Rory Sutherland's Blog

Rory Sutherland

"Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist."

J M Keynes

Steiff, the German maker of teddy bears, is re-locating production back to Germany from China because, in their own words: "cost isn't everything".   Ref: Financial Times (UK) - from Brainmail

[On the bailout of AIG]  "It's a little scary that the world's largest insurance company hasn't planned for a rainy day." Tyler Cowen at Marginal Revolution (www.marginalrevolution.com)

"The economic fallout from these events is dominating the headlines.  The intellectual and ideological fallout we are just beginning to contemplate." ibid

Based in Canary Wharf, as we are, it would be impossible for us not to have noticed the change in mood in the last few weeks. It is, in some ways, an improvement. The parking at Sevenoaks station is more plentiful, for a start. And, once in Canary Wharf, there is finally something interesting to look at. My biggest complaint about E14 (aside, that is, from the E and the 14) was there was never any pleasure to be derived from people-watching there. Anywhere else in London, the passing cast of characters provides endless entertainment, even scope for Sherlockian speculation about their lives. Out here the opportunities for detective work are few: "Dr Watson, save that our caller was young, slim, a banker, ambitious, a gym-goer, materialistic, a BMW driver and a bit of a twat, I fear that there is little I can deduce from his general appearance. Now pray pass the syringe......"

Today the mood is a little more self-aware, and the expressions on the faces more interesting. "I notice from your large cardboard box and fraught demeanour that you were until today an employee of the Lehman brothers' once respectable bank." But it is a little too easy to be mean. Occasionally I travel in to work on a 7am train from Kent, a journey which teaches you that for every Master of the Universe with a six-figure bonus there are ranks of overworked, not particularly well-paid drudges living month to month like anyone else.

Yet if there is one welcome casualty of this crisis it is the widespread and unquestioned belief that unending growth is the only proper pursuit of any business, and that a business has no responsibility other than to its shareholders. 

I am not saying this belief is necessarily wrong, by the way. I am merely suggesting it is worth debating - and should not be treated as axiomatic. And it needs to be questioned a little more now, when the businesses who have most enthusiastically espoused this particular ideal seem suddenly to be desperate for government help. 

The economist who seems to have started this whole shareholders-first-and-last assumption is Milton Friedman. Yet even on the Libertarian right his assertion is the subject of much vigorous debate. Here's John Mackey, the avidly pro-free-market founder of Whole Foods.

In 1970 Milton Friedman wrote that “there is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” That’s the orthodox view among free market economists: that the only social responsibility a law-abiding business has is to maximize profits for the shareholders.

I strongly disagree. I’m a businessman and a free market libertarian, but I believe that the enlightened corporation should try to create value for all of its constituencies. From an investor’s perspective, the purpose of the business is to maximize profits. But that’s not the purpose for other stakeholders–for customers, employees, suppliers, and the community. Each of those groups will define the purpose of the business in terms of its own needs and desires, and each perspective is valid and legitimate.

He goes on:

I believe [our philanthropic] programs would be completely justifiable even if they produced no profits and no P.R. This is because I believe the entrepreneurs, not the current investors in a company’s stock, have the right and responsibility to define the purpose of the company. It is the entrepreneurs who create a company, who bring all the factors of production together and coordinate it into viable business. It is the entrepreneurs who set the company strategy and who negotiate the terms of trade with all of the voluntarily cooperating stakeholders–including the investors. At Whole Foods we “hired” our original investors. They didn’t hire us.

The shareholders of a public company own their stock voluntarily. If they don’t agree with the philosophy of the business, they can always sell their investment, just as the customers and employees can exit their relationships with the company if they don’t like the terms of trade. If that is unacceptable to them, they always have the legal right to submit a resolution at our annual shareholders meeting to change the company’s philanthropic philosophy.

And.....

....turn to one of the fathers of free-market economics, Adam Smith. The Wealth of Nations was a tremendous achievement, but economists would be well served to read Smith’s other great book, The Theory of Moral Sentiments. There he explains that human nature isn’t just about self-interest. It also includes sympathy, empathy, friendship, love, and the desire for social approval. As motives for human behavior, these are at least as important as self-interest. For many people, they are more important.

He is suggesting that the assumption that a business can be judged on its recent financial performance and nothing else seems open to question on several levels. I would add a few more.....

1. The reductionist "it's all about the money" view will always prove especially popular with stupid people. In other words, even if it is true, it has the dangerous effect of disproportionately empowering a small caste of Aspergerish people whose outlook on the world is unsubtle, amoral and uber-rational. There is no need for refined judgment, taste, morality or any other human virtues when your spreadsheet provides you with all the answers you need.
   
   
2. Most people, as Adam Smith observed (and as the superb Indexed blog shows - see right), are not solely motivated by material wealth, with many valuing social capital more highly.  This, incidentally, may be true of investors as well as of most employees. Institutional investors, it's true, only seem to justify their performance in numerical terms. However I suspect some individual investors (whose money it really is) would prefer to support businesses whose aims they shared. What would happen if you disintermediated investment just as, say, Kiva.org has disintermediated charity?
   
   
3. The profits-only approach is a licence to be amoral. Not unreasonably, people do not want to do business with amoral people. If you want to know why this country has always had high house prices and low rates of savings, it may just be because people trust bricks a lot more than they trust bankers. The Friedman belief, if pursued excessively, destroys consumer trust in your business. 
   
   
4. A business bent on only one end may be an uncreative business. What makes a business and a brand interesting (Virgin, Apple, Nike, blah.....) is the tension between its pursuit of money and its pursuit of some other wider aim. This conflict allows for diversity of opinion - and diversity of people. One of the problems with banking's naked and unalloyed greed is that it risks disproportionately attracting a dangerously homogeneous group of people. Last week I saw a presentation by an HR specialist on Generation-Y; the Gen-Y people going into banking and finance, she remarked, were completely unrepresentative of their age group - and disproportionately self-interested.  All this is a pity when thinks of the ethical origins of most financial organisations, often created with a social purpose as well as a financial one: Quakers, interestingly, seem especially good at building long-lived brands.

Most of us pay in advertising pay unquestioning lip-service to the idea of shareholder value being the one desirable purpose for any business, our own included. Are we right? Or are we just the "unwitting slaves of some defunct economist"? Let me know what you think.