Summary
Highlights
The conventional view, championed by Milton Friedman, states that the sole purpose of a business is to maximize profit. This perspective argues that caring for society (customers, employees, environment) is a byproduct of pursuing profit. However, this theory assumes that ethical behavior's impact on profit can be mathematically calculated, which is often not the case. The alternative, Corporate Social Responsibility (CSR), suggests that businesses exist to serve a purpose beyond just profit, focusing on improving customers' lives, creating a healthy workplace, and preserving the environment. Profits, in this view, are a natural outcome of serving a purpose.
Simon Marks, former chairman of Marks and Spencer, exemplified CSR by introducing nutritious meals for staff at nominal prices after witnessing an employee faint due to hunger. This decision, seemingly costly, was driven by care for his workers, not a profit calculation. This led to an excellent reputation for quality, which in turn contributed to profit, showcasing profit as a byproduct of a purpose-driven approach.
George Merck, former president of Merck Pharmaceuticals, focused on using science to save lives rather than maximizing drug sales. In 1942, Merck became the first company to mass-produce penicillin, saving countless lives, including Anne Miller's. Merck then shared its penicillin manufacturing secrets with competitors, further demonstrating a purpose beyond profit. As George Merck stated, "medicine is for the people, it is not for the profits. The profits follow."
To test the hypothesis that socially responsible firms perform better, Alex Edmans conducted a four-year study focusing on employee well-being, using the '100 Best Companies to Work For in America' list. He controlled for various factors like industry, firm size, and past returns to isolate the effect of employee well-being on stock returns. The study also included further tests to establish causality, ensuring that employee well-being caused good performance, not vice versa.
The study found that the 100 best companies to work for in America delivered stock returns that outperformed their peers by 2-3% annually over a 26-year period. This demonstrates a fundamental shift in how management should perceive workers: treating employees better leads to better financial outcomes. This contradicts the conventional view that investing in employee well-being is costly and detrimental to shareholder profits, as exemplified by Costco's high wages and benefits, which are ultimately seen as investments that attract and retain better, more efficient employees.
These findings free managers to act responsibly without solely focusing on immediate financial calculations. Caring for society, even for intrinsic value, typically leads to financial rewards. For investors, the results suggest no sacrifice is needed when investing in ethical stocks. Socially responsible companies, particularly those prioritizing employee well-being, can provide higher returns. Edmans advocates for looking beyond short-term financial numbers and considering long-term, qualitative factors like corporate culture and customer loyalty, using measures from organizations like Trucost and Sustainalytics.
The market often takes 4-5 years to fully recognize the benefits of employee well-being in stock prices. This implies that investors looking for long-term value can still achieve financial returns by investing in these companies even after some time. It also highlights the importance of patient investing and supporting management's long-term vision, as demonstrated by Unilever's decision to stop reporting quarterly earnings and the long-term success of Alliance Trust, an investor in sustainable businesses. Ultimately, businesses exist to serve a purpose, and by doing so, they will generate profits in the long run.