What is the fundamental purpose of a company? To benefit owners and shareholders? Or to make the world a better place? Inc. asked two notable entrepreneurs who stand on opposite sides of the debate to make their cases.
Here, Kevin O'Leary, co-founder and chairman of O'Leary Funds and resident cynic of ABC's Shark Tank, and Adam Lowry, co-founder and chief global sustainability officer of Method, a maker of chemical-free household products, square off in competing essays.
Kevin O'Leary: I was sitting in my Shark Tank chair recently, taping a pitch from two Millennials who were looking to raise $250,000 for their fledgling underwear business. The undergarment market is brutally competitive, the margins are razor thin, and getting shelf space from retailers is next to impossible. If someone asked me to find a business that most emulated hell on earth, it would be this. More...
Adam Lowry: There are those who still cling to the antiquated idea that the invisible hand of the free market is all we need to prosper and ensure equitable outcomes for shareholders and stakeholders. They argue the best way for a business to "do good" is to make as much money as possible and then donate some of it to causes it thinks are important. It's a convenient, but flawed, logic. It doesn't protect the interests of society and the environment, and it actually produces poorer economic outcomes. More...
Chances that I would invest in this? Zero. But wait! This proposal was different. For every pair of skivvies they sold, they were going to give a dollar to charity. They believed that adding a dose of altruism to their business model would somehow make them impervious to the brutal realities of the undergarment market. I've heard the same pitch for socks, knapsacks, ties, and dog accessories.
I never hear from these companies again; I assume they go out of business. It seems to me that when people go out to buy underwear, they want the best product at the lowest price. Always have, always will.There seems to be an assumption, mostly by people who have never run a business, that corporate America can and should do more than achieve its primary mandate of maximizing its return. Here is the truth: The DNA of a business is to maximize returns to its shareholders, so they are incentivized to reinvest their capital and start new businesses, create new jobs, and provide innovative products and services that improve lives.
When you contort a business to change this mission, you destroy the very essence of what makes America great. Modifying the corporate model to solve all of society's problems is simply un-American. And when a CEO takes on a social mission that doesn't serve all constituencies, that's a recipe for disaster.
If you're going to adopt a social mission, it has to pay for itself. A business that disadvantages its model with expenses that don't add value for owners gets beaten by more efficient competitors. This is the Darwinian nature of competition.
I have no problem with the concept of "do no evil" in business. The fair debate is this: Who should pay for it and where should the expense live--on the income statement, or as a gift from shareholders after they have been paid their dividend?
We don't need more companies trying to solve social problems. We need businesses to return more capital to their owners so they can do what they have always done--pass it forward. It's the reward for running a good business, not a function of one. Think of the multibillion-dollar commitments made by Microsoft's Bill Gates, Berkshire Hathaway's Warren Buffett, and, more recently, Alphabet's Larry Page and Sergey Brin and Facebook's Mark Zuckerberg. There are hundreds of thousands of business leaders doing exactly the same thing. No one has to tell them; it's already in their hearts. Corporations can be bad actors, and we have laws and regulations to deal with them. But we are at a critical point in capitalism's history. It's time for those who believe in it to stand up and defend it. I'm raising my hand.
In December 2015, after 20 years of trying, the world's governments reached a historic agreement to limit greenhouse gases. It happened in no small part because a massive cadre of businesses called for action. Some of the world's largest and most successful companies signed pledges to greatly reduce their carbon footprints heading into the meeting. That's because today, even the most profit-minded companies know climate change is a huge limitation on economic growth.
Enlightened corporate governance is expanding past initial leaders like my business, Method, and into the mainstream. The success of businesses like ours is the best and final argument against a "profit-first-and-only" focus.
Method provides several examples of how integrating society and environment actually produces better financial outcomes. Method bottles are unique not just in their design, but in that they are made from 100 percent post-consumer recycled plastic. While the free-market economist would argue that we pay a premium for this material, which is true, the premium is far outweighed by the financial benefit. When oil prices spiked in 2011, nearly all of Method's competitors were forced to raise prices to cover inflated commodity costs. Because post-consumer plastic is far less carbon intense, as are most ingredients in Method products, we were able to hold our pricing. This resulted in market share gains and revenue growth 20 times the cost of the better materials. These gains have sustained, and--even now, with lower commodity prices--our recycled plastic costs essentially the same as virgin plastic. This is a direct strategic and financial benefit to Method, but there are also cost savings to society in the reduction in the billions of tons of plastic flowing into our landfills and oceans each year.
Method provides full benefits to our hourly factory workers. This investment reduces absenteeism and turnover, and increases productivity. These gains more than cover the cost of providing these benefits. Our factory is also powered by 700 megawatts of wind and solar power generated onsite. Over a 10-year horizon, our energy costs will be lower than they would be if we bought energy from the grid.
No longer can any business interested in profitability afford to let the invisible hand manage its environmental and social impacts. Companies like ours are demonstrating definitively that sustainable businesses are better, more profitable businesses.