The problem and promise of purpose 4

Last time, we discussed how moralizing is often driven by market opportunities rather than a sense of purpose.

I’ve criticized the New Capitalist movement enough. The biggest critique involves the conflicts of interest with purpose-driven companies: Milton Friedman argued that doing “social good” in the world is likely to spend someone else’s money, either the customer’s, the employee’s, or the shareholder’s. Additionally, one person’s social good is another’s social bad. Yet I do think there’s some good that purpose-minded companies can do. In response to my last newsletter, a careful reader asked the following:

I’m curious how you’ll plan to tie in the responsibility of the individual to take ownership of their moral decision making . . . And I’m curious where you will draw the line between business purpose and business ethics. Is it right for a company leader to prioritize ethical sourcing? fair market value? etc.?

Let me take a stab at it.

I work for a marketing agency in Fort Worth, Texas, the benefits of which are the envy of the world. The leadership dearly cares about their people. We have generous paid leave, unlimited PTO, asynchronous schedules, free booze, dog-friendly offices, and almost every day you’ll hear someone leave a meeting saying, “Love y’all.” And they mean it. It’s a wonderful place for which I’m truly grateful.

The employee experience I have at the agency is costly. Its leaders spend gobs of money on happy hours, VR headsets, office equipment, and more. It costs money when someone takes paid leave, whether for bereavement or birth.

Yet this cost gets recouped by happy, productive employees. Tenure and retention are also major revenue drivers—a more skilled workforce generates more revenue. This is critical for our line of work. We’re industry experts, and that expertise requires years of learning.

That’s why we value tenure so highly. Before a recent growth spurt, our average tenure was something around eight years. We even have a name for it: The Inner Ring. If you’ve been at the agency for at least five years, you’re inducted into The Inner Ring, complete with secret ceremonies and an octopus ring (our logo).

For a long time this causal connection was only intuitively understood. However, this week I finally read a decent study on the subject in the Harvard Business Review, one that had balance, limits, and good controls. The researchers concluded that “stores whose customer-facing employee base was more tenured, had more experience in prior rotations, was higher skilled, and was more skewed towards full time, generated a 50% increase in revenue.”

My point in saying all this is that there is a connection between spending money on certain ethical or purpose-driven components of a business and seeing a return on that investment. It’s not all zero-sum. That’s the promise behind purpose. By living out a shared purpose, in some very specific circumstances, everyone is better off. It’s a win-win.

The difficulty lies in where one draws that line and the trade-offs faced when drawing it. More rhetoric than reality exists along those lines. I keep coming back to that. That leads me back to the reader’s question at the beginning.

Morals and madness

We must all—each of us—take individual responsibility for our moral decision making. The smallest unit of society is the individual, and despite whatever difficulties each of us had in childhood or in our genetics, we must all one day face the Creator to give an account. That includes the sins I’ve committed against others.

A business is merely a collection of individuals. I heard someone criticize capitalism the other day by saying, “Well, corporations are . . .” That’s a broad term to criticize. There are over nine million corporations in the US, most of which are very small companies made up of just a handful of employees. Tens of millions of people comprise today’s corporations, each with their own responsibilities, purposes, and moral frameworks for navigating life.

Conversely, we could criticize one man—and it usually is a man—at the helm of a large corporation, like an Elon Musk or Jeff Bezos. Yet even that person has dozens, hundreds of people that serve him to carry out his ends. The same could be said of dictators around the world. They don’t work alone.

Additionally, each of these corporations must seek profit. That’s non-negotiable. If they’re unprofitable, they fail, and all those people—the customers and the employees—are worse off. Doing otherwise is madness.

Any amount of money taken away from a company’s profits must be explained. The explanation usually comes in the term ROI, or return on investment. For example, JPMorgan Chase received over $141 billion last year in revenue, according to their 10-K filing. They spent over $71 billion, and had a net income (profit) of over $48 billion. That profit will be distributed to the owners of the company—the shareholders—and in capital expenditures, expenses, and savings this year.

Presumably, the leaders of the company spent $71 billion because they believe they can receive at least $71.1 billion in value. Every decision must have a positive net present value (NPV), or it won’t happen. No one spends $1 to receive only $0.95.

Now, how much value is negotiable. Should the company leaders seek 15% ROI, or 20%, or 50%? Every industry is different. There’s also a time element to consider. Many tech companies are famous for spending hoards of money for years before every seeing a positive return, but that’s because years and years later, the company will be immensely profitable.

The same could be said for spending money on the employee experience—losses now can be recouped by gains in future years via tenure and more-advanced skills, as the HBR research showed.

Is that “social good”? I don’t think it is. It’s sound financial stewardship. Yet this kind of expense is often labeled social good rather than a more accurate label such as marketing or employer brand, which has a positive ROI. I think the hoopla about B-Corps and “Certified Ethically Sourced” labels should be filed as marketing expenses rather than goodwill.

But perhaps there’s something else. Sometimes when you ask someone why they bought something that you think is unwise, they respond, “I just like it.” It brings them joy. Like travel. Or a nice pair of shoes. Or a fancy dinner. I just like it. Sure, you could argue that these things enhance my knowledge or reputation, bringing in “revenue” years later, but not everything in life can be calculated in units of economic utility. We’re meant to enjoy creation as well as steward it.

If the owners my company want to spend money on a lavish office space or on donations to a local charity, that’s their right to do so. Their profits are their profits as owners of the firm. Perhaps doing some of these social good initiatives simply brings them joy. It’s what they find is the right thing to do.

But there is a cost. I think that’s all I’m try to get at these days. Like that phrase Milton Friedman popularized, “There ain’t no such thing as a free lunch.” Or a mantra I learned from Thomas Sowell, “There are no solutions, only trade-offs.”

Other people’s money

Consider this simple example. A bar of soap in my bathroom is ethically, locally, and sustainably sourced. It’s handmade. It costs $4. Alternatively, a bar of Dove Soap on Amazon costs $1.16, or $16.33 for a pack of 14. This is because large corporations take advantage of economies of scale and outsourced manufacturing. They can reduce the cost to produce to a fraction of what it takes a local artisan.

So, by “shopping local,” I’m increasing my costs by nearly 400%. I can afford to do that. It’s easy for me—it’s just a bar of soap. It’s also my own decision with my own money. Not everyone has that luxury for many goods in their lives.

The problem breaks down when companies choose to work with certain suppliers or engage in activities that increase costs like this, because the money isn’t their own. It’s the shareholder’s, or the customer’s, or the employee’s. The managers of the company, like the C-suite and board, are just that—managers. They are stewards of other people’s money.

When they choose to spend money on a consultant, a party, a gift, or a donation, it’s not a free gift. It’s why when someone receives a nice watch at an office anniversary party, someone in the back of the room elbows their colleague and says, “I would’ve rather had the cash.” They understand the trade-offs involved.

The same could be said of other social good initiatives like climate change or inequality. On Monday, the SEC issued a new proposal for large companies to disclose their greenhouse gas emissions and risks to the environment. Sounds good, but that also increases the companies’ costs of doing business. One CFO said, “The bottom line is we’re going to need to spend a great deal of time, effort and money. . . . It’s also something investors want and since it’s the SEC, we are going to have to do it.”

Those costs will be carried to the consumers. In other words, you’re paying for that ruling. Maybe that’s something you want, but maybe it isn’t. And maybe it’s something you can afford, but many poor people won’t be able to afford these costs. The energy crisis in Europe, for instance, has created negative real wage growth for the people living there. The social good of renewable energy proponents turns out to be a social bad for the working poor. And that was before the war in Ukraine.

It reminds me of a time when my dad and I were talking about these things. I said something about better pay or sustainably sourced or something. He asked, “How much is a can of Coke?” I said something like a dollar or two. And he asked, “Would you be willing to pay $4? Maybe $5? What about $10?”

How much are you willing to pay for your beliefs? Economics like this reinforces the belief that only the wealthy can afford to be socially good.

The business of belief

So, where’s the line between an expense, a joy, and a return? How much are your beliefs worth to you? It comes down to the individual’s moral framework.

A nihilist might answer, “Whatever’s cheapest.” A Christian might answer, “Whatever’s cheapest that doesn’t violate God’s laws.” Or maybe something about creating a more beautiful place, a place fit for a King.

Who should decide? The head of a governing body? The head of a company? The head of a household? Who has the moral responsibility?

Enlightenment thinkers settled on individual responsibility, allowing people to be free to choose for themselves. No one person should be able to dictate the bounds of another. It’s why we have checks and balances between our branches of government. This gave way to flourishing markets, where people can enter into voluntary exchange with others based on the prices they’re willing to pay. Others’ social good edicts have the potential to warp this price system, sending inaccurate signals about the true cost of things.

That’s why I’ve settled on a libertarian-like belief system for politics and business. Who am I to tell my fellow Americans how to live? How can I impose a cost on them they’re not willing to pay? I could persuade them, perhaps, in writing like this or arguments over a glass of wine. But forcing my view of goodness onto others can be dangerous. I’m a Christian, and I have certain beliefs that they may not hold, and I’m okay with that.

I’m afraid that our moralizing will cause others to be burned out and bitter. I want you to be free. If you feel like paying for a gas guzzler, go for it. If you feel like avoiding Facebook like the plague, go for it. Do what’s best for you and your family, and the market will sort itself out, pricing in your values and the values of others.

That’s what I tell myself anyway.

So, to end my thinking on social good and the purpose-driven company, I say this: Be free to love and serve the Lord on your own journey. It’s the kindness of God that leads us to repentance, so be free and be kind.

Thanks for reading.