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Last month saw conflicting victories in the fight to save capitalism from itself.
On the final Friday of June, shareholders of the French food giant Danone voted to add a social purpose to the company's bylaws, making it the first public company to transform legally into an enterprise à mission, or purpose-driven company. Shareholders committed the company to bring health through food to as many people as possible, and to do so in an environmentally sustainable way.
But, in a reminder of how much the US lags Europe in corporate responsibility, earlier that same week the US Department of Labor proposed a new rule prohibiting private pensions from considering social or environmental factors at the expense of financial returns. Echoing Friedman’s admonishment 50 years earlier, a corporation’s sole social responsibility is to maximise its profits.
Should corporations aim higher than profits alone? Last month gave us two views of capitalism vividly stated, three days apart.
Classical economics approaches the question of corporate purpose with a simple framework: single variable optimisation. In undergraduate classes and business schools across America, that single variable is shareholder profits. In this view, the Danone example and all the attendant talk about purpose and ESG are just more evidence of Old-World weakness, advanced by (who else) a French food company.
96% of business leaders are already satisfied with the job they’re doing on ESG. They shouldn’t be.
But could it be that classical economics has it wrong – that, as with sailing, aiming directly at your destination isn’t always the fastest way to get there? Profit is often confused with value, but they are not the same thing. As we’ve discovered in our careers as impact investors and in researching our book Accountable, many of the most durable, sustainable, and – yes – valuable companies, are those that focus on a purpose deeper than just profit.
Danone’s transformation is important because shareholders put purpose directly into the company’s charter. But however revolutionary Danone’s action may seem, it actually harkens back to an older understanding of the corporate form. In the 18th century, receiving a charter from the crown or state required corporations to state their broader purpose in their charter to justify why they deserved limited liability, freely transferable shares, and the other privileges conferred on them.
Even today, corporate charters retain a vestigial structure of this history: the articles of incorporation in Delaware still require corporations to name their purpose. But today, most write “To do what is lawful in the state of Delaware”. Danone’s action reflects a revolution in the original sense of the word – a revolving back to the way corporations once were.
There is mounting evidence that doing what Danone has done is today’s best strategy for building prosperous companies over the long term. Why? Because a company’s stakeholders are critical to its long-term success.
With half of American workers feeling no sense of meaning in their jobs, organising a company around purpose is a great way to recruit, retain and motivate a winning workforce. With three in four Americans distrustful of corporate executives, purpose is a great way to show consumers that a company is built around more than value extraction. With governments ever at odds with corporations and the risk of regulatory backlash high, purpose is how you align a corporate strategy with the public weal.
And the data is increasingly on the side of purpose-advocates. $12trn is now invested in funds that incorporate environmental, social and governance (ESG) criteria and 94% of sustainable indices are outperforming traditional ones. Studies of the correlation of ESG and shareholder returns consistently show that companies that incorporate sustainable practices into their core businesses perform better than those that don’t. Backwards-looking data may understate the truth, because what determines successful strategy in business and investing is what happens next, in a world calling out for better corporate practices.
Committing to serving stakeholders sustainably isn't a breach of fiduciary duty; we think it's in the long-term interests of shareholders to do exactly that. Business leaders say they agree: nine of 10 think that serving stakeholders is important.
The problem is: 96% of business leaders are already satisfied with the job they’re doing on ESG. They shouldn’t be. Many ESG efforts are superficial and tangential, and ESG reporting often get confused by a lack of clear standards and corporate spin. Sustainability advocates are increasingly winning the battle of ideas, but losing the war of substantive action.
We know that it’s possible to ‘do well by doing good’, but many business leaders lack the understanding and the tools to do so effectively. We have a long way to go to improve the way we pursue and measure ESG standards in American business. But for progress to continue, more companies will need to accept the premise that purpose and sustainability are critical – as Danone has done.
While the Labor Department’s rule reflects an outdated view of economics and what makes a company successful, we believe Danone’s vote suggests a much brighter future.
Michael O’Leary and Warren Valdmanis are co-authors of Accountable: The Rise of Citizen Capitalism. They were on the founding team of Bain Capital Double Impact, the firm’s impact investing strategy.