Invisible Market Hand Goes Clean and Green
Sustainable brands grow double digits while traditional brands are flat, talent gravitates to enterprises that demonstrate social and environmental values, investors use ESG to estimate future earnings
Adam Smith' invisible market hand goes Clean and Green. https://lnkd.in/gAzisqM.
Profit as Purpose or Profit with Purpose:
Part I: Business Case
Profit as Purpose
Martin Shkreli, age 36 in 2018, the former CEO of a startup Turing Pharmaceuticals, raised the price of an HIV/malaria medication Daraprim overnight from $13.5 to $750 a tablet, bringing the cost of therapy for some patients to hundreds of thousands of dollars. Outside the US, the product is available for less than $1. Shkreli has argued that such a move was legal, and good for investors…. - but was it?
Turining Pharma has stated that it needs the profits from the drug to fund the research and development of new drugs. The need to generate profit to fund research and development has been a universally accepted business principle. In the case of Turning Pharma however, patients, doctors and the public alike strongly disagreed as to the source of profit and the amount customers were to pay, without being given other therapy options. The subsequent public backlash and internet shaming of Shkreli was intense as all stakeholders became very vocal in communicating their concerns and moral outrage. In response, Turning Pharma reduced the price by half, and offered a number of programs for patients with financial needs. As a result of the immense public pressure and scrutiny, Martin Shkreli stepped down from his CEO post in 2016.
Although Daraprim is an extreme, 5000% price increase, it is hardly an isolated case. And yes, such actions are legal and argued in the name of profit. Profit as the purpose.
Champions of unfettered and remorseless capitalism have long argued for profit for profit’s sake: from economist Milton Freedman to writer/philosopher Ayn Rand, to the business politicians in the current US Trump administration. In her 1964 interview, Rand contended that “man exists for his own sake, that the pursuit of his own happiness is his highest moral purpose, that he must not sacrifice himself to others, nor sacrifice others to himself,”
Some 50 years after this interview, Rand’s books are still selling well, and her heroes keep influencing entrepreneurs and politicians alike, from Melbourne and Hollywood to Tel Aviv and Washington. Entrepreneurs like Michel Shkreli, the CEO of Turning Pharma; and James Kilts, former CEO of the Gillette Company in the US; Sonja Bernhart, Australian businesswomen; Selvaraghavan Kasthuri Rajaan, an Indian film director, and Ayelet Shaked, Israel’s Minister of Justice, are but a few of many others who subscribe to Rand’s brand of literal capitalism. Yet more recently, the appeal of a determined and self-centered strongman type leader oblivious to environment and social realities, is losing its allure and legitimacy in business, although political rhetoric fuels the debate. Recently, the revelation of Uber’s rampant culture of bullying and sexual harassment was followed by an abrupt departure of Uber’s CEO and Rand-devotee, Travis Kalanick. While on the leave of absence, Kalanick admits to soul-searching and reflection on the role of profit as a sole purpose.
Profit With Purpose - Business Perspective
The starting point for the discussion of profit with purpose, is that profit is the driver of any enterprise in a capitalistic system. Simply put, profit enables growth, creates wealth, and defines the role of a business in society.
Ethics, economics, psychology, leadership, culture, business, religion, philosophy … all of these perspectives provide unique angles to a debate on profit: its nature, its importance, its future. For the purpose of this discussion, I narrow the focus to business drivers for profit. We will not debate ethical justifications for Martin Shkreli and alikes’ views on profit. We will not ponder profit as a driver of the leadership styles of Travis Kalanick and his followers; and, we will not deliberate moral arguments for profit in the system of justice with Ayelet Shaked.
In the age of big data, we turn to empirical facts to uncover the broader trends. These data help us understand factors that contribute to the purchasing behaviors of consumers, explain employee behavior in the modern labor market place, and predict investors decisions. With the help of technology, the behavior of consumers, employees, and investors is captured in its most unaltered form: real action beyond intentions. Data reveals more than one’s intentions, which are often muddled, consciously or subconsciously, by one’s personal believes and worldview. These empirical facts help to decode and understand underlying business forces that drive and inhibit profit, independently of one’s political, religious or philosophical views.
Sustainability is one of these mega forces.
Consumers and employees across the globe, in both developed and developing economies, increasingly expect businesses to integrate environmental and social accountability into their products and services not solely as a charity or advocacy effort, but rather with intentions of stewardship and responsibility for the development of concrete outcomes as value-adds.
These attitudes are reflected by consumers voting with their wallets and by employees choosing companies with shared values. They are especially pronounced in the behavior of millennial employees, generally not as loyal to organizations, yet attracted to meaningful jobs and companies which they perceive as ethical. Simultaneously, sustainability in the form of good governance is increasingly demanded by investors who want to better understand and mitigate their investment risks, including climate-related risks, environmental risks, and social risks.
Sustainability is a business force that re-shapes all modern business functions, from design and production, to marketing and sales, to delivery and utilization. The myth that sustainability-driven strategies are marginal and costly business undertakings aimed at luring the pockets of wealthy suburban consumers has been dismissed many times over by research and undeniable business results. Global sales data and stock prices trajectories of a variety of business enterprises provide strong evidence that sustainability-driven strategies generate growth and drive profit. Sustainable profit. Profit with purpose.
For example, Uniliver’s 2015 global sales results show growth of sustainable brands to be 30% faster than other brands on a global scale.
Further, 2016-2017 sales data for the global food and beverage sector offer another tangible example of sustainability driving growth. According to a Nielsen report, sales for the entire sector declined by 0.1% while the brands with sustainable claims grew 2.5% to 11.4%. These numbers underscore the growing importance, if not out of survival, of incorporating sustainability as an integral part of business strategies
Apple’s performance, coupled with recent statements by Apple CEO Tim Cook, offers another example of sustainability taking a central place in business strategy. During the 2017 third quarter earning call (August 1st, 2017), Apple confirmed accelerating revenues and profits, while acknowledging that for a viable long run, the company needs more investment in people and in the planet. Tim Cook makes a moral argument stating ““we have a moral responsibility to help grow the economy, to help grow jobs, to contribute to this country and to contribute to the other countries that we do business in.” Meanwhile, investors reward Apple’s stock price, sending Apple stock on an upward trajectory.
It is now evident that the foundation for sustainable growth is based on embracing sustainability as a core business strategy. In a recent address at the Global Forum of Consumer Good Products (June 2017 in Berlin), the CEO of Nielsen, Mitch Burns summarized three underlying consumer-behavior principles based on the data:
Sustainability is a worldwide concern
Consumers are putting dollars behind their values
Social responsibility enhances corporate reputation and drives shareholder value
From consumer products and electronics to transportation and energy; all industries are beginning to follow this megatrend: sustainability sells, drives growth and generates profit.
Consumers Want It…
Consumers are actively seeking products with sustainable features, such as “Fair Trade”, “Organic”, and “Carbon Neutral.” Point-of-purchase data show that consumers are paying 5%-20% more for sustainable products, a substantial premium in a crowded and competitive marketplace. According to a Stanford study, not only are consumers willing to pay more, they will take it a step further and punish companies that are not responding to expectations of sustainable offerings, by simply withdrawing support and switching to brands they perceive are more aligned with their values. More and more frequently, consumers have been taking activist positions by disclosing dishonesty or greenwashing practices. They exercise the power of viral marketing on the internet, and they skillfully harness social media to disclose and shame such deceptive business practices (i.e. Martin Shkreli). And smart businesses listen. Smart business adjusts and creates new offerings that better reflect the needs and values that customers are willing to pay for.
Year after year, more products with “green, clean and responsible” claims enter the global market. In the profile of the “Future Consumer 2018” , WGSN describes consumers across all continents as expecting sustainability to be a main feature rather than just a value-add of any commercial offering. Today, sustainability is mainstream and going far beyond the buzzword of yesterdays’ marketing campaigns. Sustainability has become a material feature, quantifiable by concrete sales figures and stock prices.
It has been well documented, that consumers put their money where their values are. According to a global consumer purchasing behavior survey by Nielsen in 2015, 66% of respondents were willing to pay premium for sustainable products; this is a trend that is expected to grow only stronger.
Therefore, it is only natural that for-profit enterprises are allocating their research and development resources towards “what sells”, which are sustainable products and services. These sustainable offerings have been incorporated independently of philosophical and social views of executives, independently of the political connections of Boards, and independently of leadership styles. Such an approach of creating a portfolio of what consumers want, a sustainability-driven portfolio, is not a reflection of a value statement of a business enterprise; it is simply a calculated business behavior geared towards increasing profits.
The best talents are inspired by visions of “green, clean and responsible”, and the best minds rush to design such products and services. These designers and inventors are guided by principles of eco-efficiency, which includes conserving energy, water, and responsibly sourcing, using and reusing materials. New product innovations, process innovations, and material innovations not only bring competitive products that are supported by customers, they are saving money and produce material gains for companies increasing profit.
Employees Choose It…
The war on talent, and specifically retaining young talent, is one of top challenges facing businesses, that CEOs lose sleep over.
While pay and benefits are still the strongest drivers attracting new employees, once hired, employees increasingly seek meaning and purpose in employment that goes beyond the paycheck. Loyalty towards employers, or lack of such, is greatly shaped by the meaning and purpose employees experience first-hand through their work.
According to 2016 Deloitte Millennial Survey, 66% of millennial employees expect to leave their companies within the next 12 months. Losing trained employees is costly for business, so retaining young talent within organizations is a priority for human capital strategies. Retaining talent goes far beyond pay and benefits, underscored by the Deloitte Millennial Survey. Corporate values that are aligned with personal values bring purpose and meaning to work, becoming powerful tools that cultivate loyalty and retain a motivated workforce. This is a clear case of values directly impacting the bottom line by increasing or decreasing the cost of running business, ultimately decreasing or increasing profit.
Talented employees gravitate towards purpose-driven enterprises, towards employers that project strong values that are aligned with personal values of employees. This trend has been consistently backed by research. As in a Nielsen global survey of 30,000 households, 67% of respondents preferred to work for socially responsible companies. http://www.nielsen.com/us/en/insights/reports/2014/doing-well-by-doing-good.html. In a Rutgers University survey, 50% of millennial employees were willing to accept a pay cut if allowed to work on a project that is more closely align with their values. https://netimpact.org/sites/default/files/documents/what-workers-want-2012.pdf
To help entice millennial employees to stay with a company, employers recognize that they must project corporate values and demonstrate ethics and responsibility in an authentic way, they must communicate a sincere commitment to broader goals including environment stewardship and responsible actions within communities they operate in. Today employers are quickly learning how to effectively present a business strategy of embracing sustainability and how to bring purpose and meaning to jobs. If not done properly, employees will look for a better fit, starting from the alignment of values. HR executives understand today that every millennial employee is only 12 months away from a new job with a new employer. They know that unless meaning is incorporated into jobs, unless sustainability is embraced authentically throughout an enterprise, unless profit with purpose is clearly communicated, they will keep losing talent and consequently, incur turnover expenses.
Investors Demand It..
Investment decisions are based on understanding and mitigating risks, from operational, development, cyber risks to reputation risks, environmental risks, social and political risks.
Reputational risk is a complex factor, as Nike learned in the 80s. At that time, Nike’s management and its investors had not fully comprehended the long-term impact of the “sweat shop riots”. They underestimated how this legacy will shape their current business and future brand image until they faced consumer backlash. 30+ years later, Nike still cannot fully shake off its sweat shop legacy. Despite transparent labor practices rigorously instituted after the riots in addition to an aggressive marketing campaign, Nike’s investors took notice and their portfolio lost value.
Reputational risk challenges were faced by Apple and its investors in the 2000s. Despite the fact that the company had imposed the highest global standards in contract manufacturing, Apple lost 5%, or half a billion dollars of its stock value after the 2008-2010 reports of suicides in one of its contract manufacturers, the HongKong-based Foxconn Corporation. Foxconn had manufactured iPhones for Apple, computers for Dell, HP and other consumer electronic devices for global electronic companies. In late May 2010 WSJ reported that 10 employees of Foxconn working on the Apple phone assembly line committed suicide by jumping to their death at the Foxconn Shanghai facilities.
Apple was caught in the crossfire of quick media accusation followed by the outrage of even Apple-loyal consumers. Consequently, Steve Jobs had found himself defending Apple from accusations of sweatshops instead of promoting a the then-revolutionary features of the iPhone 3. “Steve, Apple can do better” – wrote “Jay” one of many bloggers on the MacStories Blog after the Foxconn suicides were reported, reflecting the views of many loyal Apple devotees. “You should educate yourself”, responded Steve Jobs. “We do more than any other company on the planet”. While there was truth to that claim, it was still not enough for Apple followers. The market responded with Apple losing $500,000,000 dollars over the course of 2 years. In the 2012 analysis “Did Foxconn bring Down Apple Stock”, StockRiters argued: “The Foxconn riots and suicides have illustrated something all American companies with factories in Asian countries should be strongly cautious about – that when American Consumers realize that behind the iPads they use, behind the bright LCDs and LEDs, the Nike shoes and the designer clothes they wear, that behind these there is an undernourished, underpaid, possibly underage laborer toiling away in some dank sweatshops in the foul underbelly of Southeast Asia – that understanding has an immediate effect on the stock of the responsible company. A company that resorts to, condones, or ignores such business practices from its contractors, will get hurt where it matters most, its bottom-line. Therefore it is sound financial astuteness to spend money on removing this sort of incidents from ever happening”.
Watching Apple’s stock performance during the Foxconn crisis, while also remembering Nike’s “sweatshop” legacy, shareholders of global corporations were pressured to re-evaluate the risks and benefits of the short-term cost savings of labor arbitrage, and long-term benefits of a responsible supply chains. Creating value by cutting cost for profit as purpose became simply too risky and eventually too costly, and not sustainable in a long run. Market punishment for profit as purpose was real, and painful.
It is not surprising that investors have been demanding transparency in corporate reporting in areas such as: supply chain practices, labor practices, company local reputation etc. As a response, ESG reporting, or Environmental, Social, Governance reporting, both voluntary and compliance-driven, is becoming a standard disclosure practice in global business. Business analytics powerhouses such as Bloomberg have incorporated these demands by offering an ESG reporting module on Bloomberg terminals. Many others have followed by standardizing and simplifying ESG data to offer tangible and material risk assessment.
Shareholders activism, initially marginal, starts to play an important role in shaping investment strategies based on ESG factors. Since 2011-2017, the New York City Pension Funds succeeded to implement various forms of ESG disclosure through shareholders’ resolutions at its 39 holdings, mostly technology and apparel companies. Where disclosure mandates do not exist, these resolutions require management of the companies to report on a material risk factors. This strategy is being adopted broadly by investors community, starting from institutional investors and expanding to other groups of investors including individual shareholders. In fact, companies have started voluntary reporting, either defensively to avoid blacklisting, or proactively to appeal to the consumer base. This trend of applying ESG disclosures as a straightforward risk mitigation practice, has been evolving independently of investment philosophies, economic beliefs, or investors’ views on the social role of business. It is simply safe to invest in profit with purpose.
Profit with Purpose
As investors are demanding transparency in corporate reporting, they are finding allies in consumers, in employees, and in communities where their businesses operates. These diverse groups of stakeholders are motivated by unique, sometimes opposing reasons, yet are unified by one common denominator: sustainability is the business driver for profits, and sustainable profits are driven by purpose.
Conversely, chasing quick gains at the expense of communities or environment, offering products and services without eco-efficiency considerations, practicing deceptive communication and greenwashing, are simply too risky and may not be profitable for business in the long run. Independently of ones’ economic views, philosophical beliefs or political affiliations, it pays to invest in profit with purpose:
consumers pay for it,
However, when sustainability is deployed just as a mean to maximize profit: how does purpose fit into the profit equation? Is it Profit with Purpose, or a variation of Profit as Purpose?
This author submits, that from the traditional Adam Smith’ market perspective, profit strategies driven by sustainability strategies are a way for the invisible market hand to connect profit and purpose, especially in the absence of social values or environmental considerations expressed by business leaders. As such, profit through sustainability strategies is a pure business case for sustainability itself, where values are not part of the profit equation, yet values are imposed on business by the invisible market hand. An enterprise cannot achieve sustainable profits without implementing general sustainability principles. In the words of one CEO, sustainability is business’s enlightened self-preservation.
While this conversation on Profit as Purpose and Profit with Purpose continues, the role of leadership will be explored in more detail.