As Wall Street pored over a fresh batch of lackluster earnings statements last month, another group in Berkeley, California scrutinized some important bottom-line figures of its own: social return on investment.
Snicker if you must, but judging from trends at top B-schools, and even in many high-octane boardrooms, corporate responsibility is emerging as an increasingly important variable in the traditional profit-loss calculation.
“There is a dual bottom line,” says Jerry Engel, a professor at the Haas School of Business at UC Berkeley. “Businesses not only have to look for a financial return on investment but also for a social return.”
So how exactly does a CEO quantify a social return, or SROI? That, says Engel, is a question that Berkeley’s National Social Venture Competition (NSVC) is helping to answer. It was that same question of measuring social impact that held the attention of high-profile judges as they evaluated entrants’ business plans in Berkeley last month.
“The notion of corporate responsibility isn’t new,” says Engel, who also serves as director of the school’s Lester Center for Entrepreneurship and Innovation, which sponsors the NSVC. “What’s new is that we’re asking applicants to quantify the social return.”
Social-impact columns may not appear on corporate ledgers any time soon, but the idea of quantifying business responsibility is starting to take hold. Why? Partially because companies now face more pressure than ever — from shareholders, employees, and beyond — to come clean about the results they deliver and the impact of those results on society. (Enron anyone?)
Trade-Off? What Trade-Off?
The NSVC started in 1999 as a contest for student entrepreneurs who were seeking strong results along two bottom lines: the financial and the social. During three of the most tumultuous years in business history, the pool of contest applicants has soared 140%, while Columbia Business School and the Goldman Sachs Foundation have thrown their weight — and money — behind the competition as well.
Programs focused on social responsibility have cropped up at other top schools too. Harvard Business School, for example, offers the Initiative on Social Enterprise, which prepares students for leadership roles in nonprofit organizations. Stanford has launched its own Public Management Program, and Boston College hosts an annual contest called The Best MBA Paper on Corporate Citizenship.
When asked what challenges his company faces in balancing financial interests with social concerns, Bruce Anderson, CEO of Wilson TurboPower Inc. — this year’s $25,000 prize winner in the NSVC’s high-growth category — is quick to answer: “Huh?”
It’s not that Anderson doesn’t understand the question. It’s just that his business sees a wide-open market opportunity, making a question about trade-offs largely unanswerable. No zero-sum game here. It turns out that profit and social responsibility are mutually inclusive after all.
Wilson TurboPower emerged from the labs of MIT — specifically, from the shelf of long-time mechanical-engineering professor and environmental activist Peter Wilson. The company’s first product, the regenerator, works with microturbines, units that resemble backup generators, except that they provide a source of primary, not secondary, power for a limited area like a small group of office buildings, alleviating many of the headaches associated with centralized utility grids. The Wilson TurboPower regenerator takes waste heat from microturbines and puts it to other uses, such as heating water, boosting efficiency from about 30% to 80%.
During the colossal California energy crisis of 2000, the dangers of utility grids became obvious. (The phrase “rolling blackout” still sends shivers down the spines of many Californians.) What makes Wilson TurboPower’s business plan so intriguing is that it offers an energy-efficient product at little extra cost to consumers — at least when compared to an expensive, arduous endeavor like solar energy.
The fact that Wilson TurboPower faces essentially no trade-off between its bottom line and its benefit to society hits upon a fundamental point about corporate responsibility: It doesn’t have to be an either-or choice, like picking decaf over regular. And it’s not just about philanthropy. Social responsibility is a principle that gets infused into a company’s DNA, oftentimes manifesting itself in a series of seemingly trivial business decisions.
And that’s where today’s B-school students come in. “Big” and “powerful” may describe an MBA’s ideal employer today, but “bad” is not sexy anymore. While the threat of consumer unhappiness carries its own weight, the prospect of losing top MBA talent can strike terror into the heart of any red-blooded CEO, even in lean times.
The Mercury Is Rising
“When I was looking for a job after business school, part of the appeal of Deloitte was that it played up its women and minority initiatives as well as its commitment to work-life balance,” says Ben Klasky, a 1998 graduate of Stanford Business School. Today, Klasky serves as the executive director of Net Impact, a San Francisco-based organization that helps B-schools promote corporate responsibility.
This year, Net Impact began running ads for MBA summer internships at socially responsible companies. So far, 2,500 applicants have applied to fill 75 slots, Klasky says.
Of course, the characteristics that mark a socially responsible company vary wildly depending upon whom you ask. But David Eichberg, a spokesperson for Business for Social Responsibility, says it’s difficult to apply a single metric, but he sees the “mercury rising” — mainstream business is paying more attention to corporate social responsibility.
For example, Eichberg cites results from a global survey conducted by Environics International in cooperation with several other organizations, including The Conference Board. The study found that half the people surveyed in 23 countries pay attention to the social behavior of companies, while one consumer in five has punished or rewarded a company based on its social practices.
In fact, Eichberg says globalization plays a surprisingly large role in keeping companies on their best behavior. “There is certainly a role that globalization plays in getting businesses to adjust their practices,” he says.
If you need proof, look no further than Nike, which cut off suppliers that exploited child labor after weathering a maelstrom of bad press and boycotted sales. Granted, Nike has a long way to go to catch up with Tom’s of Maine or Ben & Jerry’s. Eichberg says businesses that don’t factor in the societal impact of their operations carry the potential of huge costs in the long term.
The Haas School’s Jerry Engel agrees, saying some statements of corporate responsibility surely constitute little more than “window dressing.” At some point, companies will have to make good on the promises they’re making to the public.
“In the end, the cost they pay for violating their public statements may be their brand equity,” Engel says. “And that’s something no company can afford to squander.”
Ryan Underwood (email@example.com) works on the Fast Company Web team. Learn more about the National Social Venture Competition on the Web.
Sidebar: And the Winners Are …
Here are the winners from this year’s National Social Venture Competition, held at UC Berkeley on April 5 and 6.
Grand Prize — High-Growth Category: $25,000
Wilson TurboPower: Next-generation microturbines that will be the first distributed power-generation products to have both efficiencies and costs comparable to centralized power generators. (Also winner of the $5,000 award for best SROI analysis.)
Grand Prize — Medium-Growth Category: $25,000
Bronx Charter School for the Arts: A nonprofit public-charter elementary school in the Hunts Point section of the South Bronx that was founded on the principle that arts education is a catalyst for academic and social success.
Grand Prize — Best-Blended-Value Business: $25,000
Regale Corp.: For-profit design-and-technology manufacturer of molded products that seeks to lead the packaging industry away from the use of environmentally unfriendly plastics and foams to the use of Regale molded fiber (made of paper and water). The company’s innovative design, tooling, and manufacturing processes will address up to 15% of the total market ($82.5 billion).