Lecture Notes: Purpose of Businesses and Profitability

Introduction

• Businesses traditionally viewed as entities to earn profit.
• Conventional view: profit-oriented companies must care for society (high-quality products, good worker treatment, environmental consciousness).
• Milton Friedman's perspective: Social responsibility of business is to increase profit.

Corporate Social Responsibility (CSR)

• CSR theory: Businesses exist to serve a purpose beyond profit.
• Profit as a by-product of serving customers, employees, and the environment.
• Examples:
  • Marks & Spencer: Simon Marks focused on employee welfare leading to reputational benefits.
  • Merck Pharmaceuticals: Introduced penicillin for the public good, valuing lives over profit.

Evidence of Social Responsibility

• Employee Well-being as a metric of social responsibility.
• Fortune magazine's "100 Best Companies to Work For" used for data analysis.
• Companies treating employees well delivered superior stock returns (2-3% annually over 26 years).

Case Studies

• Costco: Invests heavily in employee welfare (higher wages, healthcare) yet remains profitable.
• Management Philosophy: Treat worker welfare not as a cost but a value-enhancing strategy (e.g., Richard Galanti of Costco).

Ethical Investments

• Investors do not need to sacrifice profits for ethics.
• Ethical stocks can yield higher returns (e.g., Parnassus Endeavour Fund).

Long-term vs. Short-term Thinking

• Importance of focusing on long-term qualitative factors (corporate culture, innovation) over short-term financial metrics.
• Example of Unilever: Shifted focus from quarterly earnings to long-term sustainability.

Conclusion

• Businesses exist for both profit and purpose.
• Serving a societal purpose leads to long-term profitability.
• Investors should support companies with strong social responsibility for potential advantages.

Key Takeaway

• The dual purpose of businesses: serving a societal purpose and achieving profitability are intertwined.
• Sustainable business practices and ethical management lead to long-term success.

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Additional Notes

• Data for employee well-being and corporate social responsibility are often overlooked but crucial for competitive advantage.
• Markets may take years to reflect the benefits of good employee treatment in stock prices.
• Investors encouraged to embrace a long-term vision for sustainable returns and societal impact.