Originally posted on 2013/04/11
Capitalism has gotten a bad rap for being purely about the pursuit of maximizing profits for investors. And though we most closely associate the word with today’s big-box stores and huge conglomerates, the roots of capitalism spread through the ground on which our country was built.
Think back to when folks did their shopping at a general store. Let’s say you bought your flour from Bob. You like Bob, know his family, and appreciate that he brings in high quality goods. Bob works hard to run his shop so you are happy for his success and are proud that he is a member of your town. But let’s say Bob started overcharging you for that flour for no reason. What would you do?
Well back then, the town was small enough that you might go and have a talk with the store owner directly. In fact, several townspeople might begin buzzing about Bob and the flour fiasco. Over time, one of two things would probably happen: 1) You and the other townspeople would take your horses across town to another general store with better prices or 2) ill will and contempt among the townspeople would build to create enough social pressure that Bob would have to change his practices to keep a thriving business. After all, even if there were no other place in town to get flour, Bob could see dwindling sales on the items people could buy elsewhere.
It wasn’t that the town begrudged Bob for making money or even trying to turn a profit. In fact, if Bob did well it was good for everyone. But there was an implicit social contract that existed between Bob and his patrons—a symbiosis whose balance was dependent upon each side upholding their end of the bargain (Bob provides goods at reasonable costs, townspeople give Bob their business).
The general store was more than just a seller of merchandise, it was a provider for the community. So the community expected Bob, as the owner, to be guided by a set of values, not single-minded profit maximization.
Connection to the values is not about limiting success or outcomes. In fact, in the example of Bob, straying too far from the values was less profitable for his general store. Paradoxically, to focus solely on profit would yield the least profit. In order to do well, Bob’s focus had to be on how to best serve the community that supported his business.
The business loci of today’s multinational corporations span cities, countries and continents. These companies focus on their customers, but less so on a community of patrons. In fact, with such large geographic footprints, sharing a contract or set of values amongst patrons who share little to no affiliation with each other becomes nearly impossible. Businesses cater, instead, to a community of shareholders whose needs are simple: maximize profit.
When companies are rewarded most immediately for maximizing profits; so, too are their employees. Banks are not filled with evil villains seeking to exploit the common person; their success depends on positive gain, so their cultures—heeding the new definition of capitalism—incentivize maximizing profit.
But just like with Bob, single-minded profit maximization yields diminishing returns over time and can result in greater negative externalities than social shunning. However, since businesses today are in effect disconnected from a true “patron community”, they lose the real time feedback loop that articulates the boundaries of the social contract. Through regulation we have tried in vain to recreate the social contract, but the market is currently not structured to equally incentivize both values and profit.
To change the landscape, we need companies to shift their focus from without to within. The national and global marketplace need values-driven leaders and organizations that intentionally align business and community incentives. Instead of relying on external forces to re-establish the social contract, these leaders build a culture and community with its most immediate stakeholders- its employees. By defining a new set of incentives that focus equally on profit and social contract to drive business goals, values driven enterprises can lead a much needed capitalist renaissance.
In the Harvard Magazine article, Can America Compete, Michael Porter and Jan Rivkin refer to the investment in this social contract as the “business commons”.
“An important notion is what we call the “business commons” from which companies draw: a skilled workforce, an educated populace, vibrant local suppliers, basic rule of law, and so on. Historically, American businesses invested in these resources deeply, and that helped to build many of America’s strengths. Then, in a world of increasing geographic mobility, many businesses took that commons for granted in America. Interestingly, they actually invested in building the commons elsewhere because they realized its importance—but in the process, over a number of decades, the commons got run down in America. The good news is, we see a large number of business leaders who recognize the importance of reinvesting at this point.”
Rivkin refers to the notion of a business commons in the context of the globalization of American corporations, but if we apply it to our general store allegory we can see where the concept of the business commons intersects with the values-driven enterprise.
The general store, with its presence directly and solely in the community it served, was investing in the business commons. Bob used the local farmers to supply his dairy, produce and meat. He hired some of the boys in the neighborhood to stock the shelves and, when the family down the road met hard times, he brought them a gallon of milk each day until they got back on their feet. What Bob was doing wasn’t just convenient or purely altruistic, it was good business.
He was contributing to the ecosystem of which he was part and from which he benefitted. Even if he could have purchased cheaper goods elsewhere, this would have hurt his local suppliers and negatively impacted the long-term vitality of his community and thereby his own operation. The fewer folks in his community who were in business, the fewer patrons he had in his store.
From Bob to the farmers to the townspeople, all had entered an implicit social contract, at the center of which was the well being of all involved. Each knew that their individual decisions had universal consequence and that to act out of pure self-interest could be to the detriment of the community and their own enterprises. That family to whom Bob gave the milk understood what his generosity meant for them, Bob and the rest of the town. They worked hard to pay off the debt for fear of being labeled a social pariah, leeching the supply of communal resources and impacting Bob’s business and reputation. Without proper care and feeding the business commons languish and, over time, become too barren for anything to flourish.
America’s businesses have moved away from the general store model and, on the whole, are neglecting the commons. As a result, the whole of our community is struggling. And though “a large number of business leaders…recognize the importance of reinvesting” it is a reactive approach in response to economic and ethical challenges and still doesn’t account for the social contract.
Values driven entrepreneurs are building something with, and for the benefit of, the business commons. Their starting point is the social contract and an understanding that the decisions they make have far reaching consequences on the collective well being. Hence, the definition in my earlier post:
Values-driven leaders pursue their individual purpose to create opportunities and resources for the collective.
In the most effective cases, companies’ social contracts directly align with what makes them more successful than their competitors. This alignment reinforces the values and serves as a compass when external pressures arise.
Take the gear and clothing company Patagonia. The company’s mission is to “Build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis.” Their pursuit was bigger than profit and, in their more than 40 years in business, they’ve earned a reputation for manufacturing the highest quality technical apparel while being a model of corporate and environmental consciousness. They are also bringing in $540M in annual revenue in the process. So what does this say about commitment to values and its connection to success?
Patagonia founder Yvon Chouiniard is quoted as saying, at a recent Greenbiz Forum conference, “Every time we’ve done the right thing for the planet, we’ve made more money.”
Patagonia’s loyalty to its values is so strong and true that it chose “clarity” over “cleverness” when it launched The Footprint Chronicles in 2007. This online feature allows consumers to see exactly what it takes to manufacture an item of clothing and the impact this has on the environment. It might seem counterintuitive for an ardently eco-conscious company to reveal its challenges with living up to its mission, but the goal was not to sell more product. They acted in service of their values and, in doing so built trust and credibility with their customers. Of course, the feature did impact product sales; since starting The Footprint Chronicles, Patagonia has posted record profits.
The values-driven enterprise, then, is filling a previously unoccupied space. If the attempt by businesses to shift is reactive, it is in primary service of business. An impact on the collective is a positive, if unintended byproduct.
There are organizations that set out to serve the collective with the social contract in mind. Similarly, a positive impact on business, the market or a specific industry might be intentional but is likely not its primary pursuit.
Values driven entrepreneurs, however, seek to serve first their values and purpose via their social contract. The goal is to both honor this contract and outperform the market; the result is a simultaneous impact on the collective and on business. A market with more values-driven enterprises will not only help to replenish the business commons, it honors the aspects of capitalism that fuel prosperity the way the general store fueled the town’s prosperity and wellness.
So now that we understand the role and importance of values driven entrepreneurship, what does the “values” part look like? How does one define those for him/herself and the organization that he/she is building? Over the next series of posts I will share what these values look like for my organization, how I built them and tackle how other values-driven entrepreneurs might approach this process for their own organizations.
Ehrenfeld, John R. “Yvon Chouinard Speaks.” http://www.greenconduct.com/blog/2013/03/19/yvon-chouinard-speaks/
Rosenblum, Jeff. “How Patagonia Makes More Money By Trying to Make Less.” http://www.fastcoexist.com/1681023/how-patagonia-makes-more-money-by-trying-to-make-less).
Rosenburg, John. “Can America Compete.” Harvard Magazine. http://harvardmagazine.com/2012/09/can-america-compete