As the United Nations Global Compact and other development organizations have recognized, big companies can play a pivotal role in raising living standards around the world. Given that their largest shareholders often expect these companies to generate the highest possible rates of return, what’s the best way for them to benefit society as well?
Our new working paper offers an answer that may seem counterintuitive at first: Publicly owned companies will be most effective in creating social benefit when they 1) plan for a long time horizon and 2) focus on a single bottom line.
The long time horizon is the key here, since several years may pass before the effects of social initiatives feed back into profits. But we’ve found that they do feed back in so many important ways that profit-maximizing companies have an obligation to take investments in social initiatives seriously.
Last year, we strategized with a group of multinational companies to create a virtuous circle involving the public and private sectors: Companies would contribute to economic development in the communities where they did business, and governments would provide a favorable climate for working and investing. The companies wanted to create this virtuous circle because they saw how generating social benefit would help them in the long term. With a long enough time horizon, local economic development would be good for everyone—including the companies themselves.
In fact, social initiatives can help companies’ long-term profitability in many ways: better reputation among consumers, leading to higher demand for products; increased loyalty among employees, reducing the costs of hiring and training new workers; deeper skills and supplier capacity in local communities, lowering operating costs; and higher incomes, creating new sources of demand. Social initiatives can also help companies build longstanding relationships with clients—in both the public and private sectors—and understand preferences and priorities in new markets.
In light of all these potential benefits, we came to the conclusion that treating social initiatives like any other long-term investments would lead to companies to invest in them more, not less.
To understand why, consider an executive’s investment decision. Right now, many companies make social investments in an idiosyncratic way, setting a maximum cost rather than a minimum return. By doing so, they put an artificial cap on how large a social investment can be, regardless of the return it might generate. They also leave the criteria for success of social initiatives unclear, which can lead to inconsistent implementation. Furthermore, lacking any means of estimating the value of social initiatives, many executives may respond conservatively and under-invest.
Focusing on a single bottom line with a long time horizon, by contrast, can lead them into bigger social investments and innovations. It also simplifies the planning process for executives, allowing them to use the same tools that they already apply for evaluating other investments.
Though a comprehensive study is yet to be undertaken, many companies are already taking an approach that suggests long-term, single-bottom-line thinking. For decades, the Tata Group in India has made social investments to support the country’s growth and, implicitly, the size of its domestic market. In the United States, Nike’s sustainable business and innovation team is built to both green and grow the company over a long time horizon. And J.P. Morgan arranges private placements for impact investors at reduced rates because of the implicit opportunity to offer its entire range of services to a new set of clients around the world.
As with other investments, the returns to social initiatives can be quantified or, at the very least, estimated within a range. It can be a complex calculation—probabilities must be assessed and the future discounted against the present—but it’s no different from the calculations that large companies already do when estimating the range of possible returns on other investments. Precision is not essential, but executives will invest more when they are confident that returns will reach a minimum standard for profitability.
So, what will happen to social investments that don’t offer a company a competitive financial return? Some of them may still go forward if shareholders and executives agree to pursue an objective other than profit, as in the donation of goods and services for emergency relief. Indeed, companies with multiple objectives—including social enterprises, impact investors, and businesses with social missions (such as B-corps)—can make significant contributions to society. But again, their shareholders do not expect them to maximize profits, and their investments make up only a small share of the private sector’s spending. When society wants to influence the bulk of that spending, it can do so through subsidies, regulation, and collective action, all of which can form part of the context as companies focus on the long-term single bottom line.
One might also argue that double- and triple-bottom lines help to promote transparency and accountability for social benefits, especially in emerging economies. Yet investments that satisfy double- and triple-bottom lines in the short term may not be built for long-term sustainability. Moreover, evaluating and reporting social investments with the same criteria as other investments offers a kind of transparency that we think shareholders will value in any economy. For most large public companies, we believe that targeting the long-term single bottom line offers clear benefits for executives, shareholders, and, most importantly, for society as a whole.