**4. Inspiration for value-creation**

### **4.1 Literature and history: Milton Friedman debates**

It may be cliché to have a discussion around corporate social responsibility and aligning strategy with purpose by addressing Milton Friedman's 1970 position that a company's only corporate social responsibility is to maximize profits [1]. But, given the multiple economic and social challenges of 2020 – not to mention the 50-year anniversary of Friedman's article – this perspective needs to be understood. Friedman wrote his article in response to the many calls for businesses to focus on social issues – and not just profits – following the social and environmental challenges that erupted during the 1960s. Friedman contends, that in open and free markets, shareholders can invest in philanthropic or social causes that are important to them individually, but it is not a CEO's role to make such investment on

#### *From Corporate Social Opportunity to Corporate Social Responsibility DOI: http://dx.doi.org/10.5772/intechopen.105445*

behalf of the shareholders. Importantly, Friedman does explain that it is perfectly appropriate – or, responsible – for CEOs to make such investments if the shareholders demand such and doing so maximizes profits.

We do not mention Friedman to agree with him or to disagree with him; many brilliant people have disagreed on the appropriateness of Friedman's perspective over the years. Alex Edmans has generally defended Friedman's perspective as suggesting that "it is legitimate for a company to focus on increasing profits because the only way it can do so, at least in the long term, is if it treats stakeholders seriously" [2]. Anat Admati argues that allegiance to Friedman's perspective can produce enormous damage to society because it is built on assumptions that do not exist in reality and Friedman's rules of the game "become meaningless without effective enforcement, with the ultimate outcomes reflecting little if any 'social responsibility'" [3].

We will not settle this debate here. We mention Friedman to lay out the foundation for how we believe corporations should address social opportunities and strategies. Directly or indirectly, Friedman's perspective is a foundation of the agency theory [19]. Agency theory recognizes both the separation of control and the conflicts of interest that arise when principals hire agents to serve the principals' interests. The key to a successful principal-agent relationship is aligning the interests of the agents with the objectives of the principles. Many critics of agency theory argue that the focus on agents serving the myopic needs of the principals overemphasizes short-term profits at the expense of long-term value creation, because doing so maximizes the rational self-interest of the agents. Hart and Zingales [20] advocate moving from shareholder wealth maximization towards the more shareholder welfare maximization because shareholders are pro-social humans who (may) care about more than just money. In the short-term, there can be a significant difference between shareholder wealth and shareholder welfare, as markets may be slow (or unable) to accurately price-in both the positive and negative externalities that result from corporate actions.

We know that small businesses and entrepreneurs have much higher business failure rates than larger businesses do [9]. On average, approximately 15% of businesses with fewer than 5 employees fail in a given year; the rate is closer to 30% for such small firms that opened during 2020–2021. Many of these firms do not suffer from principal-agent conflicts, as the managers are frequently also the owners. But small businesses are particularly vulnerable to economic whims and may be tempted to capitalize on short-term opportunities. If those opportunities align with their mission, strategy and resources, then those short-term social opportunities can become long-term purpose and profits. But what if they are not so aligned? What is the company sacrificing by chasing fleeting social opportunities? What happens when the current window of opportunity closes and a new issue arises? Resources – human, financial and natural – are limited and using limited resources to chase a fleeting moment is likely to have long-term, negative consequences. The key to turning shortterm opportunities into long-term profits is to authentically align their investments in these new opportunities with their long-term mission and strategies [21].

#### **4.2 Examples from the early 2020s**

The Covid-19 pandemic obviously created many challenges for businesses of all sizes. We saw the disastrous consequences most vividly with start-ups and small businesses; while some entrepreneurs saw the social and economic shocks as opportunities to create a new venture, creating a sustainable business was particularly

challenging during 2020 [22]. But, during 2020 and 2021, we know that business leaders were faced with the confluence of multiple challenges, the likes of which they had never seen before: the Covid-19 pandemic, systemic racism and the continued escalation of the Climate Crisis. As 2021 progresses, we know that the business opportunities we experienced in the recent past may or may not be the same opportunities we see in the future. Companies need to ignore sunk costs. Companies need to develop systems and strategies that are capable of creating economic value in the future, regardless of the societal opportunities and challenges that come their way.

Businesses exist to create economic value. Of course, there are many ways to define economic value. Some companies may view economic value in purely financial terms; some may view economic value as relating to broader social welfare; others may view economic value in more specific and personal terms, such as a third-generation family business owner wanting to pass the business down to the fourth and fifth generations. In competitive markets, the dynamics that lead to financial value, to broader social welfare and to family business succession become the same. Those dynamics relate to people and resources; economics is the science of allocating resources to be used by people. However, many companies are not focused on how to use social dynamics to create value for people. Companies that fail to focus on the social dimension are failing to focus on their future.

For many people around the world, the dominant economic event of 2020 was the Covid-19 pandemic and how it affected health, wealth and relationships. For others, the Black Lives Matter movement and devastating climate crisis were the dominant economic and social events of 2020. These events combined to make 2020 a most unique year. And a unique example can help us understand how these different social issues may be more connected than they at first seem. During the year 2020, American electric vehicle-maker Tesla saw its stock price increase by 743%. Tesla's market capitalization was more than double the combined market value of Ford, General Motors, Toyota and Honda. Why?

Of course, nobody knows why. But we do know (or assume) that stock prices represent the present value of expected future cash flows and value-creation. Stock prices are a bet on the future of a company. Tesla's corporate mission is "to accelerate the world's transition to sustainable energy." Since becoming a listed company in mid-2010, 2020 was Tesla's only profitable year; and 2020 gave the company 4 of its 10 profitable quarters since mid-2010. Maybe Tesla's stock price performance in 2020 was a result of newfound profitability and investors updating their forecasts and narratives about the company's future.

But perhaps the 743% stock price appreciation was directly a result of the economic, social, governance and environmental challenges the world faced in 2020. Perhaps these events illuminated Tesla's unique strategies and competitive advantages – and those are the factors that investors were updating in their forecasts and narratives. If we accept that that the Covid-19 pandemic was (at least indirectly) a result of our increasingly globalized business worlds and lifestyles, the narrative of business success in the future may include the costs and benefits of our business relationship with the natural environment. As business encroaches on the natural world, we increase the probability of the natural world fighting back and presenting us with ever more challenges we were not prepared to deal with. In order to prevent another Covid-19 and another 2020, we may need to change our preparedness for dealing with another deadly virus or our relationship with nature. Thus, an investment in Tesla might represent a bet on us changing our relationship with the natural world and how we use our natural resources.

#### *From Corporate Social Opportunity to Corporate Social Responsibility DOI: http://dx.doi.org/10.5772/intechopen.105445*

We are not pretending that Tesla's 2020 stock price appreciation was entirely driven by Covid-19 related enlightened expectations of a changing world. There are many other factors that could have driven investors towards the stock: more effective leadership, more efficient production, greater access to recharging stations. We know that Tesla's mercurial CEO, Elon Musk, has the potential to affect the company's stock price negatively or positively with a simple tweet or interview.

But what may have changed in 2020 is investors gaining a greater appreciation for the role that environmental, social, leadership and strategic factors play in each company's success. During 2020, these factors each became significantly more important to individual stakeholders and the societal institutions entrusted to serve individuals' values. And some investors expect Tesla to deliver on aligning our values with the world we want in the future. Investors like to talk about ESG investing, looking at the ways that Environmental, Social and Governance issues; but we generally only consider one of the 3 letters at a time when we analyze each company. We rarely consider a company's combined E, S and G dimensions. Tesla, however, may be one of the few companies and investments where we really see the E, the S and the G in ESG being integrated.
