What is the purpose of a corporation? In a landmark 1970 essay in the New York Times, the late University of Chicago economist Milton Friedman wrote that the sole responsibility of a company is to increase its profits. That became the doctrine underpinning western business practices, but, 50 years later, companies are searching for a new purpose beyond profits.
In a recent survey McKinsey & Company found that only 16 percent of executives agreed that corporations should solely focus on maximizing shareholder value within the confines of the law. Instead, 84 percent agreed that companies should generate returns for investors, but balance that with contributing to the broader public good.
Then, last year, the Business Roundtable updated its statement on the purpose of a corporation. The club of 183 of the most powerful chief executives in America said companies should shift from shareholder to stakeholder capitalism.
“The need to earn a social license to operate is, increasingly, understood by business leaders,” says Geoff Martin, professor of business strategy at Melbourne Business School in Australia. “There is an increasing awareness that you need to meet the needs of employees, customers, society, to ensure your organization has the resources it needs to succeed in the long run.”
The skills needed to create social impact
For many companies, there is still a lot to be done, as evidenced by the recent Rio Tinto scandal over the mining company’s destruction of a 46,000-year-old Aboriginal site in Western Australia. “Some organizations pay lip service to it; others are better at living their commitment to multiple stakeholders,” says Martin.
He is trying to change that. In Melbourne Business School’s For-Purpose Executive Leadership Program, he helps participants develop the soft skills necessary to identify the stakeholders that matter and what is important to them.
[See all upcoming executive education courses in Sustainability / Corporate Responsibility]
But he also gives executives the change management skills and cultural awareness needed to build a strategy that reflects the multiple needs of stakeholders. When prioritizing their needs over short-term financial gains, Martin says “companies will find it easier to attract financial investment, talent and sell their product”.
Increasingly, pressure from institutional investors, from employees and customers is driving companies to focus on a broader purpose. “In the last few decades, the political and business landscape has changed dramatically,” says Sandra Navalli, managing director of the Tamer Center for Social Enterprise at Columbia Business School in New York.
“In response to supply chain scandals, increasing evidence of climate change and the likelihood of tighter environmental regulation, and the most recent worldwide protests on racial justice, companies pay much more attention to their impact on society and the environment.”
Columbia runs several executive programs in social enterprise, including the Senior Leaders Program for Nonprofit Professionals which focuses on developing strategic leadership and superior management skills.
Navalli says that innovative companies are able to see the business case for having a purpose, such as attracting diverse and talented employees (which is linked to greater innovation and higher achieving teams), improving productivity, reducing costs and generating revenues through customer loyalty.
She says a responsible company might be faced with social and environmental issues as diverse as emissions, executive compensation, employee benefits, climate change, community development, corruption and bribery, energy efficiency, human rights, privacy and data rights, diversity and inclusion, political contributions and waste reduction.
However, Navalli says what separates companies with leading strategies in this area from corporate window dressers is the ability to tackle social and environmental issues directly related to the company’s products or services.
Laurence Lehmann Ortega, a strategy and business policy professor at HEC Paris, fears that cost cuts in response to coronavirus could reduce the focus on purpose. “This might happen for leaders who were talking about purpose for cynical or ‘greenwashing’ reasons. However, for those who walk the talk, it will be more relevant than ever,” she says.
HEC in France runs the executive certificate program in Innovation and Social Business, which explores inclusive business models as a way of expanding into emerging markets.
But Ortega says it’s not easy to train leaders to address the complex social and environmental problems alongside making a financial return. “There can be tensions between social and environmental objectives. For example: stopping production in a polluting factory leads to unemployment,” she says.
The Oxford Impact Investing and Social Finance programs are designed to move beyond Friedman’s dictum that business is for increasing profits. Rather, the courses focus on showing senior executives how to use capital for social, environmental and financial good. “We believe that business will benefit when higher purposes are achieved,” says Gayle Peterson, associate fellow at University of Oxford’s Saïd Business School.
Her courses help leaders develop certain leadership characteristics: courage to understand complex systems; candor to speak the truth when things don’t work; creativity to incorporate scenarios into the planning process to anticipate challenges and opportunities; compassion to run a business with empathy.
“Businesses are already benefiting — ESG companies and socially responsible investments have maintained their profitability and, in fact, are making more money during the pandemic,” Peterson says.