It’s the trillion dollar question. Justin Fox, in a recent post here, put it this way: “I don’t think anyone has come up with an argument for or description of better business behavior that has anything like the elegance and power of the economists’ ‘incentives matter.’ As long as it remains possible to get rich via less-than-upstanding behavior, and enjoy those riches, a lot of people in business will choose that path.”
I call it the egocentric question: “Why is doing good in our self-interest?”
Here’s my answer — and, yes, it’s all about incentives. In my writing, I’ve discussed good and evil a great deal — but in many places, and often in arcane terms. So let me take a moment to try and answer the egocentric question as simply as possible.
Consider for a second, the parable of the rug merchant. He’ll never see the tourist he’s chasing again. He’s got a local monopoly in his corner of the bazaar. His suppliers are poor, starving, and stuck in the hinterlands, cut off and isolated. The result: rugs are made in sweatshops by kids and sold at massively inflated prices.
The lesson: “In a disconnected world, the costs of evil are minimal.”
What’s different, immediately, about a hyperconnected world is that information flows much faster and more freely. So it’s less costly to ascertain who’s really evil — and who’s really good. So the first force is information.
Cheap information lays the foundations for more collective action. It’s less costly to punish those who are evil. Equally important, it’s less costly to reward those who are good.Discipline is the second force.
With better collective action comes an enhanced incentive for competitors to provide what incumbents can’t; to do good where there’s evil. After all, both punishments and rewards are magnified. The third force is competition: competitive pressure by rivals to do more good, and less bad.
With greater competition comes greater probability of high-level innovation — new business models, strategies, and institutions that reinvent the deep economics of an industry, market, or sector. And so, thanks to the fourth force, disruption, the threat of fatality for incumbents grows.
With more innovation comes a greater emphasis on rule-making: the fifth force. As new disruptive innovations proliferate, regulators take a more active interest in assessing the social costs and benefits of each, and selecting for the most productive ones. Conversely, visionary organizations make new rules in their own ecosystems that alter the incentives for their buyers and suppliers to do more good, and less evil.
Ultimately, after a given threshold of connectivity, good is self-correcting, a dynamic equilibrium. Think about it this way. Wall Street banks sold the next guy toxic junk. But the next guy was selling their toxic junk right back to them. It’s the golden rule of network strategy: what goes around, comes around. When an industry or market’s connected tightly enough, doing good becomes the only game in town — unless, of course, you want to melt down catastrophically, like Wall Street did. Self-correction is the final force.
Wall Street banks thought they were in the rug sellers’ world. But they were hyperconnected to the hilt.
Let’s flip the rug seller’s world on it’s head, to drive it home. If he faced repeat business tomorrow from the same customers, if his suppliers worked in the next corner of the bazaar, if his corner of the bazaar was chock full of rival rug sellers, the incentives for evil would decline, swiftly and severely replaced by incentives for good. That world is what the economics of the 21st century are, slowly but surely, approaching.
Today’s organizations are subject to a new range of forces that amplify the costs of evil and the benefits of good. Think of this set of forces as a ladder that people, communities, and society across the global economy are building. It’s this ladder that next-generation organizations must climb.
Pepsi’s on the first rung, information. The Refresh project hopes to build a stronger brand by doing a marginal bit of good, but it doesn’t essentially changing the fact that it sells unhealthy sugar water.
Nestle’s on the second rung, discipline. It’s reaching out to people and communities, hoping to form deeper, more meaningful relationships. Sometimes, it succeeds — and sometimes, it gets a little bit of a black eye.
Google’s just climbed back up to the third rung, competition — by leaving China, it is once again competing not just to gain more share, but to do more good, by offering higher quality services, instead of compromised ones (in turn, amplifying pressure on rivals like Microsoft).
Apple’s on the fourth rung, disruption. It is utilizing radical new building blocks, markets — the Apps Store, iAds — and their great promise is to reinvent the deep economics of media and advertising. Will they live up to it? Only time will tell whether Jobs’ insistence on heavy-handed control is hubris — or whether it really does radically rewrite the balance of good and bad. If the former, Apple will likely stumble back down the ladder of next-gen strategy.
Wal-Mart’s on the fifth rung, rule-making: its Sustainability Index lays down new rules for every single supplier in its vast, globe-spanning ecosystem. Wal-Mart is the world’s biggest company (by a long way) — and its radical new rules are a more powerful force for good than any law most countries could hope to pass, much less enforce.
No one’s on the last rung, self-correction. The climb to the apex is especially steep. But whoever gets there first will undoubtedly transform the landscape of their industry.
So why don’t more businesses see these forces?
It’s the wrong question.
The right one is: because there will be some organizations that are quicker to get it than others, what do the forces above mean for the economy? Well, they suggest that businesses who can do more good will survive, thrive, and prosper — and those who do more bad will stumble, falter, and fall.
That conclusion may sound revolutionary. It’s about as radical as cup of lukewarm tea. In the short run, focused on the here and now, it can be hard to see that there are selection effects for businesses that can do more good, and less bad. Yet, looking across the slow, steady sweep of history, it’s as clear as day. Yesterday, the global economy was built on debtors’ prisons, usury, expropriation, colonialism, and slavery. Today, it isn’t.
The numbers support the case for better. According to a forthcoming analysis from CSR Magazine, “being a good guy pays. The best corporate citizens list, which includes Hewlett-Packard, Intel, General Mills, I.B.M. and Kimberly-Clark, had a total return on shareholder value of 2.37 percent over three years. But the 30 worst had a negative 7.38 percent return”. Surprising? Far from. At the Lab, our portfolio of Constructive Capitalists, built on a tighter, tougher set of criteria for “good guys,” has shown even more dramatic outperformance.
Here’s a historical example. Around the turn of the 20th century, farmers in a newly prosperous America had to buy from manufacturers’ agents, who charged steep interest rates and earned fat commissions, or general stores, where limited supplies meant mega-prices, or a dizzying array of fly-by-night mail order schemes. Along came two revolutionaries — dangerously idealistic radicals, vehemently opposed to yesterday’s status quo, seeking to topple it — hell-bent on maximizing good, and minimizing evil.
They offered lower interest rates, trustworthy marketing instead of hype, higher quality products at fairer prices, and, most radical of all, money-back guarantees. One even pioneered viral effects, giving people a share of revenues if their neighbors placed an order with him.
Montgomery Ward and Richard W. Sears.
Seen in that light, economic (r)evolution has always been about doing more good, and less bad. Which leads me to a hunch. The economic historians of the 23rd century will look back on today the same way we look back on yesterday: with astonishment that we allowed so much bad, and so strove for so little good.
Yet even 200 years from now, I’m sure incumbents will ask — what, you want us to do moregood? And then, as ever, from under their patrician noses, revolutionaries who can do better will disrupt them.