Those of you who take the Financial Times may or may not have been surprised by ‘Capitalism. Time for a reset’, a recent letter from its editor Lionel Barber to all its subscribed readers. ‘Business,’ he says, ‘must make a profit but serve a purpose too.’ If you weren’t (surprised), then you will have taken note of an increasing number of long view and natural capital focused stories, and in particular a long form piece that questioned the once unquestionable: The Friedman Theory, which argues that shareholder primacy is all.
The times, they are a changing – as Barber’s letter clearly demonstrates. The role of business in society is increasingly being questioned. Friedman’s shareholder theory argues that any business’s main responsibility is to its shareholders. It creates value for them, period. Despite being a fundamental building block to capitalism over the past 50 years, there has been a significant shift towards a new pragmatism: business having a responsibility to society is good business.
Hence Barber’s call for the need for business to deliver profit with purpose. Hes not alone. The Business Roundtable, a large group of US chief executives headed by JP Morgan’s Jamie Dimon, have also delivered the same message, arguing for a broader view of governance, one that removes shareholder primacy and so ushers in a new and much more far reaching responsibility to stakeholders.
While criticised by many a Friedman stalwart, these shifts in the narrative around the role of a business have the potential to enable the vast resources within the private sector to be better deployed to areas that provide society and the environment with greater value. Given the significance of the investment, it’s a value that benefits all, even the shareholder, who in return for forgoing short term profits, wins out in the long run with slower – but stronger, more sustainable – growth, one that results in significant direct and indirect benefits.
This aligns very well with the work that we do through our partner impact investment vehicle, Wild Enterprise, which – with the help of Cambridge University – we have been developing as a progressive social enterprise. While still for profit, Wild Enterprise is explicitly – through its articles of association – beholden to the needs of stakeholders, allowing us to make decisions that drive real change on the ground, through fair employment, local ownership, and investing in conservation and community development. As example of its viability, our first investment has been in Wild Expeditions Ethiopia, where last year we have created 40 jobs and invested over $60k into communities and conservation projects through business and philanthropy.
This all sounds very laudable, I know. However, it also makes a lot of business sense. Younger generations are increasingly looking beyond profit maximising businesses and seeking to align themselves with purpose-driven brands. In our own area of work, the travel industry is increasingly coming under pressure for the negative impact it has on the environment and communities. Although hugely important to the global economy and job creation, with one in 10 jobs being created by tourism, it’s clear that there’s a hidden negative cost to mass tourism, one that is fast degrading the very assets on which it depends. Degraded destinations on the scale experienced by the likes of Thailand do not a profitable business make.
In terms of shareholder primacy, it’s my hope that this trend for business with purpose continues. The more business recognises the pragmatic necessity of a responsible bottom line, the quicker it will discover that stakeholder primacy is good for all, shareholders included.