The social responsibility of business | Alex Edmans | TEDxLondonBusinessSchool

why do businesses exist to earn profit or to serve a purpose for shareholders or for society customers employees and the environment well the conventional view is exclusively to earn profit and that's not as narrow-minded as it sounds because to earn profit a company is forced to care about society it has to make high-quality products or customs we'll stop buying it has to treat its work as well or they'll leave and it can't pollute the environment or its brand will be hurt indeed leading economist Milton Friedman once famously wrote the social responsibility of business is to increase profit so just head to the land of profit and you'll get all of these other decisions rights but this theory assumes that you can calculate the effect that ethical behavior has on your profits in practice you can't reduce every decision to a mathematical calculation take Marks and Spencer the UK high street store now former chairman Simon Marx he had a policy where all top management had to walk around the shop floors to see firsthand how customers and workers were being treated and one day back in the 1930s on one of his own visits Simon sees a shop assistant faint and he's concerned he wants to find out why and it turns out that her husband unemployed and she's not eating so that her family can so the very next week Simon introduces nutritious meals for all staff at nominal prices why well Milton Friedman would say do a calculation if I provide nutritious meals this many workers are not going to faint so I'm going to make this much more money there's obviously no way you can calculate that number instead Simon's thinking was different I'll provide nutritious meals even if it costs me a bit because I care about my workers I want to make they eat well and because it goes above and beyond Marks & Spencer has an excellent reputation for quality and that in turn leads to profit so that's the second view which is called corporate social responsibility now you might see it's a bit tree huggy and out of touch but it's actually not too different from the first view it agrees that profit is good but profit is only a by-product it's not the end goal instead businesses exist to serve a purpose to make products that transform customers lives for the better to provide employees with a healthy and enriching workplace and to preserve the environment for future generations even if you can't calculate the bottom line impact of doing so and if you do that profits will come naturally so take George Merck the former president of Merck pharmaceuticals his mindset wasn't how can I make as much money as possible selling drugs it was how can I use science to save people's lives now back in 1942 penicillin was still a new drug it hadn't been made outside the lab before as too expensive but George takes a punt and penicillin becomes bae by merck a first company for the first time now this is a photo of Ann Miller a thirty three old woman she lives in New Haven her husband's Ogden Miller the athletics director of Yale University and on March the 14th 1942 and lies dying in a hospital bed stricken with streptococcal septicemia which she's caught after suffering a miscarriage her fever struck 104 to 106 for 11 straight days and everything the doctors have tried has failed until penicillin and becomes the first American ever to be treated with penicillin and it saves her life the very next morning her temperatures back down to normal and she makes complete recovery she goes on to having three sons and she lives until 90 years old and that then shared the secrets of how to make penicillin with its competitors so that they could do so also saving thousands of lives in World War two as George Merck said we try never to forget that medicine is for the people it is not for the prophets the prophets follow and if we remember that they have never failed to appear so just serve a purpose and the prophets will follow nice idea if it were true but where's the evidence well that's what I set out to gather I wanted to test whether socially responsible firms actually perform better or instead distracted from the bottom line but how do you measure social responsibility well I chose to look at employee well-being now that's not the only dimension that's important there's customers and the environment but I chose employee well-being because there's a particularly good measure out there the list of the hundred best companies to work for an America now published every year by Fortune magazine so this list is available from 1984 so I have tons of data and it's also very thorough it looks at not only quantitative factors such as pay and benefits but also qualitative factors like trust and management pride in your jobs and camraderie with your colleagues so I study the effect of being a best company to work for on future stop returns but how do I know whether good stock returns are down to employee well-being it could just be your industry happen to perform well or some other factor so to isolate the effective employee well-being I control for what industry you're in for firm size for growth opportunities of a past returns and a whole list of other characteristics and as we all know correlation does not imply causation so I do further tests to suggest that its employee well-being that causes good performance rather than good performance allowing a company to spend on employee well-being it took four years to complete this study to verify the robustness of the results and to rule out alternative explanations so what did I find I found that the hundred best companies to work for in America delivered stop returns that beat their peers by two to three percent per year over a 26-year period simply put companies that treat their workers better do better and this fundamentally changes the way that management should be thinking about their workers you might think isn't it obvious that companies do better if their workers are happier but it's not obvious because treating your work as well is costly take Costco the American supermarket chain so Costco pays its workers 20 dollars per hour that's nearly double the national average of 11 dollars and it gives 90% of its employees health care that's expensive indeed a stock analyst quoted in Businessweek said Costco's management is focus on employees to the detriment of shareholders why would I want to buy a stock like that indeed the conventional view is that a pound paid to your employees is a pound taken away from shareholders so pay your workers as little as possible and work them as hard as possible just like a great football manager can squeeze that little bit extra out of his players I tried to get Alex Ferguson but I couldn't find him shouting at his own players only at referees so under this future employee well-being is a bad sign because it suggests that you're allowing your workers to slack off indeed before my current life of poverty I used to be an investment banker I'd like to see two of my oak-paneled corner office that's my empire so as you can see from the microwaveable ready meals in the bottom corner I was a junior analyst and one day in the office the vice president caps me laughing and he says Alex do not laugh when you're in the office I'm banning you from laughing why he said because of your too happy the managing director will think that I am not working you hard enough but the result suggests instead that treating your employees well actually pays off in terms of firm value indeed Costco's former CFO Richard Galante said from day one we've won the business with the philosophy that if we pay better than at better than average if we provide a salary that people can live on have a positive environment and good benefits we'll be able to hire better people they'll stay longer and be more efficient so Thanksgiving is the biggest public holiday in America everybody's free to go shopping but not at Costco because Costco is closed on Thanksgiving and other major public holidays even though doing so sacrifices tons of profits why because Costco's management believes that its workers should be spending these holidays with their families and this concern for workers is not at the expense of profit profits of topped two billion dollars in each of the last two years and while my study focuses on employee well-being research by my LBS colleague Anna Yano and many others have shown that other dimensions of social responsibility also improve firm value and these findings are incredibly freeing because this means as managers we can act responsibly without doing a calculation without expecting anything in return to do things for intrinsic and not instrumental value because even though financial awards were not the motive for acting ethically they typically manifest anyway caring about society is not at the expense of profit it supports profit the results of implications not only for managers but also for investors which nearly everybody in this audience will be now as investors you have the power to put your money into companies that reflect what you would like to see in this world now the conventional view is that if you invest in ethical stocks you have to sacrifice some returns but the results suggests there's no sacrifice investors can both do good and do well investing in companies that is socially responsible at least for their workers pays off in higher returns indeed the Parnassus endeavor fund pursues exactly this employee well-being strategy and over the 10 years since its inception it's beaten the market by 4% per year and more broadly the results suggest a new way of thinking in the criteria we use to pick stocks now it's tempting to look at price earnings ratios and profits and dividends you can easily look them up on Yahoo Finance but because this data is so easy to gather everyone else is gathering it so it doesn't give you a competitive advantage indeed some of the most important I mention of a company's value its corporate culture its customer loyalty its innovative capability simply not captured in financial numbers so we should look beyond the short-term and the quantitative and look to the long-term and the qualitative now just because social responsibility can't be quantified doesn't mean it can't be measured indeed there's many summer measures out there so just like the best companies list measures employee well-being so true cost and sustained oolitic s– measure environmental sustainability and asset four and calvert have a whole host of sustainability measures so put your hands up in the audience you've heard of all four of these companies I don't see a single hand up in a very intelligent audience of 500 so you're thinking who but that's precisely the point most people haven't heard of these measures because they're often glossed over in favor of financial numbers so because most investors are ignoring this information if you gather this information it will give you a competitive advantage indeed perhaps because the market is so short-term is perhaps the cause the market is so focused on the numbers perhaps the cause of the market like that stock analyst in Businessweek wrongly thinks that employee friendly companies are tree-hugging I find that it takes the market four to five years before the benefits of employee well-being fully show up in the stock price so you could buy those best companies three years too late and still earn financial returns so think long term value not short term numbers and simile we shouldn't dump stocks at the first sign of trouble right because investing in what your workers cost money today the benefits take four to five years to appear so we dump a stock because it's missed this quarters earnings target we pressure managers to focus on the short term now it's your responsibility as investors to support management's pursuit of the long term by looking to the long term yourselves indeed Unilever chief executive Paul Polman he stopped reporting quarterly earnings to allow him to focus on the long term and this is why they're a major force for sustainability for example designing shampoos to use yet less water and one of their long-term investors is Alliance trust they've been around for a hundred and twenty seven years and some families who held Alliance trust shares back in 1888 still hold them today in 2050 that allows them to think long term value not short-term numbers and be one of the leading investors and social responsibility and that's not at the expense of returns they've increased their dividend every single year since 1967 and if you had 100 pounds of Alliance Trust stopped back in 1888 with dividends reinvested that would be worth eighteen and a half million pounds today if this were to scale that green bar would be through the roof of this building so back to my original question why do businesses exist to earn profits or to serve a purpose for shareholders or for society customers employees and the environment well what's the answer the answer is yes but but how can you answer yes to a multiple-choice question because it's not multiple choice it's not either/or it's not zero-sum it's both and businesses exist to serve a purpose and by doing so and only by doing so will they generate profits in the long run to reach the land of profit follow the road of purpose thank you very much

  1. Truly appreciate your research on this topic. Validates the qualitative, intrinsic values of social responsibility perfectly. Excellent presentation too! Thank YOU Alex!!!

  2. Damn you Harry Potter Movies……Now whenever I hear an orator with that glorious accent I assume some manner of magical activity will interrupt the lecture….

  3. Was about to watch an episode of a TV series and stumbled across during my study break, absolutely no regrets!

  4. Im using this tostudy for a test and it really helped me, thank you so much for making these amazing informative videos

  5. Very interesting idea of CSR! I really enjoyed the talk. Although I'm wondering whether there are any examples of any companies that practiced CSR but then failed to earn profit and grow? If there are, what were the reasons for it?

  6. A very insightful video which truly gives an accurate picture of CSR and businesses pursuing profit. Very well done!! Great presentation skills as well!

  7. Excellently covers the core understanding of CSR..
    We need practical and vivid ideas which in return can become an instrument of societal change not only in developed parts of the world but in LDCs too.
    I liked the presentation and oratory excellence..
    We still need a system which inherently checks the implementation of CSR initiatives assumed by companies regardless of their size.

  8. I experience it in my office as it mostly follows the moderate way the lecturer explains. This is a superb way of molding the ethics & corporate social responsibility of a business.

  9. Your presentation was the best I've ever listened to. You not only backed up your argument with relevant resources but explained the definition of CSR from various angles. Well Done Alex

  10. I am late to this discussion, but many of the core hypothesis on this video have been debunked, by Henry Mintzberg among others. The growing inequality in open market economies proves that for profit corporations will look for opportunities to profit and take advantage of their clients, and see social impact as a secondary objective. That is why in healthcare for example, most organisations are run by either governments or community representatives.

  11. According to Robert X Cringely (decline & fall of ibm, chapter 3), the "conventional view" only dates back to 1976. Jensen & Meckling, "Theory of the Firm" in Journal of Financial Economics. Cringely points to another professor (ok, dean) — Roger Martin — for further critique of this not-very-old idea.

    I think it would be easy to make a leap from 1976 to Reaganomics, option awards to executives, executive short-term-ism, and the late-20th-c decline of the United States and its workers. I'm not ready to make that jump yet.

  12. Social Responsibility, Tired of being a thought when making attempts to make myself happy. Thoughts observed while reading and comprehending, after refusing a conversation and subjects about people, places and things!!!! Help! Being talked to after saying, No.

  13. nice going
    i wish i could know more about csr
    because of the fact that i have a seminar and this not my area of expertise i am suppossed to do a case study of any industry
    but i am confused which to choose
    plzz suggest anyone
    so far i came to know that if u want to get more profit and a large turnover u need ppl and their trust

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