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Over the past decade, the ranks of entrepreneurs who see beyond the bottom line have been growing. Method, Toms, Warby Parker, and Whole Foods Market have planted the flag of social responsibility, or conscious capitalism, and defended it profitably. Some formally declare their commitment to all stakeholders-owners, employees, the community, and the environment—by becoming "benefit corporations," a new legal designation. Others simply build a social benefit into their business plan. But should you join them? Should your business try to do anything other than generate sales and profits? Survival, after all, is a noble goal in itself Do Motally have to see the planet.to. Todos atida entre when companies maximize profits for the owners, who can then invest in social and resource depletion Many Millennials saw their Roomer nabentatonin
3 / 7 90% + a social benefit into their business plan. But should you join them? Should your business try to do anything other than generate when companies maximize and resource depletion sales and profits? Survival, after all, is a noble goal in itself. Do profits for the owners, who Many Millennials saw their you really have to save the planet, too? To dog-eat-dog entre can then invest in social Boomer parents spat out in preneurs like Kevin O'Leary, any startup trying to do more causes with the proceeds. He one restructuring or another than serve customers and generate profits is being run by said founders who do other as corporations pay fealty to labradoodles playing among the pit bulls of commerce. "Run- wise are unwitting puppets Wall Street over people. And ning a business is hard," says Shark Tank's resident cynic and of socialism who effectively they are saying, "No, thanks." co-founder and chairman of O'Leary Funds, who has myrind "tax" customers-because "The meltdown of our investments. "You have to be willing to fire your mother. When prices would have to increase global financial system was you are the leader of a business, your responsibility is to the to cover the cost of all that a direct result of inadequate success of the whole organization, not any one individual, social responsibility checks and balances," says including yourself. Successful CEOs know their allegiance But the number of entre- Adam Lowry, co-founder and must always remain with customers and shareholders, 100 preneurs who want to use chief global sustainability percent of the time." commerce in ways greator officer of Method, which If you're starting a business, or reevaluating how to focus small as a force not just for makes chemical-free house- your existing business, the profit vs. pur Tose debate has never profit but also for good is hold products. (It was pur been sharper. The argument started sonit 50 years ago, when growing. These founders chased by Belgium-based capitalist icon Milton Friedman tried to smother the nascent have witnessed the conse- "green" cleaning products corporate social responsibility movement. Friedman argued quences of unfettered capi- company Ecover in 2012.) that earning profit for the owners has been the mandate-and talism, and it isn't a pretty "It's a prime example of for public companies the legally binding fiduciary responsibil picture: global warming, the invisible hand reigning ity-since capitalism appeared. While Friedman didn't oppose pollution, income inequality, supreme, while placing the social responsibility, he reasoned that society is better served environmental degradation, trillions of dollars of recovery www St-ING. MANCHroll
THE UPSIDE OF BEING A B CORP B CORPS ARE CERTIFIED AS SOCIALLY CONSCIOUS ENTER- PRISES. THEY ARE ALSO MORE RESILIENT. . 2-YEAR SURVIVAL RATE #S-YEAR SURVIVAL RATE B CORPORATIONS 91% 83% TRADITIONAL SMALL BUSINESSES 69% 51 costs onto the backs of Ameri- can workers, whose real wages have been declining since the Great Recession." It's Millennials, the largest demographic in America, who are powering the popu- larity of socially conscious capitalism. For one, they are not shy about their desire to buy from, do business with, and work for companies that have more than profit as a goal. According to the Deloitte Millennial Survey, 87 percent of Millennials believe that a company should have a larger purpose than racking up profits. Consumers in general are also expanding their purchas- ing criteria. According to a report by the Natural Market- ing Institute, those living lifestyles of health and sus- tainability now represent 22 percent of the consumer base. That's up from 15 percent in 2005. More important, NMI reports a continued "green- ing" of consumers across the board: The segment of con- sumers who call themselves "conventional" or "uncon- cerned about social respon sibility continues to decline. More consumers care, and 200 products. Sales of Made to Matter products were expected to hit $1 billion for 2015, the company said, up 30 percent from the prior year. Target's research showed that shoppers wanted more transparency and authenticity from the brands they buy. Target may want to look up a reusable plastic lunch bag called (Re)zip, made by Blue Avocado, based in Austin Company co-founder Amy George is on a mission to cut waste, source locally, and address gender inequality. She also invests a portion of sales in microentrepreneurs. "There is a more conscious consumer at the table," says George. "The Millennials are driving growth and they care. They study your supply chain, and they know a ton about it. That's good for businesses like mine. The buyers at these retailers are also Millennials." (Re)xip's customers, which include Bed Bath and Beyond and the Company Store, are pushing Blue Avocado toward $8 million in sales. But Friedman acolytes argue that if(Re)zip is paying above-market wages and sourcing locally, surely it's not going to generate the returns of its profit-driven competitors-and therefore won't be as efficient in raising or using capital. There are signs that his argument is starting to break down. Philip Berber, an entrepreneur who founded Austin-based Enable Impact, which connects so-called "impact investors" with companies such as Blue Avocado, says any gap that once existed in returns has diminished. "We're seeing (socially responsible) investment funds outperforming the S&P and traditional investment managers," he says. According to a study by Cambridge Associates, impact investment funds launched between 1998 and 2004-meaning those that have had a chance to sell their portfolios-have outperformed comparable private equity funds. Those of later vintage still lag returning 69 percent to the PE competition's 8.1 percent, but there's still value to be realized when they cash out of investments, according to the study. Berber says both types of companies exhibit similar early stage mortality rates, There is even some evidence that socially responsible companies are more resilient than profit-driven firms. A type SOURCES LANNIS BASTELE TOP 5 B CORPS IN THE INC. SODD RUNA NO. 203 INC. SOOO RANK 2,068% MEAR GROWTH $4.6M 201 REVENUE BRIDGESTONE NATURAL FOODS NO. 495 INC. SODO RANK 927% NEAR GROWTH $83.BM 20M REVENUE ECOZOOM
SOURCES BLAADUN BRATIE TOPS B CORPS IN THE INC. 5000 RUNA NO. 203 INC. SOOO RANK 2,068% 3-YEAR GROWTH $4.6M 20M REVENUE than racking up profits. Consumers in general are also expanding their purchas- ing criteria. According to a report by the Natural Market- ing Institute, those living lifestyles of health and sus- tainability now represent 22 percent of the consumer base, That's up from 15 percent in 2005. More important, NMI reports a continued "green- ing" of consumers across the board: The segment of con- sumers who call themselves "conventional" or "uncon cerned" about social respon sibility continues to decline. More consumers care, and more care more. Increasingly, consumers buy on the basis of values and value. In turn, retailers, always sensitive to consumer sentiment, are putting profit into the equation. Target, for instance, introduced a program in 2014 called Made to Matter- Handpicked by Target that features sustainably manufac- tured and sourced products, The popularity of the line compelled Target to nearly double its size, to more than BRIDGESTONE NATURAL FOODS NO. 495 INC. SOOO RANK 927% 3-YEAR GROWTH $83.8M 2014 REVENUE to generate the returns of its profit-driven competitors-and therefore won't be as efficient in raising or using capital. There are signs that his argument is starting to break down. Philip Berber, an entrepreneur who founded Austin-based Enable Impact, which connects so-called "impact investors" with companies such as Blue Avocado, says any gap that once existed in returns has diminished. "We're seeing (socially responsible] investment funds outperforming the S&P and traditional investment managers," he says. According to a study by Cambridge Associates, impact investment funds launched between 1998 and 2004-meaning those that have had a chance to sell their portfolios-have : outperformed comparable private equity funds. Those of later vintage still lage returning 69 percent to the PE competition's 8.1 percent, but there's still value to be realized when they cash out of investments, according to the study. Berber says both types of companies exhibit similar early-stage mortality rates, There is even some evidence that socially responsible companies are more resilient than profit-driven firms. A type of certified "socially responsible company called a B Corp has higher two-and five-year survival rates than traditional companies, according to B Lab, the sanctioning organization for B Corps. Method, Warby Parker, and the evergreen Ben & Jerry's are B Corps, a designation that involves getting a formal certification and biannual audit" of criteria such as environ- mental and community impact, wages, and governance There are 1,577 B Corps worldwide, a figure that is grow- ing rapidly, and 26 of them landed on the 2015 Inc. 5000 This model might also make it a lot easier to hire top talent. The Deloitte survey found that 44 percent of Millen- nials have turned down a job offer because the company's values did not match their own So if the consumer wants it, the market wants it, profits and performance aren't necessarily sacrificed, it could make your company more resilient, and make it easier to hire top ECOZOOM NO. 768 INC SOOO RANK 589% 3-VEAR GROWTH $G.OM 20 REVENUE SUNDIAL BRANDS NO. 876 INC. SODO RANK 511% YEAR GROWTH $123M 20H REVENUE FULL CIRCLE HOME NO. 895 INC. SOOO RANK 502% 3-VEAR GROWTH $4.3M 20M REVENUE LEAD
T young talent, why is there still a debate about the logic of being a socially conscious company? HE REASON TO STICK to a profit-driven business, says O'Leary and other Friedmanites, is simple: Entre- preneurship is really difficult. Complicating it with other issues raises the risk of failure. Don't be misled by the success of companies like Warby Parker, says O'Leary. They're the exception, a green shoot, and there's no evidence this model can scale consistently and over decades. Even Ben & Jerry's, one of the most successful socially conscious companies, is now owned by a conglomer- ate, Unilever, of the sort that Millennials claim to abhor. Steven Kaplan, a professor of entrepreneurship and finance at the University of Chicago's Booth School of Business, warns against trying to serve too many masters. Without profit as a focus, "le's very hard to tell if you're doing a good job," he says. "You have to worry about accountability. It's easy to say: 'I'm great. I'm delivering value to consumers, to the environment That's why profitability is suffering. But ſe's a slippery slope" Being an entrepreneur also demands that you be able to pivot constantly, says O'Leary, That's hard to do when you're serving constituencies outside the core business. Charles Koch, the chairman of Koch Industries, the $115 billion leviathan of 100,000 employees, and author of Good Profit: How Creating Value for Others Built One of the World's Most Successful Companies, says the most compelling reason to focus on profit is because you'll do more good in the long run. "We're not a charity," says Koch. "The more earnings we have, the more good we can do and make our employees and communities' lives better." While the Koch brothers are known more for their conservative causes, in 2014, the latest year for which data is available, the Charles Koch Foundation donated $36 million, from assets of $528 million, to dozens of colleges and universities. It's just one of the many Koch-run
great. I'm delivering value to consumers, to the environment That's why profitability is suffering. But it's a slippery slope." Being an entrepreneur also demands that you be able to pivot constantly, says O'Leary. That's hard to do when you're serving constituencies outside the core business. Charles Koch, the chairman of Koch Industries, the $115 billion leviathan of 100,000 employees, and author of Good Profit: How Creating Value for others Built One of the World's Most Successful Companies, says the most compelling reason to focus on profit is because you'll do more good in the long run. "We're not a charity," says Koch. "The more earnings we have, the more good we can do and make our employees! and communities' lives better." While the Koch brothers are known more for their conservative causes, in 2014, the latest year for which data is available, the Charles Koch Foundation donated $36 million, from assets of $528 million, to dozens of colleges and universities. It's just one of the many Koch-run foundations that are funded by the company's profits. Koch Industries companies are among the nation's biggest polluters, but Koch says they are addressing this problem by running plants better. Retailers like Target and Walmart demand this as they respond to their cuſtomers' calls for greener, cleaner products. Walmart is nobody's idea of liberal, but the retailer has forced vendors like Koch's Georgia-Pacific unit, which makes paper products, to reduce packaging and optimize their truck deliveries to cut waste, CO2, and other pollution. That, says Koch, is the market working Maybe there's a third way to think about this fundamental business question-one that reflects the fact that social respon- sibility is altering business practices at all companies, whatever the founders' profit philosophy, As consumer demands shift, fair treatment of employees (which boosts productivity), green off-the-grid energy sources (which lower price volatility), and sustainable sourcing (which reduces supply chain and political risk) isn't profit-killing idealism. It's prudent management "That's a value-maximizing strategy," says Kaplan. "That's perfectly consistent with Milton Friedman." a
“Here is the truth: The DNA of a business is to maximize returns to its shareholders." KEVIN O'LEARY, CO-FOUNDER AND CHAIRMAN OF O'LEARY FUNDS I was sitting in my Shark Tank ties, and dog accessories makes America great. Modifying lems. We need businesses to chair recently, taping a pitch I never hear from these com- from two Millennials who were the corporate model to solve all return more capital to their own- panies again; I assume they go of society's problems is simply ers so they can do what they have looking to raise $250,000 for out of business. It seems to un-American. And when a CEO always done-pass it forward their fledgling underwear busi- me that when people go out to takes on a social mission that It's the reward for running a good ness. The undergarment mar- buy underwear, they want the doesn't serve all constituencies, business, not a function of one ket is brutally competitive, the best product at the lowest price that's a recipe for disaster Think of the multibillion-dollar margins are razor thin, and Always have always will. If you're going to adopt a commitments made by Micro- getting shelf space from retail- There seems to be an social mission, it has to pay for soft's Bill Gates, Berkshire Hatha- ers is next to impossible. assumption, mostly by people itself A business that disadvan- way's Warren Buffett, and more If someone asked me to find who have never run a business, tages its model with expenses recently. Alphabet's Larry Page a business that most emulated that corporate America can and that don't add value for owners and Sergey Brinand Facebook's hell on earth, it would be this. should do more than achieve its gets beaten by more efficient Mark Zuckerberg There are hun Chances that I would invest primary mandate of maximizing competitors. This is the Darwin dreds of thousands of business In this?Zero. But wait! This pro- its return. Here is the truth: The lan nature of competition leaders doing exactly the same posal was different. For every DNzf a business is to maxl- I have no problem with the thing. No one has to tell them, pair of skivvies they sold, they mint returns to its shareholders. concept of "do no evil'in busi- It's already in their hearts. were going to give a dollar to so they are incentivized to rein- ness. The fair debate is this: Corporations can be bad charity. They believed that add- vest their capital and start new Who should pay for it and where actors, and we have laws and Ing a dose of altruism to their businesses, create new jobs, should the expense live-on the regulations to deal with them business model would somehow and provide innovative products income statement, or as a gift But we are at a critical point make them impervious to the and services that improve lives from shareholders after they in capitalism's history. It's brutal realities of the under- When you contort a business have been paid their dividend? time for those who believe in garment market. I've heard the to change this mission, you We don't need more compa it to stand up and defendit. same pitch for socks, knapsacks, destroy the very essence of what nies trying to solve social prob I'm raising my hand
“Sustainable businesses are better, : more profitable businesses." ADAM LOWRY CO-FOUNDER OF METHOD There are those who still cling most successful companies market economist would argue to the antiquated idea that the signed pledges to greatly reduce that we pay a premium for invisible hand of the free mar- their carbon footprints heading this material, which is true, the ket is all we need to prosper into the meeting. That's because premium is far outweighed and ensure equitable out- today, even the most profit- by the financial benefit. When comes for shareholders and minded companies know climate oil prices spiked in 2011, nearly stakeholders. They argue the change is a huge limitation on all of Method's competitors best way for a business to economic growth were forced to raise prices to "do good" is to make as much Enlightened corporate cover inflated commodity costs money as possible and then governance is expanding past Because post-consumer plastic donate some of it to causes it Initial leaders like my business, is far less carbon intense, as are thinks are important. It's a con- Method, and into the main most ingredients in Method venient, but flawed, logic. It stream. The success of busi- products, we were able to hold doesn't protect the interests nesses like ours is the best and our pricing. This resulted in of society and the environment, final argument against a "profit market share gains and revenue and it actually produces poorer first-and-only" focus growth 20 times the cost of the economic outcomes Method provides several better materials. These gains In December 2015, after 20 examples of how integrating have sustained, and even now, years of trying the world's gov society and environment actu. with lower commodity prices- ernments reached a historic ally produces better financial our recycled plastic costs essen- agreement to limit greenhouse outcomes. Method bottles are tially the same as virgin plastic gases. It happened in no small unique not just in their design, This is a direct strategic and part because a massive cadre of but in that they are made from financial benefit to Method, but businesses called for action 100 percent post-consumer there are also cost savings to Some of the world's largest and recycled plastic While the free society in the reduction in the billions of tons of plastic flowing into our landfills and oceans each year Method provides full benefits to our hourly factory workers This investment reduces absenteeism and turnover, and increases productivity. These gains more than cover the cost of providing these benefits. Our factory is also powered by 700 megawatts of wind and solar power generated onsite. Overa 10-year horizon our energy costs will be lower than they would be if we bought energy from the grid No longer can any business Interested in profitability afford to let the invisible hand manage its environmental and social Impacts Companies like ours are demonstrating definitively that sustainable businesses are bet ter more profitable businesses o