A couple of years ago, management thinker Charles Handy wrote a short article about the unintended consequences of good ideas. He starts by talking about the corporate towers that dominate city skylines and the inescapable irony that they have entirely glass fascia yet people can’t see inside as they pass by.
He talks about the accumulation of power (in other words, capital) behind these shimmering facades and traces the roots of this rise to the unintended consequences of two innovative developments in 19th century British law: the joint stock company and limited liability. He writes:
By effectively separating the theoretical ownership of a company from its management, the [joint stock company] turned shareholders into something more like punters at a racecourse. Using shares as betting slips on the nags of their choice, they behave like neither trainers nor owners. As a result of ... limited liability, managers gained their own license to gamble, at no personal cost.
These unintended consequences were not only reinforced but extended through the rise to prominence of thinkers such as Milton Friedman, who declared that “there is one, and only one, social responsibility of business—to use its resources and engage in activities designed to increase its profits.
I’ve often thought about that short piece from Handy, and about how antagonising I find both Friedman’s theoretical obsession with profit and the fact that so many businesses render this idea into reality.
Here’s the rub: Profit as a measure will never be what we want (and increasingly need) it to be. We must move beyond the “profit proxy” as a shorthand way of determining whether a business is successful or not, and whether it is social or not.
Beyond the Proxy and Its Unintended Consequences
For a start, the profit proxy falls woefully short of capturing 99 percent of the value that an organization offers the world. It is a narrow definition of success that, as a standalone measure of anything but business model efficiency, belongs back in the 19th century.
But those of us whose purpose is seeking to create a better world have fallen into the same trap as Milton Friedman and his disciples. And there are substantial unintended consequences for how we build and invest in businesses to ensure they have positive social impact.
Although the social entrepreneurship space as a whole agrees that the pursuit of profit on its own is wrong, we are still obsessed with the concept. Our first instinct is still to look to the for-profit or nonprofit distinction as a proxy to the inherent social motivations (or lack of them) of an organization. We might be on the other side of the fence on profit, but we’re still playing Friedman’s game.
There is no shortcut to understanding how social or ethical an organization is. In fact there is real danger in believing that there is a shortcut, or that there some indicator we can use to quickly assess what a company is like on the inside.
By seeking to simplify the answer to such a complex question, the unintended consequence is that people will use the one proxy—in this case, profit and what people do with it—as the only one they need to think about.
What about the social impact of an organization that reinvests all of its profits back into its work, but has abhorrent employment practices and treats its staff appallingly? I could name four such organizations off the top of my head.
What the profit proxy really leads to—unintentionally—is the Potemkin village social organization, built with a shiny façade that echoes the gleaming corporate towers Handy spoke about but just as closed about how it operates.
We need to move on.
A new paradigm that is already playing out in markets and sectors across the world that isn’t about profit or not-for-profit, but about open or closed.
What Is Open?
First, it’s important to make a distinction between open business models and open operating models.
Open business models are one of two things to my mind:
- They are open source. In other words, there is open access to the intellectual property these organizations create to support the development of other products, services, and markets. The Linux operating system, Wiki House, and Tesla are some brilliant examples of this.
- They open out a market. This is more akin to the disruptive innovation models of markets brought to prominence by Clay Christensen. Think Spotify, iTunes, and MySpace for music; Amazon for book selling and publishing; and Toms and Zappos for the shoe market.
Crucially, although an open source business model can be disruptive and open out a market, the examples above demonstrate that there are other approaches that do not require the opening of intellectual property to open out an industry.
Both of these models are fundamentally about how an organization builds value over time, and how it can generate revenue off of the value it creates.
Open operating models, on the other hand, are about the internal workings of an organization. An operating model is about the set of activities and actions an organization undertakes every day to render its vision and potential into reality.
Two elements of an operating model are pre-requisites for being genuinely open.
- Transparency. Opening up data about who you work with, how you work, and what impact you are genuinely having is critical. Publishing regularly so that people can interrogate will become the new normal. We could even apply the US B Corporation model to all organizations. We really don’t need to re-invent the wheel.
- Human readability. The irony of publicly listed companies is that they publish their results in a format that is pretty much illegible to 99 percent of the public. Therefore, we look for that one magical mark of success: profit.
If we want to move beyond profit we also need to ensure that when organizations publish performance indicators, understanding the data doesn’t require expert knowledge of a particular sector.
This network map of Goldman Sachs’ corporate structure, developed by the excellent Open Corporates, is an example output of a closed organization.
The Participatory Principle
The only other element that sits across both business and operating models is something I call the participatory principle: the simple premise that when we build any socially minded organizations, we must involve all participating individuals and groups in the construction and implementation of our activities.
Open structures allow for social construction of products and services. This is where the real potential of approaches such as design thinking and lean startup are rendered into concrete actions; they push us to develop products and services with and not for our market.
This principle should also apply to regulation of organizations. If the two elements of an open operating model are met, then we start to allow everyone to develop their own view on how social an organization is.
Instead of a small number of people setting up definitions of what it means to be a social organization and acting as regulators without a societal mandate, we could move toward a distributed model of regulation—a model where each and every one of us has the opportunity to look into the workings of any organization and make our own judgment.
An open paradigm allows for the complexity of markets, the subjectivity of ethical as a frame, and the disruption that new business models will continue to present.
When everything is open, we empower everyone to look behind the glass facades and draw our own conclusions about what we see.