A few weeks ago, we wrote about a recent book called For Profit that examined whether corporations have historically served the interests of society. One conclusion was that the corporate structure was designed to promote the common good, but in recent times has been more singularly driven by profit.
The subject of this week’s briefing, a new book called Deeply Responsible Business by Geoffrey Jones, extracts lessons from companies that have tried explicitly to serve the interests of society and asks why there aren’t more of them.
Toward the end of the book, Jones, a professor of business history at Harvard Business School, acknowledges the simple reason why: “Deeply responsible business practices are financially expensive,” he writes. “The internalization of ecological and social costs that are conventionally and legally treated as externalities is costly in time and resources, and it puts deeply responsible businesses at a competitive disadvantage compared with conventional firms.” (p. 350)
Jones says that ethical and responsible conduct does bring benefits that can at least partly offset that disadvantage, such as brand strength and worker loyalty. But he contests the idea that companies meeting environmental, social, and governance (ESG) criteria deliver better financial returns than their peers, saying research doesn’t prove that hypothesis out.
Jones focuses on what he calls “deeply responsible businesses” for whom social responsibility isn’t just window-dressing—and he chronicles companies of significant size and substance. (“This is not a book about eccentrics or utopians,” Jones writes.) (p. 343) Such firms have never been the norm, but Jones contends that they’re still important because of the direct positive impact they have on individuals and communities, the influence their leaders often have through philanthropy and civic efforts, and the catalyzing effects for moving public policy forward.
Jones’ survey of the last two centuries of business history includes figures such as:
- George Cadbury—A pioneer of ethical capitalism, he saw no conflict between the common good and financial success as he built his family’s business into Britain’s leading chocolate maker over the second half of the 19th century and into the 20th. Cadbury created a works council with elected employee representatives, pensions for both men and women, and a company village with garden homes for workers.
- Edward Filene—In 1902, Filene introduced the first employee training system in American retail at his family’s Boston department store. Worker-elected representatives could modify any store rule with a two-thirds vote in favor of the change. And Filene opened a bargain basement with low prices that he viewed as important for redistributing power and wealth.
- JN Tata—”In a free enterprise,” the Indian textile industrialist noted, “the community is not just another stakeholder in the business, but in fact the very purpose of its existence.” (p. 106) In the 19th century, he introduced employee-friendly practices such as eight-hour days, a nursery for young mothers, pension funds, and accident insurance.
- Shibusawa Eiichi—A contemporary and acquaintance of Tata, Shibusawa was president of Dai’ichi Bank, the first bank and first joint-stock company in Japan. He went on to launch 500 companies, generally playing an active role at their founding and then leaving others to manage and share in the stock ownership. Shibusawa encouraged ethical behavior and support for Japan’s development.
- George Romney—The chief executive of American Motors Corporation during the 1950s, Romney was critical of excess consumerism and marketed compact, more gas-efficient cars such as the Rambler, arguing families could put money from their fuel savings toward education. (He had limited success.) Romney, who also served as Michigan governor, developed an early profit-sharing scheme for workers as well.
- An Wang—The computer maker gave employees pension plans and stock representing about 17% of the company’s equity by 1982, and operated childcare centers in his factories. Thanks in part to his decision to establish his company’s headquarters there, Lowell, Mass. went from having the highest unemployment rate in the mid-70s in the US to the lowest by the mid-80s.
- Anita Roddick—The Body Shop founder shed wasteful packaging, pushed against restrictive beauty norms, championed natural cosmetics and fair trade sourcing, and pioneered benchmarked environmental reporting (though close examination found some of the company’s claims of virtue were hyperbole or lies.) The Body Shop provided daycare at the company headquarters and paid every employee to do a half day of community service each week, declaring it “doesn’t believe in profits without principles.” (p. 244)
Jones identifies three common attributes of these deeply responsible businesspeople:
- Their products and services were socially useful. And, at the very least, they weren’t in industries with obvious social costs, such as gambling, tobacco, or junk food.
- They showed respect and humility in their interactions with other stakeholders. They recognized that “solving problems must be a collective endeavor,” Jones writes. (p. 345)
- They believed in the community and contributed to its vitality. They invested in institutions of education and culture, and in some cases the housing and greenery of cities themselves.
The history covered in the book suggests that deeply socially responsible practices often don’t survive stock market listings, acquisitions by bigger players, or the death or resignation of the visionary leader. “It is the historical difficulties of sustaining deep responsibility that make the recent attempts to build responsible systems capable of supporting and financing individual firms so potentially important,” Jones concludes, (p. 354) looking to some of the structures being used to better align businesses and social impact such as:
- B Corporations—The nonprofit B Lab developed a model for corporation law that mandates companies pursue a positive impact on society and the environment and assesses companies for their ESG compliance. B Corps include Warby Parker and affiliates of Unilever and Procter & Gamble.
- The steward-ownership model—Under such structures, a company is managed by stewards chosen for their skills and values, with the goal of contributing to the common good without the traditional interruptions due to transfer of ownership of leadership. The voting shares of Patagonia, a certified B Corp, were in 2022 placed in a perpetual trust as part of such an approach. This model “offers the prospect of radical reinvention of the laws of ownership to create corporate structures capable of building value for all stakeholders,” Jones writes. (p. 341)
Our critique of the book For Profit was that it didn’t acknowledge efforts to innovate within and beyond the corporate structure. Jones believes that these innovations are promising, but we’ll only know their impact in the future.
“There have been many different views of the responsibilities of business over the last two centuries, but the belief that the sole purpose of business was to maximize the wealth of shareholders was certainly never widespread,” Jones writes. (p. 302)
To be sure:
- Much of Deeply Responsible Business is the story of visionary business leaders, nearly all of them male. The voices of workers are largely absent from this history, and women have a limited place.
Memorable facts and anecdotes:
- While Adam Smith is often cited for his mention of the “invisible hand” of the market in The Wealth of Nations, in an earlier book he had written of the “Impartial Spectator,” a consciousness within each person concerned for the common good, which Jones explains, “provided an ethical framework within which capitalist markets could best function.” (p. 9)
- Britain raised the minimum age for factory work in 1891 only to 11.
- There were fewer than 14,000 Quakers in Britain in 1861, but they had an outsized influence on business, gaining a reputation for honesty and innovation. They introduced practices such as fixed prices in the place of bargaining and created some of the first socially responsible businesses. Prominent Quaker business families include the Lloyds, Barclays, and Cadburys.
- Filene was obsessed with “fact-finding” and hired fact-checkers, including journalist Lincoln Steffens, to help prepare his public speeches.
- Howard R. Bowen’s 1953 book The Social Responsibilities of the Businessman was a pioneering work of deep business responsibility, with proposals including audits of companies for their societal impact every five years, greater inclusion of business responsibility in management training, and the idea that businesses should bear responsibility for externalities such as pollution.
- Women played a central role in the expansion of ethical investing beginning in the 1970s, including Joan Bavaria of Franklin Research and Development Corporation and Amy Domini of KLD Research & Analytics.
- “Global business today is by and large not only relentlessly profit seeking but also well skilled in warping institutions of government and law to serve corporate interests.” (p. 3)
- “People are more important than profits.” —Edward Filene (p. 46)
- “I don’t pay good wages because I am rich. I am rich because I pay good wages.” —Robert Bosch, German industrialist (p. 84)
- “No one goes to business school to learn to be a virtuous or spiritual person.” (p. 155)
- “The capitalist ideal is you grow a company and focus on making it as profitable as possible. Then, when you cash out, you become a philanthropist. We believe a company has a responsibility to do that all along—for the sake of the employees, for the sake of the planet.” —Yvon Chouinard, Patagonia founder (p. 237)
- “The shareholder value maximization paradigm limits freedoms rather than protecting them. Providing consumers with socially useful goods and services, offering employees generous benefits, building communities, creating cultural and educational infrastructure, seeking to reverse environmental degradation—these are acts that offer individuals freedoms that market mechanisms fail to provide.” (p. 347)
- “Becoming quoted on the public capital markets became the kiss of death for deep responsibility.” (p. 353)
The bottom line is that Deeply Responsible Business is a valuable catalog of notable efforts over the past two centuries by profit-seeking businesses to also pursue the common good. It’s very useful to expand the visibility of models beyond that of Patagonia, which is a conventional go-to when discussing successful, socially responsible business practices. As Jones writes, “history provides students today with the opportunity to avoid pitfalls and learn from compelling role models of the past.” (p. 350)
The handbook for this new era of business doesn’t exist. We’re all drafting our own as we go along—and now we’d like to start doing so together. You can sign up here to receive this briefing by email.