These days, we have high expectations of what companies should be. It’s not enough that they make good products. They also need to be good citizens.
We expect them to minimize their social and environmental harm, to report their «impacts,» and to give money to charity. And we expect them to do more than simply follow the law. In 1970, the economist Milton Friedman said businesses should think only about making profit (any idea of social responsibility was a distraction and a disservice to shareholders, he wrote). But in the 21st century we’re starting to demand even more: Companies need to solve problems and aid causes, whether it’s Coca-Cola’s diarrhea program in Africa or Pampers’ one-for-one vaccine campaign with Unicef.
Management theorist Michael Porter says business is entering a new, third stage in its relationship with society. First, there was philanthropy: Companies made money doing bad things, but then gave some of their earnings to good causes. Second, there was corporate responsibility (or minimizing harm): Companies tried to do fewer bad things. And now companies are working (or should work) on actual solutions: products and services that serve social problems. «The ultimate impact businesses can have is through the business itself,» he told Co.Exist last year. «There are huge unmet needs in the world today. The question now is how to get capitalism to operate at its best because capitalism is fundamentally the best way to meet needs. If you can meet needs at a profit, you can scale.»
Porter’s Shared Value Initiative looks at how companies can make profits by catering to the need for things like water, sanitation, and economic opportunity. It argues that social causes are sources of competitive advantage, particularly in the developing world, and that socially focused business rebrands what companies are about. Porter says companies have allowed themselves to be portrayed as parasitic and unfeeling toward society, when in fact there’s enormous good that capitalism can do, properly executed.
BUT IS THAT ENOUGH?
The notion of companies delivering social value as an explicit goal is a radical one. It takes commerce beyond Friedman’s maxim, and beyond the defensiveness of corporate social responsibility. It embraces positivity and action, and allows profits to be linked to economies that won’t improve unless people’s lives improve. In the absence of government action, companies have a role in fixing social problems (water, electricity, lighting)—much the better to build local markets. The trick for multinationals—as a string of «impact startups» is showing—is to create «appropriate» technology, at appropriate prices.
«Fixing problems» is an entryway into the hearts and minds of consumers
Fixing problems gives multinationals credibility in local markets and plenty of on-the-ground knowledge. «Fixing problems» is an entryway into the hearts and minds of consumers. It’s a crucial part of reaching the 3 billion people who live on less than $2.50 a day. And, as such, shared value builds on the «Bottom Billion» and «Bottom of the Pyramid» ideas of Oxford professor Paul Collier and the late Harvard professor C.K. Prahalad, which posit that there is a huge market for products that target the world’s poorest.
But even in this advanced conception of what companies can do, there are several weaknesses and less-than-desirable aspects to this plan. If we’re to expect still higher things of big business in the future—and history tells us that we should—we might look at other parts of the picture. For instance, we might look at whether companies themselves are good, not just whether they can do good. Shared value is a limited vision of what companies can be in the future. It’s related to activities, not function or constitution.
Today, the goal of social value is still an add-on to what most companies do. They may improve lives as a by-product of making profits. But it’s not the explicit goal of the enterprise. And, in many aspects, the relationship between profit-making and social goals is an awkward one in companies. Departments are unaligned. One division makes a climate-conscious product, another makes a climate-negative product. Companies account for their impact on forests and oceans, but still harm forests and oceans. They sell socially useful products, then hand the profits to socially negligent shareholders.
Shared value is just a different version of making a profit
The notion of «shared value» itself is not everything it implies. As with sharing economy companies, such as Uber or Airbnb, the most visible «shared value companies» are not in fact sharing anything—at least not in the sense of foregoing something. «It’s not about the company giving anything up. It is about creating value for society that also creates value for shareholders,» says Porter’s colleague, Mark Kramer. In other words, the shared value version of social good requires no fundamental change to the enterprise itself. Shared value is just a different version of making a profit.
Nothing wrong with profit, you might say. Except that in the future we might begin to expect another change in how businesses operate: that they produce profit without harming the environment or society in other ways. That means looking at how they’re constituted, legally speaking; how they’re funded; how they relate to shareholders, or whatever these stakeholders are called in the future; and how they position themselves in their communities.
THE RISE OF THE B CORPS
We don’t have to look far for companies that have to make fewer tradeoffs. Thereare now more than 1,600 «B corporations» that meld making profit with social responsibility (Etsy, Patagonia, Kickstarter, Warby Parker, and Seventh Generation among them). These businesses must meet a threshold of «impact» compared to their peers, and, in their governing documents, agree that shareholder interests are not the only interests the company will consider. The company also needs to do well by its workers, suppliers, customers, and community. B corporations are different from companies that do good as a sideline; constitutionally, the do-gooding is required. If they fail in their social mission, they can be sued, just as traditional shareholder-owned companies can be sued for not pursuing profit aggressively enough.
«This is not a fad. It’s part of a long-term trend.»
«We’re seeing many more entrepreneurs that wouldn’t be in business were it not for the social and environmental [aspects] of what their doing,» says Don Shaffer, CEO of RSF Social Finance, an impact-oriented financial services firm in San Francisco. «This is not a fad. It’s part of a long-term trend, in my opinion.»
Could major corporations themselves become B corporations? We’re seeing the first signs of that. Natura, a big Brazilian cosmetics and toiletries brand, signed upto B Lab’s certification program last year (B Corp is a company offering a certification that examines a company’s business practices and impact, though it’s not the same as legally becoming a B corporation) . And Unilever, the massive homewares conglomerate, is investigating B-corp status as well. «The B-corp movement is a critical part of the shift to a more inclusive and purpose-driven economy, which is unquestionably needed,» Paul Polman, Unilever’s CEO, said recently.
WHAT IS IMPACT?
If publicly traded companies such Unilever become B corporations, that would mark a big shift. For one thing, these companies would have to report their impacts differently. They would no longer just talk about the negative «impacts» they were producing. They would quantify their positive impacts as well, instead of just putting out a press release about a new program. At the moment, industry measures and reports environmental, social, and governance (ESG) metrics—but it’s questionable how much this disclosure leads to better outcomes.
Mostly importantly, negative impact disclosure doesn’t stop companies doing harm. For example, BP or ExxonMobil might say in sustainability reports exactly how many carbon emissions they produced. Admirable. But that doesn’t stop them saying in another report that they’re prospecting for fossil fuels that, for climate reasons, we know we can’t burn. Responsibility rankings routinely recognize companies for depth of disclosure, passing no judgement on their actual impact. And these disclosures are often contextless. A company will say it saved so much water last year, but it won’t tell you about the water conditions where it’s operating. The numbers pay no attention to ecological limits and rely on the market taking care of sustainability problems, even though it doesn’t.
«The underlying and unspoken assumption of ESG is that we have a sustainability crisis because we don’t have the information. All we need to do is get companies to report and we’ll solve the problem,» says John Fullerton, a former J.P. Morgan managing director and founder of the Capital Institute. «I would argue that markets are just a tool and all the reporting in the world isn’t going to solve the problem.»
CAN YOU HAVE IT ALL?
With the growth of B corps and other impact companies, we’ve lately seen a burst of capital going into the social good space. Goldman Sachs, BlackRock, Bain Capital, Zurich, and AXA all now have funds for startups that generate «social returns» alongside profits. The Ford Foundation, MacArthur Foundation, and other philanthropies are investing part of their endowments in impact startups. And Mark Zuckerberg and Priscilla Chan have pledged to invest most of their $44 billion fortune in impact ventures. More than $60 billion has already gone into impact investments, a survey last year from J.P. Morgan and the Global Impact Investing Network showed.
Does «impact» really equal «responsible»?
This is obviously exciting, with the potential to scale beneficial projects. But there’s also a question of whether «impact» really equals «responsible,» and whether some of these new companies meet higher-good standards we might expect in the future (or for that matter, the standard of B Corp certification). For instance, is it really possible to make as much money with an impact company as you can with a conventionally conceived company? Goldman Sachs would say yes—that’s why it’s invested in the sector. Others would say no, that the profits required by an investment bank might intrinsically make a company unsustainable.
Leslie Christian, an impact adviser based in Seattle, argues that responsible investing necessarily involves lower returns and a different set of outcomes than, say, putting money into Amazon or GE. «I believe you can make high returns doing impact investing,» she says. «You can make a lot of money dong renewable energy, recyclable commodities, or finding a cure to a disease. But what does it cost in other ways? What is happening to that profit? Is [the business] putting further strain on the planet? Is it contributing to further inequality?»
A Wall Street veteran, Christian says the definition of impact is becoming stretched, with normal sorts of impacts—say, employing people—included. It’s no longer about having a responsible impact across stakeholders, just having an impact through the product or service. «[The impact] needs to include all the parties involved, not just the investors, but also customers, suppliers, the natural environment, and the community. That means a fair return to investors, but not an exorbitant return,» Christian says.
THE FUTURE IS DIRECT AND PERSONAL
It may be that if we want better companies, we have to change the way we invest in them. Our expectations for good are only worth as much as what we’re prepared to suffer as investors. If we expect bigger and faster returns all of the time, it’s not surprising that we end up with companies that are less good than we want.
Some impact investing is more like venture capital with a twist. And it tends to involve the same old high-net-worth folks, rather than everyday people. To scale impact investing more democratically, we need to open up the market through new instruments, such as crowd-investing (where retail investors take equity in businesses). «I believe in 10 years there will be many more options for people to invest [in social startups], even if it’s in a pooled vehicle of some kind,» says Don Shaffer, at RSF Finance.
Shaffer argues that direct connections between investors and entrepreneurs are more likely to lead to productive relationships. Before Shaffer invests in a social startup, he makes sure that he knows the entrepreneur personally—and, where possible, investors in his company’s $100 million Social Investment Fund know the entrepreneurs as well. Shaffer thinks this is important for maintaining the values of the fund and making sure everyone involved feels they’re working toward the same goals. Every quarter, RSF organizes «pricing meetings» where everyone agrees on the amount of interest the entrepreneurs will pay on their loans. The rate is set collaboratively, not according to the market rate.
«This environmental and social impact you’re having is so compelling that if you want less return, I can probably do that.»
«It’s immensely fulfilling for people to come into contact with what their money is doing,» he says. «People think investors want higher returns and the borrowers would rather have lower rates of interest to pay. But that doesn’t happen. Often, it’s the opposite. Invariably, the investors stand up and say, ‘This environmental and social impact you’re having is so compelling that if you want less return, I can probably do that.'»
Personal connection changes the nature of transaction and leads to a more cooperative, human-sized arrangement, Shaffer says. In other words, it’s the exact opposite of what happens when you invest in a mutual fund, and you’re 10 steps away from what a company does with your money. In the future, we need to build more direct, accountable relationships into investing, so we knew where our capital is going. Replicating something like RSF’s pricing meetings on a larger scale—say, in agreeing on the size of shareholder dividends—would lead to a more responsive type of enterprise. Could Wall Street organize quarterly forums where companies and investors would discuss the ratio of financial to social returns?
The future of progressive business isn’t just about what we can expect of companies. It’s also about what we, as individual investors, are prepared to accept. If we want good companies, we should ask for open companies, and start a debate. It’s only by telling companies what we want that we can start to get what we want.