A series of powerful forces are changing business as we know it. From the speed of communication to information accessibility, all lead to increased transparency and a more global perspective.
Whether we choose to define the newest iteration of capitalism as Shared Value, Conscious Capitalism, Institutional Logic, Benefit Corporations, Triple Bottom Line, SRI, ESG, or Regenerative Capitalism, the fact is companies that don’t update their business practices are significantly less likely to thrive. Meanwhile, those that harness the power of purpose are capturing significant value and creating meaningful competitive advantages along the way.
Changes in the investment community reflect signs of this shift: In 2013, Harvard’s $30 billion endowment as well as the $170 billion asset manager Carlyle Group appointed their first Chief Sustainability Officers to administer Environmental, Social, and Corporate Governance (ESG) strategies. And both Goldman Sachs and Morgan Stanley have announced the launch of sizable sustainable and social impact investment funds.
This new, holistic approach to business may be the most significant movement of our time, as well as the most misunderstood. Below are five pervasive myths surrounding stakeholder capitalism today:
Reality: Smart companies understand purpose and profitability go hand in hand.
Historically, it’s been easy to lump investing for impact in with philanthropy. When Google CEO Larry Page recently and publicly stated he’d rather give his money to Elon Musk than to charity, his message underscored a common belief that creating positive impact is necessarily tied to giving away your money.
Whether you agree or not with Larry’s view that visiting Mars is philanthropic, his point is not that charity is misguided but that businesses built with purpose and run by inspired leaders can change the world and improve lives in the process, all while creating outsized financial returns.
Mr. Musk’s entrepreneurial approach to capitalism, represented by his success at Solar City and Tesla, is built on innovation and emerging technologies and demonstrates well two key elements of next generation capitalism: building companies specifically to address social and environmental challenges, and harnessing certain advantages that purpose can create to win.
Consider examples such as Patagonia, which is at the forefront of sustainable production in a crowded lifestyle apparel space; Clif Bar or Kind in the nutrition bar category; Toms Shoes and Warby Parker pioneering a "one-for-one" conjoined business/contribution model; Airbnb and its various brethren harnessing the power of shared resources and community. Many of the world’s largest corporations are also tuning in—modifying production, distribution, sales, employment policies, and aggressively re-aligning around values-driven brands—with an eye towards sustainability and maximizing returns in the process.
Reality: Businesses taking a holistic approach to growth unlock unrecognized value and create competitive advantages.
While the fundamental purpose around which a company is built can yield compelling opportunities, equally, if not more important, is how a company conducts its business.
In their 2011 Harvard Business Review article, Michael Porter and Mark Kramer define shared value as the expansion of "the total pool of economic and social value" available to both corporations and surrounding communities. Companies who practice a shared-value approach investigate untapped revenue sources within their immediate environment, finding ways to maximize profitability by—not in addition to—improving human lives and promoting environmental welfare.
Unlike philanthropy, shared value is not external to profitable business practices but integral to them. Porter and Kramer cite cashew producer Olam International, which stopped shipping nuts from Africa to Asia for processing in cheap factories and opened local processing plants, training and hiring workers in Tanzania, Mozambique, Nigeria, and Cote d’Ivoire instead. The move allowed the company to cut shipping costs by up to 25% while establishing deep roots in a community vital to its long-term survival.
Another strong example is Nestlé which, after discovering 70% of children under three and 57% of women in India suffered from anemia, created inexpensive cooking spice packets as a delivery vehicle for iron, iodine, and vitamin A. Prior to distribution, the company engaged in years of research and development upgrading factory lines and seeking new delivery routes. In just three years, according to consulting firm FSG, they sold 138 million servings—some to families in the most remote areas of India. Nestlé’s initial investment would have appeared irresponsible through the lens of 20th-century economics, and yet, their bet paid off. In addition to creating new revenue, Nestlé generated significant goodwill while creating lasting change.
Myth #3: The point of corporate sustainability is to improve reputation—anything more hurts shareholders.
Reality: Sustainable companies outperform their unsustainable counterparts.
A growing body of research shows that companies who invest in a holistic stakeholder approach—through policies benefiting shareholders, employees, local communities, consumers, supply chain partners, and the environment in concert—perform significantly better in the long term than those who don’t.
Using a value-weighted portfolio of Fortune’s 100 Best Companies to Work For, Wharton Professor Alex Edmans strikingly found that companies who invest in the happiness of their employees see greater financial returns, as can companies who employ socially responsible investment screens. Research by Harvard Business School professors Robert Eccles and George Serafeim, and Ioannis Ionnou of the London Business School, indicates companies who voluntarily invest in sustainable practices "significantly outperform their counterparts over the long term."
One such company is Nike, whose Sustainable Business and Innovation Group has driven a company-wide shift toward sustainable products, manufacturing, and marketplaces. In their words: "Sustainability used to be the exclusive domain of experts, activists, and idealists. Then, it moved into a silo at the outskirts of the corporate landscape. Today, it is seen as an important, well-integrated part of any forward-thinking company—as one of the key drivers of success." The proof is in the proverbial pudding: Nike cut its carbon footprint by more than three-quarters since beginning efforts and publically aims to "achieve zero waste, zero toxicity, and 100% recyclability" by 2020.
Reality: Consumers are more educated than ever about sustainability and corporate values, and they’re voting with their money.
Rhetoric surrounding sustainability isn’t changing—it’s already changed. Thought leaders worldwide understand responsible consumerism doesn’t mean privation. The old "doom and gloom" model of environmental responsibility has been replaced by one recognizing resource scarcity on a planet rapidly heading toward 9 billion people and valuing resource efficiency, innovation, and socially/environmentally responsible processes.
A recent BCG study summarizes another key driver of this shift: The millennial generation—representing $1.3 trillion in annual spending—engages with brands far more extensively and personally than older generations, and expect their values to be reflected in brands they purchase. They value careers that serve the greater good, products and services connected to social causes. They will also be the most influential generation our country has seen, numbering 78 million in 2030.
Their impact is felt everywhere, to the point that brand marketers are calling for a wholesale shift in strategy: "Marketing 3.0 will be won by those who become purpose-driven social brands," explains Philip Kotler in Marketing 3.0: From Products to Customers to the Human Spirit.
Reality: Stakeholder capitalism is vital to an industry’s continued survival.
It’s well past time to start thinking about financial profit as only one element of a much larger contextual system—one including personal, social, and environmental regeneration. Human welfare, environmental sustainability, employee happiness, and social benefits are critical elements of the larger system in which we, and the companies we build and/or work for, are tied. The idea that a corporation somehow exists outside of that, subject only to the shareholder’s profit motive, is not just short-sighted but irresponsible. In the end, each of these constituents is inherently tied to long-term financial success. Without shared value creation across these areas, there can be no long-term profitability.
Today, growing waves of entrepreneurs are building inspired and inspiring companies. Social Entrepreneurship courses and content have exploded across MBA programs. Employees are seeking great companies to work for; consumers are seeking companies that inspire them and engender their trust. Large societal challenges create great opportunities for entrepreneurs and business leaders to disrupt outdated models, and a growing pool of businesses with a higher purpose built into their culture and business model are outperforming their peers.
The time has arrived to invest capital at scale into opportunities offering both compelling economic and social/environmental returns, while demonstrating a more conscious approach to how we live and do business. We can no longer afford to waste our time or money on investments that don’t drive this new wave of capitalism. We must embrace a business model seeking multi-dimensional value creation and an understanding of its integrated place in the larger system of our increasingly connected and transparent world.
—Tripp Baird is founder and Managing Partner of The Builders Fund, Cloud Mountain LLC.
With contribution by Sarah Labrie of Hippo Reads.
[Image: Flickr user Tax Credits]