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.
[Excerpt, click on the link to read the rest of this post.]