Businesses need focus only on increaing their profits, as long as they stay "within the rules of the game, which is to say, engage in open and free competition without deception or fraud," wrote Milton Friedman in his iconic Sept. 13, 1970, New York Times Magazine essay, “The Social Responsibility of Business Is to Increase Its Profits.”
Darn it if the game doesn’t keep changing, though, expanding "open and free competition," if not deception and fraud, to now include the big brands’ ongoing social responsibility beauty contest.
Early fans of the new game include Sir Richard Branson, founder of Virgin Group, and Jochen Zeitz, director of the luxury-brand powerhouse Kering (called PPR until recently). They launched a nonprofit group last week called the B Team of which they are co-founders and co-chairs.
The B Team’s mission: Promote the idea and persuade executives that “people and planet” should benefit from business activity as much as shareholders benefit from the third “P,” profits.
"In the past, it has been generally assumed that social workers deal with social issues, politicians deal with political and government issues, and business is there to make profits for their shareholders," Branson said in a phone interview last week. "And in a lot of society, that's the way it is. I think all of us in the B Team are absolutely convinced that is wrong."
Branson, Zeitz and the other business leaders on the B Team roster are channeling a much bigger trend, in which, believe it or not, companies tripping over each other to be "socially responsible" might play an important supporting role in the maximization of profits for their shareholders. And while it would be great if business solved the world’s ills, consider two other motivations behind the trend.
First, institutional investors with long time horizons want assurance that companies understand their new vulnerabilities and that they are planning accordingly. Think extreme weather, political unrest or the reputational risks of surveillance created by a world full of employees and community activists toting cell phone cameras.
Laws governing what businesses must disclose to these investors as "material" aren’t necessarily changing. They are just being broadened in practice to include all sorts of risks to wealth creation that have never been formally considered before. These risks look a lot like problems that used to be the exclusive domain of environmental, human rights or social welfare groups.
Fouling up social responsibility can put a serious brake on increasing profits. Witold Henisz of the Wharton School has shown (pdf) that two gold-mining concerns similar on key accounting metrics might have valuations that differ by an order of magnitude if one handles external relations well and the other doesn't.
Second, social responsibility is more important as brands increase in global visibility and value. Large companies compete on brand strength as a proxy for many other things: talent retention, product reliability, maintaining a social license to operate at a certain scale. The power of good branding and good reputation — what accountants include on the balance sheet as an "indefinite intangible asset" — means real money. After a generation of increasing value, by 2000 non-physical assets almost amounted to as much as physical assets, Baruch Lev of New York University has written.
An extra-business nonprofit group isn't a new route for Branson. Virgin Unite, which promotes business solutions to public problems, launched in 2003 and bore two of his signature initiatives. Branson and musician Peter Gabriel persuaded Nelson Mandela in 2007 to start The Elders, a group of world leaders who promote human rights and peace initiatives in developing countries. Branson and Virgin Unite in 2009 set up the Carbon War Room, a nonprofit designed to identify market opportunities to reduce carbon pollution that don’t require policy change.
As Puma chairman, Zeitz oversaw the development of the first "environmental profit and loss statement" (pdf). It took the company three years to develop a methodology that measures the value of the natural resources it takes from the environment. The result, in November 2011: more than $193 million in air pollution, waste and land use.
Funders of the B Team include Havas Media, Kering/PUMAVision, Strive Masiyiwa, Joann McPike, Blake Mycoskie, the Rockefeller Foundation, The Tiffany Co. Foundation and Virgin Unite.
Social responsibility and profit-making gone head to head in their own game probably for as long as either has been around — long before Friedman wrote his book Capitalism and Freedom in 1962. This generation’s contribution is to suggest that being profitable is going to be increasingly difficult without also being socially responsible.
Analysis and commentary on The Grid are the views of the author and don't necessarily reflect the views of Bloomberg News.
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