Inside Investor Relations – Volume 4 – Purpose and Profit
The first three volumes of ‘Inside Investor Relations’ have focused on practical matters, such as identifying the different types of institutional investors and targeting investors. In this edition of Inside Investor Relations, we focus on an ESG-related topic that strikes at the very heart of why businesses are created. We ask the question, “Should purpose or profit be the key ambition of a company?”
Put another way, the question can be asked in this way, “Is company management responsible primarily to shareholders, or should they be considering the wider community of stakeholders?”
What is the difference between a stakeholder and a shareholder?
As we see it, the world is increasingly asking company managements to consider all stakeholders, of which shareholders are only one. So, who are the other stakeholders that a company needs to consider? Stakeholders can be split into two groups – internal and external. Key internal stakeholders are employees, managers and the controlling shareholder/owner. Key external stakeholders are customers, suppliers, society, government, minority shareholders, creditors and the environment.
Those Who Manage for Purpose are Taking the Long-Term View
A simple way to express the difference between managing for purpose and managing for profit, can be expressed as follows. Those who manage primarily for profit, focusing solely on shareholder value, may tend to be more short-term oriented. Those who manage primarily for purpose, considering the impact of their actions on all stakeholders, are managing for the long term. For example, Unilever’s stated purpose is ‘To make sustainable living commonplace.’ Given that this is their aim, then the company must consider the long-term impact of their actions on society and the environment in everything that they do.
The Furniture Dealer who had Keener Insights than Milton Friedman
We will illustrate the issue of purpose versus profit by comparing two essays, written in the 1970s. The first essay is "The Social Responsibility of Business Is to Increase its Profits", written by Milton Friedman in 1970. The second is ‘The Testament of a Furniture Dealer,’ written by Ingvar Kamprad, founder of IKEA, in 1976. It is ironic that Friedman’s name is much more easily recognized than Kamprad’s. Friedman’s theories caught the spirit of his times, and quickly became dogma amongst senior managers worldwide, while the ideas of Kamprad were ahead of their time and are now more meaningful for our modern world.(1)
What is the Main Point of Departure between Kamprad and Friedman?
The main point of departure between Kamprad and Friedman is this: Friedman held that the main aim of managers is to increase returns to shareholders. Kamprad on the other hand, saw profits as being attractive because they provided IKEA with the financial resources to achieve the company’s purpose.(2) He defines Ikea’s purpose as “To create a better everyday life for the many people by offering a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.” Kamprad viewed top line growth and profit growth as helping to produce a virtuous cycle in which the more money IKEA makes, the more financial resources it can put to use in achieving its purpose.
The Power of Purpose – IKEA
IKEA has spent US$2.7bn over the past decade with the goal of producing enough clean power to power all of its operations, reaching the goal one year early, in 2019. The company has more than 900,000 solar panels and 500 wind turbines on site at its stores. Ikea also has a product line called ‘Products for a More Sustainable Life at Home’, which includes items such as solar panels for home use, LED lights and storage solutions to reduce food waste. These initiatives are part of the company’s overall goal to become ‘carbon positive’, in other words, to remove more carbon dioxide from the environment than its operations contribute.(3)
The Power of Purpose – Unilever
In order to implement its vision of ‘making sustainable living commonplace’, Unilever launched its Sustainable Living plan.(4) On the company website, Unilever states, “By 2030 our goal is to halve the environmental footprint of the making and use of our products as we grow our business.” To accomplish this, the company is:
1. Championing sustainable agriculture, focused land use and food security.
2. Helping consumers to recycle more and to use less water and less energy through producing products with a lower environmental impact.
3. Making its manufacturing operations and distribution channels more eco-efficient
But Unilever’s goals go beyond environmental protection, they aim for a broader, positive social impact: “We want to deliver both business growth and positive social impact. We are embedding human rights across our business and are using the power of our brands to advocate important social issues such as gender equality to our consumers. We’re also working with small-scale retailers and smallholder farmers to improve livelihoods.”
Your Customers Care About ESG
According to Raphael Bemporad, cofounder and chief strategy officer at the famous New York City branding agency - BBMG, a new class of consumers – the Aspirationals – has emerged. Bemporad says that “Aspirationals represent a powerful shift in sustainable consumption from obligation to desire.” According to a study authored by BBMG and other groups, Aspirationals represent 1/3 of the global population. 93% of aspirationals love to shop, 95% desire to consume responsibly and 50% trust their chosen brands to ‘act in the best interests of society.’
Acting Sustainably Creates Shareholder Value
On a final note, it is important to point out that ESG-conscious companies have been shown to outperform the overall equity market in many studies. For example, a meta-analysis of ESG data was conducted by the University of Oxford and Arabesque Asset Management. Eighty percent of the studies and sources that were analyzed showed that stock price performance is positively impacted by good sustainability practices.
QIC has worked with many listed companies in Taiwan on improving their ESG communication and on attracting ESG-focused investors. Our team consists of experienced professionals who previously worked at well-known global brokers and buyside funds. If you are looking for guidance in developing a successful ESG strategy, please reach out to us.
Contact: yvonnehuang@qtumic.com
Footnotes:
(1) For more information on this topic, we recommend reading Chapter 3 of Green Giants: How Smart Companies Turn Sustainability into Billion-Dollar Businesses, by E. Freya Williams. Many of the themes and content of this essay were sourced from Chapter 3 of Green Giants. The book also provides other examples of highly profitable companies for whom purpose is at least as important as profit.
(2) See the ‘Profit Gives Us Resources’ section of ‘The Testament of a Furniture Dealer,’ by Ingvar Kamprad.
(3) Fastcompany.com: ‘Ikea has invested in enough clean energy to power all of its operations (plus extra), 19 September 2019.’
(4) See https://www.unilever.com/sustainable-living/