Capitalist Good: Brands for a better system

In February, I submitted this essay to the Admap Prize 2013. The shortlist was announced last week, and sadly I didn’t make it. Still, that means I can happily publish my essay here for the loyal readers of my blog (!). I hope you enjoy reading it as much as I enjoyed writing it. It gave me the opportunity to explore and link a number of things I’d been thinking of and helped me fall upon some very interesting research from across the globe. 

Milton Friedman

Experience moulds personal beliefs in a way textbooks really can’t.

Like many others before me and probably many more hence, as a teenager with somewhat socialist tendencies I used to naively think that it was the moral obligation of corporations to work for social good. After all, who could say that doing good for society was a bad thing?

Years later I read Milton Friedman, and I don’t think any sentence burned in my memory more than “there is one and only one social responsibility of business – 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.”

I realised it was the crystallisation of my own experience. I started my career doing field research on poor communities in India before I moved to the corporate world – a move necessitated for me by the fact that charitable work, as enlightening as it was, simply didn’t pay enough. The for-profit world gave me what the non-profit world couldn’t at the time: a financial backbone – the backbone that was defined by Friedman in that statement.

Antonio Argandoña, an Economics professor at IESE Business School, mentioned in 2005 that what Friedman said was aligned with a simple classical economics theory, the efficiency principle, which says that people and institutions always try to minimize the resources used to achieve a goal in order to achieve maximum efficiency. The purpose of economic institutions, he says, is therefore ‘to contribute to the system’s maximum efficiency’ and therefore anything that distracts them from that goal is undesirable, including a plea to do right by society. Friedman’s words had a solid economic (if capitalist) grounding, irrespective of the philosophical opinions that anyone else might choose to air (including my younger self).

However, there are two things to remember with regard to what Friedman said that relate to the crux of this essay, the brand’s primary objective of maximizing profit. The first is that since Friedman propounded his theory the world has become a very different place. His words still accurately describe the key objective of business – to increase its profits – but the context is completely different, so the route to achieving that objective is no longer the same. Second is the importance of systems thinking in any discussion of brands and corporate social responsibility (CSR) today – “the process of understanding how things, regarded as systems, influence one another within a whole”, as Wikipedia defines it. Systems thinking as an area of scientific study harks back to the time of the World Wars, but as a theory linked to CSR has only become popular over the last five years.

In a 2006 McKinsey study, many executives in fact disagreed with Friedman’s thesis as they viewed CSR as a way for them to manage risk as well as the multiple socio-political challenges facing their businesses, including climate change, healthcare and human rights concerns – issues which arguably weren’t as big when Friedman wrote his text. Heads of businesses are now viewing CSR from a systems thinking perspective themselves.

A changing world order

In 1970, we lived in the era of manufacturing. Trade unions held enormous influence over corporate executives, to the extent that Friedman openly stated in his well-known New York Times Magazine piece that year that he was more or less aligned with Adam Smith’s way of thinking with regard to the demand for business to have a ‘social responsibility’: those who “affected to trade for public good” were doing so out of undemocratic compulsion. But today we’re living in the age of the customer, as Forrester Research describes it in a recent report on the 21st century brand-building experience, where responding to people’s concerns is key to success.

To illustrate, the latest results from Havas’ Meaningful Brands Index shows that almost 85% of people across the world expect brands to contribute to individual and community wellbeing, an even larger proportion than in 2010 when the study was last done.

Let’s take one area of CSR, sustainability, for the sake of brevity (though as Faris Yakob notes in his paper ‘Good for Business’, there are multiple benefits to ethical business practice, including employee retention, brand value, increased efficiency and access to capital, amongst others). Ongoing research by MIT Sloan Management Review and the Boston Consulting Group proves the positive impact of corporate investment in sustainability initiatives: they have been tracking the impact of sustainability on corporate profits since 2010 and saw a 23% year-on-year increase in 2012 in the number of respondents claiming profit from these programmes.

Examples of brands adopting sustainability as a profit-oriented business model include Unilever, whose CEO Paul Polman mentioned in January that the company’s share prices have effectively doubled in the four years since they first announced their Sustainable Living Plan, and Marks & Spencer, whose CEO Marc Bolland last year announced that Plan A, their strategy to do business in a more ethical and sustainable manner, yielded £185m in net benefits over the last five years, which were then  reinvested into the business.

It is worth noting in this context the role of the shareholder. As Charles Handy (2002) puts it, shareholders are more like investors because all they care about is a return on their money. But focussing on the interests of shareholders as one stakeholder group at the expense of others (consumers, governments, NGOs, suppliers, employees and debtors) could be detrimental to the business in the long run because of the inter-connectedness of the world in which we live today. Economic, social and political events in one part of the world can have significant impact on a business in another – think of the 2008 financial crisis or even the Arab Spring, where North American businesses are said to have felt the most impact due to increased fuel prices pushing up operation and production costs, according to a report following the political unrest by professional services firm Grant Thornton.

As the number of educated and financially well-off consumers grows across the globe, it is also possible that they represent a small (and growing) proportion of shareholders themselves. And as shareholders, they have a right to comment on the direction of the business. As with the role of CSR, the role of the shareholder is also morphing.

Over the past decade or so, as the profits of large corporates have ballooned out of proportion to their expenses, people have started questioning their role as customers in contributing to their growth. They have more access to technology and are more aware of the impact of the brands they purchase in some other part of their country or the world. People now understand the role of a business in the larger societal system.

If a business is to respond to customer demands, then integrating social behaviour into its brand strategy, as Faris Yakob states, simply becomes business sense rather than a CSR mechanism.

Breakthrough capitalism and systems thinking

It isn’t a coincidence that the popularity and financial success of socially responsible brands (such as Innocent and Method) is coming at a time that we’re seeing an explosion of entrepreneurs, and especially social entrepreneurs, across the world. This phenomenon is evidence of Joseph Schumpeter’s ‘creative destruction’ in action.

Schumpeter first spoke about ‘creative destruction’ in 1942 with regard to Marx’s advocacy of socialism, saying that socialism in some form would, as Marx declared, become dominant, but not in the way Marx envisioned. Schumpeter’s theory was that the success of capitalism would lead to the capitalist democratic majority imposing restrictions on entrepreneurship because it threatened to undermine the traditional capitalist structure. Dissatisfied with this situation, the more liberal capitalists would then evolve into socialists. This turn of events, Schumpeter said, would naturally come about when education became accessible to larger numbers of people and created more intellectuals in society – which is the case today (as indicated by the recent growth of online learning ventures like the Khan Academy, Codecademy and Skillshare).

The spurt in the growth of start-ups and venture capitalists over the last few years proves Schumpeter’s point; he was hailed as a visionary by policy analysts in Washington D.C over a decade ago.  A Wired article from 2002 recalls a paper presented by former U.S Treasury Secretary Lawrence Summers and his ex-deputy Bradford DeLong, who observed that “the economy of the future is likely to be ‘Schumpeterian,'” with creative destruction the norm and innovation the main driver of wealth.”

Creative destruction is being used as the base for a new theory being explored in the UK that is also looking at the case for brands enhancing social and economic conditions as part of their business agenda. It is called ‘breakthrough capitalism’ and tracks the symptoms of the systemic breakdown of society (the 2011 UK riots and the Eurozone crisis for example) to the growth of a new economic order that is seeing an increase in the number of individuals and organisations that hope to tackle the imbalance in the distribution of wealth (organisations like the US-based Ashoka Innovators for the Public and Acumen Fund, and the UK’s Skoll Centre for Entrepreneurship and SustainAbility, for example).

Breakthrough capitalism has its roots in systems thinking. It posits that companies who reap financial benefit in the future will be those that act early on the current disequilibrium, to cater to the sustainable future that will not only be necessary but demanded by society.

Case in point: Nike, whose most recent corporate strategy report saw CEO Mark Parker admitting that ‘rising energy costs, increasingly scarce natural resources and demands for equal access to economic opportunities’ could cause their profits to shrink. Sustainability is therefore now a key business objective for the company, along with innovation. A Guardian story on the Nike report puts it beautifully: ‘Nike’s corporate story, is, in some way, a reflection of capitalism’s own. Few companies have ridden the globalisation wave higher or faster.’

It is in this landscape that one of the action points for businesses and governments at the Breakthrough Capitalism Forum in London last year included ending the quarterly earnings system of reporting, a viewpoint echoed by Unilever’s CEO Paul Polman before their latest earnings report at the beginning of this year: “We’re not going into the three-month rat-races. We’re not working for our shareholders. We’re working for the consumer, we are focused and the shareholder gets rewarded.”

Project Shakti
From Unilever’s case study on Project Shakti

Another excellent example of CSR in a systems thinking context is Unilever’s Project Shakti in India. As of 2010, through Project Shakti, Unilever has trained and supported over 45,000 female entrepreneurs who sell the brand’s products across more than 100,000 villages and 3 million households a month, simultaneously giving them a livelihood. These are areas that would have otherwise been very difficult for the company to reach through their traditional distribution network. The programme hopes to grow to cover 75,000 women by 2015, and in 2011 expanded to bring rural males into the programme as well. Its success has seen it being replicated in Bangladesh, Sri Lanka and Vietnam; in markets where the programme exists they enjoy market share that is significantly higher than non-Shakti markets.

A better capitalism

It is clear that the time for ‘a better capitalism’, as Sir Richard Branson refers to it, has come. He is an ardent advocate of this philosophy; last year he founded the B-Team (‘a Plan B for capitalism’) – a group of business leaders whose goal is to make capitalism a more long-term and socially responsible philosophy.

B-Corp

In fact what was previously seen as more of a social objective now has a legal framework: B-Corps or ‘benefit corporations’ have been signed into law by 12 US states (with 14 more working on it), thanks to the efforts of the non-profit B-Lab, as a way of giving businesses “greater freedom to pursue strategies which they believe benefit society as a whole rather than having to concentrate on maximising profits for the next financial quarter” (The Economist, January 4, 2012). Patagonia, Ben & Jerry’s, Etsy, Plum Organics and Method are some of the more well-known brands to have got Certified B-Corp status from B-Lab, meaning they meet a high standard of overall social and environmental performance. They are amongst almost 700 companies in 24 countries with this designation.

After many years of discussion about the ethics of business, it is now truly possible to achieve profits in a responsible manner. What is needed now is an actionable plan to make this a bigger part of brand activity. Going back to sustainability as an example, the MIT/BCG research shows that sustainability-driven innovations can drive profits best when they are done in conjunction with other business model changes. Nestlé, for example, was able to achieve cost savings when they discovered that they could generate steam by burning discarded coffee grounds and use that instead of natural gas when they needed steam in their factories (typically part of the manufacturing process). About 60% of the steam they now use comes from these coffee grounds. Another positive by-product of this process is that they have been able to divert 1.24 million tons of coffee grounds away from landfills.

In order for business-wide changes like this to actually happen, top management needs to buy in to this process. A brand to emulate in this regard is 150-year-old industrial packaging goods company Greif, where the Chief Sustainability Officer sits on the executive strategy team and reports directly to the CEO.

David Ogilvy is known to have said that the aim of advertising is ‘to sell – or else’. That hard line today needs to be interpreted from a completely different angle: the aim of advertising is still to sell, but we need to sell to a better, more connected society that demands more of the brands they love. That is a much more difficult proposition than simply to sell for profit, and requires planners that understand the changing nature of society and business, and who appreciate the role of social good in growing their clients’ brands.

As the bridge between consumers and the brand, we should also remember that it is our duty as agencies to introduce and keep the social-as-profit issue on the table during discussions with clients. Big brands like Nike, Unilever and Marks & Spencer now know the serious impact of social good on the bottom line, but all brands, at every level, should be thinking about this. If we consistently challenge everyone involved to explore this theme, together we can produce better, more significant work as an industry.

It isn’t a question of whether brands CAN maximize profit and be a force for social good at the same time anymore, it’s simply a question of how and when they do it.

REFERENCES

Argandoña, Antonio. Firm, Market Economy and Social Responsibility, Working Paper 600. IESE Business School – University of Navarra, July 2005. http://www.iese.edu/research/pdfs/DI-0600-E.pdf

Balch, Oliver. “Nike reveals a new, innovative game plan for sustainability”, Guardian Sustainable Business blog, 4 May 2012. http://www.guardian.co.uk/sustainable-business/nike-sustainability-report-social-environmental-impact

B-Corporation, http://www.bcorporation.net/

Carroll, Archie B. and Kareem. M. Shabana. The Business Case for Corporate Social Responsibility: A Review of Concepts, Research and Practice. In The International Journal of Management Reviews (2010): 85-105. doi: 10.1111/j.1468-2370.2009.00275.x

de Dios, Sara. Meaningful marketing: A brand utopian world. Admap, April 2012.

Elkington, John. The Zeronauts: Breaking the Sustainability Barrier. Oxford: Routledge, 2012.

Elman, Adam and Mike Barry. The key lessons from the Plan A business case. Marks & Spencer, 2012. http://corporate.marksandspencer.com/documents/publications/2012/plan_a_report_2012.pdf

Friedman, Milton. The Social Responsibility of Business is to Increase its Profits. The New York Times Magazine. September 13, 1970. http://www.umich.edu/~thecore/doc/Friedman.pdf

Hainmueller, Jens and Michael Hiscox. Buying Green? Field Experimental Tests of Consumer Support for Environmentalism. MIT Political Science Department Research Paper No. 2012-14, May 18, 2012.

Handy, C. What’s a business for? Harvard Business Review, 80(12), 49-56. 2002.

Havas Media. Meaningful Brands Factsheet. http://www.havasmedia.com/documents/meaningful-brands-pdfs/hm_mb_global-factsheet-final.pdf

Hernandez-Murillo, Ruben and Christopher J. Martinek. Corporate Social Responsibility can be Profitable. The Regional Economist, April 2009. http://www.stlouisfed.org/publications/re/articles/?id=1258

Hindustan Unilever. Project Shakti Case Study. http://www.hul.co.in/sustainable-living/casestudies/Casecategory/Project-Shakti.aspx

Ioannou, Ioannis and George Serafeim. The Impact of Corporate Social Responsibility on Investment Recommendations, Working Paper 11-017. Harvard Business School, August 2010. http://www.people.fas.harvard.edu/~hiscox/IoannouSerafeim.pdf

Kiron, David, Nina Kruschwitz, Knut Haanaes, Martin Reeves and Eugene Goh. The Innovation Bottom Line: How companies that see sustainability as both a necessity and an opportunity, and change their business models in response, are finding success. MIT Sloan Management Review Research Report, Winter 2013. https://www.bcgperspectives.com/Images/MITSMR-BCG-Sustainability-Report-2013_tcm80-126806.pdf

Knowledge@Wharton Today. North American Businesses Hurt Most by Arab Spring. January 4, 2012. http://knowledgetoday.wharton.upenn.edu/2012/01/north-american-businesses-hurt-most-by-arab-spring/

Mohr, Lois. A, Deborah J. Webb and Katherine E. Harris. Do Consumers Expect Companies to be Socially Responsible? The Impact of Corporate Social Responsibility on Buying Behaviour. In The Journal of Consumer Affairs 35.1 (2001): 45-72. 

Reinhardt, Forest L. and Robert N. Stavins. Corporate social responsibility, business strategy, and the environment. In Oxford Review of Economic Policy, 26.2 (2010): 164-181.

Rose, Frank. “The Father of Creative Destruction”, Wired, March 2002.

Schumpeter, Joseph. A. Capitalism, Socialism and Democracy, (Second Edition, 1947). Oxford: Routledge, 1994.

Smith, Richard E. Defining Corporate Social Responsibility: A Systems Approach for Socially Responsible Capitalism. University of Pennsylvania Scholarly Commons, July 1, 2011. http://repository.upenn.edu/cgi/viewcontent.cgi?article=1009&context=od_theses_mp

Stokes, Tracy, Luca S. Paderni, David M. Cooperstein and Alex Hayes. Invest in the Brand Building Experience. Forrester Research, November 5, 2012.

The Economist, “B-Corps: Firms with benefits”, January 4, 2012.

The McKinsey global survey of business executives: Business and society. The McKinsey Quarterly. 2, 33-39, 2006

Volans. Breakthrough Capitalism Program, Progress Report 1, August 2012. http://www.breakthroughcapitalism.com/files/Breakthrough_Capitalism_Progress_Report.pdf

Wikipedia. Systems thinking. http://en.wikipedia.org/wiki/Systems_thinking

Yakob, Faris. Good for Business – The Business Case for Social Brand Behavior. http://farisyakob.typepad.com/files/good-for-business-faris.pdf

Zabarenko, Deborah. Executive Perspective: CEO Paul Polman from Unilever on “ending the three-month rat race”, Thomson Reuters blog, 3 January 2013. http://blog.thomsonreuters.com/index.php/executive-perspective-ceo-paul-polman-from-unilever-on-ending-the-three-month-rat-race/

[Cross-posted at the PHD UK blog]

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