Rings of Impact

Originally published on Jackson Hole Economics

With national elections right around the corner, there is growing angst about which party can deliver on the promise of a better economy for all people. Republicans are betting on the de-regulated and unfettered practice of capitalism, while Democrats are embracing more government intervention to drive a thriving economy. As if often the case in an ideological debate, the ‘right’ path is probably some combination of the two.

Although the COVID era has provided a glimpse into the fragility of our entire economic system, it has also given us a chance to see a third way – a trajectory to unleash a plethora of creative thoughts about how to adjust our social norms as businesses and governments respond to the recent “good trouble,” to borrow John Lewis’ memorable phrase, in our cities and towns.  

The opportunity is for businesses to engage in a “Race to the Top” as they re-design their practices to be attractive not only to investors, consumers, and employees, but also to the communities in which they participate. Competition in this new norm would not only be on quality and price, but on the positive impact each business makes in society.

For decades there has been a growing interest in ideas that have names like sustainable business, conscious capitalism, stakeholder capitalism, or benefit corporations. They all trace their roots to the UN commission chaired by former Norwegian Prime Minister Gro Brundtland that issued a seminal report in 1987. The early stages of this movement were largely driven by environmental concerns with Earth Day a direct result of this report. The movement gradually picked up steam with Paul Hawkin and Ray Anderson writing about their experiences toward the end of the 90’s. In the early 2000’s the inclusion of social issues started to gain popularity, and the birth of a measurement system by three entrepreneurs who started the B-Lab resulted in a move toward believing that profit and purpose could define a new form of capitalism. And by the second decade of the millennium, interest in changing the way America does business became more in vogue as brands like Interface Carpets, Patagonia, Ben and Jerry’s, and Whole Foods, pioneered the concept that not only could a firm be supportive of social and environmental issues, but that doing so could be a core strategy for success. While it has taken decades to get to this point, the coronavirus pandemic has presented an opportunity to accelerate this trend as it has become clear that our ‘just-in-time’ lean business model, while excellent at reducing costs, falls short when under real pressure.

To understand the breadth of the opportunity that business has to positively impact society, consider the “Rings of Impact” that identify where an organization’s impact lies. This concept helps consumers, investors, employees and business leaders to understand with which kind of business they wish to associate.

The First Ring players are profit maximizers. These firms follow the ideals of Milton Friedman and the Chicago School of Economics, who convincingly declared in the 60’s and 70’s that “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits…” The role then of corporations is simple: make as much money for your shareholders as possible. Employees? Pay what you must to keep them productive. Take advantage of any market imperfections and don’t worry about unintended consequences of your actions. Purdue Pharma would be an extreme example of first ring profit maximizers as they earned billions of dollars while America became addicted to their opioids. But Purdue is not the exception and there are indeed plenty of examples of this kind of corporation.

The Second Ring are those organizations that engage in Corporate Social Responsibility (CSR) and participate in activities that help build their brand in an effort to make their customers like them more. The companies in this ring often sponsor events and make charitable contributions with the intent of both making the world a more positive place and burnishing their image. And many impactful non-profit organizations depend on philanthropy from this group of companies.

Both First and Second Ring organizations also actively lobby governments for competitive advantages – their logic can loosely be described as ‘what is good for us is good for the economy.’

The Third Ring of impact is comprised of organizations that have figured out that doing well (financially) and doing good (socially) is a symbiotic relationship. They have learned that a thriving community is key to their long term survival and that if the community is succeeding in a broad-based way, so will their business. They are basically outward looking organizations, asking the question – what needs to be done for society, and how much can I reasonably contribute to it? These firms tend to be family owned businesses. They can be quite large, but because many are privately owned and have more latitude then their public counterparts, they do not have to deal with activist investors pushing them to only maximize profits. They take pride in taking care of their employees, who generally like working there and often speak of the firm as “family”.

The fourth ring is reserved for those businesses that have actually designed their business to try to solve a social or environmental problem. To-date, this has been a very small group, but we are now moving towards an inflection point where this universe of organizations is beginning to grow. Patagonia is an obvious candidate for this ring. Founder Yvon Chouinard started the business because he was a self-proclaimed “dirt bag” mountain climber who wanted to make climbing gear, but soon discovered that his business could thrive if he focused on what was truly important to him – the environmental impact of his business as well. Patagonia does not shy away from controversial subjects like removing dams, regulating off shore fisheries, or requiring its entire supply chain to supply only organically grown cotton for their garments. Another example is EveryTable, a grab and go eatery in Los Angeles that designed its meals to be nutritious and attractive to suburban customers while delivering the same meal in lower income areas at a price point that is competitive with a McDonald’s Big Mac – solving a social problem of food deserts in low income neighborhoods. Their business has skyrocketed during the pandemic as the LA county government has commissioned the company to help feed the homeless during the pandemic.

The Rings of Impact are a roadmap for America’s corporate progress. And the bottom line is that we need more of our companies to move towards the third and fourth ring if we are going to have a true “race to the top” in corporate America, to benefit all of America.

The time is now.