March 2011 Archives

While the current economic crisis has been devastating to many in the US and beyond, it could actually turn out to be a blessing in disguise.  In a very real sense, the world--and global capitalism-- now stand at a crossroads. New York Times columnist Tom Friedman recently observed that we had perhaps reached the global "inflection point"-- that the growth model we created over the last 50 years is simply unsustainable economically and ecologically and 2008 is when it finally imploded.

Australian sustainability commentator Paul Gilding even had a name for this: "The Great Disruption"--when both Mother Nature and Father Greed hit the wall at the same time.  I believe that the significance of the transformation we are experiencing cannot be overstated; companies and other institutions ill-prepared for this new world will simply not survive.  The time has come for innovation on a scale that we have never seen before.

It's the natural instinct of governments to pump resources into the economy during such times, but the bailouts and the stimulus packages are in some ways futile efforts to try to restore the world to the way it was. The truth is, we can't. We're witnessing the death of the "Chimerica" consumerist model, where Americans borrow money so they can buy more goods so the Chinese can build more coal-fired plants to make more goods. That model imploded, and I don't think it can come back.

What we're now experiencing is a transformation to a more sustainable form of capitalism--and ultimately, a more sustainable world. This transformation began in the 1990's with the "eco-efficiency" revolution when, for the first time, it became clear that reducing waste, emissions, and pollution can actually save money and lower risk.

In the past decade, two exciting new commercial developments have burst onto the global scene. One revolves around the commercialization of new green technology; the other around better serving and including the poor at the base of the income pyramid. Both are exciting, but the problem is that they have evolved as separate communities. The green techies say, "Just give us the venture capital, and we'll invent the clean tech of tomorrow," as if it will then spring magically into reality.

Proponents of the base of the pyramid approach seek to address poverty and inequity in developing countries through a new form of enterprise. They say, "How do we innovate business models, extend distribution, and become embedded in the community to build viable businesses from the ground up?" But such "pro-poor" business advocates often lose sight of the environment, as if all this new economic activity will automatically create a sustainable form of development at the base of the pyramid. Tragically, that way of thinking could take us all over the cliff, if we end up with 6.7 billion people consuming like Americans.

The challenge of our time, therefore, is to figure out how to bring these two worlds together to enable a global "Green Leap."  Indeed, emerging clean technologies, including distributed generation of renewable energy, biofuels, point-of-use water purification, biomaterials, wireless information technology, and sustainable agriculture hold the keys to solving many of the world's global environmental and social challenges. 

Because these small-scale green technologies are often "disruptive" in character, the base of the pyramid is an ideal place to focus initial commercialization attention.  China's towns and small cities, Brazil's favelas, and India's rural villages present such opportunities.  Once established, such technologies can then "trickle up" to the established markets at the top of the pyramid--but not until they have become proven, reliable, affordable, and competitive against the incumbent infrastructure. 

In my view, the Green Leap is a key point of leverage in transforming the global economy toward sustainability.  If I am right, this holds important implications for policy-making.  Rather than circling the wagons and seeking to build a Green Fortress America (or Europe, or Japan), the best thing we could do is get our most promising technologists and entrepreneurs out of the US (and the rest of the developed world markets) and into the rural villages, urban slums, and shantytowns of the world where 4 billion plus people currently reside.  It is here that the Green Leap will take place.  And, it is here that the corporations of the 21st century will be born.

There is a long-standing narrative in the field of management that goes something like this:  Executives are hired to maximize profits, not social welfare:  Spending shareholders' money on socially responsible but unprofitable endeavors is irresponsible.

Indeed, as stated in a recent Wall Street Journal editorial: "In cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant: companies that simply do everything they can to boost profits will end up increasing social welfare." But, the author argues, "in most cases, doing what's best for society means sacrificing profits...If it weren't, {society's pervasive and persistent} problems would have been solved long ago by companies seeking to maximize their profits."  The ultimate solution, the author argues, "is government regulation."

There is a familiar ring to this argument.  Indeed, The Economist dedicated a special section to the topic in 2005. However, most realize this perspective can be traced to Milton Friedman's famous dictum: "The social responsibility of business is to increase profit."  While many have demonized Friedman for his stance, it turns out--ironically--that he was right!

As he asserted in his classic 1970 article by the same title, it makes little sense for corporate managers to spend the shareholders' money on pet philanthropic projects that have little or no connection to the company's work.  In fact, the core premise of "corporate social responsibility" (CSR)--profit spending for the "greater good"--is fundamentally flawed.  While individuals can choose to donate their private wealth in any way they choose, corporate executives are paid to put the shareholders' capital to productive (i.e. profitable) use.

Even under the best of circumstances, it is simply not possible for companies to give away enough money to have a material impact on the world's growing list of social and environmental ills.  CSR is like trying to bail out a sinking ship with a teaspoon.  And as Maimonides made clear more than eight centuries ago, real philanthropy means giving anonymously.  By this standard, most CSR programs today are little more than self-serving public relations gambits designed to assuage corporate guilt.

Where Milton Friedman was wrong, however, was in assuming that corporations cannot understand societal problems or environmental challenges, which he viewed as the exclusive responsibility of elected governments.  It is true that corporations are not democratic institutions designed to reflect the broad "public interest."  But increasingly, it seems that the broad "public interest" is really an illusion--an abstract ideal created by enlightenment thinkers preoccupied with the design of rational and representative forms of government.

Ironically, today's representative governments, captured by monied interests and powerful players, have become all but incapable of addressing society's real challenges.  The power of "incumbency" has rendered government a conservative (rather than progressive) force, protecting the interests of those seeking to perpetuate "yesterday's" solutions.  It should come as little surprise, for example, that Dick Cheney's now infamous "energy task force" included no one from the renewable energy or conservation sectors.  Nor should it be a surprise that current efforts by the Obama Administration to reform the financial system, reinvent health care, or craft a sensible climate policy are meeting stiff resistance.

National governments are self-interested by design, concerned first and foremost with the security and well-being of their citizens.  Tragically, preoccupation with the "national interest" makes government less and less relevant in a world characterized by trans-boundary challenges such as climate change, loss of biodiversity, and international terrorism.  It is not at all clear today that the sum of "national interests" equals the "public interest" of the world.  The relative ineffectiveness of the United Nations system over the past five decades stands in mute testimony to this fact.

Ironically, then, the for-profit corporation may turn out to be our best hope for a "sustainable" future--economically, socially, and environmentally.  Increasingly, corporations are global in scope, making them ideally suited to address trans-boundary problems and international challenges.  It is not by happenstance, for example, that some multinational companies have lead initiatives to address climate change (e.g. the US Climate Action Partnership), loss of marine fisheries (e.g. the Marine Stewardship Council), and sustainable development (e.g. the World Business Council for Sustainable Development).

Even more significantly, corporations may be better positioned than governments to understand--and respond to--emerging societal needs.  Not the broad and abstract "public interest" trumpeted by enlightenment thinkers, but rather the fine-grained, on-the-ground, "micro" interests of actual individuals, families, and communities (human and natural).  Getting "close to the customer" is, after all, the stock and trade of the corporate world.

The profit motive can accelerate (not inhibit) the transformation toward global sustainability, with civil society, governments, and multilateral agencies all playing crucial roles as collaborators and watchdogs.  Through thousands (or even millions) of business-led initiatives, we can innovate our way into tomorrow's "clean" technology, and welcome the four billion poor at the "base of the pyramid" into the global economy.  The competitive process will weed out the bad initiatives--those that work neither for people, nature, nor shareholders.  And like the industrial revolution two centuries ago, this commerce-led revolution will need no central administrator.

The end is nigh for the notion of "corporate social responsibility."  Emerging in its place are a new generation of corporations that actually solve social and environmental problems through their core strategies--and profit in the process.

I’m Stuart L. Hart, a leading authority on the implications of environment and poverty for business strategy. This blog will be a place for me to update you on some of my newest insights - based on the work I’m doing to help businesses take the Green Leap.

Join the discussion!

A few years ago, I defined the concept of sustainable value; my work includes over 70 academic papers and several books.

Capitalism at the Crossroads, published in 2005, was selected by Cambridge University as one of the 50 top books on sustainability of all-time; the third edition of the book was published in 2010. I present new strategies for identifying sustainable products, technologies, and business models that will drive urgently needed growth and help solve social and environmental problems at the same time. I also argue that corporations are the only entities in the world today with the technology, resources, capacity, and global reach required.

Beyond Greening: Strategies for a Sustainable World won the 1997 McKinsey Award for Best Article in Harvard Business Review and helped launch the movement for corporate sustainability. 

With C.K. Prahalad, I wrote the path-breaking article: The Fortune at the Bottom of the Pyramid which provided the first articulation of how business could profitably serve the needs of the four billion poor in the developing world.

Learn more about my work at stuartlhart.com >>