The social responsibility of business | Alex Edmans | TEDxLondonBusinessSchool
Summary
TLDRThe video script challenges the conventional view that businesses exist solely to maximize profits, arguing that companies also serve a broader purpose for society, customers, employees, and the environment. It presents evidence that socially responsible firms, which prioritize employee well-being, outperform their peers in stock returns over the long term. The speaker encourages investors to consider non-financial metrics, such as corporate culture and social responsibility, to gain a competitive advantage and support businesses that align with their values.
Takeaways
- 💡 The traditional view of business is to earn profit, which indirectly contributes to societal well-being through quality products, good employee treatment, and environmental care.
- 📉 Milton Friedman's theory posits that a business's social responsibility is to increase profit, suggesting that ethical behavior will naturally follow for the sake of financial gain.
- 🛍️ The example of Marks and Spencer's former chairman, Simon Marks, illustrates that sometimes business decisions are made out of care for employees rather than direct profit calculation.
- 🌳 Corporate Social Responsibility (CSR) is the idea that businesses exist not just for profit, but to serve a purpose beneficial to customers, employees, and the environment, with profit being a byproduct.
- 🛑 George Merck's story from MK Pharmaceuticals demonstrates that a business philosophy focused on saving lives rather than maximizing profit can still lead to significant social and financial success.
- 📊 The speaker's research indicates that companies listed as the best to work for in America outperform their peers in stock returns by 2-3% annually over a 26-year period, suggesting employee well-being is linked to business performance.
- 💰 The study controlled for various factors to isolate the effect of employee well-being on stock performance, providing evidence that treating employees well can positively impact a company's value.
- 🛒 Costco's business model, which includes paying higher wages and providing better benefits, is cited as an example of a company that prioritizes employee well-being and sees it reflected in its profitability.
- 🤝 The findings suggest that managers can act responsibly without expecting immediate financial returns, as ethical actions often lead to long-term profitability.
- 💼 For investors, the research implies that investing in socially responsible companies does not require a sacrifice in returns and can be a competitive advantage.
- 🔢 The importance of looking beyond traditional financial metrics to qualitative factors like corporate culture, customer loyalty, and innovative capability when evaluating a company's value.
Q & A
What is the conventional view of why businesses exist?
-The conventional view is that businesses exist exclusively to earn profit. This perspective suggests that in the pursuit of profit, businesses inherently serve society by producing quality products, treating workers well, and minimizing environmental harm to protect their brand.
What did Milton Friedman famously argue about the social responsibility of business?
-Milton Friedman famously argued that the social responsibility of business is to increase its profits. He believed that by focusing on profit, businesses would naturally address societal needs and concerns.
Why did Simon, the former chairman of Marks and Spencer, introduce nutritious meals for all staff at nominal prices?
-Simon introduced nutritious meals for all staff after witnessing a shop assistant faint due to poor nutrition stemming from her husband's unemployment. His decision was driven by a genuine concern for his workers' well-being, not just profit.
What is the second view presented in the script regarding the purpose of businesses?
-The second view is Corporate Social Responsibility (CSR), which posits that businesses exist to serve a purpose beyond profit. This includes making products that improve customers' lives, providing a healthy and enriching workplace, and preserving the environment for future generations.
How did George MK of MK Pharmaceuticals approach the production of penicillin?
-George MK focused on using science to save people's lives rather than maximizing profits. He took a risk to produce penicillin outside the lab, which was successful and led to the first commercial production of penicillin, saving many lives, including Anne Miller's.
What evidence does the speaker present to support the idea that socially responsible firms perform better?
-The speaker presents a study that analyzed employee well-being using the '100 Best Companies to Work For in America' list by Fortune Magazine. The study found that companies on this list delivered stock returns that beat their peers by 2 to 3% per year over a 26-year period.
How does the speaker suggest investors should approach investing in ethical stocks?
-The speaker suggests that investors should look beyond short-term financial numbers and consider the long-term qualitative aspects of a company, such as corporate culture, customer loyalty, and innovative capability. Investing in socially responsible companies can yield higher returns without sacrificing financial performance.
What is the significance of Costco's decision to pay its workers $20 per hour and provide healthcare to 90% of its employees?
-Costco's decision signifies a commitment to employee well-being, which is costly in the short term. However, it is believed to result in a more efficient and dedicated workforce, which can contribute to the company's long-term success and profitability.
Why does the speaker argue that treating employees well can actually increase a company's value?
-The speaker argues that treating employees well can lead to increased efficiency, better hiring, and higher employee retention. These factors can enhance the company's performance and, as a result, its value in the long term.
What does the speaker suggest as a new way of thinking in the criteria we use to pick stocks?
-The speaker suggests that investors should look beyond traditional financial metrics and consider the long-term qualitative aspects of a company, such as its commitment to social responsibility, employee well-being, and environmental sustainability.
What is the speaker's final conclusion on the purpose of businesses and their relationship with profit?
-The speaker concludes that businesses exist to serve a purpose, and by doing so, they will naturally generate profits in the long run. The pursuit of purpose and profit is not a zero-sum game but a mutually beneficial relationship.
Outlines
💼 The Purpose of Business Beyond Profit
The script challenges the traditional view that businesses exist solely to generate profit, highlighting the broader social responsibilities towards customers, employees, and the environment. It references Milton Friedman's perspective that the primary social responsibility of a business is to increase its profits, which inherently encourages ethical behavior. The narrative pivots to the story of Marks and Spencer's former chairman, Simon Marks, who introduced nutritious meals for staff at low prices, demonstrating a commitment to employee well-being over immediate profit. This act of corporate social responsibility (CSR) is presented as an alternative view where businesses serve a purpose beyond profit, leading to long-term benefits such as brand reputation and customer loyalty.
📊 Social Responsibility and Financial Performance
The speaker embarks on a quest to empirically test the relationship between social responsibility and a firm's financial performance. Focusing on employee well-being as a proxy for social responsibility, the script discusses the use of Fortune Magazine's annual list of the '100 Best Companies to Work For in America' as a robust measure. The study, which controls for various factors to isolate the impact of employee well-being on stock returns, reveals that companies on this list outperform their peers by 2-3% annually over a 26-year period. This finding suggests that treating employees well is not only a moral imperative but also a strategic advantage that translates into better financial performance.
🛍️ The Costco Model: Prioritizing Employee Well-being Over Short-term Profits
The script delves into the business model of Costco, an American supermarket chain known for its high employee wages and healthcare benefits, which are significantly above industry standards. Despite concerns from stock analysts about the potential dilution of shareholder value, Costco's approach is presented as a testament to the belief that investing in employee well-being can enhance firm value. The company's philosophy is underpinned by the idea that better pay, a positive work environment, and comprehensive benefits attract and retain high-quality employees, leading to increased efficiency and ultimately, higher profits. The script also mentions Costco's decision to remain closed on major public holidays, emphasizing the company's commitment to employee welfare over immediate profits.
🌐 Long-term Value and the Role of Investors in Driving Social Responsibility
The final paragraph explores the implications of the study's findings for both managers and investors. It argues that social responsibility does not have to be a zero-sum game between profits and ethical behavior. Instead, it can be a driving force for long-term value creation. The script encourages investors to consider social responsibility as a criterion for investment, challenging the notion that ethical investing necessitates a trade-off in returns. It highlights the success of funds like the Parnassus Endeavor, which have outperformed the market by focusing on employee well-being. The speaker also emphasizes the importance of looking beyond traditional financial metrics to qualitative factors such as corporate culture, customer loyalty, and innovation capability. The script concludes by advocating for a long-term perspective in investing and management, using examples like Unilever and Alliance Trust to illustrate the success of this approach.
Mindmap
Keywords
💡Profit
💡Corporate Social Responsibility (CSR)
💡Employee Well-being
💡Milton Friedman
💡Marks and Spencer
💡George Merck
💡Fortune Magazine's 100 Best Companies to Work For
💡Investors
💡Long-term Value
💡Sustainability
💡Qualitative Measures
💡Quantitative Factors
Highlights
The conventional view of business is to earn profit, which indirectly contributes to societal well-being through quality products, good worker treatment, and environmental responsibility.
Milton Friedman's theory posits that a business's social responsibility is to increase profit, which inherently leads to other positive outcomes.
Marks and Spencer's former chairman, Simon Marx, introduced nutritious meals for staff at nominal prices, demonstrating a non-calculable ethical decision leading to long-term profit.
Corporate Social Responsibility (CSR) suggests businesses exist to serve a purpose beyond profit, such as improving customer lives, providing enriching workplaces, and preserving the environment.
George MK of Merck Pharmaceuticals prioritized saving lives over profit, leading to the mass production of penicillin and its life-saving impact during WWII.
The study aimed to test whether socially responsible firms perform better by examining employee well-being and its effect on future stock returns.
Employee well-being was measured using Fortune Magazine's '100 Best Companies to Work For in America' list, providing a robust dataset for analysis.
The study controlled for industry, firm size, growth opportunities, past returns, and other factors to isolate the effect of employee well-being on stock performance.
Results showed that the '100 Best Companies to Work For' outperformed their peers by 2-3% per year over a 26-year period, indicating the value of employee well-being.
Costco's example demonstrates that paying workers well and providing benefits can be costly but ultimately contributes to firm value and profitability.
Investors have the power to support companies that reflect their values, challenging the notion that ethical investing sacrifices returns.
Research suggests that social responsibility, including employee well-being, customer relations, and environmental sustainability, enhances firm value.
Investors should consider long-term qualitative factors like corporate culture, customer loyalty, and innovative capability, beyond traditional financial metrics.
The market often overlooks social responsibility measures, providing investors who consider these factors with a competitive advantage.
The benefits of employee well-being take 4-5 years to manifest in stock prices, suggesting a need for long-term investment strategies.
Unilever's CEO stopped reporting quarterly earnings to focus on long-term sustainability, demonstrating the company's commitment to social responsibility.
Alliance Trust, with a 127-year history, exemplifies long-term investment in social responsibility, showing that it is not at the expense of returns.
Businesses should exist to serve a purpose, as doing so will naturally generate profits in the long run, aligning with both societal and shareholder interests.
Transcripts
why do businesses
exist to earn profit or to serve a
purpose for shareholders or for society
customers employees and the environment
well the conventional view is
exclusively to earn profit and that's
not as narrow-minded as it sounds
because to earn profit a company is
forced to care about Society it has to
make high quality products or customers
will stop buying it has to treat its
workers well or they'll leave and it
can't pollute the environment or its
brand will be hurt indeed leading
Economist Milton Friedman once famously
wrote the social responsibility of
business is to increase profit so just
head to the land of profit and you'll
get all of these other decisions
right but this Theory assumes that you
can calculate the effect that ethical
Behavior has in your profits in practice
you can't reduce every decision to a
mathematical
calculation take marks and Spencer the
UK High Street store now former chairman
Simon Marx he had a policy where all top
management had to walk around the shop
floors to see firsthand how customers
and workers were being treated and one
one day back in the 1930s on one of his
own visits Simon sees a shop assistant
faint and he's concerned he wants to
find out why and it turns out that her
husband's unemployed and she's not
eating so that her family
can so the very next week Simon
introduces nutritious meals for all
staff at nominal
prices why well Milton fredman would say
do a
calculation if if I provide nutritious
meals this many workers are not going to
faint so I'm going to make this much
more money but there's obviously no way
you can calculate that
number instead Simon's thinking was
different I'll provide nutritious meals
even if it costs me a bit because I care
about my workers I want to make sure
they eat well and because it goes above
and beyond marks and Spencer has an
excellent reputation for quality
and that in turn leads to
profit so that's the second view which
is called Corporate social
responsibility now you might see it it's
a bit tree Huggy and out of touch but
it's actually not too different from the
first view it agrees that profit is good
but profit is only a byproduct it's not
the end goal instead businesses exist to
serve a purpose to make products that
transform customers lives for the better
to provide employees with a healthy and
enriching workplace and to preserve the
environment for future
Generations even if you can't calculate
the bottomline impact of doing so and if
you do that profits will come
naturally so take George MK the former
president of MK
Pharmaceuticals now his mindset wasn't
how can I make as much money as possible
selling
drugs it was
how can I use science to save people's
lives now back in 1942 penicillin was
still a new drug it hadn't been made
outside the lab before it was too
expensive but George takes a punt and
penicillin becomes made by Merk a first
company for the first
time now this is a photo of Anne Miller
a 33y old woman she lives in New Haven
her husband's Ogden Miller the Athletics
director of Yale
University and on March the 4th 14th
1942 an lies dying in a hospital bed
stricken with strepto Cole
septicemia which she's caught after
suffering a miscarriage her fever struck
104 to 106 for 11 straight days and
everything the doctors have tried has
failed until
penicillin Anne becomes the first
American ever to be treated with
Penicillin and it saves her life life
the very next morning her temperature is
back down to normal and she makes
complete recovery she goes on to having
three sons and she lives until 90 years
old and MK then shared the secrets of
how to make penicillin with its
competitors so that they could do so
also saving thousands of lives in World
War
II as George MK said we try never to
forget that medicine is for the people
it is not for the prophets the prophets
follow and if we have remembered that
they have never failed to
appear so just serve a purpose and the
prophets will
follow nice idea if it were true but
where's the
evidence well that's what I set out to
gather I wanted to test whether socially
responsible firms actually perform
better or are instead distracted from
the bottom
line but how do you measure social
responsibility well I chose to look at
employee well-being now that's not the
only Dimension that's important there's
customers and the environment but I
chose employee well-being because
there's a particularly good measure out
there the list of the hundred best
companies to work for in America now
published every year by Fortune Magazine
so this list is available from 1984 so I
have tons of data and it's also very
thorough it looks at not only
quantitative factors such as pay and
benefits but also qualitative factors
like trust and management pride in your
jobs and camaraderie with your
colleagues so I study the effect of
being a best company to work for on
future stock
returns but how do I know whether good
stock returns are down to employee
well-being it could just be your
industry happened to perform well or
some other Factor so to isolate the
effect of employee well-being I control
for what industry you're in for firm
size for growth opportunities for past
returns and a whole list of other
characteristics and as we all know
correlation doesn't imply causation so I
do a number of further tests to suggest
that its employee wellbeing that causes
good
performance rather than good performance
allowing a company to spend on employee
well-being it took four years to
complete this study to verify the
robustness of the results and to rule
out alternative
explanations so what did I
find I found that the 100 best companies
to work for in America delivered stock
returns that beat their peers by two to
three% per year over a 26-year period
simply put companies that treat their
workers better do
better and this fundamentally changes
the way that management should be
thinking about their
workers you might think isn't it obvious
that companies do better if their
workers are
happier but it's not obvious because
treating your workers well is
costly take Costco the American
supermarket chain so Costco pays its
workers $20 per hour that's nearly
double the national average of $111 and
it gives 90% of its employees Healthcare
that's expensive indeed a stock analyst
quoted in Business Week said Costco's
management is focused on employees to
the detriment of
shareholders why would I want to buy a
stock like
that indeed the conventional view is
that a pound paid to your employees
is a pound taken away from
shareholders so pay your workers as
little as possible and work them as hard
as possible just like a great football
manager can squeeze that little bit
extra out of his
players I tried to get Alex Ferguson but
I couldn't find him shouting at his own
players only at
referees so under this view employee
wellbeing is a bad sign because it
suggests that you're allowing your
workers to slack off indeed before my
current life of poverty I used to be an
investment banker you'd like to see a
photo of my Oak paneled corner
office that's my
Empire so as you can see from the
microwavable ready meals in the bottom
corner I was a junior analyst and one
day in the office the vice president
catches me laughing and he says Alex do
not laugh when you're in the office I'm
Banning you from
laughing I said why he said because if
you're too happy the managing director
will think that I am not working you
hard
enough but the result suggest instead
that treating your employees well
actually pays off in terms of firm value
indeed Costco's former CFO Richard
galante said from day one we've run the
business with the philosophy that if we
pay better than better than average if
we provide a salary that people can live
on have a positive environment and good
benefits will be able to hire better
people they'll stay longer and be more
efficient so Thanksgiving is the biggest
public holiday in America Everybody's
Free to go
shopping but not at Costco because
Costco is closed on Thanksgiving and
other major public holidays even though
doing so sacrifices tons of
profits
why because Costco's management believes
that its workers should should be
spending these holidays with their
families and this concern for workers is
not at the expense of profit profits
have topped $2 billion in each of the
last two
years and while my study focuses on
employee well-being research by my lbs
colleague Janis yanu and many others has
shown the other dimensions of social
responsibility also improve firm
value and these findings are incredibly
freeing because this means as managers
we can act responsibly without doing a
calculation without expecting anything
in return to do things for intrinsic and
not instrumental value because even
though Financial rewards were not the
motor for acting ethically they
typically manifest
anyway caring about Society is not at
the expense of profit it supports
profit the results have implications not
only for managers but also for investors
which nearly everybody in this audience
will be now as investors you have the
power to put your money into companies
that reflect what you would like to see
in this
world now the conventional view is that
if you invest in ethical stocks you have
to sacrifice some returns but the
results suggest there's no
sacrifice investors can both do good and
do well investing in companies that are
socially responsible at least to their
workers pays off in higher returns
indeed the Parnassus Endeavor fund
pursues exactly this employee well-being
strategy and over the 10 years since its
Inception it's beaten the market by 4%
per
year and more broadly the results
suggest a new way of thinking in the
criterial we use to pick stocks now it's
tempting to look at Price earnings
ratios and profits and dividends you can
easily look them up on Yahoo finance but
because this data was so easy to gather
everyone else is gathering it so it
doesn't give you a competitive
Advantage indeed some of the most
important dimension of of a company's
value it's corporate culture its
Customer Loyalty its innovative
capability simply not captured in
financial
numbers so we should look beyond the
shortterm and the
quantitative and look to to the
long-term and the
qualitative now just because social
responsibility can't be
Quantified doesn't mean it can't be
measured indeed there's many thorough
measures out there so just like the best
companies list measures employee
well-being so true cost and
sustainalytics measure environmental
sustainability and asset 4 and Calver to
have a whole host of sustainability
measures so put your hand up in the
audience if you've heard of all four of
these
companies I don't see a single hand up
in a very intelligent audience of 500 so
you're all
thinking
who but that's precisely the point most
people haven't heard of these measures
because they're often glossed over in
favor of financial numbers so because
most investors are ignoring this
information if you gather this
information it will give you a
competitive
Advantage indeed perhaps because the
market is so short-termist perhaps
because the market is so focused on the
numbers perhaps because the market like
that stock analyst in Business Week
wrongly thinks that employee friendly
companies are tree
Huggy I find that it takes the market
four to five years before the benefits
of employee well-being fully show up in
the stock price so you could bu those
best companies 3 years too late and
still earn Financial
returns so think long-term value not
short-term
numbers and simly we shouldn't dump
stocks at the first sign of trouble
right because investing in your workers
cost money today the benefits take four
to five years to appear so if we dump a
stock because it's missed this quarters
earnings Target we pressure managers to
focus on the short term now it's your
responsibility as investors to support
Management's pursuit of the long term by
looking to the long-term
yourselves indeed unilever's chief
executive Paul pman he stopped reporting
quarterly earnings to allow him to focus
on the long term and this is why they're
a major Force for sustainability for
example designing shampoos to use yet
less water and one of their long-term
investors is Alliance trust they've been
around for 127 years and some families
who held Alliance trust shares back in
1888 still hold them today in
2015 that allows them to think long-term
value not shortterm numbers and be one
of the leading investors in social
responsibility and that's not at the
expense of returns they've increased
their dividend every single year since
1967 and if you had 100 of Alliance
Trust stock back in
1888 with dividends
reinvested that would be worth 1885
million pounds today if this were to
scale that green bar would be through
the roof of this
building so back to my original
question why do businesses
exist to earn profits or to serve a
purpose for
shareholders or for for society
customers employees and the
environment
well what's the
answer the answer is
yes but but how can you answer yes to a
multiple choice
question because it's not multiple
choice it's not either or it's not Zero
Sum it's both
and businesses exist to serve a purpose
and by doing so and only by doing so
will they generate profits in the long
run to reach the land of profit follow
the road of purpose thank you very much
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