How Can Businesses Make Profit by Solving Social Problems Instead of Creating Them?

Why Should Corporate Purpose Focus on Fixing Environmental and Social Crises?

Learn how redefining corporate purpose to solve societal problems improves financial success and trust. Explore insights from Colin Mayer’s Capitalism and Crises.

Read the full article to discover how organizations can shift their focus toward genuine problem-solving, build deeper trust with consumers, and align financial success with positive societal impact.

Recommendation

Companies play a massive role in society, and it’s well-accepted that they operate purely for profit. But professor Colin Mayer’s central premise is that corporate profits should come from solving problems, not creating them. The implication is that businesses should address those actions that produce negative externalities and consider positive social contributions in their investment or allocation decisions. Mayer’s concepts are thought-provoking and inspiring, but could the business world ever move from financial self-interest to agree on altruistic and diverse goals? Whatever the answer, Mayer’s book shows that there is definitely a place for more purposeful thinking within companies.

Take-Aways

• Companies should have to justify their existence, as they have had to at certain times in history.
• Profits should only come from solving problems; creating problems should not be profitable.
• Laws should ensure that profits only derive from companies solving problems.
• These ideas are especially relevant to large companies with unusual factors at play, like monopolized markets or network effects.
• Giving the role to shareholders of imparting purpose to companies means different patterns of shareholder ownership.
• Values, policies, and even remuneration should become aligned with making profits from problem solving.
• A company with a clearly stated purpose and values can become more trusted, which indirectly ends up creating more profits.
• Climate change and other environmental issues are important areas in which more purposeful company action is required.

Summary

Companies should have to justify their existence, as they have had to at certain times in history.

It has become the accepted norm that companies are entitled to form and operate businesses in any area they choose, and to seek to maximize their profits. The only condition is that they follow relevant laws and regulations. But because companies are so crucial to society’s well-being, they should be made to consider wider goals than just profit. In Britain, for example, the first companies needed permission from government to even form. By the 19th century, firms had to provide “object clauses” that specified their line of business, an obligation from which they predictably sought to free themselves.

“It is incorrect to consider the objective of the firm as being to promote its own success…Its objective is to contribute to and promote the success of the systems of which it is an integral part. Its reason for being is to advance its local, national, and global systems.”

By then, most companies were small, and there were few multinationals, so market power was not such a concern. In the mid-20th century, many saw companies as too influenced by the personal desires and whims of their executives. Since the 1980s, companies have more and more been run in the interest of shareholders’ returns.

Profits should only come from solving problems; creating problems should not be profitable.

The traditional view is that companies should provide goods and services, and jobs, and leave charitable nonprofit activities to governments and others. But companies should make profits from solving problems and not profit from causing them. In the same spirit as when British companies required permission to form, and later were required to produce object clauses stating and limiting their activity, so should a clear purpose and problem-solving objectives be central to allowing companies to exist. In this way, the actions of companies can become more aligned with the needs of the systems in which they exist, and they can become more “other-regarding,” rather than just self-regarding.

“Profit as such is not the problem. The problem is the provenance of profit. Does it come from problem solving, which is the source of the well-being of others, or from problem creation, which is their affliction?”

In economics, the concept of “externalities” describes situations in which the actions of one entity causes costs — or benefits, which are positive externalities — that are borne by others, not by the entity itself. This thinking puts special focus on companies in “sin” sectors like tobacco, gambling, fast food, and confectionery. The health care expenses and other costs these companies indirectly inflict on society suggest they should contribute toward the cleanup of the external side effects of their business. Profits made without causing damage to others, or with any such problems being redressed by the company, can then be thought of as “just profits.” A principle in Roman law reflected these sentiments: “Unjust enrichment” was profiting to the detriment of others.

Laws should ensure that profits only derive from companies solving problems.

If most people agree that profits should come from solving problems, then that will require laws. Existing regulations and rules create a minimal floor by which companies are prevented from doing certain obvious harm to others, but the law could and should be taken further. The shareholders and directors of a company should have obligations to create purpose-based objectives for their companies, rather than just considering profits alone.

“Business is the most powerful instrument created for uniting the world in its entirety and for its eternity, and the law has a primary function to ensure that it achieves its full potential to do that. To date, it has done exactly the opposite.”

While shareholders do have ultimate power and responsibility for a company, they should have more obligations placed on them. Companies only exist, as some definitions reflect, as a nexus of different legal contracts. Laws can further shape what companies do and don’t do. Laws create a level playing field, because if these ideals were only taken up on a voluntary basis, then less purpose-driven companies will benefit at the expense of the problem-solving firms.

“The purpose of corporations is the criterion against which their success will be judged. It will be the basis of court judgments of whether directors are discharging their fiduciary duties of loyalty and care to their members.”

However, it is one thing to get a company to repair damage or to compensate those whom it harms indirectly through its actions; it is even more difficult to achieve the opposite, in which the positive externalities a firm indirectly produces can be valued as its profits. The most effective route for increasing such positive externalities is through businesses taking them into account when making their investment decisions. Government intervention is also effective, with important contemporary examples being government subsidies of green investment and medical research.

These ideas are especially relevant to large companies with unusual factors at play, like monopolized markets or network effects.

The emphasis on purpose and a fair, just profit is especially relevant to sectors like utilities, large tech firms, and pharmaceutical companies, in which abnormal factors such as monopoly power, network effect advantages, or low marginal unit costs are at play. Because of these variables, these companies are usually less subject to the normal pressures and disciplines of competition; instead, they have more latitude both to do good and to cause harm. The most prominent and iconic tech companies have all been scrutinized and criticized: Amazon, for the treatment of its workers; Apple, for its supply chain choices; Facebook, for personal data issues; and Google, for abusing its monopoly position. Their size and prominent positions mean the public more readily reacts to seeming abuses of power through protests or boycotts. Large pharmaceutical companies, with their patents, high fixed investment costs, and low marginal unit costs, also are especially relevant in this kind of purpose-based thinking.

“Purposeful regulation is then not just about the rules of the game and their enforcement but also relating the purposes of utilities with what their customers, societies, and environments are expecting of them.”

Utility companies are already the subject of heavier than usual regulation. But their customers and communities would benefit if utilities were internalizing more of their stakeholders’ interests into their stated purposes and owning problems as a matter of course. More purpose-driven cultures in utilities would mean less confrontation with regulators. Utility companies in the energy sector also have the obvious common purpose of making the transition to renewable energy. The trade-off of profits versus reputation mean that, for these special types of companies, adopting a purpose-led company culture can be worthwhile.

Giving the role to shareholders of imparting purpose to companies means different patterns of shareholder ownership matter more.

Making shareholders play a more active role in providing purpose objectives for companies highlights the varying patterns of share ownership in different countries. The United Kingdom has some of the most dispersed patterns of share ownership, while, elsewhere around the world, about 50% of company ownership is in the hands of founding families.

“UK companies in turn have fewer means of protecting themselves against markets for corporate control in the form of takeovers and short-term activist investors than in virtually any other country in the world. The result is that UK firms are under unusually intense and continuous pressure to maximize their share prices.”

The United States, which also has dispersed ownership, still retains a larger instance of founders or their families retaining large shareholdings, often with preferential shares with special voting rights. The UK model has been against dual-class shares and places emphasis on protecting the small shareholder, but this has made the system inherently less conducive to large shareholders imparting purpose to their company. Likewise, large investment companies that seek to passively diversify and index stock market holdings are not a force for encouraging purpose in the companies they invest in.

Although creating a small-investor friendly market seems a benign aim, and private equity investing has had some negative connotations, UK companies tend to welcome private equity so that they can act more strategically, away from the relentless pressure of short-termist stock markets. The “dual ownership” method, in which a block of shareholders retains some control and a remainder of shareholders provide more capital and focus on returns, seems to provide the best of both worlds. Denmark, which ranks high in lists of countries with positive attributes, has always had foundations and trusts owning controlling shares in companies, highlighting the link between ownership patterns and purposeful businesses. A main role of finance is to patiently finance companies that solve problems for society, but much of the finance industry has lost sight of this.

Values, policies, and even remuneration should become aligned with making profits from problem solving.

Companies should be focused on and rooted in a purpose and a commitment to solving problems, so incentives, monitoring, and remuneration should reflect this. Authentic problem-solving values should be defined and embedded by the owners, directors, executives, and a culture that inspires, invigorates, and devolves the same purpose and values through to lower-level employees. Workers who have absorbed these values and a purposeful company culture can then be trusted to have more power and autonomy delegated to them.

“The problem-solving element of the objective of a company is an anchor around which corporate leaders and investors perform consistent and complementary roles in assisting in the delivery of it.”

Although statutory accounts for a company must remain within standard legal norms, a company can experiment with parallel internal management metrics to bring alive theoretical concepts of creating profits through problem solving.

A company with a clearly stated purpose and values can become more trusted, which indirectly can end up creating more profits.

Many assume that going from profits into more noble purposes and objectives will sacrifice financial returns. But it is often the case that taking the more difficult high road toward prioritizing purpose and problem solving can lead towardS greater profits after all. In business sectors in which intangible factors like trust, brand, reputation, and relationships matter, a company observably driven by purpose and problem solving can attract more customers, partners, and support.

“We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that they have never failed to appear. The better we have remembered it, the larger they have been.” (George Merck, president and chairman of Merck, 1925-1957)

For example, Danish Novo Nordisk, which has its foundation as the dominant shareholder, was already involved in the selling of medication to treat diabetes when it reconsidered the field with a problem-solving approach. The company realized its medications were not affordable in less wealthy countries, and so it put its inside knowledge to work in unprofitable preventative measures and cheaper treatments. Its altruistic work was recognized by doctors, governments, and NGOs, and as a result the company became a highly trusted partner for these organizations when other opportunities to provide products and advice arose.

“Problem-solving purposes are a driver of human flourishing and shared prosperity. But businesses cannot solve major problems on their own. They must partner with other organizations, particularly government.”

Other examples of successful purpose-driven companies include Handelsbanken, a Swedish bank with two dominant shareholders. It picks its branch managers carefully, instills strong values in its employees, and then delegates more decision making to its branches. Staff are not incentivized to oversell but to serve their customers’ needs and build client relationships. British Astra Zeneca’s role in creating a COVID-19 vaccine shows the importance of ownership and cooperation with universities: The fact that the project ethos was not-for-profit encouraged more to cooperate. Boeing is an example of a company that did less well when it let the financial side dominate its engineering interests.

Climate change and other environmental issues are important areas in which more purposeful and problem-solving company action is required.

Economists have traditionally failed to value the natural world properly, implicitly focusing on maximizing the extrinsic returns from exploiting nature. A better way to think about natural assets is that they are intrinsically valuable in their own right, aside from what society can derive from them.

“There is therefore a systematic undervaluation of natural capital that comes from our inability to determine the option values that future generations will derive from its preservation and the irreversibility associated with its destruction.”

Economists are becoming more enlightened, and work is now underway on methods to measure and communicate the value of natural assets, as illustrated by a UK project that has created a 25-year plan to recognize “natural capital.” Unlike manmade assets, natural assets have the capacity for regeneration and renewal, but they also have critical thresholds, or tipping points, at which they lose their power to renew, which should be the focus of concern. The rise in prominence of ESG metrics as a stated aim of companies reflects changing values. But ESG metrics are limited in scope and tacked on as a secondary level of focus for a company, rather than being incorporated into the company’s central purpose, as they should be.

About the Author

Colin Mayer is an emeritus professor of management at the University of Oxford. His books include Prosperity: Better Business Makes the Greater Good.