Facebook, BlackRock, and the Case for Purpose-Driven Companies

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Last week, Facebook CEO Mark Zuckerberg announced that his platform needs to change. Community feedback has shown that public content has been “crowding out the personal moments that lead us to connect more with each other,” according to Zuckerberg. As a result, the company says it will be focusing more on promoting posts from friends rather than from media outlets, thereby leading to more-meaningful social interactions.

While the long-term consequences for users, journalists, media, friendships, Facebook itself, and the future of democracy (see: fake news) are uncertain and hard to judge, there are some lessons we can draw from the announcement.

Corporate Purpose Requires a Credible Commitment

There is a lot of talk about purpose in business. Purpose-driven companies have been shown to outperform their peers over the long term. They can reap benefits because of higher employee productivity and customer loyalty and satisfaction. But purpose-driven companies are also hard to come by. Why is that? Because purpose is costly. At the very least, it requires a credible commitment to that purpose. And credible commitments are those that come at a cost; in the absence of a cost, all companies can claim that they are purpose-driven, and as a result the commitment stops being credible.

The stock market reacted negatively to the announcement Friday, costing Facebook almost 5% of its market capitalization, or about $27 billion. It personally cost Zuckerberg more than $2 billion — hence the credible commitment to Facebook’s purpose to “develop the social infrastructure to give people the power to build a global community that works for all of us.” The fact that Facebook would undertake such a commitment knowing full well the costs is one more data point suggesting that Facebook could well turn out to be a purpose-driven company, and another lesson for business leaders that building purpose-driven organizations requires more than cheesy statements and “goodwashing” efforts.

Investors Are Paying Attention

The announcement came because of increasing pressure on Facebook to understand and manage its impact on society. Critics argue that the rise of fake news and propaganda on social media is threatening democracy. This is another indication that developments in society represent financially material events for a company’s performance, thereby raising the need for high-quality investor-relevant data that assesses a company’s efforts to mitigate negative impacts and increase its positive impact.

An increasing number of investors are therefore integrating environmental, social, and governance (ESG) data when they make investment decisions. Research has already shown that firms improving their performance in material ESG dimensions subsequently outperform their peers.

Short-termism

Zuckerberg announced that this is a move that could well have short-term financial costs but long-term benefits for the business. The former seems to have outweighed the latter in the market’s reaction to the announcement, with the stock declining 5% same day.

Many business leaders have talked about the phenomenon of short-termism, and research has documented that short-termism holds back good corporate intentions. But the idea that business leaders are at the mercy of a market obsessed with short-term results is dubious. In most cases, business leaders themselves are at fault by failing to properly communicating the long-term benefits of such actions, which, if done well, build trust in leadership. Promising long-term benefits is not enough. Time-bound targets based on metrics and a clear strategic plan could do the trick, though. Unfortunately, most business leaders still do not walk the talk when it comes to being long-term-oriented.

That may change as more investors signal their commitment to long-termism and corporate purpose. If Facebook was last week’s indication that corporate leaders care about more than short-term profits, this week’s comes from BlackRock chair and CEO Larry Fink, who on Tuesday sent a letter to the companies his firm invests in demanding that “every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” In a recent article, I describe this role as a steward of the commons.

Mark Zuckerberg seems to agree, and seems willing to pay a price to demonstrate it.