Does responsibility offer good value for money? Does ethics bring in the cash?
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 plenty 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 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) introduced 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 that 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 short answer is, "yes."
There is plenty of evidence in the vast database compiled by T-Media, which contains more than 100,000 individual company 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 strong corporate social responsibility performance. Employee morale was 55% higher in companies with robust sustainability programs—and employee loyalty was 38% higher. Firms that adopted environmental standards saw 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 on this issue (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 in the NFL. Kaepernick eventually sued the league for collusion against his participation in the league.
And the cash register bursts into a cheerful song.
In its Q2 (September–November 2018) report for fiscal year 2019, Nike Inc. states that sales of the Nike brand rose by 14%. Nike attributes this 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 by 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 further. The previous record high has been broken time and again.
This is happening in a volatile market. During the same period, the Dow Jones Industrial Average and the Nasdaq 100 Tech Index are down.
Looking at a single stock, Amazon—which holds a dominant position in digital retail—has seen its share price fall by nearly a quarter.
Congratulations if you bought Nike stock just before or right after the launch of the Kaepernick campaign. You’re seeing extraordinary gains. Could Nike’s campaign—built on a foundation of corporate social responsibility and purpose—be the reason behind this success? A meta-analysis by Whelan & Fink 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 figurehead 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 players go, the smaller 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 of reputation and responsibility for business success. There was a lot to cover. The discussion with a group of wise participants who contribute to the betterment of 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 quoted. (Friedman, New York Times Magazine, 1970)
Times are changing, however. Earlier this decade, Porter & Kramer (HBR, 2011) put forward 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 a 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 several hundred studies on the subject. The results are clear-cut.
Nine out of ten of the studies analyzed showed that proven 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 showed 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 likely ties in with the finding that two-thirds of consumers feel it is their duty to buy products that are environmentally and socially responsible.
Companies that can demonstrate their commitment to sustainability are able to charge up to 20% more for their products and services. Work morale at sustainable 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 cornerstone of its stakeholder communications. Please note that I’m not taking a political stance (though, given the evidence, perhaps I should!).
On Sunday, September 3, 2018, sportswear 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 against him to prevent the renewal of his contract.
And the cash register starts ringing.
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 notes in its report, this sales success is also driven by, among other things, a successful digitalization 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 since then.
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 strong, stock price performance. 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, and one more thing about Friedman. Most people seem to have overlooked his remark in the same article I mentioned 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.”
In fact, Friedman is discussing the same issue that Porter & Kramer addressed 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 marketing.
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 suit. A major sustainability transformation is underway.
Jirimiko Oranen
