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The Debating Group: Does business best serve society by focusing on the bottom line?

Tuesday December 4, 2018 at 9:44am

According to Dr Jamie Whyte, Research Director, Institute of Economic Affairs, “In the process of making profits, businesses benefit society”. He was proposing the motion, ‘Business best serves society by focusing on its bottom line’ at the Debating Group debate on 26 November 2018 at the House of Commons. The debate was sponsored by the Chartered Institute of Public Relations and chaired by The Rt Hon the Lord McNally.

Dr Whyte’s theoretical case for the proposition is that profit seekers help society in the process of making a profit. They combine components to make a new product: they take produce or labour and combine them in certain ways that can change the world. This benefits suppliers who may have a producer’s surplus, workers who are paid more than the minimum, and consumers. They only make a profit if consumers value the product at a higher level than the cost of creating it. Dr Whyte suggested that two things are clear from this argument: ‘Trickle down’ is not how society is helped by people who get rich from commerce. Benefit comes from the process. It is in the process of getting richer that they give value to society. ‘Giving back’ is a ridiculous expression as nothing has been taken. The transaction is voluntary: people buy because they choose to do so.

Dr Whyte went on to distinguish profit-directed virtue from costly virtue. The profit motive suffices to constrain harmful activity by profit seekers. It ensures they won’t break the law; they won’t offend the moral sensibilities of customers, employees or investors. They may even do charitable work. If customers or investors like it enough it can be profitable i.e. ‘profit-driven philanthropy’. However, he is concerned about cases where profit is reduced by virtuous corporate activity. It can be likened to theft: a manager can donate company money to the RSPCA, but it is not his money to give. Corporate charity is improper: it should be left to private individuals who own corporates. Dr Whyte also suggested that this undermines the cosmopolitan and civilising nature of commerce. By working at a company, you are not endorsing any moral code or political agenda. People can do that with their own time and money, but not the company’s time and money. Companies are collective enterprises aimed at making money. Money is gloriously neutral. The firm that devotes itself solely to making money is neutral. Business should mind its own business, which is to make a profit.

Organisational purpose

Opposing the motion, Sarah Hall, Sarah Hall Consulting Ltd and CIPR 2018 President, began her argument by quoting the Guardian coverage of a report published by the United Nations, ten days ago, “The UK government has inflicted ‘great misery on its people with punitive, mean-spirited, and often callous’ austerity policies drive by a political desire to undertake social re-engineering rather than economic necessity”....Philip Alston, the UN’s rapporteur on extreme poverty and human rights, ended a two-week fact-finding mission to the UK with a stinging declaration that, despite being the world’s fifth largest economy, levels of child poverty are “not just a disgrace, but a social calamity and an economic disaster”.

Picking up on the phrase; ‘a social calamity and an economic disaster’, Sarah Hall commented, “If that doesn’t speak to the need to place people above profit, nothing ever will. And when the government does not make the general public its priority, this is exactly the situation we find ourselves in”. When society’s needs are not being fulfilled, we need businesses to step up and give back – remembering that they too have a civic duty.

She went on to discuss ‘organisational purpose’. According to the Chartered Management Institute, organisational purpose is, “An organisation’s meaningful and enduring reason to exist that aligns with long-term financial performance, provides a clear context for daily decision-making, and unifies and motivates relevant stakeholders”. This means profit generation that is focused on and benefits all connected to the organisation. Not just in the management team’s interests so they can take more home in their pay packet. Surely no one can justify the £265m that Bet365 founder paid herself in 2017, more than a third of the betting firm’s annual profit.

When one considers the CIPR’s own definition of what we do in terms of being “the planned and sustained effort to establish and maintain goodwill and mutual understanding between an organisation and its public”, it becomes very clear how relevant organisational purpose is to public relations. The work PR does is interconnected and as reputation guardians, it falls to PR to help business do the right thing.

Organisational purpose outside of money making is important, not least in times of prolonged austerity and political, societal and technological change, as we are experiencing now.

If you need the commercial imperative outside of ‘doing good’, this type of change acts as a flashpoint when relationships between organisations and the public change and consumers scrutinise where to invest their hard-earned cash. They seek brands aligned with their values and which, recognising their customers’ daily challenges, are committed to alleviating these. Businesses not living their values risk being called out publicly, with reputational damage and negative impact to the bottom line that result.

Social purpose is an issue rising up the corporate agenda. Unilever’s Paul Polman has been quoted as saying, “Capitalism can no longer prosper at the expense of society”. Larry Fink of Blackrock, one of the world’s leading asset management companies, has sent an anniversary letter to CEOs saying “Society is demanding that companies, both public and private, serve a social purpose. Companies must benefit all their stakeholders, including shareholders, employees, customers and communities in which they operate”.

Profit generation and organisational purpose do not have to be mutually exclusive. Sarah Hall cited Patagonia whose purpose statement is to “build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis”. The clothing brand reached over $750m in 2017, without running a single TV advertisement. When it did advertise on TV it was nothing about clothing. Every time Patagonia amplifies its social mission, it grows.

Nike’s decision to use Colin Kaepernick as the face of its national campaign may have ruffled a few feathers, but taking a stand and doing the right thing saw its stock soar – in the bank holiday weekend alone after the ad was launched, online sales grew by 31%.

Dominos in the US have taken to filling in potholes (admittedly stamping the Dominos logo on top) – a fantastic campaign stunt which has garnered them column inches and increased sales, as well as increased customer loyalty. Social purpose equals win-win.

In the Power of Purpose, John O’Brien and Andrew Cave set out five drivers behind the increased demand for corporate purpose outside of wealth creation:

  • A need for established companies to find new, authentic ways of creating sustainable value across all stakeholders;
  • Entrepreneurs wanting to demonstrate a deep sense of personal purpose as they carve out new areas of business and social enterprise;
  • Government agencies looking to create collective communities of purpose-driven people, engaged in civil society;
  • Individuals looking to make an impact on the people and issues they care about;
  • Charities and NGOs wanting to create clarity around their rationale and operations to deliver enhanced impact.

This is echoed by the Chartered Management Institute’s report, The What, the Why and the How of Purpose which states that purpose is a powerful business tool which can increase legitimacy; attract and retain talent; drive strong stakeholder and customer relationships; increase employee psychological welfare; and increase business performance.

70 years ago, the rationale for founding what was then the IPR was to achieve mutual understanding and good relations. The Institute’s fathers came from local government and had accountable leadership and social purpose at the front and centre of their work.

It is a focus to which we are returning and it is an important role. According to the World Economic Forum’s ‘Survey on the Global Agenda’ 86% of respondents believe there is a leadership crisis in the world today, Edelman’s Trust Barometer 2018 reports that trust in business is down to 43%. Only a quarter of the population now trust social media as a source of news and information.

Public relations practitioners are well-placed to help organisations find their 'why' and agree their 'how', and build long-term, sustainable relations between an organisation and its public based on two-way engagement, transparency, authenticity and trust. They can help organisations find their purpose outside of wealth creation.

Sarah Hall is certain that stakeholders are not motivated by the ever-increasing size of director pay packets. People want to know how companies are playing their part in making our world a better and happier place in which to live.

Corporate Social Responsibility

Seconding the motion, Valentina Kristensen, Director of Growth & Communication, OakNorth Bank, stated that she works for a business that is absolutely focused on its bottom line, but has still, in only three years of existence, managed to have a very positive impact on society. The success of OakNorth, a challenger bank, which was launched in 2015 to provide loans to British SMEs, demonstrates three clear points:

  • That businesses that focus on their bottom line have a positive impact on society – they create jobs, improve people’s quality of life, help them fund their retirement and in doing so, make Britain a nation of private investors;
  • The impact on society of investment – the purest capitalist pursuit – is to stimulate productivity and innovation;
  • If you are serious about your bottom line, you need to take your corporate social responsibility seriously. The two activities are not mutually exclusive.

From the outset the company focused on its bottom line. As a result it managed to reach cash flow break-even in just eleven months and made over £10m in profit last year. It expects to triple that figure in 2018.

The company pays interest on people’s savings and then charges interest on money that is lent to SMEs. The margin between those two activities is where it makes a profit. This is then re-invested into the business, enabling it to continue to lend to SMEs and grow its loan book.

SMEs account for over 99% of all private sector businesses and 60% of all private sector employment in the UK.

Valentina Kristensen gave examples of what some of the SMEs that the company works with are doing for society:

  • Leon, the healthy fast-food chain, borrowed from the bank to open another 50 sites and hire another 1,000 people;
  • Pocket Living, London’s fastest growing affordable housing provider, developed 150 new affordable homes in Croydon, enabling young professionals to get on the property ladder and become first-time buyers;
  • The Caridon Group, a company specialising in providing social housing for tenants who may otherwise be homeless, will be developing another 620 new homes in Bristol.
  • To date, the £2.4bn the bank has lent to British SMEs has directly helped with the creation of 9,500 new homes and 11,000 new jobs in the UK, as well as adding £8bn to GDP.

By focusing on the bottom line, the bank has helped SMEs create more jobs, more homes and more economic growth.

Thanks to auto-enrolment, SMEs are contributing to 60% of all workplace pensions. This is helping Britons become a nation of private investors. The impact on society of this investment is to stimulate productivity and innovation. Virtually all major breakthroughs that have improved lives have been by private sector companies focusing on their bottom line – concrete, steel, the car, railways, antibiotics, contraceptives, the TV, radio, email, the Smartphone and so on. And virtually all major breakthroughs that will ensure the continued existence of life on earth, or on other planets, will be from private sector companies focusing on their bottom line.

Businesses that are serious about their bottom line take their corporate social responsibility seriously. The two activities are not mutually exclusive. Since OakNorth was launched in 2015, it has donated over £100,000 to various charities. From this year forward it will donate 1% of its profits to charity. One third of this will go towards supporting the numerous charities with which it already works: the remaining two-thirds will go towards supporting social entrepreneurship. Lansons, the agency where Valentina Kristensen started her career, also donated 1% of its profits to charity.

Many businesses see it as their duty to give back and know that in doing so, they are likely to attract more customers and customer loyalty and therefore make more profit. US and UK companies in the Fortune 500 spend $15.2bn a year on corporate social responsibility. Conversely, businesses that do not take their corporate social responsibility seriously are likely to see a decline in sales and profits. For example the #DeleteUber campaign has seen over a million people ditch the app – a campaign that has been boosted by everything from Uber’s attempts to protect alleged sexual harassers in the company, to the former CEO’s involvement with the Trump administration. In 1996, Nike was severely embarrassed when a US magazine featured a photograph of a young Pakistani boy sewing together a Nike football. As a result, sales of Nike products fell by nearly 8% while its share price plummeted by 15%. In the first 50 days after the Deepwater Horizon disaster BP saw its share price fall by 52%.

The fact is that public perception is increasingly important for profitability. If you are serious about your bottom line, you will take your impact on society seriously too. The two are not mutually exclusive.

The point of business is to make money. That is what rational business is about. Without a bottom line focus, you do not have sustainability, and you cannot invest in the future of your business. Even social enterprises’ primary aim is to make a profit because they use that profit to reinvest in creating positive social change. If they don’t make money they cannot survive and their whole reason for being becomes irrelevant.

Not-for-profit organisations such as the CIPR need to make a profit to pursue their organisational objectives.

Businesses which focus on the bottom line are having a positive impact on society. Businesses that are most serious about their bottom line are likely to take their corporate social responsibility seriously too.

Valentina Kristensen concluded with an old adage, “Revenue is vanity, profit is sanity and cash is reality”.

Integrated Reporting

Seconding the opposition, Professor Anne Gregory, Chair of Corporate Communication, Huddersfield Business School, recounted her experience at a hotel, when she had suffered food poisoning, and her sense of being secondary to profit in a hotel that was fully focused on its bottom line.

She quoted Milton Friedman, probably the most famous apologist for the ‘Business of Business is Business’. He maintained in 1970, “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud”.

“But”, argued Professor Gregory, “the rules of the game and business have changed. There has been too much deception and fraud: financial: think of the Enron banking crisis; technical: think of the VW emissions scandal; personal data: think of Facebook and Cambridge Analytica; in fact in every walk of business life we can find instances where focusing on the bottom line has involved deception and fraud. The result of this is dramatic: The Edelman Trust Barometer for this last year shows that just 52% of the general public trusts business”.

The response to this irresponsibility is more than a call to operate within the rules, but to demand a change to the rules themselves. Business must serve society because it is ‘society’ that has been damaged. And morally offended. This is a primary responsibility, not a sideshow. The companies mentioned are large with huge turnovers – Facebook has more users than China has people. Their size, power, influence and impact on society and the way they shape it means they are accountable to that society and society is enforcing that. According to Edelman’s Earned Brand Survey, 64% of consumers around the world now buy on belief (and the Guardian says 84%). They will choose, switch or boycott a brand based on the political or social issues they care about. The context has changed; the rules of engagement have changed. Obeying the law and keeping to regulations is not enough – meeting the reasonable expectations of society is the new rule of the game for business. Bottom line thinking does not facilitate this.

There is a dawning realisation that managerial mindsets have to change. We are now dependent on each other – business, society and the planet are related. A host of business leaders and thinkers recognise that bottom-line driven mindsets are just not appropriate for the turbulent, complex and globalised world in which we now live. A focus on quarterly or annual returns, rewards based on financial performance and careers determined by bottom-line results drives inappropriate behaviours. A more sophisticated and nuanced response is needed that takes into account the need for collaboration and joint action. Right now trust in business leaders is precariously low and it is damaging their companies. According to Edelman, just 37% of CEOs are credible in a crisis and only 24% exhibit highly ethical behaviours. The World Economic Forum claims that globally, leaders, including business leaders, have failed in three key areas where they have responsibilities: rising inequality, short termism and corruption. Bottom-line thinking has driven us to this state and if we are to survive as societies, this will have to change.

Professor Gregory maintained that value, not the bottom line, is the new truth. According to research by Ocean Tomo, a US company that prepares companies for flotation on the stock exchange, in 1975 tangible assets including land, equipment, assets and cash were worth 83% of market value. Intangible assets such as brand, reputation, and intellectual property were worth 17%. The last time they did the research in 2015, the exact reverse was true: intangibles are now 84% and tangibles 16%. Such realisation has led to new thinking about how the true value of an organisation can be measured. Integrated reporting is one answer. Adopted by many leading companies such as Unilever, Tata Steel, National Australia Bank, The Crown Estate and the Chartered Institute of Public Relations, Integrated Reporting requires holistic thinking about company value. It identifies six capitals that a company takes from society and for which it needs to make an account. Money is just one of these capitals. There are others that are worth more including the natural environment and relationships. If they are worth more, they should be focused on more: the bottom line is a small part of value.

What is really at the heart of Integrated Reporting is business securing its ‘licence to operate’ from society based on the value it adds. It is about business recognising it has profound and wider responsibilities beyond securing a good profit because it is one of the dominant institutions in society and not separate from it. It takes its resources from society and needs to return them in enhanced form; otherwise it is a net detractor of value. Focusing on the bottom line, even if the bottom line is used for good, is not enough. The World Economic Forum says that altruism has limits. What is needed is a new form of governance that recognises that business has a role to play in helping to solve the huge social and other challenges the world faces and this goes far beyond the bottom line.

To do that business needs to be good, in the richest meaning of that word. This means that it holds true to a purpose that society regards as worth supporting. It does this in a way that is principled. It has high regard for people, because at the end of the day organisations achieve their purpose through people and it does this in a collaborative way that produces value all down the line. Professor Gregory proposed four Ps: purpose, principles, people, process. All this is not a distraction from the business of making money, but necessary to it. A focus on the bottom line alone destroys the potential of business and society to realise their full value.

She concluded, "Focusing on the bottom line is neither good for business or society. The rules of the game have changed: bottom line thinking has got us into the mess we are in and value trumps the bottom line every time”.

Discussion from the floor

The following points were made:

For the motion

  • The contributor focused on SMEs. Small businesses have to focus on the bottom line to survive. But they can be valuable to society.

Against the motion

  • In the old days ‘profits are all’ was the accepted way in business. Nowadays companies tend to do the least societal good they have to and it has landed us in the mess we have today. There is a lack of ethics in business, but if you are not ethical, you are not a good company. Tomorrow’s company must be ethical to be deemed good.
  • The contributor helps schools to think like companies. He believes that business best serves its bottom line by focusing on society.
  • You have to reframe the narrative. Unless you make a profit you are not going to be around to do good. Brands have to be emotionally engaged. In an age of complexity corporate social responsibility has be integral. Having a social purpose is critical.
  • You cannot isolate profits from what a business does. The mantra should be ‘I go into business to drive purpose, not to make profits’. But making a profit enables you to do good.
  • The contributor cited Tesco as an example of a successful company which aims to do good. They have made a business case for bringing their levels of being carbon neutral down to one and a half degrees (compared with the Paris agreement of 2 degrees). Evidently in the US the carbon neutral companies are those which are most successful. Tesco has also formed partnerships with three charities over a 3-year period. Tesco is an example of a company which is using its profits to form the purpose of the company.
  • The contributor did not believe that Amazon is focusing purely on the bottom line. Otherwise it would not have agreed to pay its staff more.

Undecided

  • There is no binary response to this motion. Profits on their own are not bad. If you work in an organisation which does not focus on the bottom line, you will not last. It is an excessive focus on the bottom line which is wrong. Profits are a good indicator of how a business can help society. Profits and good are not exclusive.
  • If we add ‘in the long term’ at the end of the motion, it would be different. Focusing on the bottom line in the short term is bad. In the long term it is not damaging. It is in the long term that companies have to be profitable.
  • The contributor referred to the erosion of social capital in the UK. His father had been a butcher on the high street with sustainable relationships with the supply chain. Social capital was eroded 34 years ago with the beginning of the decline of high street retailers, but he hoped it was coming back. Focusing on profit is complimentary, not in conflict with social purpose.

Summing up

Summing up for the opposition, Sarah Hall shared the perspective of the CBI to demonstrate that senior business leaders also think that a focus on more than the bottom line is critical to improving the reputation of business in society.

She quoted the foreword of Josh Hardie’s Everyone’s Business Tracker, published in 2018, “During a time of huge political and economic uncertainty...the public are increasingly looking towards business for leadership. 92%say businesses should take a stance on social issues”.... “To deliver consistent, sustainable improvements in business reputation, companies must not only prevent future scandals, but also focus on the issues the public care most about”.

There are a myriad ways in which business can best serve society outside of a relentless profit drive. We can all think of examples where businesses, trying to drive up margin, have cut corners to the detriment of their employees and wider stakeholders. It happens across every industry, from construction to residential care homes. The Guardian reported that companies running inadequate UK care homes made £113m profit, despite the vulnerable people in their care being badly neglected according to the Care Quality Commission.

In July of this year, it was reported that Barclays, HSBC, Lloyds and Royal Bank of Scotland were due to report bumper profits of £14 billion, but despite this, customers would still be stuck with easy access savings paying less than 0.5% interest on average.

How is that acceptable in this time of austerity where poverty and food bank usage is now firmly part of daily life? How can those working three jobs and living on the edge ever break the cycle?

The worst example is Grenfell Tower, where a fire caused by flammable cladding, a cheap option chosen by the local authority, resulted in the deaths of 72 people. 72 people could still be alive today if the council had made people its priority, rather than the bottom line.

In Everyone’s Business Tracker, it becomes clear that media is influential in forming people’s opinions. Headlines about scandals and public campaigns on business issues drive the public’s view of business priorities. “As a result, the public now place a higher premium on businesses that work with ethical suppliers and that are taking action to reduce unequal pay – each gaining two places in prominence. This change serves as a clear demonstration of the impact high-profile debates have on the public’s priorities for business...... The public want business leaders to take a more meaningful and proactive stance on issues such as the environment, immigration and equality. Despite the sustained improvements in the public’s views of CEOs, a considerable proportion still believe business leaders are out of touch with wider society (67%). This disconnect is founded in the perception that business leaders are founded by self-interest...business leaders who speak out authentically and take a stance on issues which matter to society are likely to be viewed more favourably”.

Organisational purpose is no longer nice to have. The pubic expects it. You don’t serve society by focusing on the bottom line, you only serve yourself.

Profit generation and purpose are not mutually exclusive. They have benefits for all. It is more than possible to drive social good with an expectation of commercial gain.

According to a Forbes article by leadership strategist Catherina Bulgarella, purpose-driven companies evolve faster than others. Because while purpose can express what an organisation aspires to be and do, at a more advanced level, it becomes a conscious expression of how it intends to evolve and transform. It nudges the organisation to address inconsistencies in its own culture – the say-do gap.

Doing good in society can provide companies with the motivation to innovate and provide a different, better type of product or service, e.g. IKEA, whose purpose is to ‘create better everyday life for the many'. If a large retailer can place purpose at the heart of its business and make life better for those it services, anyone can.

Sarah Hall requoted the Chartered Management Institute's definition of organisational purpose.

It is a way to make money, but one that unifies and motivates relevant stakeholders.

She concluded by quoting Eleanor Turner, Head of Corporate Reputation and Purpose at Porter Novelli, London, “It’s the companies that have a clear purpose, beyond profit, that have the greatest resonance with consumers. When identifying what their purpose is, in order to be authentic and relevant, it is critical that a business identifies those issues most pertinent to it. Articulating this purpose is more important than ever, with there being an overwhelming call from consumers for business to play a role on the discussion on social issues”.

Summing up for the motion, Dr Jamie Whyte pointed out that the stories about ENRON and the banks omitted that they were not successful: they went broke. Profit seekers have a strong motive to behave well. Profit seeking is not morally bad. Focusing on profit does not lead people to behave badly.

People are generally self-serving. Does profit seeking enhance or does it constrain their behaviour? Attending to the people’s preferences makes for a good system: indeed the capitalist system makes you attend to other people’s needs. Certainly people did not behave better under the communist system. People do not necessarily behave better if the constraints of the profit and loss system are taken away.

The commercial world is openly pluralistic: there are willing suppliers and willing buyers. It is an open, free and liberal approach. If you want a free and morally progressive society you must allow people to pursue self-interest and the core of this is making a profit.

The result

The motion was defeated.

Next debate

The next debate will take place on Monday 29th January 2019 sponsored by The Chartered Institute of Marketing. For more details contact Doreen Blythe, Debating Group Secretary, e-mail: doreen.blythe22@btinternet.com

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