Does responsibility offer good value for money? Does ethics bring in euros?

Recently, we had the opportunity to speak with members of the Finnish Family Business Network. The topic of the day was the impact of reputation and responsibility on business. There was a great deal to discuss, and the conversation with this group of smart people—whose contribution to Finnish society through their companies is immeasurable—was incredibly fruitful. Here is my take on the topics we covered.

The late economist Milton Friedman has faced a great deal of criticism in recent years. He is often quoted as saying that businesspeople who call for businesses to pursue desirable social goals are “preaching pure and unadulterated socialism.”

“Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the foundations of a free society over the past few decades,” says Friedman (New York Times Magazine, 1970).

But times are changing. In this decade, Porter & Kramer (HBR, 2011) presented their concept of creating shared value. In a nutshell, the idea is that, due to changes in society and our value system, successful companies will make a strategic commitment to benefit the communities around them through their operations.

But is this really the case? Are there examples of organizations that operate this way? Do we actually have proof that responsible business practices translate into financial benefits?

The answer, in short, is “yes.”

There is plenty of evidence in the vast database compiled by T-Media, which contains more than 100,000 individual business valuations. But that is by no means all. In fact, Whelan & Fink (HBR, 2016) conducted a meta-analysis of approximately 200 studies on the topic. Their findings paint a reasonably compelling picture.

First, nine out of ten of the 200 studies analyzed conclude that strong Environmental, Social, and Governance (ESG) standards lower the cost of capital. Nearly the same proportion of studies show that strong ESG practices lead to better operational performance. Eight out of ten research reports indicate that stock price performance is positively correlated with strong sustainability practices

Second, the Top 100 sustainable global companies experienced significantly higher average sales growth. Two-thirds of consumers believe they “have a responsibility to purchase products that are good for the environment and society.”

Third, companies could charge price premiums of up to 20% based on positive corporate social responsibility performance. Morale was 55% higher in companies with strong sustainability programs—and employee loyalty was 38% higher. Firms that adopted environmental standards had seen a 16% increase in productivity.

Admittedly, talking about databases isn’t as exciting as talking about individual companies. So let’s take a look at a company that has made responsibility a central focus of its stakeholder communications. Please note that I’m not taking a political stance one way or the other (although evidence suggests it might be beneficial!).

On Sunday, September 3, 2018, sportswear and equipment manufacturer Nike launched an advertising campaign featuring (American) football player Colin Kaepernick.

In 2016, Kaepernick had become a symbol of the movement protesting racially biased police violence and President Trump when he, along with other players, refused to stand for the U.S. national anthem before an NFL game. Allegedly as a result of this protest, Kaepernick was left without a contract extension in the NFL. Kaepernick eventually sued the league for collusion to prevent him from playing in the league.

And the cash register bursts into a cheerful song.

In its Q2 (Sept. to Nov. 2018) report for fiscal year 2019, Nike Inc. states that sales of the Nike brand had increased by 14%. Nike attributes its strong sales performance to a broader initiative that includes a successful digital transformation program. So, let’s take a look at the stock price.

On Monday, September 4, 2018, Nike’s stock price (on the NYSE) fell 3% in a single day.

But in the days that followed, the stock price surged to an all-time high. As of this writing, in March 2019, it has risen even higher. The previous record high has been surpassed time and again.

This is happening in a volatile market. During the same period, the Dow Jones Industrial Average and the Nasdaq 100 Tech are down.

Looking at a single stock—Amazon, with its dominant position in digital retail—it has lost nearly a quarter of its share value.

Congratulations if you bought Nike stock just before or right after the launch of the Kaepernick campaign. You’re seeing extraordinary gains. Is it possible that Nike’s campaign—built on a foundation of corporate social responsibility and purpose—is behind this success? Whelan & Fink’s meta-analysis suggests that it might be…

Oh yes, Friedman. Most pundits seem to have overlooked what else he says in the article mentioned above. He states that a business needs “to make as much money as possible while adhering to the basic rules of society, both those enshrined in law and those embodied in ethical custom.”

Isn’t he, in fact, talking about the very same thing as Porter & Kramer more than 40 years later? Isn’t it interesting that Nike’s decision to feature Kaepernick as a leading figure finds justification in Friedman’s words?

No wonder more and more companies are viewing responsibility and sustainability as a business driver. And where the big companies go, the small ones will want to follow.

What you’re witnessing is the Great Sustainability Transformation.

Jirimiko Oranen

We recently attended a members’ event hosted by the Family Business Association to discuss the importance anseende responsibility for business success. There was a lot to cover. The discussion with a group of wise participants who contribute to building our society was fruitful. Here are my own reflections on what was discussed at the event.

The late economist Milton Friedman has been the target of fierce criticism. His idea that business leaders who champion the social benefits of business are “the absurd puppets of blatant socialism […]” […], who are undermining the free market, is often cited. (Friedman, New York Times Magazine, 1970)

Times are changing, however. Earlier this decade, Porter & Kramer (HBR, 2011) presented their ideas on creating shared value. In summary, their view is that, as a result of changes in society and values, the companies that succeed are those that, at the strategic level, commit to generating benefits for the surrounding society through their own operations.

Is that the case? Are there any examples of companies that operate this way? Is there evidence that responsible business practices yield business benefits?

The short answer is:

Yes.

There is plenty of evidence, for example, in T-Media’s massive database, which contains over 100,000 individual company valuations. But there is evidence elsewhere as well. Whelan & Fink (HBR, 2016) conducted a meta-analysis of a couple hundred studies on the topic. The findings are clear and straightforward.

Nine out of ten of the studies analyzed showed that verified environmental and social responsibility practices, as well as good governance practices, reduced an organization’s cost of capital. Nearly as many studies reported that responsible practices improved a company’s operational efficiency. Eight out of ten studies indicated that there is a strong positive correlation between responsible business practices and positive stock price performance.

Companies committed to sustainable development were able to grow their sales more effectively. This is likely linked to the finding that two-thirds of consumers feel it is even their duty to buy products that are environmentally and socially responsible.

Companies that can demonstrate their commitment to corporate responsibility are able to charge up to 20% more for their products and services. Work morale at responsible companies was 55% higher than at comparable companies.

Employee loyalty was also 38% higher. And productivity at companies that adhere to high environmental standards has risen by 16%.

Of course, it’s more boring to talk about data sets than about individual companies. That’s why I’m giving an example of a company that has made sustainability the core of its stakeholder communications. Please note that I’m not taking a political stance (although, given the evidence, perhaps I should!).

On Sunday, September 3, 2018, sports equipment manufacturer Nike announced the face of its new campaign: American football player Colin Kaepernick.

In 2016, Kaepernick became a symbol of the protest against racially motivated police violence and Donald Trump after taking a knee alongside other players during the U.S. national anthem before an NFL game. As a result of his protest, Kaepernick was not offered a contract extension by the San Francisco 49ers. Kaepernick sued the NFL, accusing it of conspiring to prevent him from re-signing.

And the cash register starts to sing.

In its report for the second quarter of fiscal year 2019 (September–November 2018), Nike, Inc. announced that sales of the Nike brand had grown by 14%. But as the company itself notes in its report, this sales success is also driven in part by a successful digital transformation program that has brought the company closer to consumers. Let’s take a look at the stock price…
On Monday, September 4, 2018, Nike’s stock price (NYSE) fell 3% in a single day.

In the days that followed, however, the stock price rose to an all-time high. As of this writing, in March 2019, the company’s stock price is even higher. The record high has been broken many times.

This is happening in a volatile market. During the same period, for example, the Dow Jones and the Nasdaq 100 index—which tracks U.S. technology stocks—have fallen, as has the OMX Helsinki. Among individual stocks, Amazon, which holds a near-monopoly position in the digital economy, has lost nearly a quarter of its value.

Those who bought Nike before the launch of the Kaepernick campaign—or immediately after—enjoyed a supernormal, i.e., unusually large, stock price increase. Could it be that social marketing has fueled Nike’s success? A meta-analysis by Whelan & Fink suggests that this may indeed be the case…

Oh, right, one more thing about Friedman. Most people seem to have overlooked his statement in the same article I referred to above. Friedman says that a company’s mission is “to make as much money as possible, while adapting to society’s rules of the game, whether based on legal or ethical considerations.”

Friedman is, in fact, discussing the same issue as Porter & Kramer did more than 40 years later. And Friedman’s argument also justifies Nike’s decision to tap into the ethical climate of the time in its product sales.

It’s no wonder that more and more companies are recognizing the role of sustainability as a driver of their business. As the big players lead the way, the smaller ones follow. A major sustainability transformation is underway.

Jirimiko Oranen