Nearly 50 years ago, Milton Friedman launched the era of “shareholder capitalism.” At that time, the Nobel-Prize-winning economist admonished American business leaders that their only responsibility was to maximize profits. The world has changed a lot since then – for better and for worse. Some still espouse this theory.
According to Friedman and his proponents, social responsibility — and the purpose of building healthier, safer, fairer, environmentally sustainable and inclusive communities — should be the province of individuals or nonprofit organizations. If businesses focus on making money for the shareholders, the good stuff will fall into place.
Friedman’s theory in question
A half-century later, Friedman’s theory about the eventual benefits to society of shareholder capitalism hasn’t worked out that way. One glaring example is income inequality. In the United States, the top one percent of households own 40 percent of the country’s wealth. This is more than the bottom 90 percent combined — and the highest discrepancy since 1962.
In 2017, the gap between the pay of CEOs and average workers was nearly nine times larger than in 1980. In one survey of large U.S. companies, the average CEO earned $13.94 million, while the average worker earned $38,613. Plus, women still earn about 80 percent of what men earn for the same work.
On a global level, the eight richest people control the same wealth as half the world’s population. The fortunes of the world’s 2,043 billionaires grew by $762 billion in 2017, while the poorest half of humanity saw no increase. The “good stuff” seems to be staying at the top.
At the same time, there is a dramatic loss of support for capitalism among younger Americans. A 2016 Harvard study found that 51 percent of U.S. respondents between the ages of 18 and 29 do not support capitalism. One-third favored a turn to socialism. A 2018 Gallup poll found similar results — only 45 percent of this demographic viewed capitalism positively. This was a drop of 23 percentage points from 2010.
And there’s the environmental and climate consequences of focusing on profit, often at the expense of planet.
Businesses rethinking social purpose
Business is waking up to these seismic shifts. Just last month, the Business Roundtable (an association of the CEOs of America’s top 200 companies) released a statement rejecting “shareholder primacy” and redefining the very purpose of a corporation as “to promote an economy that serves all Americans.” This is a dramatic departure from its historic position.
The statement mentions shareholders only near its end, where it states a business’ commitment to serve all stakeholders — including customers, employees, suppliers, communities, the environment and, finally, shareholders.
This revolutionary statement is a reaction to the rapidly growing body of evidence that social purpose and profit go hand-in-hand. Research shows that if a company has a strong corporate social purpose, its employees will feel greater meaning and impact in their jobs.
Research also show that companies with high levels of purpose outperform the market by 5-7 percent per year – at the same level as companies with best-in-class governance and innovative capabilities. In addition, they grow faster and are more profitable.
A new commitment to triple bottom line
Business philanthropy is a key component of any corporate “social purpose” strategy. Chief Executives for Corporate Purpose was founded 20 years ago as a panel of CEOs to encourage corporate philanthropy and “to call for a serious acknowledgement that corporations play an important role in society, beyond their ability to make money for shareholders.”
According to Giving USA, U.S. corporations in 2018 donated more than $20 billion in cash to charities — and billions more in in-kind and volunteer donations.
Likewise, the rapid growth of impact investing – especially with philanthropically committed capital – reflects the importance of social purpose in business objectives. Currently, $12 trillion (one out of every four U.S. dollars under professional management) is now invested using a sustainable-, responsible- and impact-investing lens.
Prominent among the many factors considered by these investors are community and employee engagement, philanthropic commitment and social purpose.
The broadening of the definition of corporate purpose fortifies U.S. businesses to work alongside government and nonprofit partners to become true and impactful agents of social change. This is the true definition of the “triple bottom line” for businesses – a positive impact on people and planet, as well as profit.
This article originally appeared in the Denver Post, Sunday September 8, 2019. It is reposted here by the author with permission.