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Full disclosure: my best stock investment ever was Berkshire Hathaway. That said, I found CEO Warren Buffett’s comments in a recent Financial Times interview (“Warren Buffett on why companies cannot be moral arbiters,” Financial Times, 29 December, 2019) to run counter to what I’ve learned about corporate leaders concerned with rehumanizing their leadership and their companies. In the article, he and others advocate that company managers and the investors that vote on their boards are wrong to impose their views of “doing good” on society. “This is the shareholders’ money,” he argues, adding that investors and managers cannot know what’s best for society. All they can do is work to maximize profits; the rest should be left up to government.
I take Buffett’s point about companies assigning themselves a role of “moral arbiter.” It can verge on arrogant when companies deem themselves to be superior because they have taken on an ostentatiously socially-conscious role or ascribed to themselves some sort of super-hero status. Indeed, Adam Neumann stated that The We Company’s purpose was to “elevate the world’s consciousness,” something I’ve labelled as “purpose overreach,” that is, when a company’s efforts to create an “institutional logic” (as Rosabeth Moss Kanter at Harvard calls it) steps beyond what a company can reasonably deliver, given its business drivers, customer needs and operational capabilities.
However, my research shows that this choice between either doing good or maximizing profits represents a false dichotomy. The first reason for this is that regardless of whether companies and their major investors “should” become more focused on environment, social and governance (ESG) issues, the proverbial toothpaste is out of the tube. The public has learned, especially since the 2007-2008 financial crisis, how to hold companies to account on their interactions with the environmental and social systems in which they operate. Shayne Elliott, CEO of ANZ in Australia, summed it up when he said, “the system was supposed to ‘trickle down’ but it hasn’t worked that way for most people… people didn’t care if companies made a lot of money as long as they could participate… what happened is that didn’t work out. It feels rigged.”
Our research suggests that companies benefit from becoming more mindful of their roles in social and economic systems. They must learn to better manage their ‘externalities,’ which are the costs they impose on society (e.g., pollution, carbon emissions, financial instability, etc.) and which are not ‘internalized’ by the company itself. This is not just because it’s the ‘right thing to do,’ but also because recent history points to the likelihood that those costs will likely be re-imposed on companies in undesirable ways, for both the company and society. This awareness is one reason why packaged goods companies are beginning to take on the issue of plastic pollution in oceans: they are realizing that they might be best positioned to understand, change and drive customer value from it.
It’s critical to note that this focus on ESG in my view does not mean that companies should blindly give away money indiscriminately. As Elliott states, doing so is not authentic and “people can tell that ‘you’re just trying to appease [them].’”
The second reason that profit-vs-good is a false trade-off is the logic behind the framing itself. Just because a company is profitable doesn’t mean that it can’t do good things. By the same token, unprofitable companies can do a lot of bad things.
Our research suggests that many business leaders believe this false dichotomy due to an absence of tools and frameworks that allow us to see a way to embrace both profits and positive impact on ESG issues. A well-constructed sense of purpose can help fill the gap. How? By asking a bigger question, managers can elevate their thinking beyond profit-vs-good arguments, to see a different way forward. Purpose enables them to undertake an act of mental agility critical to any kind of innovation: reframing.
We have found that purpose helps companies engage directly with their institutional logic, that is, creating the conditions with society and people that allow it to flourish over time. Wording here is critical – I mean “flourish,” not “survive” or “earn returns above the cost of capital.” In other words, by thinking about flourishing over time, managers get above the quarter-to-quarter performance metrics as their only mechanism for measuring success. They can begin to think more systemically and holistically, not just linearly. Performance metrics are still critical, but in the long run, they cannot be the only ones, if companies are to continue on their growth path in the context of a thriving set of stakeholders. “Metrics,” says Elliott, “allow us to avoid judgment,” which, he admits, is hard to do. “But [avoiding judgment] is an incomplete way to manage yourself.” Purpose, if done right, allows companies to create coherence between all their activities, both short-term and long-term, that might otherwise be seen as contradictory.
However, purpose is not a magic pill. It doesn’t automatically resolve the inherent conflict between ESG and profit. It must take into account who you are as a company, why you’re here in the first place, what specific value you bring to society (not just the value you hope to bring), what your customers want, what unique capabilities you have and what’s going on around you that gives your company an opportunity to contribute. Leaping to ‘why’ too early can yield a superficial or even value-destroying purpose. If our research uncovered anything, it’s that purpose has rules, or at least, guardrails. As Deborah Wahl, former Chief Marketing Officer of McDonald’s USA stated to us, “Purpose has to start from your fundamental business drivers… it should help you get back to your core, not away from it.”
Over and over, we uncovered stories about how purpose came down to the very simple idea of service. If you think about it, this is not a foreign concept to any business and is not simply about “doing good.” As my late father, a proud life-insurance salesman, told me, “I’m successful not because I sell well—I do, but that’s not the reason. I’m successful because I provide my clients and their families a service—one that they value.”
By embracing this idea of whom you serve and why, our evidence shows that managers can do something that Buffett would claim they are paid to do: create lasting value.
Michael Chavez is the Chief Executive Officer of Duke Corporate Education and teaches on the Building Strategic Agility course. He is a co-author of the book Rehumanizing Leadership.
