoods faster than ever before rightfully place them at the core of our societies, but the 21st century CEO must answer with a renewed commitment to balancing moral purpose and high performance. The understanding that the pursuit of profit does not need to run counter to what will benefit society, will help companies to create in parallels and avoid humble beginnings becoming Frankensteins.
What Friedman may have not taken into consideration is that in a democratic-capitalist society, democracy must come first. “We, the people” grant businesses their license to operate through our purchases — which they, in turn, must earn and renew.
