It's kind of like air. Invisible but omnipresent, every industry, market, and sector has a dogma — "a doctrine or code of beliefs accepted as authoritative." "This is just how things are done," dogma whispers, every second of every day, to every decision-maker in every boardroom.
What does it mean to be a revolutionary? To challenge an existing dogma, instead of complying with it: to reject its tenets, highlight its flaws and improve each of its shortcomings.
What makes Apple so revolutionary? Why is it able to disrupt industry after industry, and topple the mightiest of incumbents? Steve Jobs is, from an organizational perspective, more Che Guevara than Jack Welch: he's always challenging dogma, instead of complying with it. Apple's rivals, like most companies, do exactly the opposite: "this is how things are done," they think — and then try to do it harder.
Here are six ways to challenge the dogma that's invisible and omnipresent in your industry — to be a breath of fresh air:
Challenge products. Most companies make the same toothpaste, car, or shoe — just in a slightly different color or flavor. Not Apple. Every once in a while, it challenges the existing dominant design, the accepted ideal of what a product should be. That is, of course, the story of the iPad. Yes, tablets have been around for a while — but none with the features, attributes, and pricing of the iPad. Instead of contesting the same old stuff, Apple challenged everyone to rethink it.
Challenge strategy. Think of strategy as a pattern of investments a firm makes. What is it — really — that makes Apple different? It invests significantly more in design and usability, where its rivals don't; as an organization, Apple is more like a design studio (replete with control freak overlord) than a "company." Rivals never invested in design — because design was seen, in biz parlance, as a "cost center", not a "profit center", a frivolous, soft, unproductive use of hard-earned capital. Apple's great challenge has proven that design is perhaps the single most productive investment a firm can make — and that's why its rivals are desperately playing catch up. But they're missing the point: It's not about following Apple. It's about challenging dogma.
Challenge distribution. In the early noughties, the music industry rolled out wave after of portals, channels, and platforms: all new distribution mechanisms. The problem was that they were the same old distribution mechanisms, with a slightly prettier face. As PC World famously said, "the services' stunningly brain-dead features showed that the record companies still didn't get it." Who did? Apple. iTunes challenged the preconception that music could only be distributed in walled gardens — iTunes isn't perfect, but it is far more of a truly open market that anything that came before it.
Challenge business models. Apple's replicated iTunes' success with the App Store, of course. The App Store challenges business model dogma by turning media from product to service, letting new profit possibilities open up. Publishers can earn revenues from app sales — and perhaps further revenues from in-app sales. Apple is spearheading its own mobile ad service, shifting into a new industry, offering new products to a new market — ads that let publishers get more creative bang for the buck, and alter their business model dogma that digital ads are low-value commodities. TIME asking five bucks an issue isn't what I mean by challenging business model dogma — two kids at Stanford topping the charts with an awesome newsreader, one that people actually pay for, is.
Challenge sales and service. Apple sells very differently from its rivals, and I'm not just talking Apple ads. Instead, I mean the Apple Store. Yesterday, electronics were soulless "product," commodities hard-sold by tuned-out teenagers in big-box megastores. The Apple Store challenged every aspect of that and turned it on its head. The act of exchange became personal, passionate, and interesting. Who doesn't stop into an Apple Store every now and then just to check something out? The Genius Bar turned service upside down — giving people, well, actual service, instead of just outsourced script-reading (imagine that). That has paid steep dividends: the Apple Store is (by far) the most productive and profitable store in your local mall.
Challenge production. Apple has, as we've explored, challenged in a variety ways. Here's it's next and greatest challenge. Can it challenge how its products are made? As a recent spate of suicides at Foxconn's Hon Hai suggests, the effects of producing "magical and revolutionary" devices might not be so magical or revolutionary. Can Apple, well, "Apple" not just distribution, marketing, and retail, but the global economy's lowest-common-denominator battle for "labor arbitrage," making it simpler, cleaner, and more productive? If it can, it just might give Apple yet another edge for the next decade.
Lesson? It is through challenge — not mere compliance — that the disruptive outperformance is earned.
You might be wondering — what about Apple's dogma? After all, Apple's a pretty dogmatic company. Of course it is: that's the point. Don't accept it: it's becoming the new industry dogma. Now you know how to challenge it...Umair Haque
Showing posts with label Umair Haque. Show all posts
Showing posts with label Umair Haque. Show all posts
Friday, June 11, 2010
Thursday, May 27, 2010
Umair Haque: Rebooting Prosperity in an Age of Austerity
Welcome to the Age of Austerity. Austerity is, of course, the opposite of prosperity. It's the latest buzzword on everyone's lips. And it's not just about Europe. The vast majority of America has faced austerity for the last decade, too. Japan's been under austerity for two decades. To Asia, Latin America, and, of course, long-suffering Africa too, the bitter taste of austerity is all too familiar. Next stop for Austerity: America.
Today's austerity is the failure of yesterday's thin, inauthentic prosperity. That means the central challenge of the Age of Austerity is to reboot prosperity. Tomorrow's global economy must be built on a more authentic prosperity: one that is more nuanced and meaningful, because it matters in human terms.
In the Age of Austerity, it is institutional innovation — the most advanced and powerful kind of innovation — that counts. Today, we're still surrounded by industrial era institutions — corporations, resources, industries, exurbs, and GDP, to name just a few. Rebooting prosperity means reinventing the institutions that led to austerity.
It's the story of reconceiving, redefining, restructuring, revolutionizing, and recalibrating yesterday's economic institutions. The catch? Institutional innovation is a new, notoriously tough discipline. Few understand it, fewer still have succeeded at it. Here's my exploration of what a successful rebooting of prosperity might look like.
Reconceiving. Yesterday's prosperity was conceptualized as simply growth in GDP, the industrial economy's foundational institution. Rebooting prosperity begins with reconceiving that metric. GDP is about product. Prosperity, the measure of a good life, comprises more than growing a product. There's a tremendous diversity of perspectives on what else should be considered. Some seem utopian, like the King of Bhutan's Gross National Happiness. Some, hard-nosed, like the World Bank's Wealth of Nations. All are baby steps. Let's invent a hypothetical measure, just for this post: NA, or National Awesomeness.
Redefining. Reconceiving what prosperity is will let us redefine how it happens. It will let us finally begin taking up a challenge that should have been answered decades ago: updating our system of national accounts. When we speak of growth, it's GDP that grows. Growth equals more income in our national accounts. But for NA to grow, a new system of accounts would be necessary. One that might address the numerous shortcomings of GDP, and counts other costs and benefits that matter to people besides product. It's another new institution that will help reboot prosperity.
Restructuring. In turn, redefining how prosperity happens will change the definition of who generates it (and benefits from it). Mark Thoma, Robert Reich, and James Kwak are having an interesting discussion about the fact that the so-called Wall Street reform bill does nothing to actually "reform" Wall Street. They're absolutely right. What might help restructure not just Wall Street — but every industry that has a social uselessness problem, from Detroit, to Big Pharma, to Big Food? Making the institutions contribute in 21st century terms. New top lines, bottom lines, assets, and liabilities are the foundations of 21st century industry structures — they will radically alter industry boundaries, market sizes, and value chains, by reshaping entry barriers, mobility barriers, and sources of bargaining power. By doing so, they'll help pop tomorrow's industries into existence, vaporize yesterday's, and ask those in the middle to shape up — or bow out.
Revolutionizing. The global macroeconomy is a machine, just like an engine is. Perhaps its key institution is the Balance of Payments. The point of the BOP is to close a feedback loop — countries with deficits should see their currencies fall, so exports can rise, and the deficit fall, and countries with surpluses should see currencies rise, so imports can rise, and the surplus fall. What if we had a Balance of Awesomeness, instead? The Balance of Awesomeness might close a different, more pressing feedback loop. It's an institution that might ask a country to balance a deficit in its national awesomeness with investment in people, communities, or the natural world. Conversely, it might let a country with a surplus in awesomeness know it's overinvesting, and begin consuming a little bit more instead. And that, in turn, might revolutionize how sustainably assets are allocated are utilized.
Recalibrating. Today's investors are speculators with the attention span of a Tasmanian Devil with ADHD. Maybe, just maybe, all of the above might be a new groundwork for investing, by altering incentives radically. If new financial instruments — new institutions, again — were linked to either National Awesomeness, or a country's Balance of Awesomeness (think Awesomeness Derivatives), investment would slow down for the long haul, tune into what matters to people, and turn on to engaging with, not just taking from, society.
Sound like a pipe dream? Wishful thinking? Think again. You're behind the curve. The challenges above have already begun to be answered, at the highest level. China's beginning to include the value of ecosystems in its national accounts, for example. In America, the State of the USA project is going to unveil a new set of Key National Indicators this summer. In France, the Stiglitz-Sen-Fitoussi Commission issued a landmark report on measuring well-being, instead of income.
Rebooting prosperity is the great challenge of the teens. There's no single right way to do it. But those who don't, won't, or can't answer it — because of ideology, inability, or because they're just plain ornery — well, they're fossilizing as we speak. Institutional innovators are already hard at work igniting a better tomorrow. New measures of prosperity are already being conceptualized, new national accounts defined. And, as I've discussed at length here, a new generation of companies and investors is hard at work turning "business" into betterness at the micro-level.
Seen through the Cyclopean eye of economic evolution, a great meteor crashed in 2007 — and those who can't reboot prosperity are a bit like the poor, straggling dinosaurs who survived yesterday's great meteor crash (hello, BP): they're living on borrowed time in this Age of Austerity, in a world being furiously reshaped.
Please view here: Umair Haque
Today's austerity is the failure of yesterday's thin, inauthentic prosperity. That means the central challenge of the Age of Austerity is to reboot prosperity. Tomorrow's global economy must be built on a more authentic prosperity: one that is more nuanced and meaningful, because it matters in human terms.
In the Age of Austerity, it is institutional innovation — the most advanced and powerful kind of innovation — that counts. Today, we're still surrounded by industrial era institutions — corporations, resources, industries, exurbs, and GDP, to name just a few. Rebooting prosperity means reinventing the institutions that led to austerity.
It's the story of reconceiving, redefining, restructuring, revolutionizing, and recalibrating yesterday's economic institutions. The catch? Institutional innovation is a new, notoriously tough discipline. Few understand it, fewer still have succeeded at it. Here's my exploration of what a successful rebooting of prosperity might look like.
Reconceiving. Yesterday's prosperity was conceptualized as simply growth in GDP, the industrial economy's foundational institution. Rebooting prosperity begins with reconceiving that metric. GDP is about product. Prosperity, the measure of a good life, comprises more than growing a product. There's a tremendous diversity of perspectives on what else should be considered. Some seem utopian, like the King of Bhutan's Gross National Happiness. Some, hard-nosed, like the World Bank's Wealth of Nations. All are baby steps. Let's invent a hypothetical measure, just for this post: NA, or National Awesomeness.
Redefining. Reconceiving what prosperity is will let us redefine how it happens. It will let us finally begin taking up a challenge that should have been answered decades ago: updating our system of national accounts. When we speak of growth, it's GDP that grows. Growth equals more income in our national accounts. But for NA to grow, a new system of accounts would be necessary. One that might address the numerous shortcomings of GDP, and counts other costs and benefits that matter to people besides product. It's another new institution that will help reboot prosperity.
Restructuring. In turn, redefining how prosperity happens will change the definition of who generates it (and benefits from it). Mark Thoma, Robert Reich, and James Kwak are having an interesting discussion about the fact that the so-called Wall Street reform bill does nothing to actually "reform" Wall Street. They're absolutely right. What might help restructure not just Wall Street — but every industry that has a social uselessness problem, from Detroit, to Big Pharma, to Big Food? Making the institutions contribute in 21st century terms. New top lines, bottom lines, assets, and liabilities are the foundations of 21st century industry structures — they will radically alter industry boundaries, market sizes, and value chains, by reshaping entry barriers, mobility barriers, and sources of bargaining power. By doing so, they'll help pop tomorrow's industries into existence, vaporize yesterday's, and ask those in the middle to shape up — or bow out.
Revolutionizing. The global macroeconomy is a machine, just like an engine is. Perhaps its key institution is the Balance of Payments. The point of the BOP is to close a feedback loop — countries with deficits should see their currencies fall, so exports can rise, and the deficit fall, and countries with surpluses should see currencies rise, so imports can rise, and the surplus fall. What if we had a Balance of Awesomeness, instead? The Balance of Awesomeness might close a different, more pressing feedback loop. It's an institution that might ask a country to balance a deficit in its national awesomeness with investment in people, communities, or the natural world. Conversely, it might let a country with a surplus in awesomeness know it's overinvesting, and begin consuming a little bit more instead. And that, in turn, might revolutionize how sustainably assets are allocated are utilized.
Recalibrating. Today's investors are speculators with the attention span of a Tasmanian Devil with ADHD. Maybe, just maybe, all of the above might be a new groundwork for investing, by altering incentives radically. If new financial instruments — new institutions, again — were linked to either National Awesomeness, or a country's Balance of Awesomeness (think Awesomeness Derivatives), investment would slow down for the long haul, tune into what matters to people, and turn on to engaging with, not just taking from, society.
Sound like a pipe dream? Wishful thinking? Think again. You're behind the curve. The challenges above have already begun to be answered, at the highest level. China's beginning to include the value of ecosystems in its national accounts, for example. In America, the State of the USA project is going to unveil a new set of Key National Indicators this summer. In France, the Stiglitz-Sen-Fitoussi Commission issued a landmark report on measuring well-being, instead of income.
Rebooting prosperity is the great challenge of the teens. There's no single right way to do it. But those who don't, won't, or can't answer it — because of ideology, inability, or because they're just plain ornery — well, they're fossilizing as we speak. Institutional innovators are already hard at work igniting a better tomorrow. New measures of prosperity are already being conceptualized, new national accounts defined. And, as I've discussed at length here, a new generation of companies and investors is hard at work turning "business" into betterness at the micro-level.
Seen through the Cyclopean eye of economic evolution, a great meteor crashed in 2007 — and those who can't reboot prosperity are a bit like the poor, straggling dinosaurs who survived yesterday's great meteor crash (hello, BP): they're living on borrowed time in this Age of Austerity, in a world being furiously reshaped.
Please view here: Umair Haque
Friday, May 14, 2010
Umair Haque: Why Betterness Is Good Business
Lately, there's been a raging debate in the comments here. One camp's refrain: who is this snot-nosed idealist? Why is he telling us to do betterness instead of business, pursue awesomeness instead of innovation — and maximize good, instead of quarterly profits? What kind of expertise is that? We've got the hardest of noses — so where's the real-world evidence?
Here's the score: Striving to do more good is associated with greater profitability, equity and asset returns, and shareholder value creation. But that's still not good enough. Today, the bar is being raised: success is itself changing. Those are yesterday's metrics of success — more importantly, maximizing good lets companies outperform on tomorrow's measures of success. Increasingly, investors are using ethical/social investment criteria like the KLD score, corporate governance ratings, and other metrics we'll examine below. More and more, investors aren't just looking for near-terms financial returns: they're looking for financial returns *plus.* Why? Because the *plus* makes returns less risky, more defensible, and, the biggie, more meaningful. As the expectations of people, communities, society, and investors change, the definition of outperformance itself is changing.
Every year, the Ethisphere Institute identifies its most ethical companies and then tests their performance. In 2008, ethical leaders outperformed the growth of the S&P 500 by 40%. In 2009, again. In 2010, by 35%. Its drivers? CSR Magazine found a shareholder value performance gap of about 10% between, for example, the most and least transparent companies. No, neither are iron-clad tests. But they begin to hint at a relationship — one that, these days, most CEOs would give their eyeteeth for.
Here's a more powerful result. The mean Market Value Added of the top 100 Corporate Citizens is $36 billion, more than four times the Mean Market Value Added of the remaining companies — which is less than $8 billion, finds Curtis Verschoor of the SRI. In term's of Businessweek's ranking of Total Financial Performance — a composite of eight criteria, like sales growth, profit growth, and return on equity — the top 100 Corporate Citizens outperform by 10.4 percentiles. Both these relationships are statistically significant.
At Berkeley's Haas School of Business, Margarita Tsoutoura came up with even more interesting results: she found that companies who rated highly on the KLD rating score — socially responsible companies — had significantly higher profit margins, returns on equity, and returns on assets. Here's another pioneering study I like — one which, yet again, concludes responsibility fuels advantage, because it's risk management: better insurance against adverse future events. Those were a small studies; here's a huge one. Marc Orlitzky, Frank L. Schmidt, and Sara L. Rynes found that responsibility was significantly positively correlated with financial performance: "corporate virtue," in their words, "is likely to pay off." Their work was a meta-analysis of 52 studies, with over 33,878 total observations. Whew: that's a whole lotta outperformance.
In People and Profits?, a landmark book reviewing decades of research, Joshua Margolis and Jim Walsh found that "when treated as an independent variable, corporate social performance is found to have a positive relationship to financial performance in 42 studies (53%), no relationship in 19 studies (24%, a negative relationship in 4 studies (5%), and a mixed relationship in 15 studies (19%)". They say, pithily: "the findings might be encouraging for advocates of corporate social performance and problematic in the eyes of opponents and critics." In a recent interview, Margolis says: "there have been 80 academic studies in the last 30 years attempting to document the relationship between social enterprise activities and corporate financial performance. The majority of results (53%) point to a positive relationship, and only 5% of studies indicate a negative impact on the bottom line."
No wonder, then, that the alarm clock's going off for investors. At least 538 institutional investors use social criteria when making decisions that used to be purely financial. Social investors manage assets of $2.71 trillion, already more than 10% of the $25 trillion of the economy's total assets under management. And that's not a groundswell. It's an explosion: fifteen years ago, the number was just $640 billion.
The tectonic shift to social investing going mainstream is going to amplify the effects above as it gathers strength. It will ensure that every marginal bit of good creates even more shareholder value — and every marginal bit of bad destroys even more. It's nothing less than the retuning of the global economic engine itself.
Yet, the next thing Margolis says is "we caution against drawing hasty conclusions." Why? Well, "responsibility" can be, as Michael Porter argues, a vague, often meaningless concept — and so discovering "how" it fuels outperformance is complex. The studies above have methodological limitations. Here's a paper, for example, that argues that not investing in alcohol, tobacco, and nuclear power brings socially responsible investment returns down to market averages — hinting at that complexity. Here's a killer paper from Michael Toffel about whether responsibility ratings actually do measure social responsibility in the first place. It's not as simple, then, as fashion: merely signing up to the latest supplier standards, buying into the newest set of audits, and being included in the latest list of ethical companies.
That's why I took a different tack in my forthcoming book: considering not just whether companies are "responsible" in the sterile, often easily gamed terms above, but whether they're maximizing good: creating authentic economic value. My starting point wasn't just "social" outperformance — but, more deeply, antisocial underperformance: the, well, market itself. Business as usual is intellectually, ethically, and morally bankrupt. Surprise: it's also economically bankrupt. The S&P 500 created no value over the noughties Not a penny. If we factored in negative externalities, like, for example, the costs of the banking bailout? Trillions in value would have been destroyed. Over the last decade, business as usual is net negative in terms of creating authentic economic value.
In the starkest of contrasts, what I call Constructive Capitalists — a set of companies who meet a Mount Everest-level bar for good, not just "social responsibility" — have outperformed by hundreds of percent. While business as usual has been busy going economically bankrupt, in the middle of the most turbulent, volatile, and downright nasty decade in recent history, companies who are doing the stuff we discuss on this blog have thrived, disrupted, and prospered.
The future of advantage is never seen with perfect clarity. Yet, its shape is more and more visible. Economics ain't physics. The debate's not 100% resolved and perhaps it never will be. Yes, there is much work to be done untangling relationships, directionality, and causality. Here's the kicker. By the time the evidence is totally, irrefutably, conclusive? Well, by then, the great shift will, by definition, be over. Too late: you'll probably be one of the fatalities being studied by researchers. A Constructive Capitalist with a betterness model, pursuing awesomeness, doing radical good, who had your creaking industrial-era empire squarely in his or her crosshairs, will likely have already have dug your grave.
The evidence already strongly suggests that good is better. It's crucial to understand the nuance in that statement. Not just because it leads to better profits, equity returns, asset returns, and shareholder value, though it does. Today, those are just table stakes, an industrial-era definition of success that's increasingly out of date. Good is better also because companies are being judged against a whole new set of criteria, by customers, governments, communities, and investors. They're already asking, "So you made a profit — yawn — but did you actually have an impact?"
Good, the evidence suggests, is the very opposite of Utopian idealism. The real utopia? That was the one economists, bankers, and titans of industry promised: in a world of perfect markets and infinite leverage, companies who blindly maximized profit would lead everyone, ineluctably, to unstoppable prosperity. It didn't work out that way. Just ask Wall Street, Big Food, Big Media, Detroit, Greece, Spain, Dubai, or anyone from the American homeowner to the Chinese migrant worker. Today's real idealism is this: pretending that business as usual is good enough for companies, countries, the world, or the future. It isn't.
It's time to get real: good is as sharp as a razor, as hard as a hammer blow. That's what decades of research suggest. That's why companies as different as Google, Wal-Mart, Pepsi, Lego, Starbucks, Nestle, Apple, Patagonia, Timberland, GE, Tata, are all, in their own ways, taking steps small and large towards it — and why customers, governments, and investors are joining hands with them on the way. Welcome to 21st century business. It's a movement to do meaningful stuff that matters the most — and if you're not part of it, well, the hard-nosed chance is: you're kissing your future goodbye.
I don't advise you to do this stuff because I'm a communist. It's because I want you to outperform — today and tomorrow. And I know you can. Umair Haque
Here's the score: Striving to do more good is associated with greater profitability, equity and asset returns, and shareholder value creation. But that's still not good enough. Today, the bar is being raised: success is itself changing. Those are yesterday's metrics of success — more importantly, maximizing good lets companies outperform on tomorrow's measures of success. Increasingly, investors are using ethical/social investment criteria like the KLD score, corporate governance ratings, and other metrics we'll examine below. More and more, investors aren't just looking for near-terms financial returns: they're looking for financial returns *plus.* Why? Because the *plus* makes returns less risky, more defensible, and, the biggie, more meaningful. As the expectations of people, communities, society, and investors change, the definition of outperformance itself is changing.
Every year, the Ethisphere Institute identifies its most ethical companies and then tests their performance. In 2008, ethical leaders outperformed the growth of the S&P 500 by 40%. In 2009, again. In 2010, by 35%. Its drivers? CSR Magazine found a shareholder value performance gap of about 10% between, for example, the most and least transparent companies. No, neither are iron-clad tests. But they begin to hint at a relationship — one that, these days, most CEOs would give their eyeteeth for.
Here's a more powerful result. The mean Market Value Added of the top 100 Corporate Citizens is $36 billion, more than four times the Mean Market Value Added of the remaining companies — which is less than $8 billion, finds Curtis Verschoor of the SRI. In term's of Businessweek's ranking of Total Financial Performance — a composite of eight criteria, like sales growth, profit growth, and return on equity — the top 100 Corporate Citizens outperform by 10.4 percentiles. Both these relationships are statistically significant.
At Berkeley's Haas School of Business, Margarita Tsoutoura came up with even more interesting results: she found that companies who rated highly on the KLD rating score — socially responsible companies — had significantly higher profit margins, returns on equity, and returns on assets. Here's another pioneering study I like — one which, yet again, concludes responsibility fuels advantage, because it's risk management: better insurance against adverse future events. Those were a small studies; here's a huge one. Marc Orlitzky, Frank L. Schmidt, and Sara L. Rynes found that responsibility was significantly positively correlated with financial performance: "corporate virtue," in their words, "is likely to pay off." Their work was a meta-analysis of 52 studies, with over 33,878 total observations. Whew: that's a whole lotta outperformance.
In People and Profits?, a landmark book reviewing decades of research, Joshua Margolis and Jim Walsh found that "when treated as an independent variable, corporate social performance is found to have a positive relationship to financial performance in 42 studies (53%), no relationship in 19 studies (24%, a negative relationship in 4 studies (5%), and a mixed relationship in 15 studies (19%)". They say, pithily: "the findings might be encouraging for advocates of corporate social performance and problematic in the eyes of opponents and critics." In a recent interview, Margolis says: "there have been 80 academic studies in the last 30 years attempting to document the relationship between social enterprise activities and corporate financial performance. The majority of results (53%) point to a positive relationship, and only 5% of studies indicate a negative impact on the bottom line."
No wonder, then, that the alarm clock's going off for investors. At least 538 institutional investors use social criteria when making decisions that used to be purely financial. Social investors manage assets of $2.71 trillion, already more than 10% of the $25 trillion of the economy's total assets under management. And that's not a groundswell. It's an explosion: fifteen years ago, the number was just $640 billion.
The tectonic shift to social investing going mainstream is going to amplify the effects above as it gathers strength. It will ensure that every marginal bit of good creates even more shareholder value — and every marginal bit of bad destroys even more. It's nothing less than the retuning of the global economic engine itself.
Yet, the next thing Margolis says is "we caution against drawing hasty conclusions." Why? Well, "responsibility" can be, as Michael Porter argues, a vague, often meaningless concept — and so discovering "how" it fuels outperformance is complex. The studies above have methodological limitations. Here's a paper, for example, that argues that not investing in alcohol, tobacco, and nuclear power brings socially responsible investment returns down to market averages — hinting at that complexity. Here's a killer paper from Michael Toffel about whether responsibility ratings actually do measure social responsibility in the first place. It's not as simple, then, as fashion: merely signing up to the latest supplier standards, buying into the newest set of audits, and being included in the latest list of ethical companies.
That's why I took a different tack in my forthcoming book: considering not just whether companies are "responsible" in the sterile, often easily gamed terms above, but whether they're maximizing good: creating authentic economic value. My starting point wasn't just "social" outperformance — but, more deeply, antisocial underperformance: the, well, market itself. Business as usual is intellectually, ethically, and morally bankrupt. Surprise: it's also economically bankrupt. The S&P 500 created no value over the noughties Not a penny. If we factored in negative externalities, like, for example, the costs of the banking bailout? Trillions in value would have been destroyed. Over the last decade, business as usual is net negative in terms of creating authentic economic value.
In the starkest of contrasts, what I call Constructive Capitalists — a set of companies who meet a Mount Everest-level bar for good, not just "social responsibility" — have outperformed by hundreds of percent. While business as usual has been busy going economically bankrupt, in the middle of the most turbulent, volatile, and downright nasty decade in recent history, companies who are doing the stuff we discuss on this blog have thrived, disrupted, and prospered.
The future of advantage is never seen with perfect clarity. Yet, its shape is more and more visible. Economics ain't physics. The debate's not 100% resolved and perhaps it never will be. Yes, there is much work to be done untangling relationships, directionality, and causality. Here's the kicker. By the time the evidence is totally, irrefutably, conclusive? Well, by then, the great shift will, by definition, be over. Too late: you'll probably be one of the fatalities being studied by researchers. A Constructive Capitalist with a betterness model, pursuing awesomeness, doing radical good, who had your creaking industrial-era empire squarely in his or her crosshairs, will likely have already have dug your grave.
The evidence already strongly suggests that good is better. It's crucial to understand the nuance in that statement. Not just because it leads to better profits, equity returns, asset returns, and shareholder value, though it does. Today, those are just table stakes, an industrial-era definition of success that's increasingly out of date. Good is better also because companies are being judged against a whole new set of criteria, by customers, governments, communities, and investors. They're already asking, "So you made a profit — yawn — but did you actually have an impact?"
Good, the evidence suggests, is the very opposite of Utopian idealism. The real utopia? That was the one economists, bankers, and titans of industry promised: in a world of perfect markets and infinite leverage, companies who blindly maximized profit would lead everyone, ineluctably, to unstoppable prosperity. It didn't work out that way. Just ask Wall Street, Big Food, Big Media, Detroit, Greece, Spain, Dubai, or anyone from the American homeowner to the Chinese migrant worker. Today's real idealism is this: pretending that business as usual is good enough for companies, countries, the world, or the future. It isn't.
It's time to get real: good is as sharp as a razor, as hard as a hammer blow. That's what decades of research suggest. That's why companies as different as Google, Wal-Mart, Pepsi, Lego, Starbucks, Nestle, Apple, Patagonia, Timberland, GE, Tata, are all, in their own ways, taking steps small and large towards it — and why customers, governments, and investors are joining hands with them on the way. Welcome to 21st century business. It's a movement to do meaningful stuff that matters the most — and if you're not part of it, well, the hard-nosed chance is: you're kissing your future goodbye.
I don't advise you to do this stuff because I'm a communist. It's because I want you to outperform — today and tomorrow. And I know you can. Umair Haque
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