Deeply Responsible Business: A Global History of Values-Driven Leadership

DEEPLY RESPONSIBLE BUSINESS

A GLOBAL HISTORY OF VALUES-DRIVEN LEADERSHIP

GEOFFREY JONES

HARVARD UNIVERSITY PRESS

Cambridge, Massachusetts

London, England

2023

Copyright © 2023 by the President and Fellows of Harvard College

All rights reserved

Jacket design by Sam Potts

Cataloging-in-Publication Data available from the Library of Congress

ISBN: 978-0-674-91653-1 (alk. paper)

978-0-674-29298-7 (EPUB)

978-0-674-29299-4 (PDF)

CONTENTS

Introduction

Profit or Purpose?

PART I: A QUESTION OF RESPONSIBILITY

1

The Value of Human Dignity

George Cadbury and Quaker Capitalism

2

Redistribution of Power

Edward Filene, Retailing, and the Creation of Credit Unions

3

Promoting Choice and Facing Dictatorship

Robert Bosch in Imperial and Nazi Germany

4

The Challenge of Latecomer States

J. N. Tata and Shibusawa Eiichi

PART II: TURBULENCE

5

Educating Future Leaders

Wallace Donham, Harvard Business School, and the Push for Ethical Capitalism

6

Building a Nation, Addressing Disparities

Kasturbhai Lalbhai in Colonial and Independent India

7

Modest Consumerism, Urban Blight, Tech Solutions, and the Quest to Improve Society

PART III: NEW PARADIGMS

8

The Rise of Values-Driven Businesses

Anita Roddick and the Challenge of Growth

9

Social Three-Folding

Biodynamic Farming and How to Build a Flourishing Community

10

From ESG to B Corps

Benchmarking and Scaling Virtuous Practices

Conclusion

Business and a Better Future

NOTES

ACKNOWLEDGMENTS

INDEX

INTRODUCTION

PROFIT OR PURPOSE?

On June 4, 1927, a crowd of four thousand gathered for a large ceremony to inaugurate a new campus for the Harvard Business School set apart from the historical Harvard campus in Cambridge across the Charles River in Boston. This was the Roaring Twenties, a prosperous time for the United States, and the campus was financed by a $5 million gift ($75 million in 2021 dollars) from George F. Baker, the former president of the First National Bank of New York, later known as Citibank. The market value of the New York Stock Exchange had risen 20 percent per annum since 1922, and concentration of wealth was approaching a level not seen again until the 2000s.¹

At some point in the proceedings, the dean of the Business School, Wallace B. Donham, gave a short address that was more of a warning than a celebration. Scientific advances may have opened up new opportunities for happiness, he observed, but these would not be secured without a higher degree of responsibility. Business leaders, he went on, needed to develop social consciousness, accompanied by competently equipped intelligence and wide vision.²

In a longer article published in the Harvard Business School Alumni Bulletin eight months later, Donham further clarified his vision of what he called the social significance of business. He wrote:

Unless more of our business leaders learn to exercise their powers and responsibilities with a definitively increased sense of responsibility towards other groups in the community … our civilization may well head for one of its periods of decline.… Political leadership is on the wane while national and international problems assume more vital significance. The stake of the ordinary man in the material developments of the time is large, but these material things have apparently not produced a higher degree of happiness.… On all sides, complicated social, political and international questions press for solution, while the leaders who are competent to solve these problems are strangely missing. These conditions are transforming the world simultaneously for better and for worse. They compel a complete reappraisal of the significance of business in the scheme of things.³

The warning of a threat to civilization at the height of an economic boom might have seemed eccentric to the crowd gathered to celebrate the opening of the Allston campus, and to readers of the Alumni Bulletin at the time. In retrospect, his words were prophetic. Twenty months later, the Wall Street crash would set off a massive economic depression that spread across the globe, with profound consequences, including the rise of the Nazi Party in Germany.

Donham’s injunction to business leaders was bold. He was not asking them to donate more money to charity to help the less fortunate. Instead, he called for business to fill a perceived leadership void and assume responsibility for saving civilization. His admonition appears to have had limited effect. The Wall Street crash prompted some amount of self-reflection among business leaders, but there were no radical changes in business practices. It was President Franklin D. Roosevelt’s New Deal that aspired to change how the American economy worked through public spending and new social policies such as the introduction of social security. These policies were opposed by all but a handful of the leaders of large corporations. Over the years influential voices, some of them members of the faculty of the Harvard Business School, others farther afield in the windy city of Chicago, would insist that a business’s first responsibility was to its shareholders and that it was a mistake to suggest that business leaders should seek to play a part in righting society’s wrongs. For several decades, from the 1980s until recently, these voices became the dominant ones.

Donham was neither the first nor the last person to call for business leaders to exercise a positive social impact beyond making profits. Almost one hundred years later, in the aftermath of another shock to the global economy, identical calls are frequently raised in the context of the looming ecological crisis, societal inequalities, and discussions of how best to shore up our faltering democracy. Dominic Barton, the global managing director of McKinsey, denounced short-term thinking by companies obsessed with quarterly reporting.⁴ Companies must benefit all of their stakeholders, Larry Fink, the chief executive of BlackRock, the world’s largest asset manager, starkly declared in his annual letter to CEOs in 2018, including shareholders, employees, customers, and the communities in which they operate.⁵ In 2019, 181 chief executives from the Business Roundtable, an association of leaders of the largest US corporations, signed a statement pledging to run their companies for the benefit of all stakeholders—customers, employees, suppliers, communities, and shareholders.⁶

There is reason to be skeptical whether these recent calls for enhanced responsibility will be answered any more than were Donham’s. Global business today is by and large not only relentlessly profit seeking but also well skilled in warping institutions of government and law to serve corporate interests. The opening decades of the twenty-first century saw an extraordinary series of big-name corporate scandals in the United States and many other countries, and there is plenty of evidence of repeated ethical lapses across business systems. But an alternative movement is also gaining steam, supported by younger entrepreneurs committed to engaging with environmental and social inequities, that places purpose and social responsibility at the heart of their business model.

A wide range of critics have asserted that the problems of contemporary capitalism are systems-wide and pose major threats to society, the environment, and democracy.⁷ The giant philanthropic foundations created by multibillionaire tech entrepreneurs in the United States have been lambasted as a charade for rich business elites to dodge taxes and extend their control.⁸ Withering criticisms of contemporary capitalism have been joined by wide-ranging technocratic proposals to fix the entire economic system. Re-imagining Capitalism: Building a Responsible Long-Term Model, a collection published in 2016 whose editors include Dominic Barton, made the case for introducing major changes ranging from the institution of policy measures to reduce income and educational inequality to the elimination of quarterly reporting, the creation of a bigger role for long-term institutional investors like pension funds, and the establishment of incentives for company boards to act more like owners pursuing long-term value creation rather than short-term gains.⁹ Five years later, Harvard Business School professor Rebecca Henderson argued in Reimagining Capitalism in a World on Fire that management needs to become more purpose-driven and to pursue stakeholder approaches. She also called, among other things, for the financial system to be rewired to permit longer time horizons and for the wholesale renewal of civil society and government.¹⁰

In contrast to studies that seek to rewrite the rules of the game, including changing individual behavior—Henderson implores individuals to step outside their routines by eating less red meat, driving less, and becoming active in forcing corporations and politicians to be better citizens—this book argues that the best starting point for reimagining capitalism as a system is to reimagine business, as well as its social purpose. I have approached this ambitious task by looking at the history of business leaders who, since the nineteenth century and around the world, have pursued a broader social purpose than simply making profits and who have seen business as a way of improving society, and even solving the world’s problems. This may seem hopelessly naïve. But many of these businesses were successful, though financial success was not their only metric of achievement. These stories invite us to learn from history by asking certain key questions. What does a responsible business serving a social purpose really look like? What distinguishes these businesses from their competitors? What was the intent of business leaders who pursued social purpose? Is this a practical proposition? If such responsible businesses have existed in the past, why have they never become the norm? Does good business always, or ever, translate into good profits? Is business acting beyond its specific domain if it seeks to be beneficial to society? At a more fundamental level, we need to ask whether meaningful change on poverty or climate change can only come from governments.

This book takes as its starting point Donham’s call for individual business leaders to have a higher degree of responsibility and explores what this enigmatic phrase might mean today by looking at specific examples from the past two hundred years, when business leaders operating under radically different conditions have gone beyond narrow profit seeking in ways that Donham envisaged. I term these endeavors deep responsibility to distinguish them from the superficial rhetoric of corporate social responsibility—a language available to any corporation that sprinkles a few good deeds on top of its not-so-good works.

My central hypothesis is that deeply responsible business leaders are motivated by a set of values that shape their practices. For some, it is the bedrock of virtuous character in leaders that prompts them to act in a fashion that promotes human flourishing, a term the management scholar John Ehrenfeld has defined as the full realization of the human potential.¹¹ Honesty, fairness, loyalty, compassion, courage, and generosity are among the most important of these. These virtues are reinforced by practical wisdom, what Aristotle called phronesis, which enables the virtues of character to be exercised. The philosopher Alasdair MacIntyre has dismissed the possibility that a manager in a for-profit business could ever be virtuous.¹² My book will challenge that assumption. Meanwhile, Ikujiro Nonaka and Hirotaka Takeuchi’s The Wise Company argues that businesses have no place for virtue, because practical wisdom alone is the key. They find such practical wisdom most often in Japanese management, but my aim is to show it can be seen in many contexts.¹³

Perhaps the most influential critic of a purpose-driven business model was Milton Friedman, a Nobel laureate economist at the University of Chicago and apostle of the free market, who insisted in a widely cited article published in the New York Times Magazine in 1970, as the title proclaimed, that The Social Responsibility of Business Is to Increase Its Profits. The responsibility of corporate executives, Friedman argued, was to make as much money as possible while conforming to the basic rules of the society.¹⁴ Friedman’s view helped transform business leaders’ perception of their purpose and function not only in America but around the world. We will look at its impact and consider the arguments and evidence, in purpose-driven businesses, of those who fundamentally disagreed.

I describe another type of value driving deep responsibility as spirituality. As this might evoke misleading images of unworldly saints and raise doubts about the relevance of my historical cases to the present day, I would like to stress that my meaning is broad and holistic. While a minority of the business leaders studied in this book held strong religious beliefs, including Christian, Jain, and Muslim, others were influenced by secular philosophies or by their own life experiences. I define spirituality broadly as an implicit or explicit belief in the interconnectedness of all life and the planet that translates into a set of guiding principles and values.¹⁵ Such values promote genuine moral commitment, reduce fear of unknown futures, benefit others besides the individual actor, and encourage a holistic understanding of problems and solutions.¹⁶

This book will underscore three elements common among deeply responsible business leaders. The first is the choice of an industry with some form of social value that is not actively harmful. The second is the nature of the interaction with stakeholders beyond investors, including employees, suppliers, customers, and government. Deeply responsible business leaders do not engage in exploitative and harmful relationships with these stakeholders and choose instead to interact with purpose and humility. Finally, deeply responsible business leaders support communities. Community is a profoundly important component of human society, yet it is a construct that has often been undermined by the ongoing rise of individualism and the forces of globalization.

The business leaders I have chosen to profile should be seen as the progenitors of the socially responsible businesses of today. The important lessons, and valuable warnings, that these stories reveal are the subject of this book.

Varieties of Business Purpose and Responsibility over Time

Donham was not the first person to ponder the purpose and social responsibility of business. There is a long historical tradition of debate dating back to the social reform movements inspired by the social hardship that accompanied the Industrial Revolution, which many of the business leaders profiled in this book contributed to in important ways. One finds recurring themes, with the only constant being a lack of consensus. Certainly the view, widespread in the United States and many other countries from the 1980s on, that the sole purpose of business was to maximize value for shareholders was never dominant historically. Part of my aim with this book is to put that now-dominant view into historical perspective and to show that what many take to be an article of faith is in fact an extreme and problematic proposition.

Businesses of one sort or another have been around for millennia, long before modern capitalism, and so have questions about corporate ethics and responsibility, even if they weren’t expressed in that language.¹⁷ The greed of merchants and financiers has been an abiding concern across all societies, offending morals so deeply that bad business behavior is a feature of comic literature across cultures and proscribed by religious taboos. Merchants and financiers were rebuked in medieval Europe for feeling no responsibility for anything beyond their own selfish interests.¹⁸ Although it is hard to imagine today, the accounting historian Jacob Soll has written, guilt weighed heavily on medieval bankers and merchants.¹⁹ As modern industry emerged in eighteenth-century Britain, there were breathtaking examples of skullduggery and moral failure, as well as extravagant financial swindles like the South Sea Bubble of 1720. Fraud was a regular occurrence. But so was the push for greater benevolence.²⁰

It is widely thought that in The Wealth of Nations, published in 1776, the Scottish philosopher Adam Smith cast aside concerns about the destructive aspects of financial speculation, suggesting that making money should occur regardless of ethical considerations, ushering in a new age of capitalism.²¹ A businessperson’s pursuit of self-interest would, in Smith’s famous phrase, work through the invisible hand of the market to promote an end which was no part of his intention. Smith continued, By pursuing his own interest he frequently promotes that of the society more effectually than when he really intended to promote it.²² But Smith wasn’t really saying what many today want to believe he said. Often overlooked, especially recently, is that he excluded from this beneficial cycle of cause and effect a category of financial speculators he called projectors who sought extraordinary profits. He supported legal restrictions on interest rates for that reason and also made clear his disdain for gross inequality. No society can surely be flourishing and happy, he observed, of which the far greater part of the members are poor and miserable.²³ The economic historian Emma Rothschild has made it clear that the idea that Smith was simply saying, that unfettered market forces would lead to an optimal general equilibrium, is a skewed reinterpretation of his more complex and ethically informed views.²⁴

Smith mentioned the invisible hand only once in The Wealth of Nations, but in the 1790 edition of his first book, The Theory of Moral Sentiments, first published thirty-one years earlier, he addressed the subject at greater length and was more specific about the benefits it delivered. It led, he wrote, to nearly the same distribution of the necessities of life, which would have been made, had the earth been divided into equal portions among all its inhabitants.²⁵

While Smith’s first book stressed the distributional role of the invisible hand in later editions, the original volume featured an actor called the Impartial Spectator. This was an imaginary figure who might be equated with the conscience, within each person, that encouraged an interest in the fortunes and happiness of others.²⁶ The Impartial Spectator provided an ethical framework within which capitalist markets could best function.²⁷ The character nurtured the virtues—temperance, justice, prudence, courage, benevolence, love—that Smith saw as essential to building flourishing societies. This emphasis on the importance of virtue placed him in a philosophical tradition extending back to Aristotle.²⁸

The apocryphal father of capitalism’s belief that business had a responsibility to operate within an ethical framework was echoed by subsequent generations, although there were many different opinions on the form this responsibility should take. As industry transformed the world, changing social and economic conditions placed the question of the responsibility of business leaders in a stark light. Wealth soared in the industrializing West during the nineteenth and early twentieth centuries, but with gross inequalities as the owners of capital grew rich while urban factory workers found themselves living and working in squalid conditions with little to no social protection. A mixture of ethical considerations and self-interest encouraged some large employers to provide welfare benefits for their workforces. Others used their new wealth to engage in philanthropy.

Among the most radical proponents of philanthropy was Andrew Carnegie, who became hugely wealthy building a steel business in the United States. Carnegie argued in an essay entitled The Gospel of Wealth, published in 1889, that business leaders had a responsibility to use their wealth to promote social good. True to his word, he gave away almost all of his personal fortune of $145 million (around $10 billion in 2021 dollars) to establish the Carnegie Foundation in 1911, whose mission was to promote the advancement and diffusion of knowledge and understanding.²⁹ Meanwhile, another type of stark wealth gap cropped up between the industrial nations of the West and most of the rest of the world, which lagged in developing modern industries and became—often under Western colonial tutelage—suppliers of commodities and food to the affluent West.

The first three chapters of Part I of this book, A Question of Responsibility, consider how leaders of large businesses in Britain, the United States, and Germany responded to the central challenge of inequality that arose in this era. George Cadbury, Edward Filene, and Robert Bosch, the three central characters in these chapters, addressed different aspects of this broad challenge and proposed different solutions. They shared a commitment to radical ideas about the social responsibility of business and a willingness to execute on those ideas. They held a common commitment to ethical behavior and cared deeply about the welfare of their employees. Crucially, they also recognized the limits to what could be achieved by a single business enterprise and shared a belief that their responsibility extended beyond the borders of their firms. Shibusawa Eiichi, one of the central characters in Chapter 4 along with India’s J. N. Tata, was their contemporary, and shared these qualities and beliefs, though he was born in a country (Japan) that had not taken part in the first wave of industrialization. As a result, he pursued a vision of business contributing to a more affluent and more equitable future for his society.

While in Smith’s time thousands of small, family-owned firms competed mostly in their local markets, by the first half of the twentieth century some American and European businesses had become huge corporations that spanned the globe, dominating new industries such as automobiles and oil. This is the historical backdrop of Part II, Turbulence. Although family ownership remained important, a growing separation of ownership and control precipitated calls for the professional managers of large corporations to address perceived societal ills. These trends in the corporate world took place in the context of major political and economic shocks that reverberated around the world: two world wars, the Great Depression, the Cold War, and decolonization.

The three chapters in Part II explore developments in business responsibility in this new era. The growth of big business occasioned wide-ranging debates about the societal responsibilities, if any, of what had become very large organizations.³⁰ Chapter 5 examines the interwar endeavors to incorporate social and ethical responsibility into the education of the next generation of professional managers of large corporations, spurring the rise of the first business schools. This chapter focuses on Wallace Donham, the dean of the Harvard Business School whose speech opened this introduction, and the philosopher Alfred North Whitehead, who wanted the leaders of large corporations to think greatly about their role in society.

Chapter 6 considers the responsibility of business leaders in the interwar struggle for independence in India and the subsequent building of a new nation. It shows that the leader of the independence struggle, Mohandas Gandhi, held well-developed views concerning the responsibilities of business to all stakeholders, as well as a belief that it was its obligation to uphold the highest ethical standards. The chapter focuses on Kasturbhai Lalbhai, who built a profitable textile manufacturing business while supporting the independence struggle, operating it to high ethical standards and navigating the new complexities of independent India in a restrained fashion.

Chapter 7 brings us back to the United States after the end of World War II, when the view that business leaders had a social responsibility was becoming formalized. In interwar Britain, Quaker business families associated in particular with Benjamin Seebohm Rowntree had already become prominent proponents of the view that business should subordinate private gain to public good. Rowntree and his associates published powerful and influential books on the responsibilities of business.³¹ Oliver Sheldon’s The Philosophy of Management, published in 1923, was especially wide ranging. The third chapter, entitled The Social Responsibility of Management, maintained that the output of industry needed to be assessed by a double valuation of ethical and economic standards.³² In the wake of America’s victory in World War II, as a result of the desire to make capitalism as attractive as possible to offset Soviet propaganda in the Cold War, such ideas moved into the mainstream. Jeremy Moon has described Howard Bowen’s The Social Responsibilities of the Businessman, published in 1953, as the first study to formally examine corporate responsibility in detail.³³

The business leaders profiled in Chapter 7 operated at a time when the view that large corporations should be socially responsible was prevalent in the United States, although there were considerable disagreements as to what this actually meant. The chapter focuses on a number of cases of deep responsibility, including the automobile manufacturer George Romney, who pursued strategies to combat wasteful consumerism by promoting the compact car, and computer pioneers William C. Norris and An Wang, who used their businesses to provide employment and other opportunities to people from impoverished urban neighborhoods.

Part III of this book, New Paradigms, addresses this recent era, when shareholder capitalism was the norm. Milton Friedman’s skepticism about the social responsibility of business did not operate in a vacuum. He was a prominent figure in the Chicago school of free-market economists who made the case for laissez-faire capitalism, extolling the virtues of relying on unfettered markets with minimal government intervention. Two economists working in this tradition, Michael Jensen and William Meckling, developed agency theory, which saw shareholders as principals who hired executives as their agents, whose purpose was simply to maximize financial returns for their principals. Executives were to be incentivized by stock options, focusing their minds on share prices and stock buybacks. Although during these decades corporations increasingly proclaimed their commitments to sustainability, the assumption that the purpose of business is to maximize shareholder value spread widely. Accompanying these developments were broad shifts in the political economy, as, beginning in the 1980s, many governments liberalized and deregulated their economies, perceiving the market rather than public policy as the most efficient means of wealth creation.

The chapters in Part III feature business leaders who sought alternative paradigms to shareholder value and agency theory, instead stressing the broader social responsibilities of firms. Chapter 8 looks at a cohort of self-identified values-driven businesses that flourished during the 1970s and 1980s and reflected the new belief that markets were better placed than governments to solve societal ills, but disagreed profoundly with the view that the purpose of business was to maximize shareholder value. Instead, the founders of businesses like Patagonia, Ben & Jerry’s, and The Body Shop believed that a for-profit business could be a vehicle to achieve a more just and sustainable world. The focus here is on Anita Roddick, whose beauty retail business The Body Shop became synonymous for a time with radical social and ecological responsibility of business, though it was later shown that her impact in raising awareness of social and environmental issues was more laudable than some of her business practices.

A recurring issue in many chapters is the reliance on founders or charismatic individual business leaders to ground a vision and practice of deep responsibility in their organizations. This often raised the challenge of sustainability once that individual retired or otherwise left a firm, or if the firm sought access to finance from outside investors or the capital market.

The final two chapters consider strategies to build systems and institutions in which individual deeply responsible business leaders and their firms could find validation and support. Chapter 9 considers the oldest endeavor to build such a system. The focus is on an Egyptian biodynamic food business created by Ibrahim Abouleish and a biodynamic tea business in Darjeeling, India, developed by Sanjay Bansal. They were among the contemporary manifestations of a set of businesses founded since the 1920s under the influence of Rudolf Steiner’s Anthroposophy. This movement experienced considerable growth beginning in the 1980s and played a formative role in emergent sectors such as organic food and sustainable finance.

Chapter 10 turns to more recent efforts to institutionalize deep business responsibility by defining it, measuring it, benchmarking it, and developing communities with its value. Here I will look at environmental, social, and governance (ESG) investing, pioneered by Joan Bavaria and others; the B Lab Movement and especially its important Latin American outgrowth, Sistema B; the Economy of Communion; and the recent momentum behind diffusing and supporting the steward-ownership model.

My aim is to provide concrete examples of deeply responsible business leaders operating at different times and in different contexts. This is not a textbook suggesting how to reimagine such a complex system as capitalism. My concern is rather to show how individual efforts to pursue what Donham called an increased sense of responsibility have succeeded and failed, and why. There is no boilerplate model for such leaders. Deeply responsible business leaders are regular human beings with all the foibles of people in general. Some are inspirational, but some of the experiments in social purpose examined here were not successful, and some were not sustainable. In some cases, virtue signaling was not borne out by virtuous practices.

The rich historical evidence presented here will do a service if it punctures facile assumptions that doing good will necessarily be good business. Pursuing profits and purpose is never easy, and sometimes the two goals are in conflict. I hope, however, to show that deep responsibility is not an idealistic fantasy but rather an essential path for the future.

PART I

A QUESTION OF RESPONSIBILITY

CHAPTER 1

THE VALUE OF HUMAN DIGNITY

GEORGE CADBURY AND QUAKER CAPITALISM

Britain, as the first industrial nation, was also the first to see the massive social and economic changes caused by industrialization. Small-scale craft manufacturing had taken place in rural cottages and workshops, but the new manufacturing industries depended on factories operating in urban areas. Factory workers received little, if any, extra income from the first stage of industrialization. Between 1770 and 1830, there was no rise in average real wages, and working and living conditions were grim. Twelve-hour workdays were the norm. Laborers worked under far more rigid supervision than had previously been the case, as employers needed a disciplined workforce if factories were to function. Child labor was widespread. There was almost no state-level protection from exploitation. It was only in 1875 that Britain passed legislation controlling the employment of children to clean factory chimneys, and in 1891 that the minimum age of employment for a factory job was raised to eleven. The poor and destitute were placed in workhouses after 1834, where they toiled under brutal conditions managed by so-called guardians, who were often local business leaders. Because men, women, and children were assigned different living areas, families were split up.

These social conditions could prevail in part because Britain was a highly constrained democracy where voting was limited to male property owners. Despite successive reforms backed by popular movements to expand the vote, by the early 1860s only just over 1.4 million could vote out of a total British population of 30 million. By 1884, two out of three men had the right to vote. It was not until 1918 that all men over eighteen could vote, plus a limited number of women determined by age and property ownership. Women had to wait ten more years to gain equal voting rights as men.

In 1750, 23 percent of the total population of Britain lived in cities. By 1850, it was 50 percent. This was far higher than elsewhere in the world. At midcentury, London was one of only three cities in the world—alongside Beijing and Paris—with a population over one million. Britain’s cities were squalid and unhygienic. Manchester, a small market town that would soon become the second-largest city in Britain, was a prime example. In the early eighteenth century, Manchester had fewer than ten thousand people. By 1800, that number had shot up to ninety thousand. The population soared to four hundred thousand by 1850 as the city became the center of a giant cotton textiles industry. Manchester’s cheap cotton textile exports went around the globe, contributing (among other things) to the collapse of the once-giant textile industry in Bengal, India.¹

The living conditions for most of Manchester’s workforce were dire. Housing was poor, and the supply of clean water and waste removal was left to private companies. The worst conditions were in low-lying districts of the city near factories and railroads, where houses were flooded by polluted rivers.² Most houses had no flushing toilets until the end of the century. The novelist Charles Dickens described Coketown, a fictional English industrial town similar to Manchester, in his famous novel Hard Times, published in 1854. It was a fearful and brutal place. Friedrich Engels, the coauthor of The Communist Manifesto, described Manchester in 1844 as Hell on earth.³

Experiments in Social Responsibility

A handful of business leaders responded to this dire social situation with a belief that new industrial profits should not come entirely at the expense of their impoverished workers. Almost as soon as industrialization began, a number of employers began experimenting with using some of the funds they generated to make the lives and work of their employees better. Typically, these benefits far exceeded the minimum required by contemporary law and regulation. In some cases, they included the building of complete residential villages for employees and their families. In effect, these employers offered a visible helping hand, because they did not believe that the market was going to lift all up, as Adam Smith did. This first wave of experiments in social responsibility is widely seen as an antecedent to present-day corporate social responsibility.⁴ Often termed industrial paternalism, these policies were sometimes enforced by employers who desired a disciplined and productive workforce even more than a happy one.

Strong Protestant beliefs motivated many early experiments in ethical business. The Congregationalist Titus Salt, the Quaker John Grubb Richardson, and the Unitarian Samuel Greg built model villages near their factories in Saltaire, England; Bessbrook, Ireland; and Quarry Bank, England, and built houses, schools, shops, and recreational facilities for workers. Josiah Wedgwood, a Unitarian and one of the earliest of such figures, pioneered factory production in the pottery industry in Etruria, located outside the town of Stoke-on-Trent, England, in 1769. He introduced the innovation of specialized tasks for his workers and enforced authoritarian controls over their lives, including heavy fines for a range of things extending from lateness to bringing alcohol into the factory and writing on the walls. He also paid high wages; built free housing for workers that was a great improvement on the mud-and-wattle huts that were the norm in rural areas; and subsidized an early form of health insurance.⁵ These investments in the well-being of his employees helped Wedgwood build a profitable and sustained business.

Robert Owen’s textile mills in New Lanark, Scotland, twenty-five miles southeast of the city of Glasgow, offered extensive facilities, including schools, a company-owned general store, and an educational and cultural center. Perhaps the most famous of these early experiments, the village was an example of urban planning. Owen was so convinced New Lanark was a model for a future society that he opened it up to the public. In the decade after 1815, it was one of the most popular tourist destinations in Europe.⁶

Owen, described by his son as a free-thinking Unitarian, was motivated by a secular conviction that the root of social ills lay in the existence of private property, coupled with a lack of educational opportunities. He believed that the poor and working class were victims of their circumstances and that, if their living and working conditions were improved, they could become more functional members of society. At the same time, he rejected the idea of enfranchising people within these groups, as he believed they were too ignorant and needed guidance. Following New Lanark’s success as a profitable company and model community, Owen expressed a desire to expand his vision throughout Britain and to other countries to create a New Moral World.⁷

Owen has been described by some contemporaries and later historians as a utopian, but the term hardly does justice to a man who saw business as a means to bring about a far more equitable society.⁸ Owen believed in creating self-sufficient communities with a fairer distribution of wealth and higher living standard. He was unusual among his peers for condemning corporal punishment in his mills, and he worked to advance legislation creating new child labor protections that mirrored those at New Lanark. His employees were well fed, were healthier than the norm, and, starting in 1813, were expected to work only a ten-and-a-half-hour workday, a marked improvement on the twelve hours or more that was the standard. Children in the village received eight years of schooling on average, and both girls and boys learned a wide variety of subjects, including history and geography, that were typically only taught to children from wealthy families. Out of admiration or loyalty, many of the workers at New Lanark named their children after Owen and his wife.⁹

Owen’s experimental village attracted favorable attention. Social reformers and even royalty came to observe New Lanark.¹⁰ Many contemporaries hailed Owen as an iconic figure, even a saint. He has been less admired by later historians, who have branded his experiments as an exercise in paternalism and dismissed his self-proclaimed ethical motivations as a cover for self-interest. New industrial employers like Owen needed a disciplined, stable, and sober workforce.¹¹ Because many factories were built outside major towns, sometimes to secure better sources of waterpower, it made sense to attract and keep a labor force.¹² Paternalism in factories served, as British business historian John F. Wilson concludes, as a vital means by which employers were able to inculcate middle class virtues into their workers. Wilson is particularly critical of the close supervision of workers. They [employers] were capitalists first and philanthropists second, he concludes, and it seems likely that industrial paternalism facilitated the process of worker-indoctrination which had been going on since the mid-eighteenth century.¹³

Owen strongly favored order, discouraging disruptive behavior and drinking, both in public and at home. He overlooked (as many others did) the dangers of work in his mills and established powerful mechanisms of social control. He instituted surveillance practices such as the silent monitor, which publicly displayed each worker’s daily performance. Visitors to New Lanark were often invited to attend the children’s dance and singing classes. Some who saw these displays believed that Owen manipulated or coerced the children into putting on a cheerful show for outsiders.¹⁴

Entrepreneurs faced a huge challenge to turn preindustrial workforces into industrial ones. The response of even the most enlightened figures appears heavy-handed today, yet their concern for workers’ welfare was notable compared with most of their peers. When the overbearing Owen intruded too far on his workers’ personal and family lives, they resisted and even went on strike.¹⁵ Still, it should be remembered that the communities created by paternalistic and sometimes utopian industrialists were far better off than others at the time. The New Lanark factory community, a recent study observed, was unparalleled in terms of working and living conditions.¹⁶ But these experiments were hardly the norm. Most small and less profitable businesses could not afford to invest in their workers, let alone build model villages.¹⁷

Owen’s own legacy included his experiments with cooperatives, a movement that grew as an important alternative corporate structure to for-profit business. He opened a cooperative store at New Lanark and subsequently developed grand schemes to create cooperative land-based communities that would eventually displace capitalism. During the 1820s he established short-lived communities in Orbiston, Scotland, and New Harmony, Indiana. Although his own initiatives came to nothing, Owen’s ideas were among the inspiration for the creation of the Rochdale Equitable Pioneers Society in a Lancashire mill town in England in 1844. Twenty-eight textile workers formed the initial membership. They founded a store based on the idea of aggregating their purchasing power to obtain discounts from suppliers and returning profits to members. Over the following two decades many other consumer cooperatives were founded, especially in the north of England. In 1863, the Cooperative Wholesale Society (CWS) was formed to supply the retail cooperatives. By 1914 over three million people were members of cooperative societies, the CWS was one of Britain’s largest businesses, and cooperatives accounted for almost one-fifth of the sales of groceries and provisions in that country.¹⁸

Meanwhile, as businesses grew in size and complexity over the course of the century, employee welfare schemes such as sick pay and pensions were sometimes adopted by the more profitable, although they never became the norm.¹⁹ Altruism and self-interest continued to coexist. A classic example was the soap manufacturer William Lever, the founder of one of Britain’s largest companies, Lever Brothers. He endowed numerous schools and hospitals and, when he died in 1925, left a share of his equity to create the Leverhulme Trust, which became one of Europe’s largest educational foundations. In 1888, he began building a large model village beside the manufacturing plant at Port Sunlight, outside Liverpool.²⁰ A pension scheme opened in 1904, and five years later he started profit-sharing with employees. Lever, who was not particularly religious, also opened a church for interdenominational worship in 1904. The church was closely controlled by Lever himself and was employed quite consciously as an instrument to shape the values of employees and to keep down any socialist tendencies. The company welfare officer served as the minister in the church, which excluded nonemployees.²¹ Lever also had a testy relationship with the cooperative movement. In 1910–1911 he unsuccessfully sued thirty-eight cooperative societies for passing off their own products in place of Lever brands they refused to stock.²²

As factory industry spread in Britain, a handful of new business leaders provided support beyond wages for their employees, at a time when the state provided little or no welfare support, and when hygiene conditions in the new industrial towns were very bad. Spiritual and ethical motivations coexisted alongside self-interest. Even the most benign figures wanted to enforce their own views on the people who worked for them. Still, they were prepared to share some of their profits to give their employees better and more dignified lives, hopefully in return for loyalty. Owen, for one, went further, articulating a vision of a better society, first by his community at New Lanark and later through his promotion of the concept of cooperative societies.

Quakernomics

It has long been a staple of British business history to observe that a disproportionate number of early influential entrepreneurs belonged to Protestant sects outside the established Church of England. As with other minority groups that have become prominent in business, the reasons for this were multifaceted. The networking advantages of minorities, and strong emphasis on integrity and honesty, were likely beneficial. Protestants outside the established church, like Catholics and Jews, were also initially restricted from many spheres of public life, including standing for public office, working in the civil service, and obtaining university degrees.

Members of the Society of Friends, or Quakers, were especially prominent in business in the eighteenth and nineteenth centuries. They were visibly different from members of the Church of England. Founded in England in the 1650s by George Fox, Quakers wore plain and distinctive clothes, adhered to the principles of pacifism, avoided alcohol, and refused to take oaths.²³ They did not marry non-Quakers. The sect was small—there were fewer than fourteen thousand Quakers in Britain in 1861—but Quakers had an outsize impact as entrepreneurs. During the eighteenth century, they included pioneers in the iron industry, with such businesses as the Darbys and Ransomes, and in finance, founding banks such as Pease, Backhouse, Gurney, Lloyds, and Barclays. In the nineteenth century, Quaker families were prominent in chemicals and pharmaceuticals, including Joseph Crosfield and Sons and Allen and Hanburys, and in foodstuffs, including firms such as Huntley and Palmers, Jacob’s, Cadbury, Fry, and Rowntree.²⁴

Why Quakers were so prominent in business has been much debated. Some point to the fact that pacifism kept them out of the armed services or that, unable to attend universities, they established their own schools and developed apprenticeship schemes within their communities.²⁵ Business remained one of the few avenues open to Quakers, and they had the advantages of strong family and trust networks to raise funds. Quakers were also known for their diligence and energy, as well as modest lifestyles. Quaker financial networks existed across the country, which was a major advantage at a time when institutional capital markets had not yet formed. Quakers were also concentrated in the north of England, where industrialization began.²⁶

Quakers created innovative businesses and operated them in a highly ethical fashion. They became renowned for honesty and innovation, such as introducing fixed prices rather than the traditional system of bargaining.²⁷ Their hyper-morality, as the business historian Leslie Hannah calls it, created a climate conducive to rapid economic growth by raising levels of trust.²⁸ The Quaker businesses of this era have come to be seen in recent years as models for more responsible business practices today.²⁹

Quaker morality rested on strong beliefs and strong organization. The Society of Friends monitored the behavior of its adherents with exacting discipline. Quaker congregations—known as meetings—disowned members for bankruptcy if they had engaged in speculation or failed to pay their debts.³⁰ Fox insisted that his followers behave honestly in business. This mandate translated into a culture noted for high ethical standards. The church’s so-called Yearly Meetings provided detailed advice, such as on the importance of clear and accurate accounts, and the members of the Society believed there was a collective responsibility to help one another and ensure that the group was not brought into disrepute. Both advice and sanctions were in copious supply.³¹ That said, it took a major reputational crisis in the mid-eighteenth century for the Quaker movement to reform itself and really commit to the principle of honesty in business.³²

The Quakers were badly persecuted and suffered discrimination into the nineteenth century. This influenced a business culture noted for antagonism to inhumanity and institutional cruelty.³³ Unlike some other minority religious groups that have been successful in business, Quakers focused less on specific religious practices and sought instead to uphold a set of values, which they called testimonies, based on the ideals of truth and equality. They believed they