Want companies to invest in a better future for society? Keep them focused on their bottom lines.
- By Daniel AltmanDaniel Altman is the owner of North Yard Analytics LLC, a sports data consulting firm, and an adjunct associate professor of economics at New York University’s Stern School of Business.
Last week, a constellation of corporate heavyweights and other worthies came out to launch the B Team, a coalition devoted to changing how companies do business. In the team’s new "Plan B," people and the planet receive equal primacy with profits. That sort of triple-bottom-line thinking might work for some companies, but to abandon the pure for-profit model altogether would be a huge mistake.
"Plan A, where companies have been driven by the profit motive alone, is just no longer acceptable," the B Team’s introductory video declares. Putting aside the question of "acceptable to whom?" — plenty of shareholders seem happy with the profit motive — the idea here is that most companies are operating in an unsustainable way that dooms society to ruin. If true, most chief executives must be fatalistic good-time Charlies who will get up and leave as soon as the party is over.
As believable as that image may be, the notion that the private sector seeks only short-term profits is naive. When resources are scarce, prices go up, and companies are forced to change. Those that can’t are replaced by new companies with different business models. Some chief executives undoubtedly perceive this existential risk in the long term, and they plan their strategies accordingly. For those who don’t, the B Team offers another maxim: "In the long run, what’s better for the planet and its people is also better for business."
This, by contrast, is often true. Yet instead of invalidating the profit motive, this maxim actually reinforces its importance. As Jonathan Berman and I have written in the past, for-profit companies that take a long time horizon in their decision-making are likely to make more social and environmental investments. Things like training workers, bolstering communities, and protecting ecosystems can take a long time to pay off for private companies. When they do, the return — including a stronger labor pool, a wealthier consumer base, fewer working days lost to strikes and protests, and greater employee loyalty — can be comparable to other for-profit investments.
In fact, strictly for-profit companies can be among the best social investors because they apply the same discipline to these investments that they would to other parts of their core business. Energy and mining companies, for example, have some of the longest time horizons in the private sector, and they tend to be big social investors as well. Some European companies have actually stopped issuing quarterly reports to shift the attention of analysts to the long term. And because they are still targeting a single bottom line, profit, there’s no loss of clarity about their mission or erosion of transparency for shareholders.
Clarity and transparency are important parts of the for-profit model’s inherent value. Chief executives know what shareholders expect of them, and there is a straightforward, verifiable, and comparable way to measure their performance: profit and loss. This is not the case for companies with triple bottom lines. Even if companies measure the effects of their operations on people and the planet, every company may choose a different set of metrics, and the weight given to each metric in their decisions may be far from obvious. Shareholders in for-profit companies already have to worry about executives piling up perks and building empires; a triple bottom line may muddy the waters even more.
This is the essential problem with social enterprises. They may have admirable goals, but investors cannot always be sure of what they’re getting; the company’s mission depends on a concept articulated by a founder or a statement that’s open to interpretation, rather than the simple goal of profit. Moreover, when the management or strategy of a social enterprise changes, so might the company’s objectives. The Indian microfinance institution SKS, for example, began as a nonprofit but ended up selling shares on the stock market. At that point, was it purely for-profit or not? Could investors ever really know its goals? These kinds of issues can cause enormous and costly frictions in financial markets.
Social enterprises undoubtedly do great things, yet to encourage every company to be a social enterprise, as the B Team does, is a tremendous error. It’s also an error that the B Team’s founders would have been very unlikely to make earlier in their careers. When Richard Branson and Mo Ibrahim were building their businesses, did they tell potential investors that they would be trying to help people and the planet as well as turning a profit? Did they inform credit markets that debt repayment would be part of a triple-bottom-line strategy?
More likely, having now reached a comfortable moment in their professional lives, they have chosen to adopt the personas of benevolent elder statesmen. If this sounds familiar, it should. The United States, Western Europe, and other wealthy countries have taken the same attitude toward the developing world. Even though their industrialization occurred with little regard for people or the planet, they now insist that China, India, and the rest grow in a cleaner, greener way.
The B Team’s rhetoric is not only hypocritical but also internally contradictory. The profit motive works just fine with the long time horizon they recommend. It keeps companies focused on what they do best, so they make social and environmental investments in the most efficient way.
If owners or shareholders want a company to be a social enterprise, that’s great. But not every company has to be one. Strictly for-profit companies make our lives better just by creating and supplying the goods and services that we like, as well as giving us a way to earn a return on our savings. Isn’t that enough?