In a previous article, Preserving the Social Contract in an Economic Downturn, published in The Street and CSQ, I explored how the nearly decade-long boom-and-bust cycles over the last 40 years have frayed the fabric of American society. The article argued that it is imperative for business leaders to restore the social contract as the only way to drive sustainable and profitable growth in equitable, prosperous, and resilient societies.
Discussions on this topic over the last three months with leaders from major corporations, consultancies, technology firms, and institutional investors have revealed three prevailing themes:
- Almost no leader disputes the fact that our society is more unequal and fragmented than any time in their memory. Most agree that this hinders sustainable growth and profitability.
- Most leaders do not understand how their business decisions could have created these social and economic conditions. They attribute these to broader economic cycles and social trends.
- Very few leaders have a clear view of what they can do to create, measure, and report positive social impact as part of their business strategy and operations.
With any change in the status quo requires changing perceptions, intent, and behaviors, we could say that we have been successful in creating awareness among business leaders but need to do better on consideration and conversion.
This article will identify how our business decisions can have inadvertent negative social impacts and present a framework through which leaders can ensure business decisions drive positive impacts on people and communities as much as they create competitiveness and profitable growth.
THREE ROADS PAVED WITH GOOD INTENTIONS
Very few business leaders get up in the morning with the intent of causing harm to other people. Most genuinely believe that their products, services, and decisions make people’s lives better. When bad social outcomes happen from business decisions, these are seen as being driven by individual hubris or greed emboldened by ineffective or dysfunctional corporate governance, sometimes enabled by technologists, consultants, or investors who should have known better.
Business leaders drive innovation, growth, and profits by making critical strategic and operational decisions along one or more of three vectors. Unfortunately, each can inadvertently cause social harm in ways that are specific and well-documented.
- Defining and executing streamlined and cost-effective operations becomes a business priority as a response to economic uncertainty or downturn and is a prevailing theme in current business decision-making as we struggle to recover after the disruptions of the last three years.
The most direct impact of cost reduction is a reduction in people costs. The much-publicized layoffs of over 250,000 people in technology companies are the tip of the iceberg of impacts across industries as varied as real estate, construction, office equipment and supplies, retail, food and beverage, automotive, and warehousing.
As discussed in the previous article, an increase in unemployment has a direct negative impact on income equality, home prices, and consumer spending. The consolidation of suppliers to reduce costs has a disproportionate impact on smaller and local/regional businesses, which employ more than 50% of all American workers. Layoffs also disproportionately affect employees from underrepresented and marginalized groups, such as women, Black or Latino people, or non-white foreign workers and migrants.
There are, however, even more significant second-level effects: Layoffs and higher unemployment have a direct correlation with higher drug usage, domestic violence, violent crime, and suicide, which collectively cause long-term and intergenerational social harm.
- Creating resilient operational and financial structures and governance represent a critical way for businesses to access capital, invest in innovation and new capacity, and create a sustainable foundation for long-term profitability.
The exponentially increased pace and volume of financial investment over the last 40 years has, however, led to a focus on short-term shareholder returns instead of long-term productivity. Share repurchases and dividend payouts were greater than the net earnings for S&P 500 companies last year, and every 1% increase in shareholder distributions is funded by a 2.5% reduction in labor costs.
Access to capital itself remains highly inequitable, with only 2% of all venture capital investment in 2022 going to firms with female founders and 1% to 2% to those with Black founders. This may be explained by women making up only 20% of the top tiers in institutional investment firms, compared to 30% of Fortune 500 leadership, and only 1% to 2% of deal team members being Black.
This conflict between short-termism, productivity, and equity has reached a tipping point. Leading voices in finance such as BlackRock advocate for a balanced approach to stakeholder capitalism (Larry Fink’s Annual 2022 Letter to CEOs | BlackRock). CEOs of close to 200 leading American companies have committed to redefine the purpose of the corporation to focus on customers, employees, suppliers, and communities in addition to long-term shareholder value (Statement on the Purpose of a Corporation | Business Roundtable).
- Innovating to create new business models, products, and services is perhaps the most important driver of long-term business value, and one that is generally seen as key to improving the lives of consumers and accelerating the progress of our societies and economies.
There are of course businesses that purposefully direct innovation to cause harm as a way to increase profits (e.g., social media algorithms creating addictive behaviors and exposing children to content related to self-harm and eating disorders). Unfortunately, even well-meaning businesses create products that can be deliberately misused to harm people (e.g., authoritarian regimes using social monitoring to identify dissidents) or inadvertently hurt people (e.g., facial recognition software misidentifying Black people). Even seemingly benign algorithms and business decisions lead to products marketed to women costing 7% more than identical products aimed at men and lending rates to Black borrowers being 0.3% higher than those to white borrowers with similar employment, incomes, and credit ratings.
Leading technology companies have already responded to these risks. IBM and Microsoft have stopped or paused sales of facial recognition software to law enforcement, and Deloitte and NTT DATA are investing millions in artificial intelligence and other innovations that adhere to stringent ethical guidelines.
The potential for negative social impact is inherent in our business strategies and decisions. The lack of intent to cause harm means little to the people and societies we impact. We need to get past good intentions and take tangible actions.
PURPOSEFUL PURSUIT OF SOCIAL IMPACT
Business leaders can embed social impact considerations into strategies and operations by ensuring that each decision is accompanied by three simple steps:
- Understand and quantify the potential negative social impacts
- Guide business decisions purposefully to create and sustain positive social impact
- Define, monitor, measure, report on, and continuously improve social impact
For each of the business decision-making vectors, specific steps are directly tied to business value and can have a direct positive social impact.
- As part of cost reduction or operational streamlining efforts, we can explore realigning and redeploying people before considering layoffs; invest in reskilling people to prepare for new in-demand roles; assess layoff decisions for disproportionate impacts on members of marginalized/underrepresented groups; provide longer-term health insurance coverage to laid-off people, including for mental health; build supplier diversity programs to consider local and small/medium providers; and ensure that outsourcing providers and other vendors adhere to code of conduct and workplace standards.
- While defining financial and governance structures, or investing in businesses, we can structure and facilitate investment with long-term value focus; build in considerations for and insist on board and senior leadership diversity; create value accumulation and investment plans to convert stakeholders to shareholders; and create local and regional employment and economic opportunities. We also need to create governance over investment decisions to address overt and unconscious bias that leads to lower investment in women- and minority-founded businesses.
- Finally, when creating new business models or new products and services, we can cancel or pause products with harmful social impacts; design products and services that drive positive social impact; design purposefully for privacy, consent, and accessibility; and examine and eliminate bias in offering and pricing design. The lure of rapid growth and profits may be especially strong in decisions involving innovation, but the prospects of long-term sustainable value creation are improved when consumers believe that the products and services improve the societies and communities they live in.
By taking these steps, we can purposefully pursue the goal of leaving a handprint on our communities and societies that is larger than the footprint our business operations sometimes leave.
A BLUEPRINT FOR POSITIVE SOCIAL IMPACT
The alignment between business decisions and social impact is on a continuum, with steadily increasing impact as social considerations become an integral part of business strategy and operations.
The framework below shows such a continuum, with most businesses needing to move from seeing social impact as extraneous to the business to something that is intrinsic to the business and integrated into strategy, operations, and market differentiation.
Figure 1: Social Impact Maturity Model
As we move to the Essential and Integrated levels, we can define the business and social impacts through common metrics that are measured, reported, and continuously improved as part of our ongoing financial and operational reporting.
Figure 2: Key Social Impact Metrics Aligned With Business Operations
DOING WELL BY DOING GOOD
The largest and most influential investors and corporations are committing to environmental and social governance (ESG) not just because these are the right thing to do, but because they also directly impact business performance. Over 60% of consumers rate ESG impact as a major purchase consideration (Simon-Kucher & Partners). Close to two-thirds are willing to pay more for products/services aligned with personal values (Nielsen). A whopping 92% of millennials are more willing to buy from an ethical company (Aflac). These consumer trends have resulted in a clear difference in financial performance, with U.S. companies with credible ESG claims growing at 6.4% in 2018-22, 36% faster than the 4.7% growth in companies without such claims (Nielsen).
These trends are reflected in business strategy and operations, as shown in AlixPartners research: 69% of business leaders agree that a company’s ability to have access to finance depends on complying with ESG guidelines; 84% agree that a company’s ability to comply with ESG guidelines will impact financial performance; and 69% of private equity leaders consider ESG a new lever for value creation and are willing to invest in ESG without considering financial benefit.
While some leaders still continue to see social impact as imposing higher cost and complexity on the business, the reality is that the ability to improve businesses outcomes is reliant on creating positive social purpose and impact.
A CALL TO ACTION
As business leaders, we have a unique and unprecedented opportunity to finally reconcile innovation with the common good and reverse our country’s slide into further fragmentation and conflict.
By making social impact an integral part of business decision-making, we can reinvent our approach to business strategy and operations to be more people-based and community-centric.
This approach will enable us to drive improved competitiveness and profitable growth while preventing further erosion of the social contract, restoring trust in our institutions, and rebuilding our societies based on shared values.
This challenge goes beyond short-term disruptions or economic cycles or even generational trends. We have the ability to reset the narrative of the last 400+ years of innovation and economic growth that has driven a schism between prosperity and equality, and finally create institutions that drive equality, security, and dignity for people as much as we create economic value.
Let us begin.
The author thanks their colleagues at AlixPartners—Elton Ndoma-Ogar (he/him), Deborah Praga (she/her), Brooke Hopkins (she/her), Amelia Greene (she/her), Joanne Taylor (she/her), and Alex Huertas (they/them)—for their support, guidance, and inspiration in driving positive social impact through business strategy and operations.
Edward Wilson-Smythe is a Director in the Digital Consulting practice of AlixPartners and Head of Research at TechPACT. They are an author and speaker on topics related to innovation, disruptive change, emerging ecosystems and broader socioeconomic impacts of innovation.