In 1935, Rob Johnson, the CEO of pharmaceutical company Johnson & Johnson, wrote an essay addressed to his fellow CEOs. “It is to the enlightened self-interest of modern industry to realize that its service to its customers comes first, its service to its employees and management comes second, and its service to stockholders last,” he argued. “It is to the enlightened self-interest of industry to accept and fulfill its share of social responsibility.”
Those sentiments are hard to reconcile with today’s scandal-plagued, short-term-profit-oriented Johnson & Johnson. Nor is the fate of Rob Johnson’s beautiful dream unique. The way Johnson & Johnson lost sight of its mission is just one of many stories that James O’Toole, a professor emeritus at the University of Southern California’s Marshall School of Business and the founding director of the Neely Center for Ethical Leadership and Decision Making, tells in his new book, “The Enlightened Capitalists: Cautionary Tales of Business Pioneers Who Tried to do Well by Doing Good.”
It’s a timely work. Right now, amid the widespread disillusionment with capitalism that came out of the financial crisis and the popular progressivism expressed by Rep. Alexandria Ocasio-Cortez, among others, there’s a lot of talk that sounds just like Johnson did almost a century ago. Impact investing, social responsibility, conscious capitalism, double bottom lines, B corporations — these are all variations on the idea that a business should be about more than its profits, that capital needs to provide more to society than a return to investors. And we all seem to think this is something new, a sign of our changing and perhaps more idealistic times.
But as O’Toole demonstrates, it is not new at all. While his book is not an easy read — he has never met a detail he doesn’t like — it offers important insight, especially for anyone who thinks the kind of change we seem to want will be easy. Back in the 1970s and 1980s, many observers, including O’Toole, believed that such seemingly common-sense practices as caring about employees and the environment were about to become business as usual. Instead, making a killing by any means necessary became the rule, and even those companies that were on a different path capitulated. “I still have egg on my face from the 1980s, when I advanced, as models to be emulated, twenty four American firms with impressive records of socially responsible, ethical and environmentally conscious behavior,” writes O’Toole. “Alas, today only three of those companies have maintained their admirable practices.”
The history of good intentions gone wrong dates back centuries. O’Toole tells it through character sketches, the first of which is of British businessman Robert Owen, who some 200 years ago, amid the horrors of the Industrial Revolution, tried to treat his mill workers humanely, giving them decent housing and access to education. He was mocked and criticized, his plans eventually failed, and he died unhinged and essentially bankrupt. (“A sad bad end,” O’Toole writes. Indeed.) At one point, O’Toole recounts, Ralph Waldo Emerson asked Owen: “Who is your disciple? How many men possessed of your views will remain after you to put them into practice?” Owen answered, “Not one.”
And so it mostly goes, from J.C. Penney to William Lever (Unilever) to William Norris (Control Data) to Edwin Land (Polaroid) to Milton Hershey (Hershey) to Anita Roddick (the Body Shop) and many more. Those who tried to use their companies to make money but also to provide good wages, good working conditions, and some degree of parity between management and employees have, for the most part, failed, especially over the long term. That might be because of managerial incompetence, successive leaders who don’t want to follow the same path, a sale or pressure from shareholders. The reason varies. The outcome doesn’t. What O’Toole writes about Johnson & Johnson — “yet another sad, bad end” — applies to many of these stories.
There are a few bright spots. O’Toole profiles a $3 billion maker of welding products, Lincoln Electric, which he calls the “nation’s greatest continuing corporate success story.” Founder James Lincoln, who ran the company from 1920 to 1965, “firmly believed the world’s greatest untapped resources were the abilities of the millions of undereducated and untrained men and women trapped in social systems and work organizations in which they had no opportunity to develop, or exercise, their potential.” Since 1947, Lincoln Electric hasn’t laid off a single worker, and for more than 80 years it has paid bonuses to its workers averaging 40 to 100 percent of their annual salaries.
But even Lincoln was a failure in the sense that he did not inspire widespread emulation. “James Lincoln spent a great deal of time attempting to explain his company’s unusual practices to all manner of doubters, skeptics and critics, few of whom he appears ever to have convinced,” writes O’Toole. “What he would not — or could not — acknowledge was the reality that other business leaders were not interested in adopting his system.”
Lincoln wasn’t alone. Almost all of the executives O’Toole profiles were proselytizers. None of them won converts.
Ironically, their attempts inspired mostly opposition, including from some surprising sources like labor leaders, who have seen corporate do-goodism as a sneaky, manipulative way to get more out of workers or as a paternalistic imposition of a leader’s values on his employees, customers and the public. As one wag wrote about Hershey, Pa., the idyllic town built by Milton Hershey to provide wholesome housing and education for his factory workers, “Tell me truly, tell me please, is Hershey a town, or a disease?” In 1994, the Harvard Business Review published a vicious critique of Roddick’s environmentalism, charging, among other things, that it was just a cynical ploy designed to build a strong brand image for the Body Shop.
Even if executives did succeed during their tenures, the practices they tried to ingrain in their companies proved largely unsustainable after their departures. Herman Miller under CEO Max DePree — the third DePree to run the company — was both highly profitable and lauded for its social responsibility, but the first non-family CEOs quickly destroyed it all. “A shockingly bad, and surprising, end,” O’Toole calls this one. All companies “lose their souls,” a devastated DePree told O’Toole.
It’s even unclear what Lincoln Electric’s long-term fate will be. Its “protective shield is in the process of disintegrating,” writes O’Toole — in large part because in 1995, Lincoln Electric sold shares to the public.
What O’Toole calls the “buzz saw of investor resistance” is often the biggest obstacle to any corporate mind-set other than a relentless focus on profits. The belief that business should be only about making money for investors stretches all the way back to the late 1300s and the Tuscan Francesco Datini, also known as the Merchant of Prato, whose motto, imprinted on many of his documents, was “In the name of God and of profit.”
Fast-forward to more modern times. In 1919 the Michigan Supreme Court ruled that Ford was not allowed to raise employee wages, on the grounds that “a business corporation is organized and carried on primarily for the profits of the stockholders.” O’Toole notes that despite the fact that that case has never been cited by the Delaware court that hears most cases related to corporate governance, it nevertheless has become “gospel” to investors.
Thus it is that the companies that adhere to broader missions are privately held. Only four of the companies that O’Toole covers have managed to sustain their virtuous practices for more than two generations of leadership. Two are owned by trusts that are legally bound to preserve the founders’ values, while the other two are largely owned by family foundations and employees. This is both encouraging — it’s possible to sustain values! — and also discouraging. The vast bulk of wealth is in shareholder-owned companies, so how meaningful are virtuous practices if they can only exist on the fringes, where the real money is not?
The bigger question, of course, is whether all of today’s talk about social responsibility means that the future might be different than the past. Count O’Toole a skeptic. He writes, “It would require a prodigious degree of optimism that I am incapable of mustering to conclude that the behavior of corporate leaders will appreciably change in the near future.” Memo to us all: Beware pretty words.