A Purpose Beyond Profits

In the last 12 months, if you have turned on the TV, visited a news website, or opened a newspaper, you undoubtedly will have noticed the seemingly endless array of organisations being dragged through the mud for poor ethical decision-making as a result of choosing profits above all else.

Rio Tinto blew up Juukan Gorge, a 46,000-year-old Aboriginal heritage site of immeasurable cultural and archaeological significance. They allegedly followed this up by blaming of indigenous landowners for not warning Rio of the cave’s significance (despite doing so on multiple occasions) and then telling employees they were not sorry for destroying the sites, just for the anguish caused.

AMP promoted Boe Pahari to Chief Executive Officer despite allegedly knowing he was recently penalised for sexually harassing a female colleague. Likewise, Alex Wade, the head of AMP’s wealth business, was hit with allegations he sent indecent images to female colleagues.

Westpac allegedly charged ongoing fees to people who were dead and breached anti-money laundering laws 23 million times, with many transactions going towards the child sex trade in South East Asia.

Facebook allegedly allowed the harvesting of over 50 million users’ personal data by Cambridge Analytica.

There is a common thread linking all of these companies. In every case, they clearly communicated that their purpose is the sole pursuit of profits, which lead to an overriding of any concern for ethics or consequences to stakeholders.

What do I mean by “purpose”?

Put simply, purpose is the reason for your organisation’s existence.

Take that Friedman.

Until recently, since 1970, it has been believed that the sole purpose of an organisation is to increase its profits and return value to its shareholders. This economic theory is thanks to the influential leader of the Chicago School of Economics, Mr Milton Friedman. (Friedman, 1970b) Friedman asserted that corporate social responsibility rested on the shoulders of shareholders, and any corporate leaders who pursued a purpose beyond profitability were “unwitting puppets of the intellectual forces that have been undermining the basis of a free society”.

However, Mr Friedman was wrong. Dead wrong. Since organisations started adopting Friedman’s theory, the rate of return on assets and on invested capital declined from 1970 to 2015 by three-quarters. Forty-nine years later, in 2019, the Business Roundtable (a group that represents the leaders of the world’s largest organisations) decided that the purpose of an organisation is NOT to maximise returns for its shareholders but to provide benefits to all “stakeholders”, including the community, employees, and customers.

The Egg in One’s Beer

The data supports the decision of the Business Roundtable. Jim Collins’ best-selling book Built to Last found that companies whose purpose went beyond making money paid six times more dividends to their shareholders than their profit-driven competitors. (Collins, 2005)

According to a study by Baylor University, leaders driven by profits could be damaging their profitability by losing their employees’ respect, who react by withholding performance.

Companies whose employees recognise the importance of purpose have been shown to deliver superior shareholder dividends. As a result, shareholders and the public increasingly are expecting organisations to have a purpose beyond profits. Often purpose statements have been PR exercises, highfalutin terms geared towards recruiting wet-behind-the-ears interns and grads, rather than driving strategy and performance. As reported in an opinion piece on the Environmental Social and Governance (ESG) issues, a generic ill-thought purpose creates neither social nor shareholder value. However, when an organisation develops a purpose aligned with its business, it builds and reinforces that company’s value proposition and competitive advantage.

A report from Harvard Business Review Analytics surveyed 474 global executives and found that organisations with a solid understanding of purpose can innovate and transform more effectively. The surveyed executives who used purpose as a central lever of strategy and decision-making reported an enhanced ability to drive transformational change and innovation and achieve constant financial growth.

The evidence supporting a purpose beyond profitability and serving stakeholder needs, not just shareholder needs, is overwhelming. 87% of business leaders maintain that their organisations optimise staff performance if their purpose goes beyond profitability. Nine out of ten people are willing to earn less money in return for the chance to perform more meaningful work, and staff who find their workplace and role more meaningful are 69% less likely to make plans to resign from their jobs within the next six months.

Ouch

On the other side of the coin, let’s look at how our earlier examples fared with their focus on profits at the expense of all else.

Rio Tinto – A group of superannuation funds with investments in Rio Tinto and The Australian Council of Superannuation Investors admonished the board for its woeful response to the catastrophe, slammed Rio Tinto and questioned its licence to operate, and called for assurances that this would never be repeated. After the coruscating joint standing committee investigation and report into the actions taken by Rio Tinto, the three executives deemed responsible were summarily fired by the board, albeit with rather lucrative golden parachutes for their troubles. The report said it best: “Collectively, these deficiencies represent more than just a series of ‘unfortunate mistakes’ or mere ineptitude by individuals. Rio Tinto’s conduct reflects a corporate culture which prioritised commercial gain over the kind of meaningful engagement with Traditional Owners that should form a critical part of their social licence to operate.”

AMP – AMP’s shares remain depressed after collapsing from a high of $5.50 pre-scandal to a low of $1.445. Alex Wade resigned after less than a year in his role as head of AMP’s wealth business. Allegations of sexual harassment complaints against Boe Pahari and the mishandling of such claims by the company and the board of directors caused Chairman David Murray to resign, with immediate effect, and the short-lived CEO be demoted back to his old role. For some, it was unsurprising that the Murray departed. Brynn O’Brien, the Chair of the Australasian Centre for Corporate Responsibility, had the following to say, “ACCR has always questioned the suitability of David Murray for chair of a modern ASX50 company. Murray is a well-known climate sceptic. He waged war against the ASX’s inclusion of ‘social licence’ in its Corporate Governance Principles. It is quite ironic that AMP’s catastrophic social licence issues ultimately brought him down. His views on risk and governance frameworks are stuck in the ’80s and do not meet shareholder expectations of modern boards.”

Westpac – The Federal Court ordered Westpac to pay a $1.3 billion penalty for breaching anti-money laundering laws, the largest fine in Australian history. Westpac’s chief executive Brian Hartzer resigned, and chairman Lindsay Maxsted will step down earlier than planned. (AUSTRAC, 2020)

Facebook – After the Cambridge Analytica data harvesting scandal came to light, Facebook’s shares plunged 18%, wiping out almost $18 billion from their market value. Facebook CEO Mark Zuckerburg’s personal wealth fell by approximately $14 billion. The Federal Trade Commission fined Facebook $5 billion (Commission, 2019a), and Facebook paid another $500 million to settle with the U.S. Securities and Exchange Commission. (Commission, 2019b) According to the annual trust report by Morgan Stanley, Facebook is Australia’s MOST distrusted brand.

The Denouement

Purpose beyond profits is not “soft” or “wishy-washy”. It is a critical piece of a company’s long-term strategy that influences both competitive advantage and profitability. Committing to a purpose beyond profits encourages employees to utilise their discretionary energy and ensures the long-term trust of the company’s stakeholders. As I have demonstrated, the results of an unerring pursuit of profits and a disregard of potential negative impacts can negatively and significantly impact growth and profitability. The final word on purpose? It’s intrinsically tied to profitability and success. If your company wants to claim true success, a purpose beyond profits must be prioritised, communicated, and underpin your strategy.

“Profit at any price is not commerce, it’s exploitation.” – Labor Senator Deborah O’Neill

“The sense of being part of something greater than yourself can lead to high levels of engagement, high levels of creativity, and the willingness to partner across functional and product boundaries within a company, which are hugely powerful.” – Rebecca Henderson, the John and Natty McArthur University Professor at Harvard Business School.

Purpose is not the sole pursuit of profits but the animating force for achieving them. Profits are in no way inconsistent with purpose — in fact, profits and purpose are inextricably linked.” – Larry Fink – CEO of Blackrock

Author – Shannon Sedgwick

*This is an opinion piece and does not reflect the opinions of my employer. The information provided within is publicly available.

References

ACHOR, S. 2018. 9 Out of 10 People Are Willing to Earn Less Money to Do More-Meaningful Work. Harvard Business Review.

ACSI 2020. Rio Tinto Statement 130820.

ASTON, J. 2020a. Ancient cave scandal deepens for Rio Tinto. Australian Financial Review.

ASTON, J. 2020b. Secret recording: Rio Tinto ‘not sorry’ for cave blast. Australian Financial Review.

AUSTRAC 2020. Westpac ordered to pay $1.3 billion penalty. Australian Government.

COLLINS, J. 2005. Built to Last, Random House Business.

COMMISSION, F. T. 2019a. FTC’s $5 billion Facebook settlement: Record-breaking and history-making.

COMMISSION, U. S. S. A. E. 2019b. Facebook to Pay $100 Million for Misleading Investors About the Risks It Faced From Misuse of User Data.

COMMITTEE, J. S. 2020. Inquiry into the destruction of 46,000 year old caves at the Juukan Gorge in the Pilbara region of Western Australia.

DELOITTE 2016. Millennials want business to shift its purpose. The Deloitte Millennial Survey 2016.

FARGHER, I. 2019. How Westpac is alleged to have broken anti-money laundering laws 23 million times. Sydney Business School – Faculty of Business: University of Wollongong.

FRIEDMAN, M. 1970a. A Friedman doctrine‐- The Social Responsibility Of Business Is to Increase Its Profits. The New York Times.

FRIEDMAN, M. 1970b. The Social Responsibility of Business is to Increase its Profits The New York Times.

HBR, H. B. R. 2016. The Business Case for Purpose.

JANDA, M. 2020. AMP chairman, director resign amid shareholder revolt over board’s handling of sexual harassment allegations. ABC News.

KOZLOWSKA, I. 2018. Facebook and Data Privacy in the Age of Cambridge Analytica. The Henry M. Jackson School of Internatipn Studies: University of Washington.

MORGAN, R. 2021. It’s official: Supermarkets are the most trusted brands in Australia.

PORTER, M. 2019. Where ESG Fails. Institutional Investor.

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RODDAN, M. 2020. New AMP Capital boss accused of harassment. Australian Financial Review.

ROUNDTABLE, B. 2019. Statement on the Purpose of a Corporation. Business Roundtable.

ROUNDTABLE, B. 2021. Available: https://www.businessroundtable.org/ [Accessed].

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