The social responsibility of business | Alex Edmans | TEDxLondonBusinessSchool

TEDx Talks

9 Jul 201517:26

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

00:00

💼 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.

05:01

📊 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.

10:05

🛍️ 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.

15:08

🌐 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

Profit refers to the financial gain that a company makes after deducting all its expenses from its total revenue. In the context of the video, profit is traditionally seen as the primary goal of a business, with the argument that pursuing profit inherently leads to societal benefits such as high-quality products, good employee treatment, and environmental responsibility.

💡Corporate Social Responsibility (CSR)

CSR is the commitment of a business to conduct its operations in a way that is socially ethical and contributes to the welfare of society. The video discusses this concept as an alternative to the sole pursuit of profit, suggesting that businesses should serve a purpose beyond profit, such as improving customer lives, providing a healthy workplace, and preserving the environment.

💡Employee Well-being

Employee well-being encompasses the health, happiness, and satisfaction of a company's workforce. The video emphasizes the importance of employee well-being as a key factor in a company's success, citing the example of Costco paying its employees well and providing benefits, which in turn leads to higher firm value.

💡Milton Friedman

Milton Friedman was a renowned economist who argued that the primary social responsibility of a business is to increase its profits. The video references Friedman's view to contrast with the idea that businesses should also focus on social responsibility and employee well-being.

💡Marks and Spencer

Marks and Spencer is a British retail company mentioned in the video as an example of a business that demonstrated social responsibility by providing nutritious meals for its staff at nominal prices, showing care for its employees beyond just profit maximization.

💡George Merck

George Merck, the former president of Merck Pharmaceuticals, is highlighted in the video for his philosophy that medicine should be for the people and not just for profit. This is exemplified by Merck's decision to share the production secrets of penicillin, leading to life-saving treatments during World War II.

💡Fortune Magazine's 100 Best Companies to Work For

This list, published annually by Fortune Magazine, ranks companies based on various factors including pay, benefits, trust, and camaraderie. The video uses this list as a measure of employee well-being and its correlation with a company's stock performance.

💡Investors

Investors are individuals or entities that provide capital with the expectation of generating a financial return. The video suggests that investors have the power to influence corporate behavior by choosing to invest in companies that align with their values of social responsibility.

💡Long-term Value

Long-term value refers to the enduring worth or potential of an investment beyond short-term gains. The video argues for a shift in focus from short-term financial metrics to long-term qualitative factors such as corporate culture, customer loyalty, and innovative capability.

💡Sustainability

Sustainability in the context of the video relates to the ability of a company to maintain its operations over the long term without depleting resources or causing harm to the environment. The video implies that sustainable practices are part of a company's social responsibility and contribute to its long-term success.

💡Qualitative Measures

Qualitative measures assess non-numeric aspects of a company's performance, such as employee satisfaction and environmental impact. The video emphasizes the importance of these measures in evaluating a company's true value and its commitment to social responsibility.

💡Quantitative Factors

Quantitative factors are numerical data points used to evaluate a company's performance, such as revenue, profits, and dividends. The video suggests that while these are important, they may not provide a complete picture of a company's value or its commitment to social responsibility.

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.