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How businesses can save the world (when their shareholders aren’t breathing down their neck)

April 9, 2015
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Erinch Sahan, an Oxfam ag and supply chain wonk who is currently leading its Food & Climate Policy and Campaigns, argues that the best way to understand a company’s approach to doing good is by askinErinchSahang who owns it.

When it comes to the private sector, the biggest mistake the aid world makes is to see business as a homogeneous entity. In our enthusiasm for development led by private sector growth, we forget to ask: “what kind of a business world do we want?” and “what does inclusive and responsible business look like?” This may sound indulgent, when so many countries are in need of so much more investment and growth. But asking about the kind of businesses we want isn’t a case of letting ‘perfect be the enemy of the good’. It’s a question of maximising our impact on poverty (and as a side-effect building a nicer economy).

So far, I sound like a typical NGO private sector preacher – highlighting that quality is as important as quantity when it comes to private sector development. But bear with me, I promise to try to say something you might not have heard before.

Some businesses and investments are more equal than others

Not all investments are equal in their social impact. Otherwise, ‘impact investing’ wouldn’t exist. What makes some businesses and their investments better socially than others? The ability to take a course of action even when it hurts their bottom line.

When it’s win-win (ie; social and commercial interests align) and the business case adds up, any business can take the high road. It’s when the high road isn’t the most profitable and means you leave money on the table (or incur a significant additional cost) that you separate the wheat from the chaff.

It is very often NOT win-win – empirical studies say so

impact investingIn case you need convincing as to why there isn’t always a business case to do good (as so many in the donor and sustainability world claim), here are a few scenarios:

  • For workers on farms in supply chains to receive a living wage , companies need to pay more to their suppliers (and unfortunately the business case based on productivity gains rarely cuts it).
  • For companies to acquire land fairly (ie; avoid land grabs) will usually mean they pay more for the land.
  • For workers to have stable employment, companies have to give up negotiating power and make a commitment to employ someone longer-term(even when laws or union power doesn’t force them to).

If the most profitable option was always the most beneficial for society, why would thriving businesses so often be burning down forests, paying poverty wages and marketing junk-food to children? Academics have also looked into this and the conclusion is: “the evidence of a positive correlation between private sector social and environmental initiatives in developing countries and business performance is often weak. The business case on the environmental side is often stronger (e.g. energy efficiency often linked to cost savings)”.

But you will still read many reports of why there is always a business case for sustainability. These often focus on intangible benefits, such as managing reputational risk or benefits to brand (what about companies without consumer brands?). Or, the business case revolves around a plea to avoid free-riding, and instead protect global commons and invest in common goods, because we all need it. Overall, the business case is rarely more than a collection of anecdotes that show that sometimes – but only sometimes – there is a business case for doing the right thing.

A new -ism: Business Case Enthusiasm-ism

So why does the business sustainability establishment work so hard to avoid acknowledging that doing good usually costs money? One initiative that recently emailed me declares with concern: “Despite the evidence, many investors seem unconvinced that sustainable businesses are as profitable as any other”. This was in response to a Morgan Stanley survey finding that most investors (54%) believe sustainable investing involves a financial trade-off (providing the feel-good factor in exchange for lower returns). Investors and business people know what makes them money – it is unlikely NGO or sustainability types will teach them something about how to make more money. Enthusiasm for the business case for sustainable and responsible business only keeps us on the treadmill of the current model of shareholder capitalism – a model where companies must pursue every cent of last profit, at every cost (as long as it’s legal).

When we push the business case for sustainability, we shut down questions like: “what policies will promote the right kind of business structures with the right incentives?”. Our misguided line is: “the current corporate model is fine – business leaders just need to realise they can make more money by doing good”.

If we can’t rely on the business case, what do we do?

We need to promote or create the right kinds of companies. Some companies do more than others to go the extra mile and will compromise on profits when the drive for profits clashes with the interests of people and planet (though don’t be fooled by the 3P – triple bottom line rhetoric, everyone claims to embrace it). We must go beyond rhetoric and look at the governance, ownership, structural or cultural factors that distinguish companies who prioritise sustainability and positive social-impact over absolute maximisation of profit. In other words: what’s in the DNA of companies who ‘do good’ even when it hits their bottom line?

The clue lies in ownership

A recent World Bank event I spoke at show-cased a few companies that claim they genuinely prioritise doing good. The CEOs

If only it were that simple

If only it were that simple

 

of Novo Nordisk and Lego both spoke passionately about how they have made real long-term investments that had positive impacts. I can’t verify or discredit their claims as I’m mostly an ag/supply-chains guy, but in the case of both companies, foundations with a mission statement beyond profitability hold significant shareholdings (in Novo Nordisk’s case, it’s a majority voting rights held by the foundation). We also heard from the Social Sustainability Manager of H&M, a giant in the garments industry, who also showcased some initiatives that appear to push the envelope on social impact (including on initiatives with an arguably weaker business case, such as committing to a living wage in its supply chain workers in Bangladesh and Cambodia). H&M has a single family that holds the majority of voting rights.

Last week, I was at the BRAC Bank headquarters in Dhaka, meeting with a manager in their SME financing section. BRAC is an NGO that is thriving based on profits from social enterprises (including BRAC Bank). The group is huge and growing, working in a range of sectors from agricultural trade and finance, to selling services to farmers, to fisheries, storage and paper. Apart from there being a zillion reasons to look into BRAC (including that it shows social enterprises can thrive commercially in very tough places!), BRAC shows us what can be possible when shareholders salivating over every inch of additional profit aren’t breathing down the necks of business leaders. BRAC enterprises aim to make a profit but aren’t uncompromising about it.

For instance, when BRAC’s milk-chilling stations started losing them money, they kept them open to allow some of the poorest farmers to get fair prices for their milk. BRAC is absolutely focused on commercial sustainability, but it does compromise when provided with an opportunity to make significant social contributions. It’s this approach that means that BRAC Bank ranks fourth in Bangladesh in terms of size but eighth in terms of profitability (according to a manager at the bank). At BRAC Bank, they are more focused on growing their lending to SMEs than they are on growing profits. A corporate model where adequate, not maximum profits drive decisions?

Anecdotally, I’m starting to gain a picture of the DNA of companies based on their ownership:

DNA1) Short-termist baddies – Companies driven by short-term financial interests of shareholders, who can only ever seriously invest in sustainability/responsibility if there’s an immediate and clear business case

2) Enlightened self-interest / patiently owned – Companies with a longer-term financial horizon, who can invest in sustainability/responsibility if there’s at least a business case in the longer-term

3) Nice shareholders – Companies with shareholders who allow investments into sustainability/responsibility even where there’s a weak or hazy business case (e.g.; majority voting rights held by a foundation or a family with benevolent intentions)

4) The good guys (social enterprise?) – Companies that want to survive but their ownership model allows them to sacrifice profits to do good

There is no panacea. BRAC will not work everywhere and markets can eat alive those who choose not to always prioritise profits. Family-owned and private companies can be the worst performers on sustainability and often lack the transparency and scrutiny imposed by stock markets. However, ownership is a key part of the DNA of a company and can enable or prevent inclusive and pro-poor business investments. There is scope to be more sophisticated in differentiating businesses and their impacts that can start with, but must go beyond ownership. We need to get a lot better at it.

 

8 comments

  1. Great blog! Therefore we might ask how NGOs and society can influence companies’ DNA (ownership) thus with the aim to change shareholders’ line of thinking. And how can we create a new business culture of ‘providing the feel-good factor in exchange for lower returns’ which disengages from the current philosophy in business schools ‘profit maximization’.

  2. Absolutely we need to think about how to influence the DNA of companies, and this should include public policies that change the incentive to pursue profit maximisation. Tax rules favouring companies who aren’t purely focused on maximising profits? Policies to favour more co-operative, worker-owned businesses and social enterprises? And maybe NGOs need to focus more on working with companies with the right DNA, rather than just with companies who will only make investments where there’s a strong business case. Some more analysis necessary on the implications of this on all of us in the private sector development space.

  3. Interesting. It seems there’s scope to engage further with groups 2-4, to encourage, nudge, cajole them to go further, and for whom ‘more than the business case’ approaches may be viable – but that doesn’t mean throwing the baby out with the bathwater. Where there’s a business case for operating with a conscious, that’s surely still a hook worth using – but let’s not pretend it’s the only one, or that it’ll always be applicable. But that still leaves a very long-tail of category 1 ‘short-termist baddies’ who are going to be a whole lot harder to reform. I’m not convinced of the possibility of benevolent mutations here. It seems to me that creating a plausible business case is likely to be the only workable form of leverage for these guys. Here the ‘business case’ is perhaps best engineered through (inter)national regulations that change the fundamental rules of the game for these profit maximisers. Where compliance trumps commitment then perhaps the only approach is to raise this lowest bar? We might not always be able to change the underlying genetics/DNA, but altering the epigentics may be a more promising avenue…

  4. You’re right Richard that we need to think about how to work more with businesses for whom more is possible, in terms of new practices/policies that stretch the business case.

    Re making the business case to achieve the practices/policies we want, I’m not convinced that we development types can really be convincing. Though if we can ‘create’ the business case, through lobbying for regulations and getting public pressure so that suddenly there’s a business case to do the right thing, I can see us playing a constructive role.

    What we’re underplaying though is working with the companies who have a DNA that allows them to do the most transformative things. More is possible with these companies, including new practices that can change the broader industry. I would argue that this should be a focus for private sector development.

  5. Great blog, but missing a crucial piece: the presence at the board of a company of other stakeholders than the shareholders.

    It is just a legal choice to have only shareholders there. Germany is in respected as a capitalsit country, with legally other groups in the board. When e.g. the Unions are there, (http://eurofound.europa.eu/observatories/eurwork/comparative-information/board-level-employee-representation-in-europe) it seems the longterm horizon of a company expands.

    For short term campaigns, this peice is great strategy, but on long term vision, we should probably advocate getting the boards to represent the interests of more stakeholders than the funding agents.

  6. Great blog, Erinch. Wholeheartedly agree that we need to understand better the wide range of corporate animals out there, and develop different strategies for PSD work instead of lumping them together in a single category of baddies.
    Herman Mulder defined the desirable trajectory for impact investing as moving from oxymoron to tautology implicitly suggesting that the trade-off between financial and social/environmental returns would diminish in the longer term.
    For long tail of category 1, more analysis needed by and within sectors to tackle short-termism. Institutional investors, but not hedge funds, are generally interested in steady, or moderately growing, earnings over longer term, so profit maximisation needs to be unpicked a bit more. Volatility and uncertainly of returns are undesirable. Some corporate strategies are vulnerable to the financial cycle or to impending social regulation in markets…….tobacco in Lac perhaps.
    Business schools are a point of entry: Pamela Hartigan of Skoll Social Enterprise Centre at Said Business School, Oxford says that meaning of entrepreneur should change so that social is in-built and separate category of social entrepreneur should be discouraged. Issue is how to extend this thinking to new generation of corporate managers, and institutional investors.
    Aligning tax and regulatory treatment of earnings, bonuses and stock-related remuneration with long-term outlook could be one lever. This could apply both to investment managers and corporate directors……there needs to be as much alignment as possible between the two groups.
    Social auditing was fashionable 30 years ago. Not sure that sustainability reporting quite covers that intended ground.
    Agree that German model with TU participation is an improvement, but not sure how well this deals with negative externalities, and/or poor behaviour, in developing country markets.

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