Maslow’s Pyramid Applied to Shareholder Returns
Not only are profit and purpose not opposing objectives, but in fact the most successful companies cannot maximize one without the other
Image 1: Patty at Goalkeepers 2023 Event in New York
Last week I had the privilege of attending Goalkeepers 2023, an annual event organized by the Bill & Melinda Gates Foundation to honor and encourage those working to achieve the UN’s Sustainable Development Goals (SDGs). It was an informative and inspiring call to action, recognizing major progress in the past decades but also acknowledging the current slowdown and challenges in meeting the goals, especially in maternal/child health and sustainability. While there were many highlights, I wanted to share one that especially resonated with me: the interview with founder and CEO of Chobani, Hamdi Ulukaya.
Image 2: Hamdi Ulukaya, Founder & CEO of Chobani at Goalkeepers 2023 Event
He immigrated from Turkey in 1994 and in 2005 began building a leading yogurt brand – a private company with $3 billion in annual revenues and meaningful profits. He has remained independent, never taking outside capital nor selling to a large CPG company. In addition to its business success, Chobani is known for a business philosophy that treats all stakeholders exceptionally well (notably pays above market wages and 25% of employees are refugees). Discussing how he became the “anti-CEO” and broke the rules, he explained he had never thought about business nor known anyone who studied or was in business. As a result, he had no sense of what the rules were. And when he started the company, he just focused on making the best yogurt and doing things he thought made sense, like having happy and motivated employees. As an @HBS graduate myself, I laughed (a bit uncomfortably) at his joke that those who went to Harvard might have a hard time breaking the mold.
He went on to explain (I paraphrase slightly): “there are currently two schools of thought, the traditional (1) business exists solely to maximize profits, and (2) businesses have responsibility to all stakeholders. These are considered opposing views. But I think they are one and the same, it’s just where you decide to focus. If you care about all stakeholders, profits will be maximized. And if you care about long-term profit maximization, you will realize you must care for all stakeholders”.
I found this an incredibly crisp articulation of something similar I’d been thinking about for years which led to my focus on investing in companies with a positive impact for our world – the sense that not only are profit and purpose not opposing objectives, but in fact the most successful companies cannot maximize one without the other. Here is my full post from 2021.
Figure 1: Modern Investing Theory — Superior, Sustainable Returns are at the Top of the Pyramid
It took me over 20 years to realize this: profits and purpose are not only not in conflict with each other, they are actually highly aligned. You can have profits without purpose and you can have purpose without profits, but to maximize both they MUST co-exist. I hope this explanation will nudge some more people to put their time and money towards the issues that move the needle on the big issues that matter.
Many of today’s investors and businesspeople – including myself- grew up with the understanding that maximizing shareholder profit was the sole objective of business, and those profits could then be individually directed towards whatever noble (or not) purpose the shareholder desired. This had compelling logic including that it was easy to measure and avoided debate amongst shareholders that may disagree on how to best serve society. However, this view has been slowly eroding as the issues we face become more complex, as business takes on an increasingly important role in our society, and as the various stakeholders that make businesses prosper refuse to align with businesses which do not share or live their values.
In the current mainstream thinking, businesses must consider the repercussions of their actions on society and address them in some manner, even if this costs some portion of the financial profits. At the lowest level of the pyramid (see Fig. 1), legal and moral considerations enter the equation once basic needs (e.g. profits) have been met. Immediately thereafter, customer backlash and regulatory threats are often sufficient incentive to motivate these changes. At a higher level, the desires of the companies’ workforce and local community drive additional pressures, and in many cases the true well-intentioned and/or psychological interests of the company’s leadership may set the tone for an “enlightened” stewardship that considers all stakeholder value in the optimization equation.
However, I believe there is one additional level which applies especially in long-term planning and investing, and has yet to fully permeate mainstream thinking: optimizing for societal value actually IMPROVES the risk-reward equation and will lead to the biggest, most defensible and valuable businesses in the long term. If you can cure cancer or solve climate change profitably, it’s easy to envision astronomical value creation.
Note that in my view optimizing for societal value includes delivering profits. Long-term value at scale cannot be sustained if the economics of the product or service do not work. But the tip of the pyramid is comprised of companies that serve a real need profitably over time (Tesla delivering electric cars, Amazon enabling e-commerce, Moderna delivering a COVID vaccine, etc.).
Nowhere is this easier to crystallize than in the highly illiquid venture asset class. It’s hard to predict what the world will value in more than a decade, but it’s more likely that it will value companies that enhance our standard of living rather than destroy it, and this underlies my investment thesis. I believe the highest returns and progress at scale are achieved at the intersection of tackling the big issues of our time (which are usually attached to big addressable markets), innovations to address them in novel ways (with a go-to-market that creates sustainable barriers to entry), built by teams with the deepest motivations to reach the tippy-top of the pyramid.
