Long gone are the days in which the sole responsibility of a corporation is to maximize profits at all costs. Milton Friedman’s famous assertion that the “social responsibility of business is to increase its profits” has formally been put to rest by the corporate members of the Business Roundtable.
Today’s biggest companies are taking a second look at their priorities and measuring success by their ability to satisfy all of their stakeholders. In its recent declaration, the Business Roundtable argued that corporations must also prioritize non-shareholder stakeholders, protect the environment and work ethically with suppliers.
While such progressive ideas are welcome from any quarter, is this business model really that revolutionary?
My hope is that we can broaden the thinking around who stakeholders are as well as potential financial impacts. There are many environmental measures that are by-products of things we already do, and the challenge is to find ways to better articulate them and their financial impacts. The other key is to help people better understand how stakeholders impact and enhance others’ returns and financial outcomes. Unhappy employees mean it is more expensive to secure labor. A strike by cleaners or elevator operators will impact how tenants view the landlord.
Driven in part by the explosion of social media and the expanded number and power of activists, these important but too often neglected principles are now being shouted from the rooftops rather than whispered at cocktail parties.
If a company truly wants to maximize shareholder return, it must take care to provide value and support to all stakeholders involved in bringing a product or service to market. For example, it’s necessary for organizations to care for their employees because they need workers to operate their business. Companies also need to consider their suppliers, customers and — especially because of social media today — their critics. Ultimately, a successful business needs to be one that attracts and retains employees, with products and values consumers want to spend their money on. Simply put, organizations maximize returns to shareholders so long as they meet the needs of every other stakeholder in the business.
This new business paradigm comes at a time of increasing distress in corporate America. The nation’s biggest companies face frequent scrutiny over issues such as income inequality, recalled products and substandard working conditions. In an attempt to maximize revenue, too many have lost sight of their workers’ happiness, something essential to the smooth operation and profitability of a business. Fortunately, a great number of companies are taking part in this business revival.
Increasingly, companies seek certification as B Corporations, formalizing their positions as social enterprises that create value for non-shareholding stakeholders. B Lab, a nonprofit organization, started this certification process in 2007, and the number of firms receiving this status has grown to more than 3,000 across 71 countries.
A very important element of earning B Corporation status mentioned by the Business Roundtable is the inclusion of environmental awareness. Sustainability is increasingly playing a major role in every corporation, but many corporate leaders are asking, “Why do we need to include environmental impact and sustainability?” These are necessary elements that are important to a growing number of active stakeholders. Taking the environment into consideration as part of marketing and public relations strategies shows everyone that a company is considering something other than itself — an act consumers and employees today appreciate and actively seek.
I have learned over many years of real estate and sustainability work that it is critical to have a broad view of stakeholders as there are many people or groups that can keep a project from happening. By understanding the broad impacts of a project, you can find a broad set of allies when you need them most.
Real estate impacts a wide spectrum of stakeholders. We often think of the owner and the occupier or tenants, but you also have the community in which an asset is located. Real estate isn’t fungible but discrete and specific. You also have managers, vendors, cleaners and more — all of whom are impacted by real estate. Imagine your cleaner claims that the materials they use are causing them harm, paving the way for others to follow suit. Where you place the egress for a property will impact your neighbors and their interest in supporting your expansion plans. There are few buildings that haven’t had tenant claims of impacting their health in some way. Giving thought to all of the potential stakeholders allows you to make better and more strategic decisions.
The takeaway for all real estate investors is to think as broadly as possible about who is impacted by our actions and who you need in order to maximize the return or acquire an asset.
Milton Friedman’s famous words about the narrow responsibility of business proclaimed in the 1970s made sense in their day. But the restoration of long-established humanistic business principles is a win-win that meets the demands of a wider circle of stakeholders and reflects a changing global business dynamic that’s likely here to stay.