Good businesses are good business. Why doing the right thing pays

Co-founder and Co-CEO of Warby Parker, Neil Blumenthal. - Brad Barket / Stringer / Getty Images

Nike is nationless, or at least its intellectual property is. Apple sent its lawyers out to shop for offshore tax jurisdictions. Commodity multinational Glencore has 107 offshore companies. These are the latest revelations concerning the tax avoidance habits of some of the world’s most profitable firms, courtesy of the leaked ‘Paradise Papers’.

Few of us are surprised. Big businesses have repeatedly shown themselves anti-social, even criminal, in their thirst for profit. Tax avoidance, mis-selling, misbranding, negligent data protection, emissions cheating, dishonest accounting. It’s not hard to paint a picture of fat cats living the high life, governed by a different set of rules to the rest of us.

No wonder just 45% of Britons and 58% of Americans trust business.¹

Defenders of big business might point out that these same corporations have also improved our lives – they create jobs, cheap consumer goods, live-saving drugs. They might argue that capitalism has pulled millions out of poverty. That’s true. But it’s a meagre defence of a singular, devil-may-care focus on profit-maximisation driven by the mantra that ‘shareholder value’ is king: shareholders are the owners, they’re the ones taking financial risks, so priority must be given to delivering them a return.

Nike is one of the companies whose tax avoidance was exposed by the leaked ‘Paradise Papers’. Credit: Alex Milan Tracy/SIPA USA/PA Images

In reality, shareholders are just one set of contributors to a successful business. Businesses – whatever their tax arrangements might suggest – are based in communities, employ local people, rely on government investment and local resources. As Cornell School of Law Professor Lynn Stout argues:²

“shareholder value thinking can lead managers to focus myopically on short-term earnings reports at the expense of long-term performance; discourage investment and innovation; harm employees, customers, and communities; and lure companies into reckless and socially irresponsible behaviors.”

Think of the many corporate scandals that have made headline news in the past few years, driven by the desire to make as much money as possible, to hell with the consequences. The UK’s Sports Direct was revealed to have exploited workers – failing to pay the minimum wage, operating a punitive ‘strikes’ system to discourage workers from taking toilet breaks or talking to colleagues – causing huge damage to the brand.³ Volkswagen cheated emissions tests and spent over $7 billion dealing with the repercussions – Credit Suisse estimates the real cost to the company could be more than ten times that.⁴

The price of not being a ‘good’ company is high.

Which really shouldn’t come as a surprise. “Why is it that companies that don’t focus on maximizing shareholder value deliver such impressive returns?” asks former dean of the Rotman School of Management at the University of Toronto Roger Martin, “Because their CEOs are free to concentrate on building the real business, rather than on managing shareholder expectations.”⁵

48% of UK consumers prefer to use or purchase from companies that act ethically. In the US 85% of consumers are happy to pay at least “a little more” to buy from a company that is “just”

From purpose flows profit

Businesses need to find their purpose, and, happily, being mission-driven can be a boon to the bottom line.

Polling by Ipsos found 48% of UK consumers prefer to use or purchase from companies that act ethically.⁶ In the US, a 2017 survey by JUST Capital found 85% of consumers are happy to pay at least “a little more” to buy from a company that is “just”.⁷ The firm ranks companies based on, well, how ‘just’ they are, from their treatment of workers, through leadership and ethics, to their environmental impact. CEOs take note: those companies are better reflecting the priorities of their consumers, but they’re also more profitable according to a comparison with the Russel 1000 index.⁸

Doing the right thing pays – and plenty of companies, like the trendy shoe supplier TOMs and ethical cosmetics companies The Body Shop and Natura, are showing that.

“Every purchase has a purpose”

That’s the tag line for TOMs – and it’s quite literally true. Blake Mycoskie founded the company on the simple premise that for every pair of shoes sold, TOMs would give a pair of shoes to a child in need; “one for one”. Since 2006 the company has given away more than 75 million pairs. And that purpose (plus a product people want to buy) helped TOMS achieve an annual growth of 300% for five years running.

TOMs is a highly successful purpose-driven business. It operates a “one for one” model where for each product bought, the company gives a product or support to those in need. Credit: Vivien Killilea / Stringer / Getty Images

Having grown disillusioned, in 2012, Mycoskie took a sabbatical. He realised “TOMS had become more focused on process than on purpose”, but their purpose was their USP:⁹

“We were concentrating so hard on the “what” and “how” of scaling up that we’d forgotten our overarching mission, which is to use business to improve lives. That is our greatest competitive advantage: It allows us to build an emotional bond with customers and motivate employees, because they know they are shopping and working for a movement bigger than themselves.”

Since then, the company has launched TOMs coffee roasting (pairing purchases with providing safe water) and TOMs bags (pairing purchases with training and materials to support safe births). In 2014 Bain acquired a 50% stake having valued the company at $625 million.

The success of the TOMs model isn’t a one-off – it’s inspired numerous other businesses.

Warby Parker, purveyor of eyeglasses uses the tag line: “buy a pair, give a pair”. Founded in 2010, it grew from zero stores to 30 in just 6 years. Their success is such that they plan to open at least 25 more stores this year, at a time when bricks and mortar retail is struggling to compete.¹⁰ Miscoots outfitters, founded in 2012, goes one step further – you buy a piece of their 100% American-made apparel, they give a piece to someone in need, and they employ local homeless people to package up your order. “Get+Give+Employ”.

Business, making money, doing good.

“Enrich Not Exploit”

The Body Shop has a long history as an ethical brand. Marking 40 years, in 2016, the company launched its manifesto “Enrich Not Exploit”. It includes 14 targets the company is committed to achieving by 2020, for example powering their stores with 100% renewable energy, and ensuring 100% of their natural ingredients are traceable and sourced from sustainable habitats.

This summer Brazilian beauty company Natura – a certified B Corp (meaning it meets “rigorous standards of social and environmental performance, accountability, and transparency”) – bought The Body Shop from L’Oreal for almost £900 million. Natura also places sustainability at the heart of its products, “enrich not exploit” fits their ethos. Roberto Lima, the cosmetic company’s CEO until late 2016, shared TOMs founder Mycoskie’s view that business should have purpose beyond profit:¹¹

“yes, we should seek profits, which is the basis of our activities, but… this shouldn’t be the sole purpose of our existence.”

And that’s the nub of it. Profit is good, but when businesses pursue it to the exclusion of all else, they ignore their wider role in society – and their dependency on the ordinary people who make them a success, both as workers and consumers. Nike is not nationless. Its grounded in the factory hands who produce its trainers, the high street clerks who work its tills, the customers who buy its kit and the numerous other businesses that make its supply chain.

If capitalism is going to recover its reputation, then businesses need to do things differently. They need to place purpose before profit.