Can A More Fair And Equitable Free Market Help Companies That Do Good?

The free market can save us, but first the free market needs to change whom it rewards.

In 1970, Milton Friedman famously declared, "The social responsibility of business is to increase profits," and anything else was "pure and unadulterated socialism." According to this doctrine, business activity that cannot be attached to a material financial outcome is treated with suspicion and, ideally, discarded. Employee well-being, customer loyalty, fair hiring practices, community prosperity, and environmental vitality are important only if they drive profits.

But businesses and their stakeholders have always attempted to understand and capitalize on the connections between a company’s social and environmental profile, and its financial interests, throughout the history of commerce. And over the years, various schools of thought have emerged that have sought to develop a more enlightened calculus around how to capture and report on corporate performance, value, risk, and reward beyond standardized financial filings. 

Though we now think of corporate social responsibility (CSR) as a shorthand for good management in commercial enterprise, the truth is that business and financial leaders have been thinking this way well before anyone put a label on it. The famous GE "Blue Books," which became the management bible for a generation of corporate leaders, talked about companies acting in the "balanced best interests" of all stakeholders.

The facts of the matter are that the basic connections between corporate sustainability and financial performance have been established. Where the lines are drawn—or, more accurately, where the connections are strongest—is a question of judgment and circumstance. But in the broadest sense, a correlation between profitability and CSR leadership has been demonstrated. 

Causation, on the other hand, has been more difficult to pin down. (As an aside, it’s worth pointing out that defining causative links between business performance and financial outcomes in any realm is hard to define; otherwise, I would be writing this piece from my luxury yacht in the Mediterranean instead of my office in New York City.) All we know for sure is that successful CSR strategies have been instrumental in helping to reduce business operating costs, boost top-line growth, attract and retain talent, enhance culture, attract shareholders, win public support, engage communities, and more.

Now the time has come to elevate the discussion still further: to go beyond asking how CSR can boost profitability or enhance market performance, and address how business can be used as a force for good in the world. Is there a higher purpose for business beyond simply making money and providing employment? Surely the answer has to be yes.

In his "Revolution of Values" speech in 1967, Dr. Martin Luther King Jr. said, "A true revolution of values will soon cause us to question the fairness and justice of many of our past and present policies." I believe there is a revolution of values beginning where it can arguably have greatest effect: the capital markets. The challenge in this case is how to build a more just marketplace that better serves the broader interests of society as a whole.

It’s a challenge that lies closer to the economic philosophy of Adam Smith himself, in which justice and freedom are placed alongside prosperity for all as guiding tenets. I am convinced that were he alive today, Smith would recognize some of the more grotesque sins associated with early capitalism—the long work days, low wages, egregious profiteering, and child labor, to name a few—that inspired his original thinking.

For the plain truth is, we need a fully functioning free market system now more than ever. Philanthropy alone is not enough to solve today’s problems. Nor is government action. Only free market enterprise can muster the resources and establish the systemic solutions we need right now. To date, the visions of capital market reform have been largely generated from the top down, by experts, politicians, and insiders. One problem with this approach is they have been processed through the orthodoxy of financial materiality.

According to a major poll conducted by my organization, JUST Capital, earlier in 2015, the overwhelming sense among Americans—regardless of political ideology or income bracket—is that corporations are too focused on meeting the needs of shareholders, and need to better balance the interests of customers, communities, employees, and the environment. What’s more, we know that although trust in big business is low, more than 90% of Americans surveyed said it's important to measure corporate justness, and more than 75% said such information would influence the decisions they make as consumers, employees, or investors.

By establishing the first nationwide index of just business performance based solely on the public’s attitudes, preferences, and values, we think we can begin to address this unmet need. Counterintuitively, we also think that many companies will actually want this information too. What business doesn't want to know what its customers, its employees, and its wider stakeholders truly care about when it comes to performance? Once this is in place, we can begin to provide both consumers and companies with the information they need to incentivize and reward more just corporate behavior.

This idea of using the power of the markets to drive change is by no means new. But it is effective. Shifting a mere 1% of total personal consumption to companies that prioritize the things we care about would channel some $120 billion per year—almost half as much as Americans donate to charity annually—toward companies that provide greater employee benefits, pay a living wage, and make products that are healthy and safe; strengthen our communities; protect the environment; respect customers; pay their fair share of taxes; and other things we value. Now that’s a marketplace we can all be proud of.

-Fast Company