In the Harvard Business Review blog, Umair Hague, Director of the Havas Media Lab, writes a piece entitled, "Why Betterness is Good Business".
He argues that the bar has been raised for companies to be considered great. Maximizing the "good" a company does is related to greater profitability, equity and return on assets, and creates more shareholder value.
Top investors are using measures of 'betterness' to predict which companies will be more successful in the future -- social/ethical criteria like the KLD score. In this way, investors can look for financial returns "plus". "Plus" returns make an investment choice less risky and more meaningful -- in line with the higher expectations that are developing every year among communities, society and investors.
To bolster his argument, Hague cites the annual Ethisphere Institute that identifies the most ethical companies and then test their performance. In 2008, the most ethical companies outperformed the S&P 500 by 40%, in 2009 and 2010 by 35%. The Mean Market Value Added of the top 100 Corporate Citizens is $36 B while the same figure for all other companies is less than $8 B. In Businessweek's ranking of this same top 100 via their Total Financial Performance criteria -- sales growth, profit growth, and ROE -- the top 100 outperform by statistically significant 10.4 percentiles.
Responsibility yields advantage because it is effectively risk management against adverse future events. It is very positively correlated with financial performance as determined in a very large meta-analysis (see M. Orlitsky, F. Schmidt, and S. Rynes) of 52 studies with over 33,878 total observations.
Hague further explains that 538 institutional investors use social criteria when making decisions now that used to be only financial -- while managing assets totalling $2.71 trillion or 10% of the assets under management.
"Good Businesses" are not judged solely by better sales, profits, equity returns and sharholder value - these becoming old measures on their own. Investors are increasingly asking "So you made a profit - yawn - but did you also make an impact?" This is what it takes to outperform today and tommorrow.
What about Big Pharma? Or little Pharma for that matter.
Aren't these companies founded on the ideals of delivering novel life-changing treatments to patients, transforming science into therapies, to serve patients, to deliver meaningful benefits to consumers, and to improve the quality of life?
How does this square with off-label marketing, physician payola schemes, manufacturing failures resulting in product shortages, contaminated or adulterated product, massive corporate lay-offs and outsourcing jobs elsewhere?
Sounds like we're starting to miss the mark, doesn't it? AstraZeneca and Novo Nordisk were the only two Big Pharma companies to make the Ethisphere Institute top 100 for 2010. I don't see any of the venerable US companies on this year's list. There ARE a lot of US companies on the list from other industries. Hmmm.
At a time when the industry is looking to recreate itself, perhaps these companies can remind themselves of their mission/vision statements and take that to heart in the way they choose to operate their businesses in the future. We'll be the better for it.
Posted by Bruce Lehr May 17th 2010.