00:00:12
why do businesses
00:00:14
exist to earn profit or to serve a
00:00:18
purpose for shareholders or for society
00:00:22
customers employees and the environment
00:00:25
well the conventional view is
00:00:27
exclusively to earn profit and that's
00:00:30
not as narrow-minded as it sounds
00:00:32
because to earn profit a company is
00:00:34
forced to care about Society it has to
00:00:37
make high quality products or customers
00:00:39
will stop buying it has to treat its
00:00:41
workers well or they'll leave and it
00:00:44
can't pollute the environment or its
00:00:47
brand will be hurt indeed leading
00:00:49
Economist Milton Friedman once famously
00:00:51
wrote the social responsibility of
00:00:55
business is to increase profit so just
00:00:59
head to the land of profit and you'll
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get all of these other decisions
00:01:03
right but this Theory assumes that you
00:01:06
can calculate the effect that ethical
00:01:08
Behavior has in your profits in practice
00:01:11
you can't reduce every decision to a
00:01:13
mathematical
00:01:15
calculation take marks and Spencer the
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UK High Street store now former chairman
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Simon Marx he had a policy where all top
00:01:23
management had to walk around the shop
00:01:25
floors to see firsthand how customers
00:01:27
and workers were being treated and one
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one day back in the 1930s on one of his
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own visits Simon sees a shop assistant
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faint and he's concerned he wants to
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find out why and it turns out that her
00:01:39
husband's unemployed and she's not
00:01:42
eating so that her family
00:01:44
can so the very next week Simon
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introduces nutritious meals for all
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staff at nominal
00:01:53
prices why well Milton fredman would say
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do a
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calculation if if I provide nutritious
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meals this many workers are not going to
00:02:03
faint so I'm going to make this much
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more money but there's obviously no way
00:02:08
you can calculate that
00:02:09
number instead Simon's thinking was
00:02:13
different I'll provide nutritious meals
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even if it costs me a bit because I care
00:02:19
about my workers I want to make sure
00:02:22
they eat well and because it goes above
00:02:25
and beyond marks and Spencer has an
00:02:28
excellent reputation for quality
00:02:30
and that in turn leads to
00:02:33
profit so that's the second view which
00:02:36
is called Corporate social
00:02:39
responsibility now you might see it it's
00:02:41
a bit tree Huggy and out of touch but
00:02:44
it's actually not too different from the
00:02:46
first view it agrees that profit is good
00:02:50
but profit is only a byproduct it's not
00:02:52
the end goal instead businesses exist to
00:02:56
serve a purpose to make products that
00:02:58
transform customers lives for the better
00:03:00
to provide employees with a healthy and
00:03:02
enriching workplace and to preserve the
00:03:04
environment for future
00:03:06
Generations even if you can't calculate
00:03:09
the bottomline impact of doing so and if
00:03:12
you do that profits will come
00:03:16
naturally so take George MK the former
00:03:19
president of MK
00:03:21
Pharmaceuticals now his mindset wasn't
00:03:24
how can I make as much money as possible
00:03:27
selling
00:03:28
drugs it was
00:03:30
how can I use science to save people's
00:03:34
lives now back in 1942 penicillin was
00:03:37
still a new drug it hadn't been made
00:03:39
outside the lab before it was too
00:03:40
expensive but George takes a punt and
00:03:43
penicillin becomes made by MK a first
00:03:46
company for the first
00:03:48
time now this is a photo of Anne Miller
00:03:51
a 33y old woman she lives in New Haven
00:03:53
her husband's Ogden Miller the Athletics
00:03:56
director of Yale
00:03:57
University and on March the 4th 14th
00:04:01
1942 an lies dying in a hospital bed
00:04:06
stricken with strep tockle
00:04:08
septicemia which she's caught after
00:04:10
suffering a miscarriage her fever struck
00:04:13
104 to 106 for 11 straight days and
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everything the doctors have tried has
00:04:21
failed until
00:04:23
penicillin Anne becomes the first
00:04:26
American ever to be treated with
00:04:27
Penicillin and it saves her life life
00:04:31
the very next morning her temperature is
00:04:32
back down to normal and she makes
00:04:34
complete recovery she goes on to having
00:04:37
three sons and she lives until 90 years
00:04:40
old and MK then shared the secrets of
00:04:44
how to make penicillin with its
00:04:47
competitors so that they could do so
00:04:49
also saving thousands of lives in World
00:04:52
War
00:04:53
II as George MK said we try never to
00:04:57
forget that medicine is for the people
00:05:01
it is not for the prophets the prophets
00:05:04
follow and if we have remembered that
00:05:06
they have never failed to
00:05:08
appear so just serve a purpose and the
00:05:13
prophets will
00:05:14
follow nice idea if it were true but
00:05:18
where's the
00:05:20
evidence well that's what I set out to
00:05:23
gather I wanted to test whether socially
00:05:26
responsible firms actually perform
00:05:29
better or are instead distracted from
00:05:31
the bottom
00:05:32
line but how do you measure social
00:05:36
responsibility well I chose to look at
00:05:38
employee well-being now that's not the
00:05:41
only Dimension that's important there's
00:05:42
customers and the environment but I
00:05:45
chose employee well-being because
00:05:47
there's a particularly good measure out
00:05:49
there the list of the hundred best
00:05:51
companies to work for in America now
00:05:54
published every year by Fortune Magazine
00:05:57
so this list is available from 1984 so I
00:06:00
have tons of data and it's also very
00:06:02
thorough it looks at not only
00:06:04
quantitative factors such as pay and
00:06:07
benefits but also qualitative factors
00:06:10
like trust and management pride in your
00:06:12
jobs and camaraderie with your
00:06:14
colleagues so I study the effect of
00:06:17
being a best company to work for on
00:06:19
future stock
00:06:22
returns but how do I know whether good
00:06:24
stock returns are down to employee
00:06:26
well-being it could just be your
00:06:28
industry happened to perform well or
00:06:30
some other Factor so to isolate the
00:06:33
effect of employee well-being I control
00:06:36
for what industry you're in for firm
00:06:38
size for growth opportunities for past
00:06:40
returns and a whole list of other
00:06:43
characteristics and as we all know
00:06:46
correlation doesn't imply causation so I
00:06:49
do a number of further tests to suggest
00:06:52
that its employee wellbeing that causes
00:06:55
good
00:06:56
performance rather than good performance
00:06:59
allowing a company to spend on employee
00:07:03
well-being it took four years to
00:07:05
complete this study to verify the
00:07:07
robustness of the results and to rule
00:07:09
out alternative
00:07:11
explanations so what did I
00:07:13
find I found that the 100 best companies
00:07:16
to work for in America delivered stock
00:07:19
returns that beat their peers by two to
00:07:23
three% per year over a 26-year period
00:07:29
simply put companies that treat their
00:07:33
workers better do
00:07:36
better and this fundamentally changes
00:07:39
the way that management should be
00:07:40
thinking about their
00:07:41
workers you might think isn't it obvious
00:07:45
that companies do better if their
00:07:47
workers are
00:07:48
happier but it's not obvious because
00:07:51
treating your workers well is
00:07:54
costly take Costco the American
00:07:57
supermarket chain so Costco pays its
00:08:00
workers $20 per hour that's nearly
00:08:03
double the national average of $111 and
00:08:06
it gives 90% of its employees Healthcare
00:08:09
that's expensive indeed a stock analyst
00:08:12
quoted in Business Week said Costco
00:08:15
management is focused on employees to
00:08:18
the detriment of
00:08:20
shareholders why would I want to buy a
00:08:22
stock like
00:08:23
that indeed the conventional view is
00:08:26
that a pound paid to your employees
00:08:30
is a pound taken away from
00:08:32
shareholders so pay your workers as
00:08:34
little as possible and work them as hard
00:08:36
as possible just like a great football
00:08:39
manager can squeeze that little bit
00:08:41
extra out of his
00:08:43
players I tried to get Alex Ferguson but
00:08:46
I couldn't find him shouting at his own
00:08:47
players only at
00:08:50
referees so under this view employee
00:08:53
wellbeing is a bad sign because it
00:08:55
suggests that you're allowing your
00:08:56
workers to slack off indeed before my
00:08:59
current life of poverty I used to be an
00:09:01
investment banker you'd like to see a
00:09:03
photo of my Oak panel corner
00:09:06
office that's my
00:09:08
Empire so as you can see from the
00:09:10
microwavable ready meals in the bottom
00:09:12
corner I was a junior analyst and one
00:09:16
day in the office the vice president
00:09:17
catches me laughing and he says Alex do
00:09:21
not laugh when you're in the office I'm
00:09:24
Banning you from
00:09:26
laughing I said why he said because if
00:09:29
you're too happy the managing director
00:09:32
will think that I am not working you
00:09:33
hard
00:09:35
enough but the result suggest instead
00:09:37
that treating your employees well
00:09:39
actually pays off in terms of firm value
00:09:42
indeed Costco's former CFO Richard
00:09:45
galante said from day one we've run the
00:09:49
business with the philosophy that if we
00:09:51
pay better than better than average if
00:09:53
we provide a salary that people can live
00:09:55
on have a positive environment and good
00:09:58
benefits will be able to hire better
00:10:00
people they'll stay longer and be more
00:10:05
efficient so Thanksgiving is the biggest
00:10:08
public holiday in America Everybody's
00:10:11
Free to go
00:10:12
shopping but not at Costco because
00:10:15
Costco is closed on Thanksgiving and
00:10:18
other major public holidays even though
00:10:21
doing so sacrifices tons of
00:10:24
profits
00:10:25
why because Costco's management believes
00:10:28
that its workers should should be
00:10:29
spending these holidays with their
00:10:32
families and this concern for workers is
00:10:34
not at the expense of profit profits
00:10:36
have topped $2 billion in each of the
00:10:39
last two
00:10:40
years and while my study focuses on
00:10:43
employee well-being research by my lbs
00:10:46
colleague Janis yanu and many others has
00:10:49
shown the other dimensions of social
00:10:51
responsibility also improve firm
00:10:54
value and these findings are incredibly
00:10:57
freeing because this means as managers
00:11:00
we can act responsibly without doing a
00:11:02
calculation without expecting anything
00:11:04
in return to do things for intrinsic and
00:11:07
not instrumental value because even
00:11:11
though Financial rewards were not the
00:11:13
motor for acting ethically they
00:11:15
typically manifest
00:11:17
anyway caring about Society is not at
00:11:20
the expense of profit it supports
00:11:25
profit the results have implications not
00:11:27
only for managers but also for investors
00:11:29
which nearly everybody in this audience
00:11:31
will be now as investors you have the
00:11:35
power to put your money into companies
00:11:38
that reflect what you would like to see
00:11:40
in this
00:11:41
world now the conventional view is that
00:11:43
if you invest in ethical stocks you have
00:11:45
to sacrifice some returns but the
00:11:47
results suggest there's no
00:11:50
sacrifice investors can both do good and
00:11:54
do well investing in companies that are
00:11:57
socially responsible at least to their
00:12:00
workers pays off in higher returns
00:12:04
indeed the Parnassus Endeavor fund
00:12:06
pursues exactly this employee well-being
00:12:09
strategy and over the 10 years since its
00:12:12
Inception it's beaten the market by 4%
00:12:16
per
00:12:18
year and more broadly the results
00:12:20
suggest a new way of thinking in the
00:12:22
criterial we use to pick stocks now it's
00:12:25
tempting to look at Price earnings
00:12:27
ratios and profits and dividends you can
00:12:29
easily look them up on Yahoo finance but
00:12:32
because this data was so easy to gather
00:12:34
everyone else is gathering it so it
00:12:36
doesn't give you a competitive
00:12:38
Advantage indeed some of the most
00:12:41
important dimension of of a company's
00:12:43
value it's corporate culture its
00:12:46
Customer Loyalty its innovative
00:12:49
capability simply not captured in
00:12:51
financial
00:12:52
numbers so we should look beyond the
00:12:55
shortterm and the
00:12:57
quantitative and look to to the
00:12:59
long-term and the
00:13:02
qualitative now just because social
00:13:05
responsibility can't be
00:13:08
Quantified doesn't mean it can't be
00:13:10
measured indeed there's many thorough
00:13:12
measures out there so just like the best
00:13:14
companies list measures employee
00:13:17
well-being so true cost and
00:13:19
sustainalytics measure environmental
00:13:22
sustainability and asset 4 and Calver to
00:13:25
have a whole host of sustainability
00:13:27
measures so put your hand up in the
00:13:29
audience if you've heard of all four of
00:13:32
these
00:13:33
companies I don't see a single hand up
00:13:36
in a very intelligent audience of 500 so
00:13:38
you're all
00:13:40
thinking
00:13:43
who but that's precisely the point most
00:13:47
people haven't heard of these measures
00:13:50
because they're often glossed over in
00:13:51
favor of financial numbers so because
00:13:54
most investors are ignoring this
00:13:56
information if you gather this
00:13:58
information it will give you a
00:14:00
competitive
00:14:02
Advantage indeed perhaps because the
00:14:04
market is so short-termist perhaps
00:14:06
because the market is so focused on the
00:14:08
numbers perhaps because the market like
00:14:10
that stock analyst in Business Week
00:14:12
wrongly thinks that employee friendly
00:14:14
companies are tree
00:14:16
Huggy I find that it takes the market
00:14:20
four to five years before the benefits
00:14:24
of employee well-being fully show up in
00:14:26
the stock price so you could bu those
00:14:29
best companies 3 years too late and
00:14:34
still earn Financial
00:14:36
returns so think long-term value not
00:14:40
short-term
00:14:41
numbers and simly we shouldn't dump
00:14:44
stocks at the first sign of trouble
00:14:46
right because investing in your workers
00:14:47
cost money today the benefits take four
00:14:50
to five years to appear so if we dump a
00:14:53
stock because it's missed this quarters
00:14:55
earnings Target we pressure managers to
00:14:58
focus on the short term now it's your
00:15:01
responsibility as investors to support
00:15:04
Management's pursuit of the long term by
00:15:08
looking to the long-term
00:15:10
yourselves indeed unilever's chief
00:15:12
executive Paul pman he stopped reporting
00:15:15
quarterly earnings to allow him to focus
00:15:17
on the long term and this is why they're
00:15:20
a major Force for sustainability for
00:15:22
example designing shampoos to use yet
00:15:25
less water and one of their long-term
00:15:28
investors is Alliance trust they've been
00:15:31
around for 127 years and some families
00:15:35
who held Alliance trust shares back in
00:15:38
1888 still hold them today in
00:15:41
2015 that allows them to think long-term
00:15:43
value not shortterm numbers and be one
00:15:46
of the leading investors in social
00:15:49
responsibility and that's not at the
00:15:51
expense of returns they've increased
00:15:54
their dividend every single year since
00:15:57
1967 and if you had 100 of Alliance
00:16:00
Trust stock back in
00:16:02
1888 with dividends
00:16:05
reinvested that would be worth 1885
00:16:08
million pounds today if this were to
00:16:11
scale that green bar would be through
00:16:13
the roof of this
00:16:15
building so back to my original
00:16:17
question why do businesses
00:16:21
exist to earn profits or to serve a
00:16:25
purpose for
00:16:27
shareholders or for for society
00:16:29
customers employees and the
00:16:32
environment
00:16:34
well what's the
00:16:37
answer the answer is
00:16:45
yes but but how can you answer yes to a
00:16:48
multiple choice
00:16:50
question because it's not multiple
00:16:53
choice it's not either or it's not Zero
00:16:57
Sum it's both
00:17:00
and businesses exist to serve a purpose
00:17:04
and by doing so and only by doing so
00:17:07
will they generate profits in the long
00:17:09
run to reach the land of profit follow
00:17:13
the road of purpose thank you very much
