Hierarchy of Investing Insights: Maslow’s Pyramid Applied to Shareholder Returns
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.
