A shared purpose can have

enormously powerful effects. But

why, then, does talk of purpose
make many managers nervous?
Should it be legal for firms to
sacrifice economic returns for
purpose?
As we’ve seen, a shared purpose can have enormously powerful effects. But
why, then, does talk of purpose make many managers nervous? Should it be
legal for firms to sacrifice economic returns for purpose?


Why does being genuinely

purpose-driven require firms to
sacrifice economic returns from
time to time?
Purposeful initiatives are often highly complex and therefore take time to plan, implement, and improve before results are seen.
This may mean a decrease in productivity, temporary loss of revenue, or decrease in investor confidence which all have very real
economic impacts on a company.

Purpose driven firms will always try to do the right thing in business. The profits will come as their purpose leads them to run a more
effective, virtuous business. Purpose motivates the entire firm to act as one and understand its responsibility in business and in life.
It requires sacrifice because we live in a world with finite resources -the only great equalizer we all have is the time we are afforded;
as such, it cannot always be about maximizing profits for profits sake, it has to be with intent to provide continuing value both
economically and socially. I tend to think of it as a Venn diagram.

Most of the time, when you are doing thing with purposes, it requires huge investment for the future benefit, which might not be
there at all. As such, firms have to sacrifice some of their returns. 1. It is costly to do thing out of the ordinary. 2) You might not see
the result immediately.

You have to sacrifice economic returns from time to time because you are pivoting in how you are doing business. You are also
changing the culture of the business (i.e. re-inventing the business). Changing the culture is not often considered, it can be
challenging, and it takes time. It could also fail. Those businesses that do not adapt don’t seem to hang around. Those business
that do not adapt to the changing times or lead the way seem to continue.

n the long run, being purpose-driven can significantly improve a firm's financial
performance. But in the short term, authentically purpose-driven firms occasionally need
to sacrifice economic returns in the service of the firm's purpose to establish their
credibility.

Fortunately, it turns out that managers and boards of directors are not—except in a few
exceptional circumstances—legally required to maximize shareholder value.

The world's major capital markets are dominated by what is often called the
"shareholder value" model of capitalism. Many managers operating under this model
believe they have a legal duty to maximize profits, and that to sacrifice economic returns
in the service of purpose is to betray these duties. Of course, if being purposeful always
maximizes profits, there's no conflict between the two—but in practice, being genuinely
purpose-driven requires firms to at least occasionally sacrifice profits in the service of
the purpose. After all, would you believe someone was authentically purpose-driven if
they only acted on their purpose when it was clearly going to make them money?
The duties that Professor Coates describes—to be careful, to be loyal, and to be candid—are
called “fiduciary duties.” The duty of care requires that boards exercise “good faith” and act
“reasonably” when carrying out their obligations. The duty of loyalty requires that fiduciaries put
the interests of the organization ahead of their own interests, protecting and promoting them.
The duty to be candid requires that boards communicate honestly and fully disclose all
information known to them.

At face value, do these duties require directors to ensure that the

firm maximizes shareholder return?

Based on what you’ve heard about the fiduciary duties, is there

anything that would prevent a firm from adopting a purpose?
There’s nothing that I’ve heard about fiduciary duties that would prevent a firm from adopting a purpose. In fact, I think having a
purpose is being a good steward of your fiduciary duties.

Leadership that lacks vision can prevent a company to adopt purpose. This is still a problem in many organizations and the
sustainability agenda requires commitment from top to bottom. Culture can also prevent the organization from adopting purpose.
Employees who are not highly motivated can see it as an agenda to get them fired instead of embracing. Costs of implementation
and lack of support from boards and executives of the organization.

None of the fiduciary duties would prevent a firm from adopting a purpose for the firm. In fact, it would encourage them to have a
purpose as they are required to exercise in “good faith” and “put the interests of the organization ahead of their own interests.”

Yes, if the purpose was not aligned with regulatory directives and legislation.

A company’s shareholder value depends on strategic decisions, wise investments and fiduciary duties that generate a healthy
return. A well-managed company maximizes the use of its assets so that the firm can operate with purpose on their mind. If
everything is done right I see no reason why purpose should not be included in company DNA. As a matter of fact it should stay at
the core of the business plan.

While directors have a duty to avoid actions that will certainly harm the corporation, they
don't have a legal duty to maximize shareholder value, except in a few tightly defined
circumstances.

It's not appropriate, for example, to double everyone's pay if there's no plausible
business case for doing so. But it's entirely OK to invest in an employee training
program or decide to make your supply chain more sustainable if you have a clear
sense of why making these investments will increase the long-term health of the
corporation, even if they don't immediately increase shareholder value. In these kinds of
cases, the board is protected by the "business judgment rule."

In summary, fiduciary duty does not preclude public companies from embracing
purpose. But, if you want to act with purpose in a world where investors are expecting
you to maximize shareholder value, it helps enormously if you can:

1. Generate great financial results

2. Communicate like crazy—both to persuade your shareholders of the long-term
potential of the investments you're making in purpose and to persuade
shareholders who share your goals and/or time frame to invest in your firm
Now that we know it’s quite legal to adopt a purpose beyond shareholder value
maximization, let’s consider the morality of doing so. Many managers believe that “the
social responsibility of business is to increase its profits”—that to do anything else is to
betray their moral duty to their investors and the broader society. It turns out, however,
that this is a relatively recent idea, and that the conditions that might have made it true
no longer hold—if they ever did.

Business Roundtable
Business and society have a symbiotic relationship. The long term viability of the corporation depends upon its responsibility to the
society of which it is a part. And the wellbeing of society depends upon profitable and responsible business enterprises.

Milton Friedman and his colleagues suggested the following:

 The efficiency of free markets makes them a spectacular driver of economic

prosperity. In truly competitive markets, booming demand triggers the kind of
innovation and entrepreneurship that produces innovations like the smartphone
and Airbnb, while competition forces down prices.
 By opening up economic opportunity to everyone—regardless of family, color, or
creed—free markets give people the ability to control their economic destiny.
This, in turn, supports them in building genuine freedom.
 Managers work not for themselves, but for their investors. Since investors
generally want to make as much money as possible, managers who do anything
other than maximize their investors’ returns are indulging themselves at the
expense of their investors and have betrayed their investors’ trust.
Taken together, these arguments implied that to do anything other than maximize profits
would not only make society poorer and less free but would also betray the manager’s
duty to their investors.
Imagine you're the CEO of a company and have just learned that burning coal is a major
contributor to the risk of catastrophic climate change and causes pollution that kills millions of
people every year. The local government is considering imposing a carbon tax on your plant
that, if enacted, would cut your profits by more than half. Your government affairs department
recommends investing in an aggressive public relations campaign and donating heavily to local
government officials to prevent the tax from being imposed. You're sure that this move has the
best chances of maximizing your profits.
Should you approve their recommendation?
 Should you approve their recommendation?
o  Yes
o  No
Why did you or didn't you agree to approve their recommendation?
The better solution (or question) is “How might we find a cleaner solution which produces the same amount of net gain and at the
same time help save the planet?” How might we engage our employees and supply chain in developing these innovative solutions?
How quickly can we migrate to a new solution without impacting shareholder vale? Now that we have the answers to these
questions, let’s go and negotiate a timeframe before the carbon taxes begin.

In these kinds of situations, there's a clear conflict between the duty to maximize
shareholder value and the planet's long-term health. Focusing solely on the creation of
shareholder value can be a source of enormous dynamism and power. But it can also
be immensely dangerous to the long-term health of business as a whole and the values
of freedom and prosperity on which the injunction to maximize shareholder value was
originally based.

Markets need to be balanced by institutions like government, shared cultures, and

strong moral codes. Sometimes, however, these institutions don't exist or aren't doing
their jobs. When this happens, firms have a moral obligation to take responsibility and
action.

Sue Garrard, senior vice president of business development and communications at

Unilever, makes this point in a way that brings us back to the role that purpose-driven
firms can play in driving change on a global scale.
https://lessons.online.hbs.edu/lesson/making-business-case-purpose/