A useful way of thinking about the complex relationship between virtue
and profits is to view business activities as falling into one of four categories (see
Figure 1):
Cell One represents the “zone of opportunity” for Conscious Capitalism,
corporate social responsibility, and sustainable business practices. Many of the
businesses created by the new, so-called “social entrepreneurs” fall into this category.
These entrepreneurs (profiled regularly in BusinessWeek and Fast Company)
have developed business models that make money by doing good—for example,
by creating an inexpensive product for sale in the developing world that simply
and quickly purifies water, or by marketing healthy, environmentally friendly
products domestically. There are, literally, thousands of examples of business
activities that fall into this first category. Indeed, almost all of virtuous activities
typically associated with the policies and practices heralded by Conscious Capitalists
are found in Cell One. Such activities—running the gamut from recyclable
shopping bags to employee stock ownership programs—are desirable economically,
socially, environmentally, and ethically.
In the increasingly important arena environmental performance, in particular,
many firms are now investing in Cell One green production technologies,
developing greener products, becoming more energy efficient, and reducing
their waste—all practices that have a positive effect on the bottom line. Environmentalist
Amory Lovins argues that corporate measures designed to increase
energy efficiency and encourage the use of renewable resources mostly pay for
themselves within a year: “That’s not a free lunch. It’s a lunch you are paid to
eat.”30 Hence, numerous startups, as well as established multinationals such as
General Electric and Wal-Mart, have learned and demonstrated that “green”
can be “green.” These instances of a positive relationship between CSR and profits
are important. We confidently expect creative, socially or environmentally
motivated entrepreneurs, as well as senior and middle corporate managers, to
discover many more business opportunities that fall into this category.
Indeed, if all business activities were to potentially fit into Cell One, then
advocates of Conscious Capitalism would have a strong, even compelling, case.
Unfortunately, most do not. In fact, Cells Two and Three are now, and are likely
to remain, much larger. While some seemingly inescapable business tradeoffs
can be avoided through the creative rethinking of a problem or policy (creating
“win-win-win” polices, as Conscious Capitalists say), it is misinformed to claim
that all or even most socially or environmentally desirable business activities
can and will form into Cell One. For example, some anti-pollution (Cell One)
practices literally pay for themselves in the long run: the cost of replacing an
incandescent light bulb with a fluorescent one typically pays for itself, as Lovins
claims, through lower electric utility bills within a year. However, not all do: for
example, constructing a truly carbon neutral office building (Cell Two) is possible
but not financially viable, and no one has found an economical way of
burning coal (Cell Three) that is carbon neutral. A major problem with the arguments
typically put forward in favor of Conscious Capitalism is that they do not
distinguish among the business activities that fall into each of these cells.
Consider an example of a potentially virtuous (Cell Two) practice that
Wal-Mart, while lauded for its green initiatives, has not adopted. The company
sells many small products—particularly electronics—in large, hard, plastic shells
(the frustrating kind you can’t cut into even with a Ginzu knife!). These shells
protect the products, allow for large colorful packaging, and reduce shoplifting.
They are also non-biodegradable, typically not recycled, and their manufacture
is highly energy-intensive. Indeed, it is not unlikely that, were Wal-Mart to stop
using these shells, that action would produce at least at least as many environmental
benefits as any of its well-publicized “green” initiatives.
However, Wal-Mart’s managers understand there is no economical
way for them to replace the shells. So they continue to use them. Of course, if
someone could come up with an effective substitute, or if consumers began to
demand different packaging, Wal-Mart’s managers presumably would be happy
to insist that their suppliers change their packaging. However, until this happens,
Wal-Mart sees little choice but to continue to use them.
Consider another example. Meat production is widely regarded as environmentally
destructive: at the least, it is a highly inefficient way to deliver
protein to consumers. Yet Whole Foods, which is committed to marketing sustainable
food products and whose CEO is incidentally a vegan, continues to sell
meat (albeit without hormones and antibiotics). It does so for the simple reason
that meat sales are a highly profitable (Cell Three) product for which there is
strong consumer demand.
The extent to which American businesses can be said to have become
“more sustainable” over the last decade is due largely to their increasing adoption
of Cell One environmental practices that are both profitable and virtuous.
Unlike some critics, we do not question the motives of those who make money
from their good deeds. Instead, our concern is that business students, corporate
managers, entrepreneurs, and the general public are confusing those profitable
activities with the unprofitable ones found in Cell Two.
To be sure, the distinction between which virtuous practices fall into Cell
One and which belong in Cell Two is not always obvious. As we note above, one of the contributions of Conscious Capitalism has been to broaden the scope of
Cell One by encouraging many managers to recognize that the number of virtuous
activities that are, in fact, financially viable is both large and growing. Moreover,
the economic benefits of many business programs or policies associated
with corporate social responsibility can be difficult to quantify and, thus, managers
enjoy a considerable degree of discretion in deciding which responsible
activities make business sense.
The decision of Merck to develop and distribute free of charge a drug
to cure river blindness is a case in point. At various times, the firm’s managers
had to decide whether to commit additional financial resources to this project.
Because the business case for doing so was always unclear and uncertain, Merck’s
managers could just as easily have decided it was in the long-term interests
of their shareholders not develop the drug and pay for its free distribution. Even
with 20/20 hindsight, it is not clear how the decision that amounted to giving
away hundreds of millions of dollars has affected Merck’s shareholder value in
the long term.31 While Merck’s managers are to be commended for deciding
that developing and distributing the drug free of charge fell into Cell One, other
managers with different values, priorities, or perspectives could just have easily
decided to place it in Cell Two. Again, the values of managers and the culture of
firms do matter.