Increasingly, CEOs' incomes and careers are tied to quarterly stock reports. The result: a focus on impressive, immediate gains over smart, sustainable policies that are healthy for businesses, the economy, and society.
In spite of this systemic myopia, many businesses today focus explicitly on making a positive social impact on the communities they serve, while minimizing their environmental footprints. Executives and stockholders are aware that, for a number of reasons, good citizenship is generally good business.
Yet, according to Daniel Altman and Jonathan Berman, colleagues at Dalberg Global Development Advisors, the double and triple bottom line approach many public companies take
to account for their humanitarian activities is likely to yield lower social benefits than a long-term approach to profitability.
Daniel Altman: The problem is that so many [corporations] are focused on the short term, and as a result, they have had to figure out a different way to account for these social investments and that is where you see things like corporate social responsibility, creating shared value, double bottom lines, triple bottom lines. These are really short term ways of accounting for investments that will have benefits to the company in the long term.
In their recent paper The Single Bottom Line, Altman and Berman argue that companies need to evaluate their social and environmental efforts in terms of their impact on the classic, single bottom line – profit, rather than considering these activities as expense streams with vague future payoffs that are impossible to calculate. In other words, businesses need to ask of any proposed social effort: "how will this benefit us in the long run?"
According to the authors, the long view is key here. While social investments can yield tremendous private benefits for companies, these are almost never immediate. Simply folding social programs back into a single bottom line isn't sufficient – to perceive the returns on these investments, companies need to look years, even decades into the future.
Daniel Altman: One great example of companies that are using this long term thinking is JP Morgan’s social finance office. They have an office in London where they’re actually helping ‘impact investors’ who are doing social investments through their portfolios, giving money to organizations that not only will turn a profit, but will also contribute something to society, and they’re doing this at concessionary rates. Now you might say, well, how does that contribute to JP Morgan’s bottom line in the long term? Well, they realize that this impact investor class is a new class of customers for them, and by offering them concessionary rates here they can offer their whole spectrum of products to these new customers.
This is not a return to trickle-down economics or Milton Friedman's doctrine of pure self-interest. Following Altman and Berman's advice, businesses would have strong, concrete incentives to invest in social programs. The authors demonstrate that, over a long enough time-horizon, some social programs can benefit businesses significantly, and in numerous ways, including:
- Better reputation amongst consumers, leading to higher demand for products
- Better relationships with government, leading to easier regulatory complacence and lower costs of operations.
- Increased loyalty among employees, reducing the costs of hiring and training new workers.
- Increased skill levels amongst local workers, leading to more efficient production.
The authors also provide several theoretical examples of cost/benefit analyses of corporate social initiatives, such as producing low-cost smart phones for sale in poor countries, or investing in a developer of educational software for inner city schools. Some of these initiatives have a high probability of paying off, others are likely to cost far more than they bring in.
Ironically, by considering their financial self-interest over a long time-horizon, businesses are more likely to invest in ambitious social programs, and more likely to sustain them in times of economic downturn. Many corporate social and environmental initiatives will come through this kind of scrutiny with flying colors, but others will turn out to be bad investments.
This isn't a bad thing, say Altman and Berman; on the contrary, it would refocus businesses on doing what they do best – which may or may not include building a school – while clarifying those areas of social need that can be better served by government, community organizations, or private philanthropy.
The authors' findings echo the larger refrain: a culture of shortsightedness produces bad results for everyone – business and society alike. The obsession with quarterly profits and constant growth creates an unrealistic climate in which bad decisions are incentivized.
For the future health of the global economy, and of every person whose life it touches, it's time for the corporate ostrich to unbury its head from the sand and look to the horizon.