CAPITALISM II

We First Book Video: "We-defining Me" from We First on Vimeo.

Some of you may have been confused by the last post on capitalism. You wonder how is it possible that companies are not doing enough.

Without giving you all the facts and figures, the main point is that the world is facing staggering problems in areas of global health, global homelessness, global climate change, global conflict, food security and agricultural development problems, energy instability or deficiency, water scarcity, gender disempowerment, unemployment, underemployment, education, youth leadership, etc. The list goes on. Yes, it’s true that most countries give a small percentage of their budget to help with foreign assistance, foreign aid, or international development. But this is not the same as the 1% of pretax profits the average company gives to charity.

To explain, let’s use the U.S. as an example. It is true that less than 1% of its budget goes to foreign aid, so it seems similar to the average corporation, on first glance. But remember, much of what countries do is domestic. If the US works on shelter and housing domestically, it’s the Department of Housing and Urban Development (HUD); if they work on it in foreign countries, it’s the U.S. Agency for International Development (USAID) or Department of State. If the U.S. works on energy security domestically, it’s the Department of Energy (DoE); in foreign countries, it’s USAID or State. If the U.S. works on public health domestically, it’s the Department of Health and Human Services (HHS) and the National Institutes of Health (NIH); in foreign countries, USAID or State (or the international parts of NIH, HHS, and a bit of Homeland Security). So when you say that the U.S. spends less than 1% on international development, remember the key word is international. They are also doing local or domestic development all the time.

Still, I do believe the government could do more. Generally, countries that spend a greater proportion of their budget on effective education and health have higher standards of living (Norway, Sweden, etc.). So I do want the government (around the world) to do more. However, I’m specifically speaking about corporations due to the limitations of government. Before talking about corporations, let’s think about the benefits the government has. It has 60 years of knowledge in foreign aid and over 80 years of knowledge since the New Deal (U.S. government). It has guaranteed income—the tax base. It can create legislation or use executive power. And it has existing administrative, programming, and financial infrastructure at the local and state levels. However, the government is limited by fraud, corruption, bipartisan politics, jarring bureaucracy. In trying to solve problems of global and domestic poverty alleviation, the government struggles (or doesn’t struggle) with national interests versus global need, disagreements about where the poverty line should be, lack of enthusiasm towards social programs for the poor (in the U.S.), and feelings that the non-profit sector, families, and churches should handle poverty efforts.

The non-profit sector also faces great advantages and limitations. Remember, when I say non-profit sector I’m including philanthropies/foundations, NGOs, charities (501c3 status) and non-profits which can have other tax exempt status. Generally non-profits enjoy being seen as credible and neutral. More generally, non-profits have the advantage of super-motivated volunteers and staff, potential ability to attract big contributions, field expertise (many NGOs have feet on the ground in various countries around the world or in local communities), and limited staffing, bureaucracy, and overhead. Obviously this does not apply to all NGOs, however, the big large NGOs are not most NGOs. Unfortunately, NGOs and the non-profit sector also deal with fraud and corruption like the government. There can be policy conflicts between headquarters and people out in the field. Money is always a problem. A lack of coordination between NGOs working on the same or related problems diminishes impact. And NGOs are always subject to the agendas or requirements of donors and host country governments.

And that leaves . . . you guessed it—corporations. Of course, social enterprises (the 4^th sector), NGOs and the non-profit sector are doing all they can. They can continue to improve efficiency, but they are doing a lot. Governments need to do more. However, corporations have not really scratched the surface of their potential to contribute to solutions to the major problems plaguing the world, today.

We looked at the short history of corporate charitable giving, Corporate Social Responsibility (CSR) movement, and Cause-related Marketing (CRM). So yes, to summarise, U.S. corporations went from 0 charitable giving in the early 1900s when they were barred from making such contributions to giving to arts and culture in the 1950s and 1960s. In the 1970s they began to give to civic causes, and then moved to national and global issues of poverty and social justice in the 1990s and 2000s. And yes, contributions grew from 0, then, to $14 billion in 2009. Still it’s a small percentage of the profits that companies pull in annually. Most importantly, CSR is still somewhat of a second thought and operates with problems and deficiencies in many companies. Here are few of the problems according to Simon Mainwaring.

• Giving is disproportionate to profits and salaries – The $14 billion in 2009 is small compared to money (billions) made by investors and top executives not to mention bonuses.

• Top executives are uninvolved and insincere – In a 2010 McKinsey survey of 1800 respondents, more than 50% considered sustainability to be “very” or “extremely” important. Contrast that with the fact that only 30% say their company invests in sustainability and embeds it in business practices, while only 25% said that it is a top priority for their CEO.

• Companies fail to understand CSR – According to the same survey, 20% of executives claimed their company has no definition of sustainability. Fifty-five percent thought that CSR related to management of environmental issues; 48% thought it was related to governance issues like ethics, regulations, and compliance; 41% thought it was related to social issues like worker rights and labour standards.

• CSR efforts are just window dressing – The great majority of companies still use CSR as a tool for public relations and their public image. Simon Mainwaring even quotes the Economist as saying “ . . . for most public companies CSR is little more than a cosmetic treatment. The human face that CSR applies to capitalism goes on each morning, gets increasingly smeared by day, and washes off at night.”

• Companies spin their CSR and CRM – Companies have been exposed for green-washing, cause-washing, and local-washing in order to market themselves.

• CSR results and measurements are scattershot – There really are no national or international standards of achievement in CSR. So few companies measure their results. Most of us use various watchdog agencies to watch, analyse, rate, and rank corporations on their socially conscious good work.

When I say “it’s not enough,” this is what I mean.

I’ll close with a report mentioned in We First. One of my favourite people is Paul Newman (God rest his soul). When he was alive he convened a group of CEOs and founded the Committee Encouraging Corporate Philanthropy (CECP). The CECP commissioned a report from McKinsey to project 10 years into the future to see if social responsibility was important for the future of corporations. The report predicted 5 important trends between 2010 and 2020: (1) a rise in the power of emerging nations, like China; (2) a shrinking of the labour force and talent pool due to demographic changes; (3) a global integration of capital markets, trade, and technology; (4) natural resource scarcities; and (5) competition among nations to attract work.

The report mentioned 4 scenarios based on how extensively corporations adopt true social responsibility.

Scenario 1 – People put greater demand on companies for social change and corporations react positively. Consumers began to trust corporations that they will agree to enact social change. Consumers and corporations become partners in actually improving the world. And governments allow corporations to voluntarily meet these social expectations.

Scenario 2 – Corporations try to adopt some social changes, but citizens fail to trust them. As a result, government and NGOs stop partnering with corporations to enact social change, and we are left with a “patchwork” of international laws and standards and a “bifurcated system of capitalism.”

Scenario 3 – Society’s expectations of businesses continues to rise, but companies refuse to enact changes for positive global impact. Governments enforce regulations reducing capital and increases expenses for companies. Citizens (who are also consumers) distrust companies creating a problem of expectations.

Scenario 4 – Societies and companies cannot match their expectations or their engagement levels so there is an ever-downward spiral of social responsibility. Trust in business drops low enough that the economy suffers exacerbating the very global social problems we are trying to solve.

The report says that only the first scenario is the logical and preferred scenario. Each of the rest does not have a beneficial outcome for corporations.  Which of the scenarios do you think is likely to happen? Do you see any other options or scenarios not listed?

THE NON-PROFIT DISADVANTAGE

Now if you’re someone who doesn’t want to donate money to a water-based non-profit because you think they are wasteful, have too much overhead, pay their employees too much, or are not really innovative, let’s start talking.

I’ve talked a lot about social enterprises that have revenue-generating models. But even the social enterprises with revenue-generating models still fundraise. And fundraising is what non-profits do. So today, I want to talk about the disadvantage that non-profits face because of the different standards applied to for-profits and non-profits.

I’ve been bothered a lot lately by the fact that there is no multi-national, global, big-money social enterprise. When you think of big companies you think of Apple, Samsung, Coca-Cola, GM, GE, Shell, Chevron, Wal-Mart, BP, etc. But I can’t think of one non-profit company or one social enterprise that size. Some say, it’s fundamentally and inherently an impossibility. Why it bothers me is that I think of all the amazingly impacting change a multi-billion dollar social enterprise could do—one that was still amazingly innovative in selling its products but just as innovative in using its profits for seeable change and whose products themselves were changing the world for those without access to basic needs. I’m still pondering this and what it would mean if it existed and if it’s possible to exist.

I do know that non-profits, today, are often hindered in their growth due to concerns of giving to non-profits, efficacy, efficiency, and waste. So I want to list the disadvantages they face in their work compared to for-profits and for-profit work. These disadvantages are highlighted by fundraiser and activist Dan Pallotta in his recent TED talk, The Way We Think About Charity Is Dead Wrong.

      1) COMPENSATION: It’s ok for for-profit leaders to make tons of money, but we do not like it when non-profit leaders make a lot of money. People don’t care so much if someone makes a lot of money selling violent video games, but they get very angry when a non-profit leader makes a lot of money. The problem is that for-profit sector then has an advantage because they can use compensation and salary to attract talent whereas the non-profit sector cannot. Dan gives a beautiful example where he takes the median compensation (with bonus) of a Stanford MBA holder at age 38 ($400,000) compared to the average salary of the CEO of a hunger non-profit ($84,000). It may not be greed that entices a person to take the $400,000 job., according to Dan. It can be much smarter to (1) take the $400,000 job, (2) donate $100,000 every year to the hunger charity, (3) save $50,000 on taxes (still $270,000 ahead of the hunger charity CEO), (4) be called a philanthropist for the $100,000 donation, (5) sit on the board of the hunger charity, (6) supervise the poor person who decided to become the CEO of the hunger charity, (7) and have a lifetime of this type of power and impact.

(Now, I have a slight problem with this thinking since I find it counter-productive, on one hand, to be part of a system that creates hunger and, on the other hand, sit on a board to fight it. However, the point that we need to be willing to compensate non-profit workers in general is an important one. At the very least, the extra attraction of higher salaries, allows people to live consistent lives “on both hands.”)

2) ADVERTISING: We’re ok with for-profits spending as much as possible on advertising, but we don’t like our donations to non-profits to go to their advertising needs. This reminds me of criticism heaped upon Invisible Children. What’s interesting here is that for-profits use advertising to increase revenues.  In the same way, a non-profit can actually increase the amount of money they bring in and fundraise, and therefore increase the good they do and the amount of money directly impacting beneficiaries through advertising.

  

      3) RISK TAKING: We’re ok with for-profits taking risks to generate potential new revenues such as new products (Apple) or new, daring movies (Disney). But when a non-profit takes a risk with a fund-raiser that doesn’t produce huge profits, they get in trouble and their reputation is hurt. Non-profits then become scared to take risks. The problem is that prohibiting failure kills innovation, which prevents the possible growth of revenue and stifles an organization or industry.

      4) TIME: We’re ok with for-profits taking time to get a return on investment (Amazon took 6 years before it generated profits). But if a non-profit needed 6 years of work before generating any return that benefited the hungry, people would critique the non-profit out of business.

      5) PROFIT: For-profit companies can pay out profits that can attract capital for investment into new risks and new ideas, but non-profits can’t pay profits, which reduces their risk capital, idea capital, and potentially their growth potential.

I’m not sure if these things will change, but I am happy that through social sector enterprises combining the social aims of non-profits with the for-profit revenue-generating models, that at least 5 is being addressed. However, it’s still a problem with non-profits. I know people criticise Jeffrey Sachs a lot, but often, I do understand what he means, that we honestly have not given much money (percentage-wise) to the problems we want to resolve. So I often wonder what would a world look like where a multibillion-dollar-profit-making company was a social enterprise and was so innovative in its products that it always remained on top. How would their profits go to social use and would it make a difference? My guess is that its products would become socially good if it was the ethos of the company. But is it possible?

I’ll leave the topic alone and invite you to comment and respond to it. Do you agree with the list? Do you see any possible solutions? Any new ideas bubbling beneath your hoods?

CORRECTIONS

I normally like to take a moment to correct anything from the last update. Usually these corrections come from readers who point out how silly I am trying to write about so many things (but these are really just thoughts in my head). So here are the updates or corrections from last time.

First, my intelligent friend Alex mentioned that he also noticed that British television shows don’t last as long as U.S. American shows. He believes part of that is due to the fact that we pay for a TV license here in order to have television service. I never knew to whom it goes. Alex explained that this annual fee goes to broadcasters and may give them much more financial protection to try out new shows and series. Good point.

The second correction was related to the section called The Town. I worded the section on "The Town" poorly. What my friend, Praj told me is absolutely true and much more nuanced: people have good parts and bad parts (as opposed to Hitler being all bad). I think what I was referring to in that section was contradictory messages. Does Hitler love and care about humanity? In one context, you might say yes (in the magazine article); in another you might say no. Hitler himself would say yes and tried to construct an image of what he wanted the world to see or know (he did the exact same thing at the concentration camp at Theresien in which he invited the world to see what was going on, showing himself as a really great guy who was treating the people there well). So I was (poorly) pointing to the fact that the truth of us in not in our constructed image of ourselves (which does involve actions in order to construct the image) but in our actions outside of the construct.

I am focusing on the phenomenon when your words differ from your deeds. Are you the deeds or the words? Some people would say it’s possible to believe one thing and your actions show another. Instead of being able to believe one thing and do another, I was simply talking about the fact that what you do is not separate from what you believe but what you do is the very thing you believe (the truth lying in your actions). So instead of Hitler’s hate-filled, genocidal actions being different than his love of humanity, I would argue that he did not have a love of humanity which is borne out in his deeds regardless of the image he portrays or the beliefs he says he has (his true beliefs being his actions).

Again, Praj brought up an excellent point saying that he wasn’t sure if some groups pursuing profit is a bad thing (if there are other groups helping people). I tried to be careful with my wording about the job (and at work). I actually wasn't commenting on profit-driven organisations (though I could comment on it). I think my main point, poorly conveyed, was that the role given to me is not what was advertised to me and not what I wanted to do. So if people want to go to India and create a certification programme and call it an educational programme and help upwardly mobile people get jobs when they would be competitive without the presence of the programme, that's fine. And people can make money doing that. What I've tried to communicate at work is that picture/vision is not what I wanted to create/do. It's ok if someone else wants to do that, and I don't begrudge him or her. However, I didn't go to London to only teach Company products (and wasn't told that) or to do the kind of work where we're jumping on moving trains or work that helps grow the GDP and inequality together. It's just not what I wanted, and as other people get to choose what they would like to do, I think I'd like to do something else. I also thought I would be working partly in the philanthropic arm of the company, so it was sad that didn't work out. :-)

The toughest part in such situations is that your opinion is not valued or understood. People think because it’s a for-profit technology company we’re not doing development work. Unfortunately, many groups do development work besides just international and community development organisations. And if we enter into the education field, we’re doing development work. I’ve been told that you don’t sit and force teachers to sit through an entire year of schooling so they learn the material they are going to prepare. This was one of the strangest comments told to me to show why we didn’t need to teach the material to future trainers. What was not understood is that teachers (people who major in a specific academic field or education) [should] already know the material they are to teach; this is why they don’t sit through an entire year of the subject they will teach. When I have had to teach teachers new things like how to incorporate engineering into science curriculum, I have most definitely taught the teachers just as they will teach the students. This type of thing where I’m asked my opinion as the education person but whenever there is a disagreement, my opinion is disregarded or dropped or dismissed—this happens again and again and again. And it has an effect on you even though people expect it to have none.

The last correction or amendment I wanted to make was to the section called Women in the last update.