Tuesday, September 21, 2010

The Flawed Logic Against Social Responsibility

In his Case Against Corporate Social Responsibility (Wall Street Journal, August 22, 2010), Aneel Karnani questions the efficacy of social responsibility, saying the idea that companies should act responsibly and will profit from it is fundamentally flawed. This is true, but the flaw is in his vision.

Today, as Karnani indicates, any officer of a publically traded company is legally bound to maximize shareholder profit. Given this mandate morals, ethics, and good conscience are (must be) shunted, unless of course they can be rationalized as being in the shareholders’ best interests. And it is often true that more profits can be gleaned, at least in the short term, if a company is willing to forgo the niceties of social responsibility.

Karnani goes on to explain that regulators, watchdogs, and advocates should play the role of pulling in the reins on companies that would otherwise run amok and destroy us all for the sake of quarterly returns. And if we could ensure that these roles were played by uncorrupt, impartial, and passionately just persons perhaps we wouldn’t be in the pickle we’ve found ourselves in today. But given what’s happened this solution seems a bit dated or na├»ve… been there, done that.

But where his logic and his vision really fails is when he says that “In the end, social responsibility is a financial calculation for executives,” because it assumes that we must always continue to based everything on financial calculations. I think the world is opening up to some other options.

Social Enterprise is one of those options and it’s catching on. A Social Enterprise is any venture that is structured to use market forces to make a net positive social impact. Social Enterprise, can be seen as a step back to a time when social responsibility was part of the nobles oblige pact that successful company founders made with the communities in which they lived, brought up their children and left their legacy. Or Social Enterprise could be seen as a step forward in our evolutionary development as a species beyond selfish greed and toward a more just and compassionate society.

Either way, it is enables businesses to form based on the premise that purpose, people, and planet come before profits, and that while profits are an important metric of health, they do not have to be the raison detre for a company. This is the free market at its best. Not only are all of us free to pursue happiness, but we can each determine what happiness means.

As a Social Enterprise, the company that I founded over 25 years ago is required to act in a Social Responsible way (in other words we are required to avoid doing harm whenever we can). We are required to be transparent, and engage in participative governance, and any profits that we distribute have to be split equally among employees, investors, and the community. To ensure that this pact isn’t undone at the whim of a future majority shareholder we’ve created a separate class of preferred shares that are held by a nonprofit reSET(Social Enterprise Trust) which has as its mission to “promote, preserve, and protect social enterprise.” This class of stock doesn’t give reSET any day to day control of our operations, but it does give a majority vote to reSET on any changes to the Social Enterprise status of the company. This protects and preserves our Social Enterprise structure and while it may reduce the sale value of the company, it makes it much more satisfying to me as the owner wanting to leave a legacy that’s greater than the sum of my balance sheet.

The main difference between a Social Enterprise and a traditional business is that the Social Enterprise exists to make a contribution, while the traditional business exists to make a profit for its shareholders. Two different games, two different sets of rules, and the great thing is we don’t have to choose one or the other. In a free market there’s room for both.

Can these Social Enterprise ventures scale? Ask Muhhamed Yunus, nobel prize winning father of micro finance who started Grameen Bank as a Social Enterprise, not to get rich of the backs of the poor, but to make a difference, which he has done in the lives of millions through the almost 9 billion dollars that have been loaned out. Yes they can scale, and as an investor it’s where I would put my money every time: One, because it feels better to me, and two, because in the long run I think that will be the better investment.

Karnani says social responsibility is “ an illusion, and a potentially dangerous one.” On the contrary, I think believing that we can continue to let GDP and other financial metrics define success for us a company or a country is an illusion and clearly a dangerous one.

The exciting thing is that what America has always stood for is initiative and creativity. We’re great at innovation. We got ourselves to the moon. We created the first PC and the rolling suitcase. It feels like we’re the crew of Apollo 13 and we’ve been handed a cardboard box of odds and ends and asked to cobble something together to save our butts. To stay on course is not an option. To freak out and dive for cover is an understandable but not particularly helpful response. Time is not on our side and we don’t have a lot to work with. But we have brains and hearts of many passionate people. I think we can do it.

Of course we also invented the Stop Sign and the Revolving Door. But I think Social Enterprise will prevail. I think we will prevail. Winston Churchill once said: “Americans always do the right thing, but only after exploring all the alternatives.” Our hearts are in the right place, but we’ve got to open our minds to other possibilities.