Balancing corporate and social benefits: “how to do it” – not “can we do it”

by Jeff George 

(This essay was submitted to the Admap Prize in February 2013 in response to the question Can brands maximize profits and be a force for social good?)

 

An important issue that needs a meaningful response

“We were born with an opposable mind we can use to hold two conflicting ideas in constructive tension. We can use that tension to think our way through to a new and superior idea . . . Using our opposable minds to move past unappetizing alternatives, we can find solutions that once appeared beyond the reach of our imaginations.” – Roger Martin, The Opposable Mind (2007)

The topic of balancing brands’ profitability with social responsibility is an important one, which deserves significant attention and a thoughtful, productive response. We can no longer continue on the familiar path of corporations using the “we-exist-for-one-reason” line to excuse focusing all efforts on maximizing their bottom line at the expense of everything else.

Corporate profits come at a significant cost and in most instances that cost is not borne by the corporation. As Umair Haiq describes in The New Capitalist Manifesto, (2011) the current capitalist approach shifts costs to and borrows benefits from people, communities, societies, the natural world, or future generations. While this method of measuring profitability may look positive from a brand’s perspective, when examined more holistically from a societal or global view, we’re under-counting costs and over-counting benefits.

In 2012, corporate profits as a percentage of GDP hit an all-time high. Why, then, all the talk of economic crises and fiscal cliffs? Although this may seem counter-intuitive, corporate profitability is not necessarily synonymous with economic health. At a time when corporations’ profits are at their peak, employment ratios are at a 35-year low and wages are at an all-time low. While companies are better off, fewer people are employed and these employees are making less than ever. This isn’t good for society or the economy as a whole, nor is it good over the long term for the brands that enjoy their current level of profitability. The cost-cutting advantage from having fewer and lower-paid employees translates into having fewer customers with less disposable income to continue to buy from these companies. So brands are running their own wells dry, so to speak.

If we want individuals, companies, and society to thrive, then operating based solely on self-interest is counter-productive. Since we give corporations the legal rights of a person, I submit that it’s reasonable to hold them to the same moral obligations of a person as well. Yes, companies have a responsibility to shareholders, but as integral members of our society, should they not, like individual people who comprise those companies do, have a collective responsibility to their neighbours, employees, customers, and their world, not to mention their own long-term fiscal health? In a quintessential ‘from-the-mouths-of-babes moment’, Kid President observed wisely in his “Pep Talk” on SoulPancake.com, “If we’re all on the same team, then let’s start acting like it.”

Reframing the question

“The most serious mistakes are not being made as a result of wrong answers. The truly dangerous thing is asking the wrong question.”   – Peter Drucker

While the question originally proposed brings forth a very important topic, I suggest that a slight adaptation will lead to a more compelling question and, by extension, a more meaningful solution.

The first modification involves the addition of a simple three-letter word: How can brands maximize profits and be a force for social good?

As planners and strategists, we understand the value of open-ended rather than closed-ended questions. Open-ended questions are more likely to lead to reflection by the respondent and stimulate thoughtful discussion. In general, they lead to better answers. With that in mind, consider the easy response to come from asking someone within the corporate world, “Can brands maximize profits and be a force for social good?” “Nope.” The end. It’s a short conversation. This question provides the respondent with an out. “Can” it be done? “Well, no way. I know this isn’t possible, so I won’t bother wasting time or effort thinking about it, much less trying to do something about it.”

Asking “How” removes the option for a binary response. It closes the door to providing a yes/no answer, and makes it much more difficult for the respondent to fall back on the comfortable default position that corporations exist only to make money, and thereby answer without probing into the merits of the question itself.

The other modification to the original question seeks to create greater equality in the level of importance between the two variables being evaluated. The idea of “maximizing profitability” while also being a “force for social good” might be interpreted as placing greater weight on profit (i.e., “maximizing”), with social good being an afterthought or, at best, being of secondary importance to profit. The question I believe we should be asking, and for which I aim to provide a response, is “How can brands balance their responsibilities for creating both profit and social good?”

How can we . . .

Brands can balance their responsibilities for creating both profit and social good by using the following four guiding principles.

1. Start with purpose

In Start With Why (2009), Simon Sinek explains that “People don’t buy what you do, they buy why you do it.” Ultimately, a customer’s goal is to do business with brands that share their beliefs.

Imagine if Steve Jobs and Steve Wozniak had begun with, “We need to make some money. Let’s build computers.” Instead, Apple was built around a desire to empower the little guy. They had a vision to revolutionize the world by challenging conventional thinking, and just happened to do that by making computers. Apple’s belief in challenging the status quo has allowed them to move seamlessly from “we happen to make computers” to “we also make MP3 players” and mobile phones, as well as sell books, and music, and whatever other device or industry they happen to revolutionize next. Apple customers believe in what Apple believes, and share their sense of purpose.

In addition to doing more ‘good,’ conscious businesses—brands that build their purpose around creating value for all of their stakeholders—appear to generate better long-term performance for their shareholders. In their study, Firms of Endearment: How World Class Companies Profit from Passion and Purpose (2007), Rajendra Sisodia et al. demonstrated that ‘good’ businesses outperformed S&P 500 companies by a nine-to-one ratio over a ten-year period (and the Good to Great companies – selected solely for their ability to produce great returns – by over three to one).

2. Use better metrics

Management guru Peter Drucker said, “What gets measured gets managed.” It seems quite simple, obvious even, and yet companies continue to measure variables and build incentive programs that don’t support or encourage their desired outcome(s). If you evaluate based on revenue, then revenue is what you’ll get, but with little regard for expenses. If you reward short-term profit, then short-term thinking will prevail, regardless of its long-term impact. Brands can improve their metrics in three ways in order to balance their responsibilities to create both profit and social good.

i. Shift from profit to value

Although he expressed it over 40 years ago, many in the corporate world still seem to measure success based on Milton Friedman’s profit-obsessed point of view: “There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

In an interview in The Corporation (2004), Elaine Bernard, Executive Director of the Trade Union Program at Harvard, expressed dismay around our current (which is to say, Friedman’s) definition of wealth creation. We often equate wealth with profit or financial prosperity, but dismiss the value of clean air, ample natural resources, and happy, healthy people.

Conscious companies take a more holistic view of wealth creation. Sisodia et al (Firms of Endearment, 2007) note that, “What we call a humanistic company is run in such a way that its stakeholders—customers, employees, suppliers, business partners, society, and many investors—develop an emotional connection with it, an affectionate regard not unlike the way many people feel about their favorite sports teams. Humanistic companies—or firms of endearment (FoEs)—seek to maximize their value to society as a whole, not just to their shareholders. They are the ultimate value creators: They create emotional value, experiential value, social value, and of course, financial value. People who interact with such companies feel safe, secure, and pleased in their dealings. They enjoy working with or for the company, buying from it, investing in it, and having it as a neighbor.”

Sisodia’s study suggests that, paradoxically, when we stop obsessing about profit for shareholders and instead focus on value creation across all stakeholders, profit seems to take care of itself.

ii. Shift from short-term to long-term

In Drive (2009), Daniel Pink warns of the dangers of an obsession with the short term: “several researchers have found that companies that spend the most time offering guidance on quarterly earnings deliver significantly lower long-term growth rates than companies that offer guidance less frequently.”

A 2005 working paper, “Has Financial Development Made the World Riskier?” by Raghuram Rajan, then Chief Economist at the International Monetary Fund, warned of the dangers looming within the financial industry. Incentive structures generated huge bonuses based on short-term profits, but no penalties for long-term losses. Because of this focus on short-term gains, fund managers took risks that led to the 2008 global economic meltdown. The negative implications were not only to these individuals or their companies, but also to the economy and society.

If we expect long-term value, then we must reward behaviour that supports it, and move away from incentive programs that encourage short-sightedness and risk-taking which, for the most part, are to the detriment of others.

iii. Apply them consistently throughout the organization

While it may be a nice idea for a company to suggest “Our goals for this year are to do x, y, and z,” individuals—whether executives, middle managers, or lower-level employees—are driven by the metrics upon which they are evaluated and compensated. I once worked for a company that claimed “innovation” was one of its objectives and core values; the leadership of the organization often spoke of how important it was for all employees to bring forward innovative thoughts and ideas.

Much has been written about the importance of risk taking and failure as key ingredients of innovation. Imagine my surprise when I was reviewing my performance standards for the coming year, and saw “Execute the strategy flawlessly” as one of the objectives that would determine whether or not my colleagues and I were “meeting expectations.” In my estimation, this organization innovated rarely if ever, which wasn’t surprising because the metrics for employees didn’t align with the outcome they claimed to want at a corporate level. In evaluating and compensating employees based on not making mistakes, they were telling them to not innovate.

It’s not enough to have a corporate objective and then hope that everyone in the organization works toward it. Metrics and incentive programs must encourage and reward all employees—from the CEO, to a sales manager, to a receptionist—for behaviours that truly contribute to the company’s objectives.

3. Think counter-intuitively

There are certain paradigms and ‘laws’ in business that seem to go uncontested for the most part. For example, to reduce costs, we need to eliminate and cut things; to increase revenue, we need to encourage customers to buy more. Brands that want to balance profit and social good challenge those assumptions with counter-intuitive thinking, which can lead to unexpected benefits.

George Akerlof—winner of the Nobel prize in economics—and his wife Janet Yellen discovered that paying employees above average can attract better talent, reduce turnover, and improve productivity and morale. Higher wages can reduce costs.

Most of us would assume that telling your customers to buy less of your product would not be good for business. However, a number of companies have adopted this approach to great benefit. Patagonia, for example, ran an ad on Black Friday that instructed customers, “Don’t buy this jacket.” Asking their customers to buy less will likely create even stronger brand loyalty and, consequently, lead to greater long-tem profit for Patagonia.

4. Employ strong, committed leaders

Yvon Chouinard, founder of Patagonia, and Vincent Stanley, his VP of Marketing, suggest in The Responsible Company that 99% of genes are shared in companies—whether BP, Walmart, or Patagonia. They all “pursue the same opportunities and face the same competition and constraints.” One of the things distinguishing Patagonia is that its owners are committed to social and environmental responsibility. Because of their own commitment, they’re more likely to attract employees with shared views, and to engage and empower employees in pursuing their vision. While strong, committed leaders have many positive attributes, the most important for brands that want to balance their dual responsibilities is that they will drive the other three principles outlined above. Without strong leaders to drive the process forward, the entire system collapses.

The next question

While values for corporations continue to be based primarily in a more traditional, profit-based realm, values in the human side of our world continue to evolve and progress. Andy Hines discusses in ConsumerShift (2011) how people’s values have shifted over the past several decades from traditional to modern to postmodern, with an impending shift to integral.

More than ever, people are seeking, if not demanding, to do business with brands that align with their own values. If brands are interested in their “consumers’ point of view” and “connecting with the consumer,” then they would be wise to take note of people’s shift in values and seek to align with them. Much of the past century in business has had companies focusing first on profit. Paradoxically, starting with good that’s rooted in sincerity may in fact be a better path to profit.

As more companies have the courage to be responsible and then are proven successful in both financial and social terms, other companies will see that it’s not as risky as they’d thought. In fact, as balanced companies continue to build more loyal customer bases, and attract and retain better employees because the companies’ purpose and values are aligned with people’s, their competitors may start to see that balancing profit and ‘good’ is not a competitive advantage but the price of entry into the market.

If a critical mass of brands outshines their competitors because of their efforts as balanced companies, then there will come a time in the not-too-distant future when our question evolves significantly. We’ll no longer ask, ““How can brands balance their responsibilities for creating both profit and social good?” Rather, the question will be “How can they not?”

 

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