Jason Fried and David Heinemeier Hansson are the notorious duo behind Basecamp, project planning and management software for small teams. Their approach to business has been widely debated thanks to their transparent culture and popular books, Rework and Remote.
In the spirit of their culture of transparency, Fried published the employee benefits Basecamp offers as of January 2016. In reading through the list, you’ll find things as wide-ranging as surprise holiday gifts, a massage budget, and a community-supported agriculture allowance. In other words, Basecamp offers best-in-class benefits to their employees without the benefit of venture capital (they’re bootstrapped) to ease the burden.
Ask any investment analyst about what they think of this kind of approach to taking care of employees and you’d probably get something akin of a scoff, at best. In fact, let’s go straight to the horse’s mouth for a quote from an investment analyst about Costco’s policy of paying hourly employees $20 an hour:
An equity analyst was quoted in Businessweek as saying that “[Costco’s] management is focused on … employees to the detriment of shareholders. To me, why would I want to buy a stock like that?”
That’s the quote of a pretentious twenty-something, profit-driven, traditional capitalist of an analyst if I’ve ever heard one. If traditional business teachings are to be believed, the analyst is spot on.
But that’s where Alex Edmans comes in.
Edmans, a finance professor focused on corporate finance, behavioral finance, and corporate social responsibility, starts his TEDx London Business School talk with a question:
What is the the purpose of business? Profit? Or Purpose?
As Edmans reminds us, Milton Friedman, the classic American economist, would argue, “The social responsibility of business is to increase profit.” But, thanks to Edmans, four years worth of work scouring 28 years of data has given us an alternative viewpoint.
In a recent article in the Harvard Business Review, Edmans reveals the core finding of his paper on The Link Between Job Satisfaction and Firm Value. He spent those four years leading up to the paper being published analyzing historical data from Fortune’s 100 Best Companies to Work for in America and it’s relevance to long-term stock performance.
Here’s what he found:
…firms with high employee satisfaction outperform their peers by 2.3% to 3.8% per year in long-run stock returns – 89% to 184% cumulative – even after controlling for other factors that drive returns.
In other words, Edmans shows that purpose and profit can go hand in hand, starting with taking good care of employees. The concept of corporate social responsibility promotes the idea that corporations exist primarily to serve a purpose, and profits are simply a byproduct.
Traditionally, that idea has run into a bit of a problem:
- Serve a purpose
- Earn a Profit
Edmans research now shows us what that middle step entails, and it looks a lot like prioritizing purpose first by pursuing stakeholder value rather than focusing solely on shareholders. A stakeholder-driven approach looks like one that prioritizes a variety of factors:
There’s more work to be done to determine whether prioritizing each of these stakeholders can produce similar results, but for now Edmans has given purpose-driven founders one more excuse to focus on taking care of their employees, just like Basecamp from the beginning of this post.
The lesson to take away is this: business resources are not a fixed pie… a dollar paid to employees does not have to be a dollar taken from shareholders. In fact, over the long term, the opposite holds true. Edmans found that “it takes the market four to five years before it fully incorporates this information.”
This yields a variety of ways we can take advantage of the research:
- Start a company and prioritize employee wellbeing through compensation, benefits, and culture
- Make a concerted effort in your existing company to create a more engaging and employee-focus culture
- Share this information with your employer and do everything you can to encourage them to take a more employee-driven approach
- Invest in the companies you see taking care of their employees. If the data holds, the market doesn’t respond to a listing on a Best Places to Work list for years, which is an eternity in market terms.
We’re one step closer to popularizing an important reality: The point of business is not profit OR purpose. It’s both.
Or, as Alex Edmans puts it, “To reach the land of profit, follow the road of purpose.”