People vs Profit: Do We Really Have to Choose?
"Article originally hosted and shared with permission by The Christian Economic Forum, a global network of leaders who join together to collaborate and introduce strategic ideas for the spread of God’s economic principles and the goodness of Jesus Christ. This article was from a collection of White Papers compiled for attendees of the CEF’s 2019 Global Event.
by Marshall Everett
Anyone working in the secular marketplace has faced the dilemma at one point or another: What should we prioritize, profit or people? Is our ultimate responsibility—in whatever capacity we are operating—to the shareholders of the business? Or, as Christians, should our highest priority be to love and serve those around us without regard for the bottom line (I mean, isn’t that what nonprofits are for)? And it seems logical, doesn’t it, that at the basest level, these two priorities are incompatible? Either you are going to care for people (which usually costs something) or you are going to return every possible dollar back in profit.
This has certainly seemed to be the case for most of our careers. We have seen rents raised so aggressively that people lost their homes, and eviction was chosen over the option of providing a modified payment plan. We saw too much leverage used to squeak out an extra dollar, only to result in loss of jobs and principal. And we have seen highly capable employees lost due to cultures that treat them like machines. In almost all of these circumstances, decisions were being made in a conference room or while looking at a spreadsheet, and the human individual or family on the other side of the decision was rarely ever thought of:
“Evicting and relisting will result a higher recurring rent than working with this tenant.” Meanwhile, the family that will have nowhere to sleep remains unnamed.
“The IRR will improve if we push leverage as high as the bank will let us.” Meanwhile, the human cost of risky investing is not factored in.
“Steve did not meet the target, so I guess we have to let him go.” Meanwhile, we never to stop to ask who God made Steve to be and whether or not his current role aligns with his God-given talents.
But we have also seen glimmers of hope along the way. We have seen untapped potential realized when employees were loved and intentionally developed in accordance with who God made them. We have seen how radical transparency with investors has led to a counter-cultural level of trust between investors and operators. And we have seen, occasionally, families restored and kept off the street by choosing a payment plan instead of eviction. Beyond personal anecdotes, the histories of world-class companies like Hershey Chocolate and Guinness Brewing also make one wonder whether or not the dichotomy we seem to be living in is really the truth.
So, is it really true, as seems to be the norm, that in search of the almighty dollar, there has to be some collateral damage along the way? Or, as in a few but compelling examples, is it possible that the same, if not better, financial results can be achieved while loving and serving everyone along the way? And if so, what are the structures needed to prove the simple, yet profoundly compelling, thesis that financial returns and human flourishing can be synergistic instead of antagonistic?
It’s a question that many of us have been wrestling with for years. We fundamentally believe that, as investors or operators, we are responsible for creating a fair return on any dollar entrusted to us. At the same time, informed by our faith and our calling to love others more than ourselves, we want to spend our time and resources on endeavors that truly better the lives of the people involved.
Rather than feeling stuck between a rock and a hard place, we believe these seemingly conflicting ideas are different sides of the same coin. You do not have to choose between people and profit. Strong economic performance leads to greater capacity to make a positive impact on people. Thriving people who feel loved and valued lead to better financial returns for the companies they work for, shop from, sell to, live near, and invest in.
It sounds nice right? But if it is true—if we really can approach profit and people synergistically and believe that making money and loving people can be part of a self-reinforcing virtuous cycle—why don’t we see more of it in this broken world we live in. Why, even in companies that put much lip service towards being “people first,” do we still see people commoditized and devalued? And why do we still—especially in Christian circles—view the nonprofit sector as the only real career option for those that care deeply about loving and serving others in line with the gospel?
Within the investing world, two newer ideas have taken hold that seem to be addressing this concern. However, upon closer evaluation, they both fall short of truly breaking the old dichotomy of people vs profit. The first is the ESG (Environmental, Social, and Corporate Governance) investing movement. While there are many great things one could say about the ESG movement, it isn’t fundamentally about people on an individual level. Equity and diversity goals, environmental sustainability goals, and corporate governance goals are all worth pursuing, but lots of people could still be hurt and used while pursuing these goals. If you care most about flourishing families, healthy minds, strong bodies, fulfilled spirits, engaging careers, and thriving relationships for all the humans involved, ESG still leaves something to be desired.
The second is the impact investing movement. Again, it is a powerful movement that has done an incredible amount of good for the world. However, most impact investing platforms include the idea that some level of decreased returns are required in order to accomplish the social goals of the investment. These so-called concessionary funds are willing to leave some value on the table in order to make an impact. Again, these are valuable and important platforms that are doing a lot of good, but they aren’t going so far as to break the people-vs-profit dichotomy; they are choosing to sit on the side of people and are willing to sacrifice some profit. However, we believe that we can push even farther, to a point where investments perform better because people and profit are seen as complementary.
Human thriving and financial performance can work in harmony. However, companies have to create—and work hard to maintain—an environment where this symbiotic relationship can work. Investing deeply in people will lead to better economic returns, but it often takes time to see the full return on investment. For example, spending $100k/yr. on drug and alcohol prevention and abuse programs will likely lower EBITDA by about $100k in the short term. But it might reduce employee turnover and sick days in the long term, saving the company far more than the program costs. Companies must exist within a structure that allows decision making based on long-term impact. For both private and public companies, the most common forms of ownership do not incentivize long-term value creation. Instead, short-term profit generation is what matters most, for owners and often for the compensation packages of management teams. The biggest hurdle to an environment where people and profit exist in a virtuous cycle is the propensity for short-term thinking in most capital structures.
For public companies, the need to make quarterly earnings targets and the ever present and constantly fluctuating stock price incentivize management to do whatever will make the stock price appreciate. Investors evaluate management performance based on stock market appreciation, and management teams are typically incentivized to meet short-term stock price goals. In privately owned companies (both private equity backed and venture capital backed), it is the fund life cycle that is the primary culprit of short-term thinking. Most funds are structured with predetermined end dates, typically less than 10 years. The value creation and realization must all happen within that window. Moreover, fund manager incentives are typically IRR based, incentivizing managers to realize profits as quickly as possible. For private, family-owned businesses, the propensity to be short or long-term focused resides primarily with the main owner/CEO. Whether he or she personally cares about long-term value or short-term profit is usually the critical factor in whether the business is existing within, or breaking free of, the people-vs-profit dichotomy. Thus, privately held, family-owned businesses often offer the biggest beacon of hope when led by a long-term focused, caring leader.
So, what to make of all this? Fundamentally, human flourishing and financial profit are synergistic over the long term; however, the ownership structure of most companies does not incentivize long-term thinking or decision making that prioritizes long-term value creation. Thus, we have been fooled into believing that we must choose between profit and people, when in reality, we should be talking about what kinds of structures can be created to incentivize the right kind of long-term, people-AND-profit decision making. A personal favorite is the private, evergreen holding company structure, but that is certainly not the only solution.
If we, as a group of Christian investors and operators, can work hard to creatively eradicate short-term thinking from our organizations, we will be able to break the people-vs-profit dichotomy and show the world that when you care deeply for the humans involved, companies will thrive financially.