Are values and profitability incompatible?
Values have taken a central role in the debate about how private companies ought to conduct business in the post-recession era.
The idea that businesses should go beyond the narrow measures of shareholder value maximization and embrace a wider role of a ‘responsible citizen’ that cares about the society it operates in, is certainly not a new one. The 16th to 18th centuries saw the Quakers establish household brands such as Barclays, Lloyds, Cadbury and Rowntree. They were successful precisely because ethical behavior and a deep understanding of their responsibilities were the foundation of how they conducted business. Far from hindering profit, these companies understood that responsible behavior actually increased profitability (for more on Quakers in business, please see here). In the post-recession era, the idea of a values driven company (whether encompassed within traditional models such as Corporate Social Responsibility (CSR) or more recent development such as ‘B’ corporation certification) should therefore not be seen as simply an operational cost, or an add-on necessary only for PR purposes, but as a critical part of the long-term business plan.
But what exactly do we mean by Corporate Responsibility? Given the rather elusive nature of the concept we can easily find ourselves lost in the myriad of ideas that come to mind. However, CSR is effectively a management concept whereby companies integrate moral, social and environmental concerns in their business operations and interactions with stakeholders (adapted from the UN Industrial Development Organisation, 2015). By stakeholders we mean all actors that come into contact with the business itself, from internal stakeholders such as employees and owners, to external stakeholders such as customers, creditors, the government and so on. Ultimately, Corporate Social Responsibility is a business management strategy that holistically takes into account a company’s entire operational ecosystem.
From a more theoretical and rather traditional standpoint, one could argue that the odds are stacked against any significant CSR-related engagement. After all, it was Milton Friedman who famously claimed that “There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” (New York Times, 1970).
Most business schools around the world have adopted Friedman’s notions defining the purpose of enterprise solely in terms of ‘maximizing shareholder value’. We’ve heard this definition many times before and at least for the time being, it provides us with a clear purpose of what all private sector entities should ultimately be aiming for, i.e. making profit.
However, it is within this pursuit of profit that divisions begin to arise. The goal itself has an embedded sense of urgency that could (and has done in the past – prior to the financial crisis) compromise future returns in exchange for short-term gains. So at the very least the concern should be with long-term shareholder value. More importantly, how is shareholder value to be defined? Contrary to popular belief, Milton Friedman did believe that ‘CSR’-type expenditure such as local community investments, employee training or involvement in charitable activities are justifiable since they contribute to the long-run interests of a firm, whist also generating corporate goodwill (Hernandez-Murillo, 2014). It is therefore crucial that perception surrounding CSR or similar spending is changed from being seen as a cost, to an investment, a commitment to the medium and long-term goals of a company. Academics sometimes refer to this as ‘profit-maximising CSR’, whereby the firm’s ethically-driven activities are aligned with the firm’s self-interest (ibid). It ultimately leads to a win-win situation whereby both the firm, as well as the stakeholders gain from the strategy.
This leaves us with two questions that seek to answer CSR alignment on one hand, and real impact on the other. In other words: 1. Is the strategy aligned with the overall aims of the firm? And 2. Is it achieving the desired impact?
Nike, the shoe and sports clothing manufacturer is a perfect example of a CSR strategy that was not just limited to charitable donations or environmental issues, but was brilliantly in tune with the overall strategy of the firm.
Known as ‘NIKE +’, the company shifted its focus from promoting its products to helping its customers. “Instead of putting up another campaign of billboards with celebrities saying ‘buy our shoes’…NIKE + actually helps you become a better runner” (Levick, 2012). Through products such as the Nike FuelBand (a wristband which monitors your physical activity) and personalized customization through Nike iD, the firm is effectively trying to say “we care more about you and your personal fitness goals than we do about advertising our products”. This was a serious customer focused strategy which contributed – alongside the traditional CSR values type activity – to show the company strategically interested in aligning itself with the interests of its customers. Profitable too.
The result? Nike’s share price almost doubled over the last 24 months from $64 per share to $115 per share while its closes competitor Adidas, dropped from $84 to $64 over the same period of time. Of course, one could argue that there are other contributing factors to the success of Nike and apparent decline of Adidas, but the commitment and focus on a morally-guided strategy of placing the customer’s interests first have clearly paid off.
Values, corporate responsibility and profitability are not juxtaposed as alternatives – they are two parts of the whole. A concept such as CSR and its wide-ranging type of activities and approach to business should therefore not be seen as a cost, but a crucial part of the long-term business plan. As a strategy that holistically takes into account the entire business ecosystem and if aligned correctly, it can produce tremendous results indeed.
Andrei Rogobete is a Research Fellow with the Centre for Enterprise, Markets & Ethics. For more information about Andrei please click here.