Firms, Morality, and the Search for a Better World

REBECCA HENDERSON

A World on Fire

Could the private sector play a significant role in the struggle to build a just and sustainable world? At first sight, the idea might seem preposterous.

Since December 2015, for example, when the Paris Climate Agreement was signed, the world's fossil fuel companies have spent more than a billion dol­lars lobbying against controls on greenhouse gas (GHG) emissions. As Salter (chapter 8 in this book) suggests, a commitment to maximizing shareholder value at almost any cost has led them—and too many of the world's firms—to what can appear to be an almost complete moral disengagement with the so­ciety around them.

Turning things around will require sweeping, systemic reform and the re­discovery of the critical role of government in constraining the free market in ways that ensure that competition is genuinely “free” and genuinely fair. This implies that we will not be able to solve the great problems of our time without renewing the power of democracy, rebuilding a strong voice for la­bor, strengthening the power of independent media, and creating a shared sense of common citizenship and social solidarity—and we are not going to be able to do any of these things without building strong social movements rooted in popular participation and a renewed commitment to civic society.

But none of this will be easy. Our public institutions are struggling. In many countries the labor movement has been almost totally destroyed, and both democracy and the free media are under widespread attack. Rebuild­ing our communities and our political systems in ways that are transparent, inclusive, and responsive is surely the royal road to change.

Given this context, this chapter makes the argument that “authentically purpose driven” firms—those that explicitly embrace a prosocial goal beyond profit maximization and that routinely sacrifice short-term profits in the ser­vice of these goals—may be crucial allies in the pursuit of a just and sustain­able society. They can serve as living demonstrations of alternative ways of structuring economic activity, providing conclusive proof that it is possible to create decent jobs that pay well in workplaces where employees are treated with dignity and respect. Building a more sustainable society requires not only the complete restructuring of the power, transportation, construction, and agricultural sectors but also profound changes in consumer behavior. Purpose-driven firms have the courage and the vision to catalyze the pro­found innovation that is required to drive this kind of transformation and to sustain the levels of trust and commitment internally that is required to operationalize them.

Purpose-driven firms may also have an important role to play beyond their own boundaries. They are already acting as catalysts for cooperation across industries and regions, attempting to make commitment to the public good “precompetitive.” As they cooperate—and as they build business models de­pendent on successful cooperation—they are learning that it is immensely easier to make progress if these kinds of moves are supported by the capital markets—and by local governments.

It is easy to be skeptical, of course. Much of this is probably just green­washing. Indeed, the idea that business could hold to any normative commit­ment—and that such commitments might shape action—may seem deeply counterintuitive. Many people consider the idea deeply eccentric and poten­tially dangerous. When Larry Fink, the CEO of BlackRock, the largest asset manager in the world, suggested that business might have a “social responsi­bility,” he was widely attacked. Nearly every manager at every firm feels con­strained by the pressure of competition and how so many investors focus only on short term results. The idea that business should take on responsibil­ity for solving public goods problems, and that it might be a powerful agent of positive change if it did, can seem deeply eccentric.

Those on the right fear any talk of purpose or a broader mission for firms as at best a distraction and at worst both illegal and immoral—something designed to provide cover for policies that will shield mediocre managers from the rigors of an efficient capital market. The left views the private sector with deep suspicion. They fear that talk of purpose is at best greenwashing and at worst a cynical attempt to seduce employees and to forestall serious regulation. When I told Ed Balleisen, one of the great economic historians of self-regulation, that I thought that cooperation across firms could help solve the great problems of our time, he laughed out loud and referred me to his research (Balleisen 2007).

It is certainly true that throughout history the quest for profits and power has led many firms to do terrible things. When the Dutch first discovered the Spice Islands, they were dismayed to find that the local inhabitants could not be forced to work sufficiently long or sufficiently hard to be usefully enslaved.

More recently, American business has come close to destroying the US labor movement, while the Chamber of Commerce has led the push to hold down the minimum wage and resist the regulation of greenhouse gases. The arrogance and negligence of the world's banks led to the Great Crash of 2008. Wells Fargo lied to its customers and set up millions of fake accounts in the pursuit of the bottom line. Facebook failed to tell the American gov­ernment that a foreign power was using its product to influence elections. More than 40 million people continue to be enslaved, 71 percent of them women and girls, 25 percent of them children (Council on Foreign Relations, n.d.). But the fact that businesses and businesspeople sometimes behave dreadfully does not mean that businesspeople never think about ethics or that morality has no place in business. Throughout history, business people have grappled with the morality of what they were doing and they continue to do so today.

It Was NeverJust about Profits

People have questioned the morals and goals of private corporations for hun­dreds of years. Some commentators have celebrated trade and industry as a source of prosperity and markets as sources of innovation and opportunity, while others have wondered whether any institution motivated almost en­tirely by greed can be moral and whether and when managers should focus on their responsibilities to society as well as on their own profits. Our soci­ety's current obsession with shareholder value is just one swing of a pendu­lum that has been swinging for a long time.

Under the Sung dynasty (960-1279), for example, great fleets of ships left China carrying porcelain, paper, and silk to Southwest Asia, India, and the Arab world.

In thirteenth- and fourteenth-century Italy, the great merchant compa­nies of Florence, Venice, and Genoa laid the foundations for the diffusion of capitalism across Europe, generating enormous wealth in the process. But many merchants struggled with their conscience as a result. Money lending—“usury”—was considered a sin, something equivalent to robbery or lying—and in 1179 the Roman Catholic Church denied Christian burial to usurers. Fra Jacopo Passavanti, one well-known preacher of the time, de­scribed the “commerce of money,” as it was called, as “abominable.” Filippo degli Agazzari, a fourteenth-century Augustinian monk, told the story of a usurer whose corpse was placed in a mortuary chapel that his heirs had built for him. “On the night after the funeral,” he wrote, “all the devils of Hell sur­rounded the chapel wheren he lay, with so much noise and clamour that for miles around no man could sleep; and in the morning it was seen that the chapel had been uprooted and cast into the river nearby (Origo 2017, 152).

The tension that this created in many successful merchants of the period is evident in the letters of Francesco Datini, one of the richest men of his time. Datini made his fortune in international trade, dealing in armor, cloth, enslaved people, spices, wine, and olive oil. He left a fortune of 100,000 flo­rins, a small fortune at a time when a pig cost 3 florins, a maid's wages for a year were 10 florins, and a female enslaved person—one of which Datini owned and by whom he had his only recognized child—cost between 50 and 60 florins (Soll 2014).

Datini appears to have liked not only money, but all the things that money could buy: fine clothes, large houses, great banquets, guests with titles to their names, and a crest to put over his doorway.

It grieves me that you should take these enterprises of yours... with too much avidity, desire, solicitude and anguish. It is not good. A wise man should learn to bridle himself and not thus follow his desires, but behave with moderation and temperance You know men are not pleased with a

house wherein the maid rules her mistress; even so the soul in which reason is ruled by the will, is displeasing to God. (Origo 2017, 155)

Again and again in his letters, Datini promises that he will moderate his desires, wind up his business, and have time for thoughts of God. “May God give me grace, if it be His pleasure, to lead a better life than in the past, for it is a dog's life—and it is all through my own fault” (Origo 2017, 156). When he died in 1410, he left his money to the clergy of Prato. His massive fortune was used to found a hospital for the poor—the Casa del Ceppo dei Poveri di Francesco di Marco. The hospital still stands, and over its door is an inscrip­tion calling Datini “the Merchant of Christ's Poor” (Sull 2014).

The belief that the pursuit of profit for its own sake might run counter to the will of God and one's duty to the community remained a live issue for at least the next 200 years. In 1639, for example, a Mr. Robert Keayne, who “kept a shop in Boston,” was fined 200 pounds for charging unreasonable prices, and thereby making unreasonable profits, despite “being an ancient professor of the gospel, a man of eminent parts (and) having been formerly dealt with and admonished, both by private friends and also by some of the magistrates and elders, and having promised reformation” (“Admonishment and Reconciliation of Robert Keayne with the Church 1639-1640”).

John Cotton, who was the leading Puritan minister in the early decades of the Massachusetts Bay Colony, preached against Keayne, once summarizing in a sermon why this kind of behavior was unacceptable and laying out some “false principles,” among them “that a man might sell as dear as he can, and [buy] as cheap as he can” and that “if a man lose by casualty of sea, etc., in some of his commodities, he may raise the price of the rest” (Winthrop 1853, 1:377-82).

As firms began to play an increasingly important role in European com­mercial life, the philosophers of the enlightenment squared this particular circle by proposing that the greedy businessperson might—paradoxically— increase the general good, as long as firms competed fairly and honorably with each other. Adam Smith's Wealth of Nations, together with its lesser known but equally important counterpart The Theory of Moral Sentiments, were the key texts in this conversation, but as Albert Hirschman's book The Pas­sions and the Interests suggests, it was by no means the only one. Hirschman's central point is that this literature solved a moral problem—replacing the imperative to pursue honor with the imperative to pursue material gain—by transforming greed from a vice into a virtue that could enrich the entire so­ciety. This solution was not taken to release businesspeople from the need to have a strong sense of personal morality. The Theory of Moral Sentiments, for example, insisted that humans had to pay great attention to matters of personal ethics—and indeed that society could not survive if they did not.

The idea that business was potentially a source of enormous social benefit was taken up particularly enthusiastically in the United States. In the words of Gordon Wood, a prize-winning historian of the American Revolution:

Most of the Americans' defenses of interest and money as the best connect­ing links in society were thus not cynical or reluctant concessions to real­ity; they were not made obliquely or in embarrassment. Quite the contrary: these defenses were made proudly and enthusiastically, as if interest and the making of money through trade had become deserving of as much acclaim and admiration as republican virtue traditionally had been given. Interest and moneymaking after all were egalitarian and democratic. When people related to each other only through interest, there was no obligation, no grat­itude required; the relationship was to that extent equal. (Wood 1993, 337)

Samuel Blodget, who wrote extensively about the American economy in the first decade of the nineteenth century, suggested that commerce was the major source of cohesion in the society—that commerce and business were the “golden chains” that held the society together, creating “the best social system that ever was formed.” The principle of commerce was “the most sub­lime gift of heaven wherewith to harmonize and enlarge society.” Similarly, the French theorist Comte Destutt de Tracy, whose works Thomas Jefferson translated and prepared for publication in America, wrote that “commerce, that is exchange, being in truth society itself, it is the only bond among men; the source of all their moral sentiments; and the first and most powerful cause of the improvement of their mutual sensibility and reciprocal benevo­lence” (Wood, 1993).

The turn to the free market was seen as a powerful anecdote to traditional hierarchical relationships based on patronage and deference. Instead of re­lationships based on trust or on personal or familial relationships, relation­ships were structured by cold, hard cash. Caesar Rodney, who became attorney general under Jefferson wrote that, in the old world, “statutable provisions fix and regulate the price of everything,” but in the US, “honesty and industry are sure to meet a due reward” and “the poorest individuals can claim the full price of his labor.” “In America,” said William Findley, who fought in the American Revolution and who retired in 1817 as the longest-serving member of the US House of Representatives, “no man has a greater claim of special privilege for his £100,000 than I have for my £5” (Wood, 1993).

In the nineteenth century, a number of highly successful businesspeople built their firms on the idea that the goal of the firm was not to maximize profits but to sell useful, high-quality products produced by well-treated, well-paid employees. Take, for example the case of Cadbury, the British con­fectionary giant. George and Richard Cadbury took over their father's failing tea and coffee business in 1861. They were Quakers or, as they preferred to be called, members of the Society of Friends. As a community, the Quakers were suspicious of profit, believing that the function of commercial activity should be to serve the community as a whole and that conflict between labor and management should be resolved through open conversation and good­will. George was an active teacher in the Quaker Adult School Movement and had spent years teaching in Birmingham's worst slums. The brothers ex­plicitly rejected Frederick Taylor's approach to management and its implicit assumption that employees were merely things to be manipulated. “Even if on the productive side”—one of them remarked in a 1914 paper entitled, “The Case Against Scientific Management”—“the results are all that the promot­ers of scientific management claim, there is still the question of the human costs of the economies produced.” George Cadbury claimed that “the status of a man must be such that his self-respect is fully maintained, and his rela­tionship with his employer and his fellow-workmen is that of a gentleman and a citizen” (Smith, Child, Rowlinson, and Cadbury 2009).

The Cadbury brothers invested heavily in their beliefs. The firm, for exam­ple, required that every employee take an introductory training course and gave employees the option to take further commercial or technical training at company expense. It provided sports facilities, sick pay, and a (men's) pen­sion fund and experimented with worker participation in the running of its plants. The Works Committee included both staff and foremen and was re­sponsible for factory conditions, quality control, and welfare work. In 1919,

the company began to experiment with full-fledged industrial democracy, creating a three-tiered structure of Shop Committees and Group Commit­tees reporting to a Works Council. There is no evidence that this method of management placed the firm at a competitive disadvantage. Indeed, rather the reverse. By the 1930s Cadburys was the 24th largest manufacturing com­pany in England and had created a portfolio of brands that remain global powerhouses today.

The sense that business was at heart a moral enterprise was reinvented in a particularly powerful way by Milton Friedman and his colleagues. The advent of neoliberalism is often framed as a movement that took its power from neoliberal economics. But it was also an explicitly moral movement.

Friedman's suggestion that the “social responsibility of business is to in­crease its profits” is first and foremost a moral injunction, deeply rooted in the belief that well-functioning capitalism is a critical source of economic prosperity and economic and political freedom and that for managers to do anything other than maximize profits is to invite them to betray the trust of their investors and reduce the efficiency of the market. Friedman and his colleagues suggested that, under a number of well-defined conditions, in­cluding free competition, nonconstant returns to scale, the absence of collu­sion, the mitigation of information asymmetries, and the presence of proper accounting for both positive and negative externalities, maximizing share­holder returns maximizes public welfare. (For an early articulation of this model, see Stigler 1952.) In modern business, executives who talk about their duty to maximize shareholder value thus often experience themselves as act­ing from a deep sense of moral responsibility.

Indeed, one way of thinking about the current move toward prosocial pur­pose is that it represents a natural evolution in this kind of moral thinking. For if markets are not genuinely “free”—if, for example, firms are free to in­fluence the political system in ways that shape the rules of competition to benefit themselves, or if prices do not reflect real costs because firms can legally emit huge quantities of greenhouse gases that cause enormous social harm, then there is no reason to believe that maximizing shareholder value will maximize either welfare or freedom.

Paul Polman, the former CEO of the European consumer-goods giant Uni­lever, is one of the most prominent exponents of this idea. On his very first day in the job, he announced that Unilever would no longer issue either quar­terly earnings guidance or quarterly earnings reports. (He laterjoked that it was the first thing he did because he did not think the board would fire him on his first day.) Instead, Unilever would focus on the long term and on solving the great problems of the world. He even went as far as to urge share­holders to put their money elsewhere if they did not “buy into this long-term value creation model, which is equitable, which is shared, which is sustain­able.” Six months later he announced the Unilever Sustainable Living Plan, under which the firm committed to halving the size of its environmental footprint while doubling its output. In the years that followed, he claimed repeatedly that his responsibility was to multiple stakeholders, including consumers in the developing world and climate-change activists. Regarding shareholders, Polman said, “I'm not just working for them.... Slavery was abolished a long time ago” (Boynton 2015).

Many people continue to believe that it is illegal for a firm to embrace a purpose beyond profitability, but in general business leaders do not have a fiduciary duty to maximize profits—except in the highly exceptional circum­stances that trigger “Revlon” or “Unocal” duties (Henderson and He 2018). Managers owe duties of care, candor, and loyalty to both the corporation and its investors, but that's it. It is probably illegal for the board of a publicly traded company to announce that any particular course of action will cer­tainly significantly reduce short-term profits, but if the board believes that adopting a purpose beyond profit maximization is consistent with the long­term health of the corporation, doing so is entirely legal (Henderson and He 2018). Indeed, the first dean of the Harvard Business School suggested that the purpose of the corporation was to “make a decent profit, decently” and in August 2019, 181 members of the Business Roundtable—an organization composed of the CEOs of many of the largest and most powerful American corporations—r eleased a statement redefining the purpose of the corpo­ration to be “to promote an economy that serves all Americans” and com­mitting to lead their companies for “the benefit of all stakeholders: custom­ers, employees, suppliers, communities, and shareholders” (Business Round Table 2019).

Running an authentically purpose-driven company is thus both ethically required and entirely legal. This does not mean, of course, that it is practical! Here the evidence is mixed but encouraging. While there is no guarantee that embracing purpose will lead to long-term competitive advantage, and ruth­lessly managed companies focused on the bottom line are often very suc­cessful, there are many reasons to believe that well-managed purpose-driven companies can compete successfully with more traditional rivals—and in­deed that in some circumstances they can be extraordinarily successful.

In the first place, many of the most successful firms of the last 50 years have been demonstrably driven by purpose. Walmart's founder aimed not to make himself rich but to bring a much wider selection of products to cus­tomers who had historically been chronically underserved. Toyota's incred­ible success was built on the idea that the role of the firm was to create great jobs and serve Japanese society. Southwest Airlines insists—on its investor relations site, no less—that its purpose is to “be the world's most loved, most efficient, and most profitable airline.”

In the second, an outpouring of research in psychology and behavioral economics has suggested that while people like money, and while in some situations offering employees additional compensation can be a power­ful motivator, beyond the critical threshold at which people believe they have “enough,” relying on monetary incentives can be ineffective and even counterproductive—and that companies motivated by purpose who treat their employees with dignity and respect and give them significant auton­omy and agency in their jobs are likely to be significantly more productive and innovative than their conventional rivals (Henderson 2020a, 2020b).

Most human beings are driven by a deep need for some sense of meaning, by the desire to be autonomous and competent at work, and by the need to be in relationship with others (Pink 2011). Shared purpose creates a sense that one's work has meaning, and in authentically purpose-driven firms, the com­bination of a strong mission and the decision to treat employees with dignity and respect often creates ideal conditions for this kind of intrinsic motiva­tion to flourish (Henderson 2020). It also creates a strong sense of identity, persuading people to go the extra mile in the service of the firm (Henderson and Van Den Steen 2015). When employees are empowered to be their au­thentic selves at work, they are also more likely to find work satisfying and interesting in itself, rather than approaching work as an instrument toward some other goal. This in turn leads to positive emotions like happiness and self-confidence, which in turn make it easier to build new skills, to bounce back after difficult times, and to be more resistant to challenges or threats.

This research has focused almost entirely on the level of the individual, but there is also increasing evidence that the embrace of purpose can drive performance at the firm level. In the US, for example, on average the most productive plants in any given industry make almost twice as much output with the same measured inputs as the least productive. In China and India, the best plants outperform the worst by an average of 5:1. I spent 20 years in windowless conference rooms full of economists trying to make these results go away. But they would not. Even with the inclusion of careful controls for factors like the age and quality of capital equipment, the nature of the firm's governance structure, the education and experience of workers and manag­ers, and the pricing power of the firm, there are still “persistent performance differences across seemingly similar enterprises” (Gibbons and Henderson 2013; Syverson, 2004a, 2004b).

High productivity turns out to be correlated with differences in the adop­tion of high-performance management practices, where “high performance” is measured by the degree to which firms pay sustained attention to skills development, implement incentive systems that use more than simple quan­titative metrics to measure performance, and use self-directed teams to man­age work and create widespread opportunities for distributed communica­tion and problem solving (Bloom and Van Reenen 2007, 2010, 2011; Bloom et al. 2019; Jon, Ichniowski, and Shaw 2002; Ichniowski and Shaw 1999).

These practices do not readily diffuse, suggesting that they are deeply rooted in the history and culture of the firm. It took General Motors nearly 20 years to come close to imitating Toyota—one of the best documented examples of a firm whose success is deeply rooted in its use of high com­mitment practices—despite the thousands of articles and the hundreds of the book that had been written about the firm (Helper and Henderson 2014). Some scholars believe that this enduring heterogeneity is rooted in the slow diffusion of information. One study in the Indian textile industry, for ex­ample, showed that the adoption of high-performance practices was accel­erated by exposure to management consultants (Bloom et al. 2013). This is certainly plausible in some situations but cannot explain cases like GM, in which firms are aware of the superior practices and strongly motivated to adopt them but nonetheless find it immensely difficult. My own belief is that in many cases, slow diffusion reflects the fact that high-road firms are char­acterized by very high levels of trust between management and employees, and that this trust takes time and trouble to build (Gibbons and Henderson 2013; Henderson 2020).

Studies of the relationship between purpose and financial performance have generated mixed results, partly because it has proved difficult to de­velop credible measures of the degree to which a firm is purpose driven and partly because even when the embrace of purpose increases productivity and creativity, in many firms the benefits of these improvements are largely de­voted to the very real costs of being purpose driven. Zeynep Ton's pioneering work, for example, suggests that in the retail sector, purpose-driven firms succeed by paying over the odds and redesigning work to give significantly more autonomy to floor-level employees. This allows purpose-driven firms to survive and even thrive, yet they do not seem to consistently outperform their more conventional rivals (Ton 2014). That said, Gartenberg, Pratt, and Serafeim (2019) use measures of purpose derived from more than 4 million individual employee surveys to show that the embrace of purpose is corre­lated with financial outperformance when there is a tight link between the firm's purpose and its strategy, and Alex Edmans (2020) summarizes much of the quantitative data suggesting that the embrace of purpose is increasingly linked to superior competitive performance.

In summary, there is ample reason to believe that authentically purpose- driven firms can survive, even in the face of intense competition. They may also be crucially important allies in the drive to build a just and sustainable economy.

Purpose-Driven Firms Are Catalysts

Most obviously, purpose-driven firms often have an immediately positive im­pact on their employees, customers, communities, and suppliers. Walmart claims that its commitment to energy efficiency and renewable energy has reduced greenhouse gas emissions by millions of tons (Walmart, 2019). When Mark Bertolini, Aetna's CEO, discovered that nearly 12 percent of the com­pany's workforce were being paid minimum wage and, consequently, were having a great deal of difficulty making their lives work, he insisted that the firm pay them a living wage and increased their average cash compensation pay by more than 30 percent.

Purpose-driven firms are also ideally situated to act as catalysts for inno­vation within their industry.

It is tempting to believe that there is a bright line between business deci­sions that are profitable and those that are not. But in reality, most major de­cisions come freighted with significant risk, leading different firms to value them very differently. The decision to invest in new technologies or entirely new business models, for example, is fraught with enormous uncertainty. Things that look obviously profitable in retrospect rarely look so before the fact. Well-established and highly profitable firms often find it very difficult to believe that the future will be different from the past, and they frequently have trouble exploiting new innovations even once it is clear that they will be profitable.

A commitment to purpose provides both the strategy vision to iden­tify these kinds of opportunities and the organizational capacity required to exploit them successfully. A commitment to a common purpose greatly increases strategic alignment within the firm, making it much more likely that employees will work hard and that their efforts will be mutually aligned (Henderson, 2020b). Purpose-driven firms are likely to select for employees who share the firm's values and for those who have prosocial preferences. In combination, these qualities are likely to create a preference for cooperation within the organization, greatly increasing the ability of the firm to pioneer disruptive or “architectural” innovation (Henderson 2020).

I have had the good fortune to meet many entrepreneurs who are trying to make a difference in the world. They begin by outlining the astounding new business they have in mind—one firm I know of, for example, is planning to invest more than $4 billion in mining mineral nodules from the floor of the Pacific Ocean—but then they unfailingly transition to telling me about the purpose that drives them to pour both their lives and their hearts into the venture. A brand-new idea may be profitable—or it may not—but if you believe strongly that it will make a real difference against the big problems, at the margin you are more likely to take the risk inherent in trying to make it happen. Purpose is the fuel that can drive change at scale.

This dynamic is evident inside much larger firms. When Unilever com­mitted itself to making 100 percent of its tea brands sustainable, for example, it was not at all clear exactly how such a move was going to be profitable. Tea bags are a commodity business in which it is impossible to raise prices. But Michiel Leijnse—a relatively low-level employee—was able to pull together a coalition within the firm that was able to push the decision through. He and his team pointed to a variety of business models that might make the deci­sion profitable—but their primary motivation was their deeply held belief that making the business sustainable was simply the right thing to do.

The move significantly increased Unilever's market share, and every other major branded tea company was forced to follow suit, tipping the entire in­dustry toward sustainable production. Ex post, the decision is now viewed as a brilliant strategic move, but ex ante it was driven by the passion of the leaders of the tea business, who were able to translate their deep concern for the long-term sustainability of the business and the well-being of their em­ployees into a convincing business case.

The US solar business is now a $84 billion industry and employs more people than coal, nuclear, and wind combined. The alternative meat busi­ness is expected to be a $140 billion industry within the next 10 years. The automotive industry is in the midst of a multibillion-dollar transition to electric vehicles. In each case the business was catalyzed by purpose-driven leaders willing to take the risks necessary to explore entirely new ways of doing things.

An equally important consequence of the willingness and ability of purpose- driven firms to challenge the status quo is the fact that their success—and the escalating commitment to solving the world's big problems that this success nearly always entails—often leads them to realize that there are many prob­lems that they cannot solve—or at least that they cannot solve alone.

Take, for example, the case of palm oil. Palm oil is the world's most widely produced and consumed vegetable oil. Land planted with palm yields 5 to 10 times more oil, on average, than land used to produce other oils like soy­bean or rapeseed (canola), and it is both largely tasteless and highly stable. Thousands of products, including food, detergents, cosmetics, and biofuels, contain palm oil or its derivatives. But conventional palm oil production comes with heavy environmental and social costs. Clearing forest for palm oil production is a major source of greenhouse gas emissions and also reduces biodiversity and drives species extinction. New plantation development also frequently forces indigenous communities from their land, compelling locals to take on work as low-wage laborers on palm oil plantations, often under dangerous and abusive conditions (Henderson, Yew, and Baraldi 2016).

Unilever is the world's largest purchaser of palm oil, and in 2008—under significant pressure from activists—committed itself to buying only sustain­ably grown oil. But this commitment proved impossible to keep since sus­tainable palm oil is significantly more expensive than conventionally grown oil, and most consumers were unwilling to pay a premium for products that contained it.

In response, Unilever helped to found the Roundtable for Sustainable Palm Oil and was then able to persuade the Consumer Goods Forum—a trade association that includes nearly all of the major Western manufacturers of consumer goods and nearly all of the major retailers—to commit to purchas­ing only sustainably grown oil. Since together the group purchased roughly 60 percent of the world's traded palm oil, Unilever believed that these com­mitments could tip the entire industry toward the use of sustainable oil— thereby ensuring that no single firm would be at a competitive disadvantage despite its higher price.

This kind of industry-wide cooperation is emerging across a wide variety of industries. Many fisheries can be almost completely regenerated within a couple of years if left unfished for two or three years, for example, so fisher people that can jointly agree to restrain themselves are usually much bet­ter off than those who cannot, and a significant share of the world's inshore fisheries are now sustainably fished. In the apparel industry, it proved to be impossible for individual firms to force child labor out of their supply chains. In response, a group of firms together founded the Sustainable Apparel Coali­tion, a group committed to disseminating (and auditing) better labor stan­dards across the entire supply chain, and the group has attained some success in improving conditions across the worldwide apparel industry. Cooperative arrangements to address the problems of sustainability are springing up not only in palm oil but also in crops like beef, soy, timber, and cocoa.

Here again, it is tempting to believe that building cooperation is simply a matter of economics. But it is not. Just as in the case of the decision to invest in significant innovation, the decision to enter a cooperative agreement— and to continue to conform to its provisions as it evolves—is fraught with uncertainty and as such often relies on the combination of economics and purpose-driven commitment that is fueling so much innovation. Many of the key quantities are socially determined and evolve endogenously as the various firms learn more about their own payoffs and those of their collabo­rators. Merely being able to demonstrate on paper that everyone would be better off if everyone cooperated is not sufficient to put a collaboration in place or to sustain it over time. Any single firm's decision to collaborate is shaped by its beliefs about how other firms are likely to behave.

Purpose-driven firms are thus particularly well suited to initiating these kinds of collaborations. They are likely to have already invested heavily in making credible commitments to behaving “well,” so they are much less likely to take advantage of short-term temptations to cheat. This makes them much better partners. They have strong incentives to punish badly perform­ing firms and have often built strong connections to the nongovernmen­tal organizations (NGOs) whose activism is often one of the best means of bringing defecting firms into line. Moreover, building these kinds of collabo­rations is an intensely personal exercise as well as an economic one, requir­ing that the participants build a complex network of shared relationships and mutual trust. Purpose-driven firms like Unilever are uniquely suited to initiating such groups and to persuading others to join them because they have made costly commitments to behaving well and to following through on their commitments.

Of course, as Ed Balleisen reminded me, voluntary cooperative agreements are inherently fragile since they often present a classic prisoner's dilemma. Individual firms may promise to do the right thing but often face a signifi­cant temptation to fail to follow through, leaving the defectors with a short­term cost advantage and those that chose to cooperate feeling like (angry) patsies. It has become very clear that—as the work of Eleanor Ostrom and her collaborators has long suggested—the ability to sanction or to punish is critical to sustaining long-term cooperation (Ostrom 1990).

Sometimes voluntary private associations can find a way to put this ca­pacity in place. The Institute of Nuclear Power Operations (INPO), for exam­ple, was founded in 1979 following the disastrous nuclear reactor meltdown at Three Mile Island. It develops operating standards and procedures for the nuclear industry and supports their adoption through an aggressive program of training and plan visits. Each plant is extensively evaluated each year and publicly ranked against its peers, and in the case of bad performance, INPO first contacts the utility's board and then reaches out to the relevant regula­tors. INPO is entirely industry funded and participation in its work is entirely voluntary, but between 1980 and 1990, the average rate of emergency plant shutdowns fell more than fourfold, and the INPO is widely credited with making an order of magnitude improvement in the safety of the US nuclear power industry. This is perhaps not surprising since the benefits it offers to the industry are tangible and immediate and the temptation to cheat is very small. Moreover, “defection” can be both easily observed and routinely punished.

But in many other cases, while ongoing collaborations have succeeded in making major gains they have not (yet?) achieved their original objectives. In the palm oil industry, a significant fraction of the supply chain is now sus­tainably certified—but marginal players desperate for short-term gains who are willing to sell to Indian and Chinese buyers are continuing to drive high levels of deforestation. In textiles, basic improvements have been achieved in some areas (e.g., health and safety) but not in others (e.g., freedom of associa­tion, excessive working hours) (Locke 2013).

The good news is that in many cases the effort to collaborate has created a network of firms that have built their business models—and recruited their employees and their customers—on the basis of an implicit promise to “do good.” They now have strong incentives to support the creation of entities that have the power to sanction those firms that will not cooperate. These in­centives are driving them to seek help from two powerful groups—so-called universal investors and governments.

The world's largest asset owners are now so wealthy that they are effec­tively forced to hold all the world's assets. They are increasingly coming to believe that problems like inequality and climate change are not, for them, “externalities” that can be diversified away but instead critical determinants of future performance. For example, Hiro Mizuno, who was until recently the chief investment officer of the Japanese Government Pension Fund, the world's largest pension fund, came to believe that climate change and social exclusion were the largest risks to the fund's ability to meet its long-term obligations to Japanese pensioners, and that his fiduciary duty required him to tackle them. These “universal investors” face their own free-riding prob­lem, of course, but there are so few of them that it may well be that they can form a sufficiently powerful coalition that they can reshape the behavior of the firms in which they invest (Henderson 2020; Serafeim 2018). An NGO called Climate Action 100+, for example, includes more than 400 investors who together control more than $40 trillion in assets. They are committed to pushing the world's 100 largest GHG emitters to transition to a carbon-free economy and have proved to be willing to vote against boards they believe are not moving sufficiently fast.

Purpose-driven firms on the leading edge are also rediscovering govern­ment. In both palm oil and textiles, for example, the purpose-driven firms that have pioneered cooperation and bet their strategies and their brands on it have begun to look to local regulatory authorities as critical partners in achieving fully sustainable supply chains. For example, in palm oil, mem­bers of the Consumer Goods Forum have been meeting regularly with a broad range of stakeholders to explore productive ways forward. One possibility is to move to a “jurisdictional” approach—to build partnerships with local politicians, NGOs, and communities in an attempt to build a business case for converting entire regions to sustainable palm. Similar conversations are happening in the textile business in the context of some promising early suc­cess. One study of the Indonesia apparel industry, for example, found that self-regulatory efforts were significantly more likely to increase wages when the self-regulating body worked closely with the state and when local unions were mobilized to push for state action. As Rodrik and Sabel suggest in their chapter in this book, these kinds of public-private partnerships are starting to emerge in many industries.

Allies in Building Inclusive Institutions?

In short, purpose-driven firms are beginning to learn that the easiest way to solve the big problems—and to ensure that they themselves are profit­able—is to support smart, well-run government. Could they be allies in the fight to rebuild our institutions and our democracy?

Historically, dramatic social change and, in particular, the dissolution of concentrated wealth and power has been most often accomplished by violent upheaval—by revolution, war, or famine. But profound change is not always cataclysmic. In Denmark in the 1890s, for example, the Danish business as­sociation reached out to Denmark's major labor association, suggesting that there had to be a better way to run Denmark than through endless labor unrest—and the Danish system was born. In Germany in the 1940s, German business—facing the ruin of all their hopes and the threat of communism— likewise reached out to German labor, proposing a system of industry-wide collective bargaining and a nationwide apprentice program. In Mauritius in 1968, as ethnic riots led to the death of hundreds of people, the head of the newly elected (largely Hindu) Labor government reached out to the re­cently defeated (largely francophone) party—the home of Mauritius's sugar barons—to suggest taking a new road to development, one in which business worked as hard to grow the supply of good jobs as it did do grow revenues. Together, they initiated a partnership that has endured to the present day. In South Africa, De Klerk's Afrikaner party yielded power peacefully to Nelson Mandela's African National Congress, following years of struggle that most observers had expected would end in bitter civil war. While much of his suc­cess was a result of more than 50 years of courageous struggle on the ground, it was almost certainly helped by the support of South Africa's white indus­trialists (Acemoglu and Robinson 2019).

In each case, it was clear ex post that working together to build a more inclusive society was good for all the parties concerned. But there have been many situations in which there is a clear collective case for action and the relevant actors have been unable to realize it. I believe that the current move to purpose greatly increases the odds that in the face of our current problems we may be able to build these kinds of coalitions. Purpose can be as catalytic for cooperation in the service of the public good as it is for innovation within the firm and cooperation across industries.

The world's largest firms are larger than many economies. By some mea­sures, the 1,000 largest firms together control over 70 percent of the world's gross domestic product (GDP); more economic activity takes place within the world's firms than in the free market. If even a relatively small fraction could be persuaded to argue that justice (as well as self-interest!) requires a remak­ing of the international economic and political order, they could prove to be powerful allies.

Are they sufficient to drive the changes we need? Surely not. But they could be very helpful. US CEOs have pushed local politicians to respect gay and transgender rights. NGOs like “We Are Still In” draw on the support of hundreds of firms to push for local action on climate change. Many of the firms attempting to increase diversity and inclusion within their ranks are discovering that really moving the ball forward will require tackling struc­tural racism in the broader society. The 2020 election in the United States saw many of the country's largest firms speak out publicly in support of the democracy and the peaceful transition of power.

None of these moves are enough to change the world. But they are impor­tant steps in the right direction, and they might well have broader implica­tions. Firms are increasingly the place where people spend most of their time and are often the institution that employees trust the most. Could purpose- driven firms become a site for the development of civic consciousness? I have only anecdotal evidence on this front, but I know of more than one firm where the embrace of purpose has led to employees whose lives are now characterized by greatly increased agency becoming active in local politics.

Most fundamentally, the emergence of purpose-driven firms has the po­tential to normalize the idea that the purpose of business is not to increase its profits—indeed that it never was. The purpose of business is to help build prosperous, just, sustainable societies rooted in genuine freedom of opportunity and mutual respect. No one now argues in public that employ­ing child labor is a good idea. It should be as unacceptable to emit green­house gases, to pay less than a living wage, or to lobby to subvert either the free market or democracy. Purpose-driven businesses have the potential to help drive a profound normative shift, making it much, much harder for firms whose profits are rooted in the destruction of our environment, our society, or our politics to hide behind the claim that they are simply maxi­mizing shareholder value.

Several policies can help to support the emergence of this new approach. Reforming the governance of corporations so as to make it significantly easier for firms to commit to doing the right thing over the long term is undoubt­edly important; see, for example, Mayer (2019). There are a raft of sensible proposals in this space, including accelerating the adoption of the “Benefit” corporate form, explicitly changing the responsibilities of the board, making it easier to form firms that are owned by their customers and their employ­ees, and supporting the creation of sources of long-term or “stewardship” capital (Strine 2019). But it will also be crucially important to develop audit­able, replicable, reliable measures of the degree to which firms are indeed “doing good” in the world. If we are to trust firms, we must be able to verify their behavior. In this context, the gathering strength of the so-called ESG movement—a movement pushing for the mandatory reporting of environ­mental, social, and governance metrics—is a hugely welcome development.

Let me close by coming back to the question with which I opened— namely, whether firms that are genuinely committed to doing the right thing can survive in the context of a system premised entirely on self-interest. I could tell you many stories, but I will close with one of my favorites.

In February 2017—eight years after Paul Polman had taken the helm and announced his commitment to purpose—Kraft Heinz, a large consumer­goods company controlled by Warren Buffett's Berkshire Hathaway Hold­ings, and 3G Capital, a large Brazilian private equity firm, made a hostile bid for Unilever. (Kraft Heinz was offering $143 billion for the company, an 18 percent premium over Unilever's market value. Unilever had announced lower than expected fourth quarter sales just three weeks before, sending its shares down by 4.5 percent.) 3G had a reputation as an aggressive cost cutter, and Unilever's stock jumped 13 percent on the announcement.

Unilever's board immediately turned down the bid, claiming that it grossly undervalued the company. This in itself was not unusual. What was out of the ordinary was the way in which the company's supporters mobi­lized in protest.

One group pulled together 100,000 signatures on an online petition in less than three days. Bono, the rock singer and campaigner, reached out offering to write a song. And a number of carefully selected people—we don't know exactly who or how many—called Mr. Buffett. “Warren was approached by probably more people than he expected,” Polman later said. “As soon as (he) discovered that this was a hostile takeover, the tone of the conversation be­came different.” Three days later, Kraft Heinz withdrew the bid.

Unilever has since emerged as one of the world's most successful consumer­goods companies. The company claims that in 2018, its purpose-driven brands grew 69 percent faster than its more conventional brands, generating 75 per­cent of the firm's overall growth (Unilever 2019). Unilever's new CEO, Alan Jope, remains deeply committed to purpose—and to changing the world.

Polman, Jope, and other business leaders like them believe—and are in­creasingly saying in public—that to continue on our current course is deeply immoral. They use the language ofjustice and equity as justification for busi­ness decisions—and they are thriving. We live in a desperate time. Perhaps they can be helpful.

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