What if Milton Friedman was right about corporate purpose?

In the age of Extinction Rebellion, businesses need a purpose beyond profit. But crusading capitalists miss the point if they forget the importance of providing jobs, growth and investment.

by Matthew Gwyther
Last Updated: 06 Jan 2020

What’s your purpose as you sit behind your desk at work? To get through the day to 5.30pm with the minimum of collateral damage to yourself and those you lead? To do your bit for the company bottom line? Or do you have a higher calling? Do you believe your quotidian effort actually contributes towards making the world a better place? The jaded and world- weary may scoff at such a sentiment but this isn’t a facetious, rhetorical question.

The corporate buzzword of the moment is ‘purpose’. Its advocates believe that business has to be about more than making money, and remind us that this idea would not have been new to the Cadburys, the Rowntrees or the founders of Lever Brothers, famously moral men with an eye on civic duty and benevolent stewardship. The purpose enthusiasts claim there’s a fundamental shift happening now – rather than a sole focus on profit maximisation, companies are rightly starting to focus once again on their wider role in society above and beyond making a profit.

Those who reject this supposition will also go back to the 19th century and point out that the top-hatted men whose iron, banks and railroads made industrial America the top nation (thus unseating those quaint Quakering and moralistic Brits) were known as ‘robber barons’ for their unscrupulous business practices, not their civic-minded philanthropy.

On a philosophical level, the two sides have very different ideas of what corporate purpose should mean. It can be summed up in the words of two American business academics. First, Milton Friedman, that no-nonsense member of the Chicago school of economics: "There is one and only one social responsibility [or purpose] 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."

Second, from the father of management Peter Drucker, with his milder and middle European outlook (he was born in Vienna): "The purpose of business is to create a customer." This is wittily distilled common sense but well worth remembering. One thing’s for sure – most CEOs on both sides of the Atlantic these days would rather retweet Drucker or teenage activist Greta Thunberg than be caught dead quoting Milton Friedman. Friedman is so out of fashion he’s almost beyond the pale. 

That business should be about more than pounds isn’t new in the post-war era, of course. Corporate Social Responsibility (CSR) was the watchword in the 90s. This then lost the S and became CR, which then morphed into ESG (Environmental, Social and Corporate Governance) as a way of actively measuring a company’s ‘responsible’ behaviour. It was only following the crash of 2008, when we were all forced to take a long, hard look at financial services in the deepest recession in recent history, that purpose came along. But what does it actually mean to be purposeful?

One of the better frameworks for a purpose-driven business comes from the UK charity and think tank Blueprint For Better Business. It proposes five principles: honesty and fairness when dealing with customers and suppliers; being a responsible and responsive employer; having a purpose which delivers long-term sustainable performance; being a good citizen; and being a guardian for future generations. Few would argue with these principles, though it remains a challenge to measure accurately whether they are actually being adhered to.

Trust issues

There are, nonetheless, increasing numbers of business leaders who are up for giving purpose a serious try. At the vanguard was Unilever’s recently retired chief executive Paul Polman, who has called for a cohort of "heroic CEOs" to fight climate change and global inequality. Even someone as unexpected as investor Blackrock’s CEO Larry Fink (net worth over $1bn) has woken up to the fact that his outfit may have to go a little further than Friedmanite maximisation of shareholder return – "without a sense of purpose, no company either public or private can achieve its full potential." 

The Co-operative Bank is "for people with purpose" (although it didn’t do so well several years ago when former boss Paul Flowers – nicknamed the Crystal Methodist – pleaded guilty to possession of drugs including cocaine and methamphetamine). The FT has launched its regular Moral Money section announcing that "the long-term health of free enterprise capitalism will depend on delivering profit with purpose" and PwC has chipped in by appointing a chief purpose officer.

It’s easy to see why they’re all piling in. The movement is in some ways a direct result of the widely held lack of trust in business – according to the 2019 Edelman Trust Barometer, while 73 per cent of Britons trust their employers to do what is right, only 47 per cent of people trust business as a whole, which has led to talk of more government regulation and a crackdown on business. Among the more anxious, there’s a genuine concern over their continuing licence to operate and sell goods or services. Capitalism, it seems, requires a serious reset, and capitalists don’t want to be on the wrong side of it. 

"So much came together after the Great Crash – CEO pay, the haves and the have nots, the sense that business must have been behind us getting into such a terrible mess," says Sue Garrard, who until last year was one of the masterminds behind Unilever’s Sustainable Living Plan 2010-2020 (USLP) – its blueprint for increasing positive social impact and decoupling its environmental footprint from business growth. 

Garrard is no late-arriving woke-washer. She was brought up with parents and grandparents in the Salvation Army – "They put the right microchip into me" – and spent time in government at the Departments of Energy and Work and Pensions. Her hiring chat with Polman lasted two-and-a-half hours. In the Dutchman, she had a CEO who was part- campaigner and not afraid to rub backs up the wrong way.

"I’ve met many bosses over the years and most actually want to do the right thing," she notes. "They feel they haven’t spent 35 years getting to the top of the greasy pole just to deliver quarterly profit targets which they live or die by and have their kids feel awkward about what their parent is doing at the office. The trouble is a massive gap exists between intent and activism. It was always tough at Unilever. It’s a painful, iterative journey. There’s no first mover advantage in purpose and sustainability. But the irony remains that I detect business is far more up for the fight than government."

One of the reasons, Garrard believes, is that purpose works. Poster child Unilever possesses around 400 brands in total but 40 of these create 80 per cent of total turnover. By the time she left, 26 of these 40 big hitters had been given the thorough USLP treatment and, she says, they were growing 67 per cent faster than the rest of the portfolio.

"Take Lifebuoy soap," Garrard says. "We know that its use in India has contributed to reducing infant mortality, so we said so and promoted the fact. Of course, rivals have copied us in their marketing but consumers know when they are being conned. Also eventually regulators will not allow any more bullshit claims. Brands that are all talk and no action will be found out."

Tool for engagement

A key reason proponents believe purpose can help the bottom line is that it is now almost universally accepted as a prime tool for recruitment and engagement. Why wouldn’t you work for John Lewis Partnership where its purpose is to maintain the happiness of its members "through their worthwhile and satisfying employment in a successful business"? 

In her recent book Weconomy, You Can Find Meaning, Make a Living and Change the World, Holly Branson, daughter of Old Beardy, argues that "social purpose is the biggest thing to happen to business since [the invention of ] the assembly line." The driving force behind this turn to purpose is millennials, says Branson, who is involved in Virgin’s medical businesses. The typical millennial worker wants "to work for a company that has purpose baked into its culture". This might not include her father’s airline Virgin Atlantic, given the carbon footprint of the air travel industry.

However, rafts of surveys and polls are now suggesting that the millennial generation, which came of age during the financial crisis, is highly sceptical of big business. According to Deloitte’s 2019 Global Millennial Survey, 55 per cent said business has a positive impact on society, down from 61 per cent in 2018 and "many would not hesitate to lessen or end a consumer relationship when they disagree with a company’s business practices, values or political leanings". The purpose thing may have come too late for them. Across the globe this generation has a tendency to favour a stronger role for governments, disapproves of tax cuts for the rich, likes trade unions more than its parents do, and feels more sympathy for Bernie Sanders or Jeremy Corbyn’s socialism – which it associates with fairness – than for capitalism. 

This can cause problems for businesses that use their purpose as a recruiting tool. Unilever may be able to siphon off the cre`me de la cre`me in the graduate recruitment market, but those who make the cut can come rapidly down to earth when they find themselves learning how to shift pallets of Domestos to Asda rather than going to Borneo – by solar-powered yacht – to save the orang-utans. Just how you find the path to purposeful virtue isn’t always straightforward. I can recall speaking to Stuart Rose, then CEO of Marks & Spencer, in the early noughties, when his organisation launched Plan A ("being a business that enables our customers to have a positive impact on wellbeing, communities and the planet"). Once M&S had put up the Open for Sustainability sign it was descended upon by dozens of single-issue NGOs all convinced that their remedy to the retailer’s ills was the correct and only one. Even among apparently simple things, such as packaging, the retailer found itself being pulled in different directions. And once you commit, you put yourself up for painful accusations of failure and hypocrisy.

Take genetically modified organisms, for example. Purposeful companies tend to be very down on them. Emmanuel Faber, the CEO of Danone, has proposed shifting about half the company’s products – representing some $1bn of yoghurt sales – to non-GMO ingredients. He argued that this was an important change that would improve soil health and biodiversity.

Eco-activists Exctinction Rebellion demonstrate outside the Bank of England in October 2019

If only it were so simple. Ever since their introduction back in the 90s, GMOs have been under attack from organisations like Greenpeace, which even got The Daily Mail on board when it labelled such products Frankenstein Food. But that’s only one side of the story. Golden Rice is a form of normal white rice that has been genetically modified to provide vitamin A to counter blindness and other diseases in children in the developing world. It was developed two decades ago but still struggles to gain approval in most nations. Stifling international regulations – mainly caused by intense lobbying by, ironically, the likes of Greenpeace – have been blamed for delaying the approval of a food that could have helped save millions of lives this century.

Giles Gibbons understands the importance of purpose more than most. He founded his consultancy Good Business in 1994, when he and his then partner Steve Hilton left the ad agency Saatchis (Hilton has since left and, via the Cameron government plus The Big Society, has somehow wound up as a presenter in the US on Fox News). "It was the time of [Canadian author] Naomi Klein’s No Logo and the verdict that brands were bad," says Gibbons, "but we wanted to be the defenders of good capitalism."

For 25 years, Gibbons has been ploughing the furrow of virtue and his faith remains strong. "If you want the best people to work for you, great quality products from your supply chain, customers to want to buy your products, not to mention your shares, then you had better be on the right side of the purpose argument. If you’re shown to be on the wrong side – beware. And, if you actively wish to generate change in our world then the only place to do it is via the capitalist system."

As someone who’s been there, Gibbons finds green-washing Johnny-come-latelys a serious barrier to progress. "The problem is that the word ‘purpose’ has been hijacked by the marketing departments of corporates as another word for brand strategy," he groans. "They get together and declare, ‘We need a new purpose.’ And, hey presto. You cannot just pluck your purpose from the air and present it as a definition. Is it really possible for an organisation to have a different purpose from the brands within it – all our crisp products need a different purpose? Bizarre.

"A bank is defined by society – NatWest’s purpose is fundamentally the same as Lloyds’. How can a biscuit company have a purpose? I mean c’mon. But it can go about its business in a responsible way. Purpose isn’t advertising, it needs to be an organising idea. Very few business people go into the world trying to be bad. Which isn’t to say bad things don’t happen. We now know trying to establish carbon footprints of every product, as Tesco did back in 2006/07, isn’t the way forward. But the best businesses are open and engaged. They know they won’t please everybody but they will try to do ‘the right thing’ if they can."

We should conclude, perhaps, by returning to Friedman, the 20th century’s biggest advocate of free markets. In his laser focus on the bottom line and profits he was a realist but he was not quite the villain he is sometimes made out to be. Were he alive he’d be interested in the example of Unilever. What concerned him was companies that take their eye off the knitting and go off on a crusade.

Investors matter

So what happens when your purpose and your long-term financial position clash, which they sometimes surely must? What happens when a ruthless competitor – like Amazon in the way it has put conventional retailers to its sword – just competes you out of existence and doesn’t appear to clasp the five principles constantly to its corporate bosom?

This isn’t to say there’s no role for business ethics in such companies, but that’s not the same as purpose, or indeed the corporation’s basic role in society – to provide jobs, growth and prosperity by surviving – which is the original Friedman point.

Where the capital goes remains vital. Investors are no less important stakeholders in the proposed argument than customers, and for every ‘purposeful Paul’ there will be purists who like to remind board directors of public companies that their fiduciary duty is very Friedmanlike, to fill the pockets of shareholders. Thus when Unilever received an unwelcome but lucrative $143bn takeover approach in 2017 from Kraft Heinz – which had earlier done a number on that British corporate gem Cadburys – the defence had to be careful to talk about the long-term best (financial) interests of shareholders when rejecting it. Anyone who thinks Kraft is more ‘purposeful’ than Cadbury was, or Unilever apparently is, might struggle to convince public (read: consumer, employee) opinion.

For now, the investment community seems divided. At a recent FT City Network debate on whether capitalism could fix the climate crisis, two of the world’s biggest fund management bosses called for change. Anne Richards, chief executive of Fidelity International, reported the FT, said the world needs to pivot away from the "primacy of shareholders", while Andreas Utermann, CEO of Allianz Global Investors, said more sophisticated measures than GDP were needed "to determine whether capitalism is delivering to all stakeholders without borrowing from the future while destroying the environment".

But the Council of Institutional Investors (a US lobby group of which Fink’s BlackRock is a non-voting associate member) "respectfully disagreed" with the US Business Round Table’s statement which endorsed a more purposeful path, countering that "accountability to everyone means accountability to no one". Earning a rate of return for pension funds and charities "is itself a social good – a very high one", Paul Singer, founder of activist hedge fund Elliott Management, told The Economist.

The risk with purpose is when it all becomes puritanically reductive, when every last corporate action is weighed in the balance of modern woke virtue. John Lewis got the lead story on the BBC’s business section of its website in November for a cosy yarn about forbidding plastic toys in Christmas crackers. But minor sustainability tinkering around the edges isn’t going to solve the all-encompassing problem of global climate change.

This is why individuals like Greta Thunberg or organisations like Extinction Rebellion have captured so many imaginations – they are purpose epitomised. If it ever gets face-to-face with XR, the problem business will find is that XR isn’t that interested in Christmas crackers – it has had it with ‘neoliberal’ capitalism, which it blames for the excess consumption and wilful waste of natural resources that led to the climate crisis in the first place. Its puritan vision demands a purpose-based, ie planned, economy, not a free market.

Way before purpose came the father of economics, moral philosopher Adam Smith , who wrote in The Wealth of Nations: "Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it... he intends only his own gain."

One could equally well quote Margaret Thatcher’s infamous 1987 interview with Woman’s Own: "There’s no such thing as society. There are individual men and women and there are families. And no government can do anything except through people, and people must look after themselves first. It is our duty to look after ourselves and then, also, to look after our neighbours."

Invisible hands imply unintended, trickle- down consequences. The trouble with that is that some of the great troubles we face at the moment require a good deal of coordinated, visible hands to sort them out. (If, indeed, they are sortable.) That is going to call upon a tripartite effort on the part of citizens, business and government, each doing its bit. A sense of purposeful pulling together that is, despite the best efforts of some well-intentioned businesses, markedly lacking.  

Images: Getty Images

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