5 Myths Socially Conscious Entrepreneurs Need To Ignore

Whether you call it Shared Value or Benefit Corporations, the future of capitalism—companies that care—is creating a meaningful competitive edge for the businesses that embrace it.

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:


Myth #1: Impact investing is a fancy term for giving money away.

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.


Myth #2: Environmental and social welfare are the government’s responsibility.

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.


Myth #4: It’s human nature to prioritize profit over sustainability.

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.


Myth #5: Stakeholder capitalism is a choice.

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]

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14 Comments

  • Adam Smith wrote in The Theory of Moral Sentiments about an "invisible hand" that you've probably never heard of before. It reads: "They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of society, and afford means to the multiplication of the species."

  • Tripp Baird

    Thanks for reading, "Green". I am of course familiar with Adam Smith's "invisible hand". I think you are missing the main point of my article, which does not call for government intervention or some "benevolence" outside of normal market forces. I am simply pointing out a series of trends and opportunities that suggest purpose-driven enterprises have competitive advantages in this market and time and therefore are a compelling arena for investment. Regards, t

  • Larry Menkes

    I agree, having observed this from my exposure to the Business Alliance for a Local Living Economy (BALLE) and "B" Lab. When it comes to cost benefit issues few ask what the cost of sending humanity down the tubes. Isn't this what we're really about? I'm not sure why the omission of Natural Capitalism and Rocky Mountain Institute. Lovins, Lovins, and Hawken have been saying and documenting this for decades.

  • Tripp Baird

    Thanks Larry. I was a founding member of B Corp and consider Paul a friend. Natural Capitalism surely should have and could be included in my list. There is a much longer article (4x actually) which FC edited this from that expounds in more detail on some of their great thinking. There are many others we might add to that list. We all stand on the shoulders of folks who have come before us. So yes: many thanks to PH and the Lovins. Big nod to their work. Now lets take that foundation and bring it into the mainstream. Cheers/t

  • James McCorkle

    Great and insightful article. Gives me a more motivation to continue the good fight. JM

  • Tripp Baird

    keep on keeping on, James! In the long run, the broader perspective afforded by a systemic worldview will win out. T

  • ajitjhangiani

    Fabulous. However it applies to big companies who understand these deep, almost philosophical, concepts and can afford sustainability officers and/or Michael Porter or Conscious Capitalism folks to come consult. However if one gets to the poor and underserved, the situations gets complex and consultants are not available or affordable. Now, if I am a not very big manufacturing company and need to train 50 welders for myself, why not pick 5 more from the community and train them too? Why do I have to say that this is profitable because it creates a larger pool of welders for me to choose from and besides after they make money with their new found trade they will become buyers of our products. Let us just say that one ought to do the right thing and if one can train welders in the ciommunity then act, do it, if one can reduce pollution or save water then go ahead and do it. Why does this still have to be sold on a profit motive basis? And if it does, then we just dont get it, not yet.

  • Tripp Baird

    Thanks for the comment, Ajit. I fundamentally disagree that this only applied to big companies or those with deep pockets. These trends aren't going away and apply to all companies and investments across industry and asset class. It is also, in my opinion, misguided to be focusing on "trade offs". Ultimately, to maximize impact in a company who's business is fundamentally tied to purpose / improving lives - through its supply chain, products/services, employees - you maximize growth and profitability. Grow the company, grow the impact. Positively, tripp

  • Topia Inn

    At our ultra eco inn in the Berkshires, our experience bears out what the author describes. When we take care of our guests on as many levels as possible - from the organics beds, breakfast and linens to our fair-trade and organic coffee, we support a whole chain of green business that helps preserve the pristine natural playground around us (pure ponds to swim in, one of the most beautiful rail trails to run, walk or bike, natural forest to hike...). Our guests respect us, our community appreciates us, and we spend less on marketing and more on what makes us unique in the lodging industry.

  • cliff

    Thanks Tripp - Good to see Fast Company catching on Sustainable Business and Investing trends. We have been covering it for 20 years at- www.GreenMoney.com

  • Thanks Cliff! Congrats on 20 years and thanks also for the great field building you have done over that time. The move toward the mainstream represented by FC and others is hugely encouraging indeed!

  • As one who runs such a business and has sometimes commented here. I have a question for Fast Company. Why don't we hear from those like us who actually apply these principles. We called it a profit for purpose business and last year when McKinsey's Mixmarket offered the opportunity , I described the "New Bottom LIne" of business that goes past shareholder returns, to people. We called it People-Centered Economic Development and it has operated since 1999 when applied in Russia to source a microenterprise development initiative in Tomsk. I've also described it as Inclusive Capitalism, a term that has recently created much attention.

  • Thank you, Christopher. Congrats on your 23 years. I do think it's encouraging that a more integrated or systems based worldview is creeping its way into the mainstream of business and investing. I am not sure yet whether we are in the 3rd or the 6th inning of the proverbial game, but it seems clear we are reaching an inflection point.... not because of a moral imperative so much as an awareness it can create competitive advantages and opportunity.
    Positively, T

  • Bravo! Thank you Tripp.

    We used to see diversity as primarily a moral or ethical issue -- not the powerful performance issue that it is. Only by integrating diverse perspectives do we find new paths, perspectives and intersections.

    Now, an integrative perspective, one that sees all stakeholders as connected in an evolving ecosystem, is being seen as not just a moral or ethical issue, but one of powerful performance.

    We at Partnerwerks stand ready to help, and we bring a 23 year track record to prove it.