Current Issue
This Month's Print Issue

Follow Fast Company

We’ll come to you.

4 minute read

Business Isn't As Profitable As Betterness

In an excerpt from his new book "Betterness: Economics for Humans," Umair Haque looks at the trends that should be pushing businesses to create more than profits—if they know what’s good for them.

Academics have spent decades studying in great detail whether responsible companies are also more profitable companies, and three decades of evidence suggest that betterness yields greater equity returns, asset returns, and profitability. Researchers Marc Orlitzky, Frank L. Schmidt, and Sara L. Rynes found that responsibility was significantly positively correlated with financial performance: "corporate virtue," in their words, "is likely to pay off." Their work (PDF) was a meta-analysis of 52 studies, with over 33,878 total observations. Whew, that’s a whole lotta outperformance. How is that outperformance achieved? One pioneering study that I like concluded that responsibility fuels outperformance because it is risk management: better insurance against adverse future events.

In People and Profits?, a landmark book reviewing three decades of research, Harvard’s Joshua Daniel Margolis and the University of Michigan’s James P. Walsh found that "when treated as an independent variable, corporate social performance is found to have a positive relationship to financial performance in 42 studies (53%), no relationship in 19 studies (24%), a negative relationship in 4 studies (5%), and a mixed relationship in 15 studies (19%)." They say, pithily: "the findings might be encouraging for advocates of corporate social performance and problematic in the eyes of opponents and critics." In a recent interview, Margolis said, "There have been 80 academic studies in the last 30 years attempting to document the relationship between social enterprise activities and corporate financial performance. The majority of results (53%) point to a positive relationship, and only 5% of studies indicate a negative impact on the bottom line."

Economics isn’t physics, and the messy human world doesn’t obey ironclad laws. Yet, the link between greater returns and what isn’t quite yet at this point what I’d call betterness but more like not-worseness—for "responsibility" is essentially the notion that a firm inflicts less damage than rivals do—is one of the strongest relationships to be found in modern economics, grounded in thirty solid years of evidence. I’d conclude: business as shoulder-shruggingly usual isn’t as profitable as not-worseness.

And I’d bet that’s an arc that will continue an unbroken ascent toward full-blown betterness. My claim isn’t merely that "corporate responsibility is associated with greater profitability," based on several decades of backward-looking evidence, nor is it that responsibility is the cause of profitability. It’s subtler and forward looking. Rather, I’m suggesting that in a resource-constrained, hungry, transparent, winner-take-all world, what we’re used to calling "responsibility" and seeing as a luxury will be akin to table stakes in tomorrow’s game, a competence necessary to enter the arena of human exchange. If you can’t demonstrate that at the very least and at the barest minimum, you’re not harming people, nature, communities, society, or tomorrow’s generations, forget about vanquishing your rivals; you probably won’t have a seat at the table.

And at that table, the measure of success isn’t likely to simply be better profits, equity returns, asset returns, and shareholder value. Those are part of an industrial-era definition of success that’s already increasingly out of date.

The bigger picture of twenty-first-century competition is richer, more nuanced and complex. Companies are beginning to be judged against a whole new set of criteria by customers, governments, communities, employees, and investors. They’re already saying, so you made a profit. Yawn. Did you actually have an impact? Did what you do have a positive, lasting consequence that was meaningful in human terms?

Harvard Business School’s Ioannis Ioannou and Georgios Serafeim recently found that socially responsible firms receive more favorable ratings from securities analysts: "We find evidence that in earlier periods, CSR [corporate social responsibility] strategies were perceived as value-destructing and thus, had a negative impact on investment recommendations, whereas for later periods, CSR strengths are perceived as value-creating, reversing the earlier negative into a positive impact on recommendations: analysts are more likely to recommend a stock ‘buy’ for CSR-strong firms in later years."

See what just happened? The folks that recommend to the world’s investors whether to buy or sell your shares just upended their expectations about better and worse—and in which direction prosperity lies. Decode the message inside the logic, and they’re issuing a manifesto worthy of an uprising. It says: Want to create shareholder value in the twenty-first century? Tough. Now, it depends first on not destroying real wealth—and better yet, on creating it. Continue to map that trajectory, and here’s what you might conclude: we’re heading toward a world of human exchange in which hard-nosed measures of a company’s impact are as important to a company’s vitality and viability as yesterday’s weary conceits of "profit."

Responsibility is strongly associated with greater profitability, equity and asset returns, and shareholder value creation. But that’s no longer good enough. Today, the bar is being raised; success is itself changing. Those are yesterday’s definitions of success, and more importantly, arcing toward betterness lets companies begin outperforming on tomorrow’s measures of success, which are going to hinge on the creation of real wealth.

Reprinted by permission of Harvard Business Review Press. Excerpted from Betterness: Economics for Humans. Copyright 2011 Umair Haque