Business should have a social purpose.
Words John Berry
Many companies have a sustainability focus and achieve great things for New Zealand. But equally there are companies that do harm.
It may be social harm – there are more than a hundred exploitive employers on the Labour Inspectorate’s ‘blacklist’ for breaching minimum employment standards. Others cause environmental harm; the worst in recent times was the grounding of the container ship Rena on the Astrolabe Reef near Tauranga, spilling 350 tonnes of oil into the ocean. Diamantis Manos, managing director of the company which owned the Rena, apologised to New Zealanders. But that’s no help to the 2500 sea birds killed and the serious damage to local ecology caused by the wreck.
Controversial companies damage their reputation and can be shunned by consumers. It is bad for business to behave badly. It is critical for businesses – and investors – to understand what it means for a company to have a focus on “doing good”.
When any group is asked what they see as the purpose of a company, the answers will cover a broad spectrum. At one extreme is the free-market thinking of Nobel Prize-winning economist Milton Friedman. In his view, “the business of business is business”, meaning that companies exist to make money and values don’t come into the equation. They should operate within the law to maximise profits and therefore maximise dividends paid to shareholders. In Friedman’s view it is then up to shareholders to express their values – they can save or spend their dividends or give to charity.
At the other end of the spectrum is Larry Fink, chief executive of Blackrock, which is the world’s largest fund manager. He is clear that the companies in which Blackrock invests should have a social purpose. They must act in the interests of all stakeholders, which he defines as shareholders, employees and communities.
Patagonia, a US clothing company with a huge focus on sustainability, takes this view one step further, regarding our planet as its key stakeholder.
There are three reasons why companies may choose to focus on doing social and environmental good. The first is values based – the founder or senior management genuinely believe it is the right thing to do.
The second reason is business sustainability. If a business looks 10, 20 or 50 years into the future, it may realise it is essential to take environmental issues seriously. For example, New Zealand fishing company Sanford is well aware that sustainable fishing stocks and fishing practices are critical if it is to survive and flourish in the long term.
The third reason is to protect corporate reputation. Whether it is the scandal of KiwiSaver providers owning cluster bomb manufacturers or Facebook’s multiple and damaging data breaches, no company wants the headlines, brand damage and potential fines that result from severe controversy. Social and environmental risks can lead to massive financial costs.
When investing in companies, we typically want them to behave in a way that is consistent with our personal values. This generally means that a “do no evil” approach (acting just inside the law to maximise short-term profit) doesn’t go far enough.
Companies should have a social purpose. The good news is that companies that accept this make better investments – with more loyal customers, stronger brands and less risk of severe financial damage from social and environmental controversies. A company, and its share price, can do well when it does good.
John Berry is co-founder and chief executive of Pathfinder Asset Management, a specialist responsible investment fund manager. He is also a member of the government-appointed Financial Advice Code Working Group.