How to Create Socially Beneficial Business
I want my children to inherit a world that meets the basic needs of all human beings and sustains a healthy planet for future generations. There needs to be a major change in the way business interacts with society in order to reach this goal.
Achieving Shareholder Equality
An element that is missing from the modern view of business is assigning value to social benefit along with financial gain. A successful business is almost always defined by profit, earnings and growth, instead of its ability to provide social or environmental benefit to the societies in which it operates.
The default goal of a business is to provide value to shareholders through either constant growth or cost cutting; shareholders are typically defined as those who have made financial investments in a company, not those who are affected by the business operations. Leaders are chosen by their ability to show profit and make people rich, and those who fail to prioritize earnings will most likely be replaced with somebody who does. If a corporation fails to serve shareholders it becomes at risk of being acquired by a stronger company or losing access to capital markets that are key for growth. In this context, the biggest challenge with considering social and environmental benefits through business is that no monetary value exists for the beneficial impacts on society.
Milton Friedman, a well-known economist, defined two kinds of costs in business: expenses and investments. He explained that social responsibility falls in the category of investments, which are considered good if they increase value. Some companies are finding a balance between profitability and social benefit by incorporating corporate responsibility in their mission and business plans.
One example is TOMS, whose original mission was to give away a pair of shoes to a poor child for each pair sold. Their investment in providing a social benefit made headlines and created buzz, and it likely contributed to more sales that ultimately translated into value for shareholders. To continue this trend of creating social benefits through business we must imagine a culture in which investors and the societies they operate in are considered equal shareholders.
Misaligned Incentives in Business Analytics
The importance of capital in maintaining a viable business cannot be ignored. The pressure created by this kind of goal leads decision-makers to forego benefits to society as a whole in exchange for profit. I experienced this paradox working in the residential solar industry, where the most popular business model is based on installing the largest possible solar system for a customer’s home and collecting payments for 20 years. While solar panels create tremendous value in the form of both financial and environmental benefits, simply adding an option for energy efficiency upgrades could reduce the customer’s electricity demand by a significant amount and have a positive environmental impact. However, currently there is no clear incentive for this alternative approach because the company would lose a portion of its long-term revenue. Companies do not make as much money from socially or environmentally responsible decisions, which are long-term investments that are hard to measure. Instead, businesses focus on traditional sources of short-term income to ensure they stay in business.
Another important rule in business is maximizing competitive advantage through a path that delivers a product while ignoring negative impacts on the environment and society. The goal is to minimize measurable costs and capture the largest possible market share without including positive or negative impacts on the environment in a profit and loss statement. Rarely do we see companies competing for the largest positive impact on society. A company that believes it should reduce emissions because it’s the right thing to do is at a competitive disadvantage as long as its competitors do not think the same way.
Similarly, it is often more profitable to plan for obsolescence and manufacture more products than it is to help customers make the most out their existing goods. Many businesses do not attempt to sell a product that will outlast their competitors, as we can see in the electronics industry where new models are available annually, if not more frequently. Teaching consumers how to use less of their product is less beneficial to a business than closing a deal.
Unfortunately, social and environmental costs and benefits are rarely incorporated in the financial tools that analysts use to measure a company’s performance and stability. Were companies held accountable for these inefficiencies and rewarded for creating positive impact, it might be possible to see that companies we consider profitable are in fact creating negative impacts that offset their stated financial value.
Valuing Social Benefits as Profit
In order to create a more socially supportive economy it is vital that businesses are re-imagined in a more sustainable and environmentally friendly way. Upfront investment would temporarily raise costs and threaten to weaken some businesses in the short term, but provide long-term stability to the economy and greatly benefit my generation and those to come. One way to ease the transition would be to define a monetary value for social benefits that all businesses incorporate in their financial statements along with profits and losses. However, the evolution towards a more socially responsible economy will require a more comprehensive approach. It is exciting to think about how a future economy could maximize social benefits with sustainable business practices.
Developed countries have been outsourcing business to reduce costs by accessing cheaper wages, lowering manufacturing costs and avoiding taxes to achieve higher margins and bigger profits.The countries on the receiving end of outsourcing typically benefit from short-term employment opportunities without any other significant economic improvement. I studied globalization in the rural northeast region of Thailand where a Dutch company built a solid-waste power plant that was never turned on by the community it was meant to serve. It doesn’t make sense that a foreign company would assume their investment provides value without first understanding how to best support a society. Instead of simply sending jobs and operations to developing countries, businesses can instead support a model for a healthy economy by understanding local demand; this can translate to clear social and economic benefits whether it be in the form of manufacturing, communications, or utilities.
Outsourcing can provide investment to local businesses that would otherwise have no access to funding. This would not be charity but actual investment. Not only would this approach stimulate a developing economy, it also has the potential to influence a more sustainable version of business that meets local demand for essential services such as clean water, renewable energy, and locally grown food. In exchange, the downward pressure on the investors margins might be protected by the additional employment created. If a business in a remote market not only supports growth but also provides social benefit, other forms of investment might become available.
Products created on unsustainable foundations do not provide social or environmental benefit. Social responsibility as a foundation in business stands to greatly benefit future generations and the developing countries where industrialization and globalization is trying to catch up with the Western world.
The evolution toward an economy that generates more social benefits is no small task. These ideas are scratching the surface of the many ways to approach this challenge. We are just getting started in an attempt to bring social responsibility to developed economies; the Western world has drawn blueprints for international business and built the foundation without considering its impact. We now have the opportunity to influence the future of business. This means providing developing communities with the funds or resources they need to build infrastructure and manufacture goods at an affordable price in their region. The opportunity lies in our ability to create partnerships between businesses and society. If we consider social responsibility as an investment we have to understand how to monetize that return on investment. It is time the definition of value is expanded beyond profitability and growth to include sustainability and a healthy civilization.
