“Without action, the world would still be an idea” – Georges F. Doriot
The goal of capitalism has always been the same: earn profits. This can be done in many ways: focusing on revenues (increasing product offering or differentiation), reducing costs, increasing velocity of inputs…, but always focusing on achieving a competitive advantage that allows the company to make profits. In “The Goal” Eliyahu M. Goldratt states it very clear: “the goal of any organization is not to reduce costs or increase efficiency, but to simply increase throughput” or, in other words, to raise profits. In its search for larger financial gains, capitalism has fostered competition, which has led to company specialization and innovation in an attempt to achieve certain differentiation. Firms under capitalist regimes have created millions of jobs and have driven humanity to the highest levels of technological progress in history of humankind.
However, companies have focused on their profits. Most of their decisions are based on whether an additional unit produced/sold reports positive private marginal benefit for them or not; firms have never paid attention to the social marginal benefit/cost of that additional unit. This lack of social perspective, has led to many negative externalities for society, captured in some (out of many) shocking headlines:
- The 8 richest people in world own the same amount of wealth than the 50% poorer (3.7 billion people) (source: Oxfamm)
- More than 30% of the food produced is wasted – at the same time, 1 in every 6 people on Earth don’t get enough food to live a healthy life (source: FAO)
- In the last 50 years global Earth average temperature has risen more than 1 degree (if it raises one more degree most of existing ecosystem will be altered and might not survived) (conclusion based on C. Le Quere et al. “Earth Sustem Science Data 2018” study)
- 50% of children in the world (1.1 billion) live in poverty (with less than 1.25$ per day) (source: Unicef)
- Gender pay gap remains a major issue even in the most developed economies besides Governments efforts to reduce it (source BCG)
- And unfortunately many more…
This makes you wonder whether profits should be the the only goal? What are we doing to counteract these spillover effects of capitalism?
Supranational institutions like the UN have launched a series of initiatives to address global imbalances, like the UN Sustainable Development Goals. Governments have started to coordinate, and global initiatives like the Paris Agreement have managed to set, for the first time in history, a global goal regarding climate change (keep temperature rise well below 2 degrees Celsius above pre-industrial levels). Every year more and more people are getting involved in social impact causes, being social entrepreneurship one of the top 3 fastest areas of job growth in the last years. Supranational public organizations, governments, individuals… but what about companies? what are they doing?
“A company can invest in being more environmentally friendly / socially responsible but it will be costly, potentially not profitable; being socially responsible goes against a company’s ultimate goal”. This was the premise for many years: companies should decide between more profits or more social impact. Social responsibility was for Governments or NGOs, it did not fit in capitalism. But that is simply not true. Recent examples completely refute that conception of capitalism:
- Larger multinational companies like Unilever have demonstrated that pursuing socially responsible goals, in addition to leaving huge impact on societies they become involved, can eventually increase product sales and make the consumer more loyal to a brand (see Paul Polman speaking about Unilever Sustainable Living initiative for more details http://tiny.cc/ykml7y)
- Mid-cap international companies like Patagonia or Herman Miller have changed its internal processes and operations to ensure they offer a sustainable business model, proving that traditional industries (in this case clothes and office furniture) can also become profitable and sustainable
- A boom of (for now) small companies with social soul and purpose is taking place; these companies happen to be profitable since day one (for example, Essmart in India, Grameen Companies in Bangladesh, Auara in Spain, etc.)
One could argue that even being less profitable, since companies are part of (and can shape) society, they should be socially and morally sensitive. That might be true but the point I am trying to make is that there is no need to choose. Business model innovations (e.g. resequencing, risk shifting, servitization, etc.), new technologies (e.g. block chain), and changes in consumer preferences (more aware of social imbalances) are allowing top management of firms to shift towards a more sustainable and profitable capitalism. Given existing successful aforementioned examples, management teams have run out of excuses: capitalism is not only compatible with a social focus, but it can be strengthen and more profitable if pursuing a social cause. This new paradigm reinforces Mr. Satyarthi (founder of Rugmark Consortium in India, which gives the buyer of Rugmark carpets a guarantee against the use of child labor) call for action: “if not now, then when? if not you, then who? if we are able to answer these fundamental questions, then perhaps we can wipe away the blot of human slavery”.