It is all about the money when discussing ‘planet, people and profits’
One only has to glance at the recent academic literature and the popular press to note that the new mantra increasingly adopted by academics and others is that firms should focus on “planet, people and profits.”
But this pithy turn of phrase paints an incomplete picture of how modern companies find success.
Bloomberg recently reported that U.S. Rep. Alexandria Ocasio-Cortez, D-New York, visiting South by Southwest in Austin said, “Capitalism is an ideology of capital.”
“The most important thing is the concentration of capital and to seek and maximize profit,” she said, discussing the costs to both people and the environment, “so to me capitalism is irredeemable.”
Even the buzzwords floating around for the past decade — the “balanced scorecard” and the “triple bottom line” — are loaded terms. The former suggests that firms should pay attention to the firm’s nonfinancial performance in addition to the traditional financial measures of performance. The triple bottom line uses factors that include financial performance, social responsibility and environmental responsibility to benchmark firm performance.
Increasingly, firms are self-motivated to report their performance along financial, customer relations, internal business processes and learning/growth dimensions. Presumably, stakeholders — that includes customers, investors, governments and anyone else interested in the firm — use this information to judge the firm’s overall performance.
Rightly or wrongly, firms now believe that they should routinely report their performance along financial and nonfinancial lines to outside stakeholders. It seems important for them to prominently display their social and environmental performance in addition to their financial performance to stakeholders. Arguably, each generation of stakeholders believes it is more conscious about social and environmental issues than the previous generation. Hence, firms may seem to be pandering to the needs of these generational stakeholders by showcasing their nonfinancial performance as well.
Blue Apron and Plated are two firms offering meals that target young adults and provide information on their websites to appeal to these stakeholders. Plated, for instance, indicates that its produce is grown organically and its poultry and fish originate from sustainable sources. “Look,” it seems to say. “We are good custodians of the planet and take care of our stakeholders!”
Additionally, in today’s social media world, good and bad news about anything or anyone is instantly disseminated globally. Firms and individuals must increasingly manage information flow very carefully. Together, increased stakeholder focus on environmental and social issues, and the relative ease of information dissemination, can be a deadly combination for firms.
One faux pas on either of these counts can prove disastrous to a firm’s image. Witness the response to the United Airlines CEO’s apology blaming the victim in reaction to a video circulating on social media of a man dragged off a plane. And how about tweets from Adidas congratulating Boston Marathon survivors? It was forced to take down that ad after furor from Twitter followers who suggested this ad reminded individuals of the tragedy.
The cost to erase these errors in judgment proved extremely expensive to the firms involved. To avoid costly missteps like these, firms are more proactively inclined to expend valuable resources to hire people to manage their corporate social responsibility, or CSR, profiles and their advertising campaigns.
Examining the phrase “planet, people and profits,” one could conclude that if the firm is profitable, it is not taking care of the planet or the people. The phrase “planet, people and profits” can erroneously suggest that, somehow, if a firm is profitable, it is making money at the expense of the people and/or the planet.
But in today’s globalized, social-media-filled world, a firm cannot be profitable unless it takes care of the people and the planet. The most profitable firms of today are successful because they are good stewards of the planet and take good care of the people.
For instance, Rackspace has announced its aim to only use 100 percent renewable energy sources by 2026. In 2018, it was also ranked in Forbes’ list of best places to work in the medium firm category. H-E-B also boasts similar attributes while remaining financially profitable. It has partnered with the Environmental Defense Fund to ensure that its seafood originates from socially and environmentally responsible fisheries. It also donates vast quantities of food to help end hunger. The list of firms that adopt socially responsible practices is endless.
Research by my colleagues and me also indicates a direct link between a firm’s CSR activities and its future financial performance. We found evidence that current CSR activities for a group of service firms are strongly positively correlated with how much future profits the firms can generate from its assets, after controlling for other factors.
In another study, we found that global manufacturing and service firms use CSR dollars as strategic dollars to be spent carefully for maximum financial benefits.
Another related analysis found that banks offer lower interest rates on bonds to firms that follow good CSR principles relative to firms that do not. Bankers may feel good about firms that implement good CSR practices, but they still follow the money. They offer lower interest rates to such firms since they may recognize that such firms are likely to attract higher revenues in the future — lowering their business risks, which translates into more money — capital.
Ultimately, firms cannot make money unless they take care of their stakeholders. The harsh limelight of social media punishes irresponsible firms because potential, and even loyal, customers will avoid its products. Decreased revenues, in turn, lead to lower profits. Lower profits can negatively affect the stakeholders of the firm. It is essentially unimaginable for any firm today to earn sustained profits while being irresponsible custodians of the planet and/or not taking care of its employees and customers.
So, yes, firms will (and should) continue to report their performance along financial and nonfinancial lines because stakeholders demand it. It is part of their strategic outcome.
The focus should be on increasing profits by producing quality products and taking care of its stakeholders and the planet. However, instead of a focus on “planet, people and profits,” which may suggest to some that these objectives are in direct conflict with each other, it should be “people for profit” and “planet for profit,” or, more appropriately, people and planet for profits.
Yes, it is all about the money.
Prasad Padmanabhan, Ph.D., is a professor of finance and the Myra Stafford Pryor Chair of Free Enterprise at St. Mary’s University.