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Does a Trade-off Need to Stay a Trade-off?

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There are two dominant reactions to my assertion that corporations should abandon shareholder value maximization as their singular goal -- their objective function. The first is that it is a lovely but idealistic and impractical thought. The second is that it is a socialist, anti-capitalist thought that would be good for social justice but bad for economic progress.

Both reactions are based on the fundamental assumption that for corporations there is an irresolvable trade-off between doing well and doing good. I believe that assumption is flawed. While I am not so utopian to believe that there are no trade-offs either in life generally or for corporations specifically, I believe that most trade-offs remain trade-offs because of the assumption that trade-offs can't be overcome. (I even wrote an entire book on the subject several years ago -- The Opposable Mind).

If a corporation would like to do good, but its management believes there is a trade-off between doing good and maximizing shareholder value, it will seek to maximize shareholder value. Ironically, attempting to maximize shareholder value is a crummy way to maximize shareholder value. This is for the same reason that George Orwell (riffing off of Aristotle) argued: "Men can only be happy when they do not assume that the object of life is happiness." Corporations think that shareholder value (like happiness) is something one can pursue directly and by pursuing it actually achieve it, when, like happiness, it is in fact the by-product of something else -- living a 'good life' in Aristotle's well-reasoned opinion. Corporations that ideologically pursue shareholder value maximization will alienate employees and customers, making it more difficult to maximize shareholder value.

If a corporation does seek to break the trade-off between doing well and doing good by living a 'good life', the key is innovation. Nobody has ever broken an existing trade-off by benchmarking others and replicating what they do. In order to break the trade-off, a corporation must imagine doing something good for the world that will be rewarded by customers, employees or regulators to a sufficient extent that it will be good for shareholders too. Sometimes a corporation can do this alone as did The Body Shop when it pioneered animal and eco-friendly beauty care products. Customers and employees loved it and Anita Roddick created massive amounts of shareholder value. Sometimes a corporation needs help from others in an industry as cement giant Holcim did when it formed the Cement Sustainability Initiative to lower carbon emissions in the notoriously high-emitting cement industry. Producers representing half of the world cement production participate in self-regulatory actions aimed at making the cement industry environmentally friendlier.

These are big examples but every corporation has the opportunity to look at myriad existing trade-offs from big to small that pit making an extra buck against making the world a better place and asking how they might innovate around that trade-off. As with all innovations, some will fail and some will succeed. The good news is that the ones that succeed -- i.e. make the world a better place and make a buck -- get quickly copied. The Body Shop has plenty of competitors legitimately making the same environmental and animal-protection claims -- and arguably the world is a lot better place for The Body Shop's innovation than if only The Body Shop had done it.

This illustrates the key role of corporations in making the world a better place. They see an existing trade-off between making profit and providing something that will be meaningful to customers and/or employees and/or regulators. They innovate to overcome the trade-off. They succeed. And lots of corporations copy-cat until such time as the innovation becomes standard operating practice and the world is a better place.

There are two factors that limit progress of this sort. The first is the belief on the part of all players in the system -- executives, customers, employees, regulators, commentators -- that there are fundamental, immutable trade-offs between doing well and doing good. The second is the unwillingness of customers in particular to reward corporations for innovation in overcoming such trade-offs. If nobody believes it is doable without experiencing the downside of the trade-off, few if any will try. And when a corporation tries, if the reaction of customers is lukewarm or negative, the corporation won't be encouraged to try again.

On this front, there is good and bad news. The bad news is that sometimes customers can be pretty pathetic on this front. I have long worked with Procter & Gamble and in the early 1990s, it had a big initiative in environmentally friendly packaging. The centerpiece was a thin-film refill container for its huge-selling Tide Liquid Detergent. The concept was that after you bought your first regular bottle of Liquid Tide, you would thereafter buy refills in containers made of thin film that had one-tenth the environmental footprint of the original bottle. All that was required of the consumer was to snip off the corner of the container and pour the liquid into the original bottle. Perfectionist company that it is, P&G worked engineering miracles to make the container stand properly on the shelf, have great graphics on the film, be easy for the consumer to pour, etc. Nonetheless the result: complete disaster. Consumers refused to buy the refillable container to such an extent that the first shipment of refills sat on store shelves until they were sharply discounted to get them to move. The initiative was junked and it sent a chill across the company for a number of years in terms of further such bold attempts.

The good news is that was 20 years ago and consumers have really changed. Their eco-friendly desires build entire brands (e.g. Prius) and corporations (e.g. Whole Foods). They do hold the key in turning the apparent trade-offs into win-win. They can provide the encouragement to innovate and then reward it with their purchases and loyalty. And every such win will encourage more corporations to innovate.

Will there continue to be trade-offs between shareholder value maximization and social good? Absolutely. We live in an imperfect world. Does there have to be a trade-off between the two in all instances? Only if we collectively decide to make it so. Let's not. Let's encourage and reward innovation that produces shareholder value by making the world a better place!