Socio-Economics and the Single Company

February 7, 2012

[Editor's Note: On February 10th BCLC executive director Stephen Jordan and AccountAbility director Steve Rochlin will cover this topic during the next "Conversations with Stephen" discussion. Register now for the free webcast and join the tweetchat at #BCLConCSR.]

In Economics 101, economists make an important distinction. What an individual business does and how it behaves is a vastly different field of study than what businesses do in aggregate. They call this mass behavior macro-economics.

Businesses on their own are subject to local conditions such as the tastes of their customers, the cost of their materials, the productivity of their employees, and so on. As a result, they can behave wildly different from each other. But in aggregate, their behavior rolls up into macro-economic indicators – unemployment, inflation, and interest rates, for example. Instead of CEOs calling the shots, the Fed, the Treasury Secretary, and the House Budget Chair – non-business players – have some of the biggest sway.

The same disconnect occurs between corporate citizenship as practiced by individual companies and socio-economics as influenced by politicians and stakeholders. Whereas corporate citizenship and CSR are strategies individual companies use to address social and environmental issues, socio-economics is the study of the interplay between business and society as a whole.

Many business leaders used to think of CSR as a proxy for philanthropy or community relations. It was an add-on to the business, a cost center that was priced based on whim or some arbitrary rule of thumb.

Socio-economics, on the other hand, has always engaged people with deep questions – how will globalization affect the clash of civilizations? What will global supply chains mean for labor relations or environmental practices? How will specific industries affect the structure and design of communities? What does energy mean for the environment? How does the transition to the knowledge economy affect our education system and vice versa?

Many people are struggling to get a grip on socio-economics today. They are trying to understand economics and its relationship to technology, social structures, urban planning, the family, the environment, culture, and so on.

Here’s just a sample of relevant literature on these issues: The World is Flat (Tom Friedman), The Rise of the Creative Class (Richard Florida), Trust and The Great Disruption (Francis Fukuyama), Bobos in Paradise and The Social Animal (David Brooks), Wealth and Democracy (Kevin Phillips), The White Man’s Burden (Bill Easterly), America in 2050 (Joel Kotkin), Radical Evolution (Joel Garreau), and Jeffrey Sachs and Charles Murray’s work.

From a wide range of perspectives, critical thinkers are trying to get at the central questions of what kind of society our economy is driving and what kind of economy our society is producing.

For many business people this interconnectedness of economics with other issues is a blind spot. MBAs are trained to think in terms of cash flow and balance sheets, income statements and profit margins. Decision-making in the economic context is relatively easy: will course X create more value than course Y? If the answer is yes, then anyone who doesn’t take course X is a moron. They are being inefficient. They are destroying value. They are not maximizing their resources.

But as we just saw with President Obama’s Keystone decision, sometimes economic no-brainers are shot down for non-economic reasons. Keystone is not an isolated case of economic behavior being affected by non-economic values. I have been in many conversations where I’ve seen policy makers, activists, community leaders, etc. concede the economic benefits of a proposed plan, and still be against it anyway.

Socio-economic considerations can significantly affect individual businesses. This understanding is based on the “license to operate” concept. This theory argues that regulations and legislation rest on customs, past experience, and social acceptance of the status quo. It takes a lot to change an industry structure, but if attitudes change and a scandal surfaces and crystallizes a problem, then the regulatory environment can change quickly. This is what happened when the Enron scandal led to Sarbanes-Oxley. The accounting profession, and the way that companies reported their financial statements, changed radically.

Interestingly, considering how regulated they are and the ups and downs that they have had to endure, financial service firms have been particularly tone-deaf historically to socio-economics. The Sherman Anti-Trust Act, the imposition of Glass-Steagall, and the Community Reinvestment Act, to name a few examples, resulted not just from economic conditions of their eras, but from political and social policy motives as well. The financial service firms in those eras had huge blind spots when it came to understanding what their non-economic stakeholders wanted. As a result, these blind spots ended up costing them economically. No one would argue that any of these landmarks in financial service legislation were ever considered great works of economic policy, but that wasn’t their point. They were crude, blunt instruments used to deal, in part, with social (and therefore political) concerns about certain economic impacts.

Now many firms are learning that they need to add socio-economics management skills to their competencies. In fact, the Private Equity Growth Capital Council just launched to start illustrating how private equity benefits pensioners, creates jobs, and provides capital for innovation.

A decade ago, two dozen of the Fortune 500 issued CSR, citizenship, or sustainability reports. Now, almost all of the Fortune 1000 publish them. Many companies have developed a suite of tools to address the socio-economic dimensions of their business. Companies like Caterpillar, Dow, FedEx, UPS, Nike, the Gap, and many others have re-engineered their operations. They are moving away from looking at society as something irrelevant to their business to realizing that their interaction with society can have a profound impact on their competitiveness. Business being business, they are also finding ways to make money by being pro-active in this regard.

It is a shame that socio-economics has been a blind spot of business historically, because actually, business does have the moral high ground in a number of areas. Through trade, investment, and global development, businesses are empowering people in unprecedented ways around the world. Business is one of the main drivers for encouraging skills development and R&D investment in the United States. Business contributes to the artistic, culinary, musical, sports, and entertainment establishments of many communities. Businesses have a lot to be proud of.

Also, where business does create non-economic frictions, an active socio-economic management approach would help to minimize costs, reduce tension, and enhance stability. Sophisticated firms know how to help communities transition their economic base when they have to close down a plant or how to become accepted when they enter a new community. Sophisticated firms know how to promote employee morale and retention and to create jobs while diversifying their supply chains. Sophisticated firms know how to do environmental impact studies and build consensus with key stakeholder groups. They know that an ounce of prevention is worth a pound of cure.

Isn’t it time that these sophisticated socio-economic management practices were shared throughout the CSR field? Instead of looking at CSR as a cost center, isn’t it time to develop a widespread understanding of socio-economic management practices that reduce costs and add value?  Well, some of us are working on precisely these questions.

To be continued…