Over the past decade, the ranks of entrepreneurs who see beyond the bottom line have been growing. Method, Toms, Warby Parker, and Whole Foods Market have planted the flag of social responsibility, or conscious capitalism, and defended it profitably. Some formally declare their commitment to all stakeholders--owners, employees, the community, and the environment--by becoming "benefit corporations," a new legal designation. Others simply build a social benefit into their business plan.
But should you join them?
Should your business try to do anything other than generate sales and profits? Survival, after all, is a noble goal in itself. Do you really have to save the planet, too? To dog-eat-dog entrepreneurs like Kevin O'Leary, any startup trying to do more than serve customers and generate profits is being run by labradoodles playing among the pit bulls of commerce. "Running a business is hard," says Shark Tank's resident cynic and co-founder and chairman of O'Leary Funds, who has myriad investments. "You have to be willing to fire your mother. When you are the leader of a business, your responsibility is to the success of the whole organization, not any one individual, including yourself. Successful CEOs know their allegiance must always remain with customers and shareholders, 100 percent of the time."
If you're starting a business, or reevaluating how to focus your existing business, the profit vs. purpose debate has never been sharper. The argument started some 50 years ago, when capitalist icon Milton Friedman tried to smother the nascent corporate social responsibility movement. Friedman argued that earning profit for the owners has been the mandate--and for public companies the legally binding fiduciary responsibility--since capitalism appeared. While Friedman didn't oppose social responsibility, he reasoned that society is better served when companies maximize profits for the owners, who can then invest in social causes with the proceeds. He said founders who do otherwise are "unwitting puppets" of socialism who effectively "tax" customers--because prices would have to increase to cover the cost of all that social responsibility.
But the number of entrepreneurs who want to use commerce in ways great or small as a force not just for profit but also for good is growing. These founders have witnessed the consequences of unfettered capitalism, and it isn't a pretty picture: global warming, pollution, income inequality, environmental degradation, and resource depletion. Many Millennials saw their Boomer parents spat out in one restructuring or another as corporations pay fealty to Wall Street over people. And they are saying, "No, thanks."
"The meltdown of our global financial system was a direct result of inadequate checks and balances," says Adam Lowry, co-founder and chief global sustainability officer of Method, which makes chemical-free household products. (It was purchased by Belgium-based "green" cleaning products company Ecover in 2012.) "It's a prime example of the invisible hand reigning supreme, while placing the trillions of dollars of recovery costs onto the backs of American workers, whose real wages have been declining since the Great Recession."
It's Millennials, the largest demographic in America, who are powering the popularity of socially conscious capitalism. For one, they are not shy about their desire to buy from, do business with, and work for companies that have more than profit as a goal. According to the Deloitte Millennial Survey, 87 percent of Millennials believe that a company should have a larger purpose than racking up profits.
Consumers in general are also expanding their purchasing criteria. According to a report by the Natural Marketing Institute, those living lifestyles of health and sustainability now represent 22 percent of the consumer base. That's up from 15 percent in 2005. More important, NMI reports a continued "greening" of consumers across the board: The segment of consumers who call themselves "conventional" or "unconcerned" about social responsibility continues to decline. More consumers care, and more care more.
Increasingly, consumers buy on the basis of values and value. In turn, retailers, always sensitive to consumer sentiment, are putting profit into the equation.
Target, for instance, introduced a program in 2014 called Made to Matter--Handpicked by Target that features sustainably manufactured and sourced products. The popularity of the line compelled Target to nearly double its size, to more than 200 products. Sales of Made to Matter products were expected to hit $1 billion for 2015, the company said, up 30 percent from the prior year. Target's research showed that shoppers wanted more transparency and authenticity from the brands they buy.
Target may want to look up a reusable plastic lunch bag called (Re)zip, made by Blue Avocado, based in Austin. Company co-founder Amy George is on a mission to cut waste, source locally, and address gender inequality. She also invests a portion of sales in microentrepreneurs. "There is a more conscious consumer at the table," says George. "The Millennials are driving growth and they care. They study your supply chain, and they know a ton about it. That's good for businesses like mine. The buyers at these retailers are also Millennials." (Re)zip's customers, which include Bed Bath and Beyond and the Container Store, are pushing Blue Avocado toward $8 million in sales.
But Friedman acolytes argue that if (Re)zip is paying above-market wages and sourcing locally, surely it's not going to generate the returns of its profit-driven competitors--and therefore won't be as efficient in raising or using capital. There are signs that his argument is starting to break down. Philip Berber, an entrepreneur who founded Austin-based Enable Impact, which connects so-called "impact investors" with companies such as Blue Avocado, says any gap that once existed in returns has diminished. "We're seeing [socially responsible] investment funds outperforming the S&P and traditional investment managers," he says.
According to a study by Cambridge Associates, impact investment funds launched between 1998 and 2004--meaning those that have had a chance to sell their portfolios--have outperformed comparable private-equity funds. Those of later vintage still lag, returning 6.9 percent to the PE competition's 8.1 percent, but there's still value to be realized when they cash out of investments, according to the study. Berber says both types of companies exhibit similar early-stage mortality rates.
There is even some evidence that socially responsible companies are more resilient than profit-driven firms. A type of certified "socially responsible" company called a B Corp has higher two- and five-year survival rates than traditional companies, according to B Lab, the sanctioning organization for B Corps. Method, Warby Parker, and the evergreen Ben & Jerry's are B Corps, a designation that involves getting a formal certification and biannual "audit" of criteria such as environmental and community impact, wages, and governance.
There are 1,577 B Corps worldwide, a figure that is growing rapidly, and 26 of them landed on the 2015 Inc. 5000.
This model might also make it a lot easier to hire top talent. The Deloitte survey found that 44 percent of Millennials have turned down a job offer because the company's values did not match their own.
So if the consumer wants it, the market wants it, profits and performance aren't necessarily sacrificed, it could make your company more resilient, and make it easier to hire top young talent, why is there still a debate about the logic of being a socially conscious company?
The reason to stick to a profit-driven business, says O'Leary and other Friedmanites, is simple: Entrepreneurship is really difficult. Complicating it with other issues raises the risk of failure.
Don't be misled by the success of companies like Warby Parker, says O'Leary. They're the exception, a green shoot, and there's no evidence this model can scale consistently and over decades. Even Ben & Jerry's, one of the most successful socially conscious companies, is now owned by a conglomerate, Unilever, of the sort that Millennials claim to abhor.
Steven Kaplan, a professor of entrepreneurship and finance at the University of Chicago's Booth School of Business, warns against trying to serve too many masters. Without profit as a focus, "it's very hard to tell if you're doing a good job," he says. "You have to worry about accountability. It's easy to say: 'I'm great. I'm delivering value to consumers, to the environment. That's why profitability is suffering.' But it's a slippery slope."
Being an entrepreneur also demands that you be able to pivot constantly, says O'Leary. That's hard to do when you're serving constituencies outside the core business.
Charles Koch, the chairman of Koch Industries, the $115 billion leviathan of 100,000 employees, and author of Good Profit: How Creating Value for Others Built One of the World's Most Successful Companies, says the most compelling reason to focus on profit is because you'll do more good in the long run. "We're not a charity," says Koch. "The more earnings we have, the more good we can do and make our employees' and communities' lives better." While the Koch brothers are known more for their conservative causes, in 2014, the latest year for which data is available, the Charles Koch Foundation donated $36 million, from assets of $528 million, to dozens of colleges and universities. It's just one of the many Koch-run foundations that are funded by the company's profits.
Koch Industries companies are among the nation's biggest polluters, but Koch says they are addressing this problem by running plants better. Retailers like Target and Walmart demand this as they respond to their customers' calls for greener, cleaner products. Walmart is nobody's idea of liberal, but the retailer has forced vendors like Koch's Georgia-Pacific unit, which makes paper products, to reduce packaging and optimize their truck deliveries to cut waste, CO2, and other pollution. That, says Koch, is the market working.
Maybe there's a third way to think about this fundamental business question--one that reflects the fact that social responsibility is altering business practices at all companies, whatever the founders' profit philosophy. As consumer demands shift, fair treatment of employees (which boosts productivity), green off-the-grid energy sources (which lower price volatility), and sustainable sourcing (which reduces supply-chain and political risk) isn't profit-killing idealism. It's prudent management. "That's a value-maximizing strategy," says Kaplan. "That's perfectly consistent with Milton Friedman."
Correction: An earlier version of this article misstated the name of a (Re)zip customer. It is the Container Store, not the Company Store.