The modern trend of Socially Responsible Investing (SRI) has placed business practices of corporations in the spotlight and provided a new lens through which investors view their investment selections. As this trend grows, there seems to be an increase in public interest in the differences between companies that rank well on SRI screens versus those that rank poorly.
A common characteristic that many high-ranking companies seem to share is a benevolent “economic philosophy” that seeks to provide the greatest amount of good for the most amount of people, especially the company’s stakeholders (ie: employees, customer, investors, community). An “economic philosophy” is a system of beliefs that governs the decisions and behaviors of an organization. This is not often stated or identified by the company but is evident in the decisions and actions of the leadership and management teams and becomes a framework for operations within the business. To understand how this works, let’s evaluate two good examples: formalism and utilitarianism.
Author and CEO, Tom Chappell, writes about these philosophies in his book, The Soul of a Business: Managing for Profit and the Common Good. Chappell’s company, Tom’s of Maine, is designed to be a business of blessing to their stakeholders. Key to their success is their economic philosophy which Chappell identifies as formalism. Chappell defines formalism as “the inner sense of obligation and human connection that people feel for their friends, neighbors, and family.”
Chappell compares this against the most popular economic philosophy called utilitarianism defined as “the moral view that a good course of action is calculated on the scale of what gives the greatest number of people the most pleasure of greatest happiness.”
The differences between these philosophies is best illustrated by how profit is obtained. A utilitarian process treats all members of an organization, including resources and supply chain, as tools to be used or discarded. If the tool is useful (as a utility) then it is employed, but if a more efficient tool (better utility) is available, the prior would be easily discarded in exchange for latter.
Chappell argues that, since people are of higher value than profit and relationships are more important than efficiency, this philosophical world view runs contrary to scripture and must be avoided in order to participate in business as a ministry and a blessing to the earth.
By contrast, formalism views all members of an organization, including resources and supply chain, as intrinsically valuable and directs courses of action based on whatever provides the greatest good (as opposed to greatest pleasure). The business decisions directed by this philosophy would look at several different “bottom lines” (not only company profit) in order to provide the greatest good as an outcome. Chappell writes that this philosophy allowed him to see his career at Tom’s of Maine as a position of influence to provide the greatest good possible for the greatest amount of people.
I would suggest that this perspective should be the aim of corporations around the world as the trend of Socially Responsible Investing continues to grow. I believe that the businesses that are more closely aligned with a formalism philosophy will be the giants of the next generation on the international stage, outlasting the companies that seek after profit at all costs. As the bar for ethical conduct is pushed up through investor demand, companies who have designed a culture of benevolent economic philosophy will be better suited to withstand scrutiny through the SRI lens and likely receive more investor preference in the marketplace over time.