At Outthinker, we have been tracking a sea change in the idea of a corporation’s shift for two decades. We have witnessed a slow but determined march away from the view that corporations exist to serve shareholders toward one in which corporations recognize they serve many masters: employees, communities, the environment, the world. In our 2012 book, Outthink the Competition, we dedicated an entire chapter to “Be Good,” writing that “there is a shift under way from making money to doing good.”
This “be good” idea has, like all concepts, evolved as it interacts with the ideas and trends of the day. From a fairly paternalistic “big companies should take care of the little people” paradigm, it evolved into adopting the triple bottom line (TBL) framework and a corporate social responsibility (CSR) business model, to supporting the UN Sustainable Development Goals (SDG) and Environmental, Social, and Governance (ESG) framework. Each acronym influenced the name we placed on the swell as “be good” rose to the surface.
Today, we are close to realizing the next evolution of this debate: what is the purpose of a corporation that wishes to endure? If you lead or work within an organization that wants to remain relevant in the next era, you want to quickly grasp what it means to “be good.”
What this is not: waiting until your cart is full
First, let me tell what the new “be good” paradigm is not.
It is NOT simply traditional corporate social responsibility initiatives that are often grounded in the view that successful organizations should help society. Years ago, I got the honor to share the stage with former GE CEO Jack Welch. I was opening a conference for him. We talked in the hotel lounge the night before and in the green room. He was gracious, smart, showed real interested in me, and was encouraging. But one thing he shared in his speech rubbed me a bit the wrong way as it captures what I have felt was a short-sighted view.
He said that before a company can give away resources to good causes, they need make sure they are profitable. You can’t give away things from the cart, he said, until the cart is full.
This idea, while logical, is still rooted in the view that companies face a trade-off between making money and doing good. Economists like Nobel Prize winners Jean Tirole, Bengt Holmstrom, and Robert Shiller have all advocated the view that this apparent trade-off is an illusion. That if you really look at the data and take a long-term view, corporations don’t get to choose. Sustainable success depends on creating a situation in which your financial success is good for society.
What this is not: adopting a social mission
Throughout the 1990s we saw corporations start to stir from their slumber, opening their eyes to the idea that maybe being good was also good for business. But their economic logic was still overly simplified and went something like this, though no executive would publicly articulate it this way: “our customers seem to care about the social impact we have, so if we are seen doing bad things like polluting the environment or enabling unfair labor practices, they will stop buying from us.”
In response they started adopting bold, public social mission statements. The statements of purpose of the 1970s that prioritized beating the competition and capturing market share – “Crush Adidas” (Nike), “a computer on every desk” (Microsoft) – had already shifted by the 1990s to a focus on the customer – “to bring inspiration and innovation to every athlete” (Nike).
In the 1990s, we started seeing social objectives incorporated into companies’ statements of purpose. J&J committed to produce 35% of its energy from sustainable sources, Coca-Cola to reducing its carbon footprint by 25%, Wells Fargo to donating up to 1.5% of their revenue to charity, etc. Newer companies were founded on such social missions like Tesla’s – “to accelerate the world’s transition to sustainable energy.”
While incorporating social missions into your statements of purpose is important as they can begin aligning behavior with such “do good” ambitions, they cannot really “lock in” a “be good” strategy. They can be the positive self-speak of a smoker who says “I will not smoke today” but still keeps a pack of cigarettes in their bedside drawer. One need not look further than Wells Fargo’s 2016 scandal, which was clearly inconsistent with their stated mission of to “help customers succeed financially.” Facebook’s choices in recent years have run counter to its mission “to bring the world closer together.”
Missions are a start but they are not enough if you are truly committed to the possibility of “be good.”
What this is not: the corporate foundation
Neither are we talking about corporations and their founders launching philanthropic foundations as the founders of Microsoft and Facebook have done.
Many corporate foundations have incredible impact on society. The W.K. Kellogg Foundation, launched in the 1930s, is doing important work for children, and the Mastercard Foundation for financial inclusion. This work is critical but it is still grounded in the outdated view that doing good and making money represent two mutually exclusive choices. This is why such foundations operate independently from the for-profit company.
Remove the roots of an old paradigm
The underlying assumption that has dominated business theory for nearly five decades stems from the influential work of Nobel Prize-winning economist Milton Friedman who, in the 1970s, espoused the view that a company’s executives worked for the owners (the shareholders) and so should exclusively focus on maximizing shareholder value.
He wrote that a corporation’s purpose is “to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
Introducing a new paradigm
In recent decades we have seen companies that follow this dictate struggle against backlash from customers, regulators, society, and increasingly even investors themselves.
Mission statements and foundations should be encouraged and continued, but they really only scratch the surface of what is possible.
Two ways to permanently “lock in” being good
If you are truly committed to the idea that for-profit corporations can and should play a role in creating a better world – indeed that it is in their self-interest to do so – then you want to consider digging in deeper. Consider anchoring your “be good” commitment firmly:
- Adopt a “be good” business model
- Assemble a “be good” investor base
These two actions could make the difference between your company embodying its larger social purpose eternally and you slipping back into the unsustainable “profit at all cost” past. Throw out your cigarettes, empty your alcohol case, buy a Peloton, block a daily workout in your calendar, fill your refrigerator with fresh vegetables, and you are much more likely to stick permanently to your chosen path.
Lock one: Adopt a “be good” business model
The step to lock in a “be good” strategy is to redesign your business model. Look honestly at the behaviors that your current business model rewards.
We do this when organizing people. We ask how our incentive structure will motivate actions that align with our goals. For an outstanding article on how and why we often get incentives wrong, see “On the Folly of Rewarding A, While Hoping for B.”
We ask: will our commission structure encourage our salesforce to sell new innovations or persist with pushing legacy products? Does our bonus structure encourage employees to collaborate or to operate in silos?
And yet we shy away from asking the deeper incentive question: does our business model (the way we earn money) reward good or bad behavior?
That Facebook generates 98% of its revenue from advertising leads it to naturally seek new ways of selling customer data and pursuing new ways to generate clicks, comments, and likes (heated political, philosophical, and social battles have proven a lucrative tactic for Facebook). That almost none of Apple’s revenue comes from advertising but rather from directly selling products and services to customers leads them naturally toward wanting to protect customer data.
No wonder that recently, in the wake of Apple’s new data privacy announcement, Facebook is working to get customers to sign up to agree to share data with them. No wonder that public opinion on data privacy has shifted in Apple’s favor and Facebook has become the pariah.
Robinhood, the trading platform that helped drive the investor craziness around GameStop, makes its money from stock loans and rebates from market makers. The more people borrow and trade, the more money Robinhood earns. Is it any wonder that they introduced gamification elements that encourage more frequent trading and buying on margin?
But contrast that with one of my favorite “be good” investment platforms, Stockpile, which was built from the ground up to teach financial literacy to children. They predominantly make money not from commission on trades but from a fee they charge every time a parent buys a gift card for their child. This naturally motivates them to prioritize marketing gift cards over trying to turn those kids into frequently transacting day-traders.
Lock two: Assemble a “be good” investor base
If your executives work for their owners (as Friedman and those in his “corporations exist to serve shareholders” camp believe), then to lock in “be good,” you should align your investors’ motivations with “be good.” The first step is to assess your current investors’ motivations and expectations. Are they looking for short-term or long-term returns? Are they after cash flow or growth? Do they see you as a black-box that spits out cash flow or as a vehicle for creating change?
Lockheed Martin and SpaceX both build rocket ships. But the former’s investors are primarily after steady cash flow while many of the latter’s investors are inspired by the possibility of populating Mars. You can see the impact of these different investor bases clearly. Lockheed’s choices over the last decade have shifted them from being one of the leading aerospace and defense contractors to finding themselves on the defense. Their CFO Kenneth Possenriede summed the situation up nicely at the end of last year saying that SpaceX has evolved from “an emerging threat” to something “more than an emerging threat.”
Great business innovators like Elon Musk, Jeff Bezos, and Steve Jobs all get to this critical point: the investors you attract will guide your choices and behaviors over the long term.
And it’s easier today to attract investors who will support a “be good” strategy. The rise of socially responsible investing has accelerated with more socially driven investors, mutual funds, exchange-traded funds (ETFs), and even ESG-rated agencies on the scene.
Larry Fink, CEO of BlackRock, one of the largest asset management companies in the world, shook the investor community in recent years by aligning their firm behind the realization that “Over the course of 2020, we have seen how purposeful companies, with better Environmental, Social, and Governance (ESG) profiles, have outperformed their peers.”
Special investment vehicles that prioritize socially driven for-profit businesses are popping up. Social Capital, for example, has assembled a portfolio of “be good” companies and recently used a Special Purpose Acquisition Company (SPAC) that helped SoFi go public. SoFi is a socially responsible financial services company with “a mission to help people achieve financial independence to realize their ambitions.”
If you shift your investor base away from people seeking near-term cash at any cost toward the growing population of long-term, socially motivated investors, you further lock in “be good” behavior.
Summary and two next steps
So, go ahead and develop an inspiring social mission. But if you want to commit your organization perpetually to it, if you want to lock in a “be good” strategy, ask yourself two sets of questions:
- How can you adjust your business model?
- Who pays you now?
- How will this choice of who pays you influence future behavior?
- Who should be paying you?
- How should you charge?
- What must you do now to adjust your business model?
- How can you restructure your investor base?
- Who are your current investors?
- What are their motivations?
- How will those motivations incentivize your organization’s choices and behaviors over the long-term?
- What investors have long-term motivations more closely aligned to your long-term aspirations and desired behaviors?
- How can you start shifting your investor base toward these types of investors?