From Friedman to Fink: Why Profit is no longer Purpose
April 17, 2019 / Startup
Shortly after CEO and Chairman of BlackRock, Larry Fink, published his 2019 Letter to CEOs, the internet and airwaves erupted with analyses on what exactly the legendary executive meant when he said ‘Purpose is not the sole pursuit of profits but the animating force for achieving them’. This seemed a direct contradiction of the Friedman Doctrine (that the sole purpose of business is to generate profit for shareholders), held sacred by the corporate world since the 1960s.
The value of having purpose is undisputed. 58% of companies with a strong sense of purpose reported more than 10% growth in 3 years, compared to just 25% of companies with a mildly developed sense of purpose and 15% in companies with weak understandings of their purpose. But if purpose is all-important, why is profit no longer a good enough one for the modern company? Simply put, the context within which businesses operate is fundamentally different from the world Milton Friedman understood. And it is set to change even more. No longer are companies allowed to consider only their own shareholders. No longer are companies free from social responsibility. No longer can companies pursue profit at the expense of all else. Companies are increasingly judged on their global citizenship. On their interaction with and concern for society. And on the good they do in the world. A fact noted by Fink, and embraced by the Millenial and Gen Z workforce.
Having purpose means having a reason for existing that goes well beyond generating returns for shareholders. For CVS Pharmacies it meant stopping the sale of cigarettes at any of its stores in order to ‘help people on their path to better health’. Airbnb deleted the accounts of members it believed to be white supremacists. Virgin Atlantic risked the ire of conservative customers by launching a ‘Pride flight’. In the short term, these decisions cost the company in question revenue. For Milton, they would have been bad business decisions. But in Larry Fink’s world, and the new world of work, these decisions were absolutely right – because they held true to the company’s purpose.
Holding true to one’s purpose is crucial. Purpose provides the company with a strong sense of identity. It’s also the framework for day-to-day operations. It serves as a guiding light for future aspirations. And when difficult decisions must be made, it provides a moral compass to keep the company steadfast
Companies are increasingly called upon to make difficult decisions. And unlike the days of ‘profit is king’, these decisions may not relate to internal processes and product lines alone. Instead, businesses must often take a stand on social or political issues. In fact, according to the Edelman Trust Barometer, 64% of people believe CEOs should take the lead on social change. Which explains why sports brands have subtly denounced presidents, why grooming companies have taken a stand against gender inequality, and even soft drinks have waded in on social issues. While Friedman may have been astounded at why businesses would choose to concern themselves with such issues – this is the new reality demanded by employees, customers, and shareholders themselves. A company is not just responsible for products and services, it must have moral character.
According to research done by PWC, 83% of employees believe striving towards the company purpose gives their day-to-day work meaning. 56% feel the company purpose gives them a strong sense of identity. And 53% are energized by it. The statistics for customers echo this trend. Almost 80% of consumers buy the character of the brand before judging the product or service’s merit, with 73% of customers willing to defend the brands they support. 66% would be willing to switch products to a company with a better perceived character. Even shareholders themselves demand more from their companies. Consider Unilever, which no longer has a separate corporate social reponsibility arm, instead changing its organizational purpose to ‘…[M]ake sustainable living commonplace. We work to create a better future every day, with brands and services that make people feel good, look good, and get more out of life’. Nowhere is shareholder returns mentioned.
As Fink points out, companies can’t afford to take a short-term view on profits any longer. The world simply cannot sustain that. On the one hand, he means the world of work can no longer sustain that, for the reasons cited above. And on the other, he calls to businesses to step up as ‘society is increasingly looking towards companies, both public and private, to address pressing social and economic issues’. He cites issues ranging from protecting the environment, to retirement, to gender and racial inequality. Surely these are not business requirements, but moral imperatives.
Embedded in his letter is the belief that companies can not operate in isolation from society any longer. That good business is not only what’s good for the business, but the good a business can do. And that this new mindset must be embraced, and enshrined in new understanding of a company’s true purpose.