The recent coverage in the media on the urgent need for companies to broaden their purpose by incorporating Environmental, Social & Governance (ESG) factors is worth some analyses. When Milton Friedman pronounced Fifty years ago that the creation of shareholder value was the main purpose of a business, he merely confirmed loudly what was already well understood, acknowledged and practiced for centuries, albeit tacitly.
Return on Investment is the primary motive for setting up a business. It panders to the primordial urge in us to accumulate wealth. The other, less mercenary, motives are often bolted on as an afterthought, as if to assuage a latent guilty conscience or, indeed, to dress up the corporate image. The whys and wherefores of this, the myriad psychosocial undercurrents and reasons, are best left to another discussion.
Friedman’s academic gravitas and credentials bestowed instant legitimacy and validity to the profit motive and wrenched it out of the closet. Finally, here was the affirmation the investor could wield openly and proudly without any fear of opprobrium – entrepreneurial guilt had indeed found a welcome outlet. This validation meant the other reasons were marginalised with impunity or, at best, demoted as subsidiary; to fester on the back-burner and only brought to the fore when required to deflect any negative publicity.
But the profit motive, however much denigrated or disapproved by the moral police, has played not an insignificant role in the evolution of the world as we know it; though not without consequences. Progress is a two-edged sword. The unbridled pursuit of profit is like a wedge cleaving its way into the future, leaving in its wake a deluge of both: delightful developments and destructive detritus.
Not to belittle or dismiss the remarkable and positive impact of the former, it’s the latter that concerns us here and includes the numerous ‘villains’ currently in the spotlight: rampant consumerism, rising carbon emissions, proliferation of non-recyclable products, unconscionable profiteering, destruction of natural resources, disenfranchising of segments of society, uneven distribution of wealth, etc. As the consumption frenzy intensifies and proliferates around the world so the collateral damage continues to mount up, literally. The consequences have been a long time coming but they didn’t come upon us suddenly.
History is replete with examples of how companies have wreaked havoc in the pursuit of profit, as William Dalrymple describes so vividly in his recent book about the East India Company (The Anarchy - The Relentless Rise of the East India Company). The EIC may have exploited all manners of resources in India (human and otherwise) with unabashed rapacity, in its pursuit of profit, but it also left behind many disciplines and practices that have since become an intrinsic part of the political, civil and commercial landscape of both India and UK. This theme is repeated right across the world with all kinds of companies.
However, it’s important to put all this into perspective. Profit is not so much the problem as is the manner of its acquisition. Commercial ventures come into being to fulfil human needs and wants. Viewed from another perspective, a business is just another link in a long chain of resource-converters – accreting and accruing value (quantitative and qualitative, financial or otherwise) at each stage of the conversion process before delivering the final product or service to the consumer. And profit is the compensation, the incentive and the lubricant in that chain. Were it a mechanistic system it would have been easy to insert checks and balances within the process to prevent it from going astray, or from overreaching itself. Unfortunately, our system is subject to human interaction and intervention. Humans are innately self-serving, to say the least, and don’t always know where and when to draw the line between need and want; between greed and sufficiency.
No doubt some commercial businesses were, and are, setup with a philanthropic intent, but their rarity is a telling point. The John Lewis partnership and its ilk right across the world have always been the outliers throughout history. Overt philanthropy and social responsibility are traits that have invariably originated from family-owned companies, or from individuals with a strong social conscience.
But no philanthropist, however saintly or selfless, can indulge in his or her largesse without the means to do so. An ineluctable logic underpins this fact: you need to make money first, to then have the luxury to dispense it. Jack Ma and Bill Gates being two demonstrative examples of this phenomena.
Moreover, a philanthropic intent doesn’t always outlast the founder/s. Over time, as a business grows, and the ownership stake starts to dilute and spread from the active few to the passive many, the profit motive asserts itself and becomes the sole common denominator. Passive or remote investors rarely question or appreciate the actual source or origin of their profits. Their primary focus is on value growth. And so, left unrestrained, the profit motive becomes increasingly impersonal and detached from its origins and its consequences. This is especially the case with global companies and publicly-owned conglomerates.
Public companies have always had a hard time convincing themselves of the need to prioritise ESG. Conscience does not always generate profit. Don't get me wrong, there is no shortage of a vigorous debate, but it's mostly lip service, brought on by social pressure and reputational concerns. Whenever you want to know where ESG is on the corporate agenda just look at the negative headlines in the media: there is a direct correlation between the two. Zeitgeist and fear of social backlash are not insignificant influences in senior management circles. They spread around the ranks like a seasonal virus.
Management are the supposed vanguard against this gradual entropy in the collective conscience, but they are invariably beholden to the shareholders – their own livelihood and furtherance depends on it. Whilst the dominating or domineering personalities within the management ranks normally sway the collective mindset, groupthink doesn’t always veer towards the positive or the selfless.
The call now to widen corporate responsibility to include a larger array of stakeholders, the dramatis personae of ESG, will be interesting to observe, though it does raise some puzzling questions. How will the executives address the needs of these additional masters, apart from that of the investor? Will this hamper and dissipate decision-making? No doubt the profit motive is in for a long and vigorous jostle.
The possible key to rearranging corporate priorities lies with the investor and the customer: a pincer movement of pressure. Both are key to the success of the business: one invests in the product, the other buys it. The modern ethical investor is gaining some ground in bringing ESG into the management radar. Equally, the customer is increasingly more discerning and discriminating. But melding ESG with the profit motive is not without its challenges. The inevitable conflict between the two ways of thinking will mean something will need to give, or at a least compromise found. Most likely the latter.
Those companies directly in the firing line of the pushback – the extractors and the users of fossil fuel – are already feeling the pressure. Several major investment funds, including the Norwegian Sovereign Fund and the Rockefeller Foundation, have begun to shift away from the fossil fuel industry. Ironically, both made their money from the very industry that they now eschew. Nevertheless, they serve as a good example of how the profit motive can provide the investor with the financial wherewithal to influence change in business ethics.
Don’t expect the collective executive conscience to be swayed easily anytime soon if profit continues to be the sole purpose for a company’s existence; but the profit motive can be leveraged. Two factors are bound to galvanise management attention immediately: the promise of bigger and more assured profits, or the threat of losing existing profits. Yoking these instincts to sustainable investments is possibly the way forward. Appealing to the conscience is the hard way, and not necessarily the most productive way – it’s far too subjective and personal.
Until negative opinion reaches a critical mass or the actual effects of ignoring ESG begin to impact the profit, the pace of change will remain slow. Nevertheless, we are now at an inflection point where both these factors are coming to bear on companies.
We dread losses more than we anticipate profit. And profit emanates a certain sweet aroma; investors and management are bound to wake up the moment it turns rancid. Let’s hope it’s not too late, or too rude, an awakening.