The proposition that profit captures the full spectrum of social value is a flawed one.
In a wide-ranging economic discussion between Kevin Williamson, the managing editor of the conservative magazine National Review, and myself, we discussed what makes a GOOD company. I thought my off-the-cuff comments deserved some elaboration.
“Profit ... Profit’s the measure of social good you do,” is how Kevin defined a good company. It’s a succinct answer, and it’s the classical answer of economists. You’re not going to have a business for long if you can’t turn a profit, so it’s obviously a key criterion for the GOOD Company Project.
But the proposition that profit captures the full spectrum of social value is flawed. Not only does it assume that all social value can be monetized, but also that the accounting standards that spit out profit measurements include all the public and private costs of a business. Neither of those is a given. A major aspect of the GOOD Company Project is figuring out how to redress those shortcomings.
One obvious example is external costs that aren’t priced into a company’s balance sheets: When companies pollute, overuse water, hurt biodiversity, or degrade land without cost, they may profit in the short term, but they sow the seeds of long-term disaster not only for themselves, but for their economies. Trucost, an environmental risk analysis firm, has calculated that annual unrecognized environmental costs around the world are $6.6 trillion—and that’s not a number found on a company’s balance sheet.
It’s true, as Kevin points out, that lawsuits can help redress some of this, but the typical pattern—lawsuits identify a problem, public furor leads to regulation, regulation imposes costs on a company—fails to recognize that mitigation is usually less costly than after-the-fact sanctions and clean-up that result in higher taxes and more burdensome regulation.
Thus, companies that take pains to act sustainably ought to be rewarded for absorbing the real costs that their competitors might simply hand off to the public. And they should have an interest in doing so, both in the medium term for enhancing brand equity and reducing energy costs and litigation risk, and in the long term to preserve the economic foundations on which their continued prosperity depends.
There’s also the reality that a single company’s innovation can have wide-ranging social benefits. Groundbreaking companies like Microsoft and Apple today or Ford and General Electric in the past created entire industries and spread economic and social benefits far beyond their own products and profits; this, too, merits recognition.
Creating a workplace environment that values diversity and provides benefits—whether healthcare, family or educational—can seem like a secondary concern to a company’s revenue-earning operations, but attracting and nurturing top talent can increase productivity in the face of upfront costs.
Just as economists are starting to question the value of measuring a country’s economic strength by gross domestic product alone, we should rethink our measures of corporate value. New proposals for national accounting include measures of inequality, environmental costs, and even corporate accounting techniques that measure equipment depreciation to account for the depreciation of natural resources.
Perhaps the best way to assure ourselves that profit isn’t the best measure of social value is to look at the enormous profits generated by the financial and housing industry in run up to the United States’ recent financial crisis. Those profits, based on wildly inflated values that nonetheless reflected the wisdom of the markets, proved ephemeral when the disastrous consequences of their business model caught up with them.
Figuring out just how to broaden our assessment of companies beyond their bottom lines won’t be an easy task, but different organizations are already on the job, advocating corporate social responsibility, b corporation and triple bottom line accounting. The GOOD Company Project is about finding those mid-size companies that are figuring out how to be profitable while simultaneously leading in other measures of value that impact us economically and socially.