When Profit Isn’t Enough
As the coronavirus pandemic shutters businesses across the U.S., some of the largest corporations in America are posting huge profit margins. The top 25 most profitable companies in the U.S. are earning an 11-percent profit margin on average while smaller firms reported a nearly 50-percent earnings drop on average during the first quarter of 2020, according to an analysis from activist organization Oxfam America. While that profit is great for those companies, so many are being left in the dust and begs the question; what’s in it for the rest of us?
The Bottom Line for Youngstown Ohio
On June 18th, 1980, the United States Court of Appeals, Sixth Circuit, heard the case of The United Steelworkers of America v. The United States Steel Corporation. The litigation focused on the closing of two steel mills in Youngstown, Ohio. The Local 1330 steelworkers’ union was desperately trying to stop the closure of the mills which U.S. Steel had previously promised to keep in operation if the location remained profitable. They were at odds whether the mill was indeed turning a profit, each side arguing the veracity of their definition for profitability and a plaintiff trying to preserve a major component of the local economy. The case was argued for a scant 2-weeks and a verdict issued 2 weeks later. The presiding judge, Harry Edwards, ruled: a court cannot require a corporation to continue operations when its officers and board of directors have decided to discontinue operations based on their perception of profitability. Central to the case was the definition of profitability which Edwards conceded was a matter of interpretation although he was “loath to exchange the court’s own view of the parameters of profitability for that of U.S. Steel.”
U.S. Steel ultimately closed their doors in Youngstown, a decision based on a single bottom line; monetary profitability. Executive and shareholder concerns usurped the needs of Youngstown’s residents, economy, and community. While nearly 40 years ago, the single bottom line of profit remains a pervasive force in corporate governance. Clearly some things have changed, companies have grown wise to public perception of profit focused operations but have there been any material shifts in how companies view or pursue profit? Are there any models, or ideally, tangible examples, that monetary profit alone isn’t still driving corporations?
Reinterpreting Profit
Jonathan Levey, Professor of History at the University of Chicago, muses that profitability is malleable. Citing Judge’s Edwards’ ruling, Levey contests that history supports an evolution of profit beyond money; “Rather than being a timeless category, profit has a history as contingent and as eventful as any other.” Levey asserts that while profit always represents a change of value over time, what constitutes capital is a lever that can be interpreted and changed to the needs of a society that uses it. Wealth is subject to tautology and while perhaps a static category, what is valuable and creates wealth has evolved beyond strictly monetary terms.
Even before Levy’s work, entrepreneurs like John Elkinton sought to redefine the nature of profit. In the 1990s Elkinton posited the notion of the Triple Bottom Line (TBL) and his work indirectly credited as a catalyst for sustainable corporate development advanced by the UN more than a decade later. A TBL framework shifts from a singular monetary focus on shareholders in favor of a more balanced “three-legged stool” popularly coined as people, planet & profit. Profit follows the traditional definition of competitive productivity yielding goods/services around scarce resources for consumption and generation of revenue. With TBL however, the idea is that overall profit is a function of the collective and value is sourced from and shared with the other legs of the stool, not just shareholders. The inclusion of people signals a departure from economic and corporate resource norms. TBL companies take a holistic view of all individuals touching the enterprise, thinking about the impact their actions have on all the people involved with them. TBL companies focused on the planet leg seek to reduce or eliminate their ecological footprint. They strive for sustainability, recognizing the entire lifecycle of their actions and attempt to reconcile the true cost of operations regarding their impact on the environment and true cost of resources used.
Businesses seeking a triple bottom line must acknowledge that a business model focused solely on financial profit is inherently unsustainable as it ignores the critical elements of human and natural capital. A bottom line that focuses on more than just profit prompts a company to make fundamentally different decisions when then are accountable for more than a monetary goal. A TBL can bolster a business’s sustainability and enable their organizations with tools to identify risks and evaluate opportunities that aren’t available when motivated solely by financial profit.
TBL Examples
Patagonia’s commitment to think beyond profit has roots from their founder, Yvon Chouinard, who founded the company as a supplier of affordable yet durable climbing equipment for rock climbing enthusiasts. As Chouinard reached critical mass with equipment and an expanding clothing line, he encountered his first pivot point. Patagonia had become a large climbing gear but their climbing pitons were causing damage to the rock faces their customers climbed. Chouinard risked a change and employed a new technology to replace the disfiguring pitons. Chouinard’s concern for the environment endures today though Patagonia’s mission to operate with a triple bottom line.
The highlights of Patagonia’s TBL pursuits include the use of recycled and environmentally sound materials and leaving out chemicals in their clothing production. The company is vocal in their support for the environment supporting environmental initiatives with their voice and pocketbook. The company’s annual report demonstrates this support reporting on conservation, sustainable farming and advocacy programs. Patagonia backs up their stance with profit, including advocating customer involvement in giving back with programs that contribute 100% of Black Friday revenues to environmental causes.
Larry’s Coffee provides an example of a burgeoning business building their brand and staking their growth on the principles of a triple bottom line. The company states their mission as being “happily committed to blending and roasting innovative uniquely delicious coffees — and making the world a better place.” The company produces 100% of their coffee from Fair Trade practices, and utilizes environmentally friendly processes like passive solar construction, active solar systems, radiant floors, zoned heating, composting, and rainwater harvesting to minimize their impact.
Larry Larson’s vision starts with farmers, he developed the basis for sourcing beans based on a model he observed via the Mut Vitz cooperative in southern Mexico. The region was a favorite from his first visit to the coffee bean region and inspired Larson to found Cooperative Coffees, the first and still the only cooperative of independent coffee roasters in the U.S. importing coffee directly from Fair Trade cooperatives. Like Patagonia, Larry’s Beans operates via tenets from B-Corp., a nonprofit organization that helps new and established companies certify their operations as triple bottom line and help organizations use business as a force for good.
Make Room for a Fourth Leg?
In a discussion I had with Yosef Abramowitz, President of Gigawatt Global, he described a 2014 deal that was in final negotiations with Rwandan President Paul Kagame to install the nation’s first solar power array. The project represented a source of clean, green energy to a nation bereft of even fundamental infrastructure, the sub-Saharan Africa region has over 600 million people without basic utilities, including electricity. The terms of the project were nearly finished however Abramowitz had some final stipulations to discuss with President Kagame. Abramowitz presented his final conditions; orphanages, knowledge transfer, and job creation. The terms were framed around the creation of housing and schools for orphans and programs to ensure the local community be instilled with the vocational skills and resources to run the solar array independently, with Rwandans. Abramowitz characterized Kagame’s response as somewhat incredulous, “he asked us when we were going to tell him our final demands, I told him those were it.”
While Gigawatt is a for-profit company, they govern with a hybrid triple bottom line. The organization’s people, planet and profit targets seem obvious but Abramowitz professes an additional bottom line as part of their secret sauce; purpose. Gigawatt’s purpose is spiritual, fueled by a Jewish national value, to improve the standing and respect for Israel and Israelis around the world. Jewish philanthropists have been helping the region over the last several decades with the establishment of the Agohozo-Shalom Youth Village, a strategy like the one employed in Israel’s kibbutzes following the Holocaust. Another driver stems from by a shared history of being victims of genocide, a catalyst for a huge orphan population in the region.
Today, Gigawatt leases land from the Agohozo-Shalom Youth Village to deploy the 28,000+ solar panels behind the 8.5 megawatt power plant. The facility produces 6% of the country’s energy output and has created 350 local jobs. Beyond the immediate local benefits, the initiative is greatly improving the nation’s GDP and lowered emissions through improved green energy, offsets and reduction of diesel fuel consumption. Gigawatt’s monetary return comes from a mix of developer fees, expense reimbursement, management fees and equity investment. As important as the people, planet and profit deliverable Abramowitz says that the “peace dividend” Gigawatt delivers is just as important.
Purpose
Abramowitz’s definition of purpose presents another leg to a multi-line profitability model. Purpose is indeed impactful but can become an elusive target to define and measure. A popular business adage advocates, “If something is not measured it cannot be managed.” The quote, attributed to W. Edwards Deming from his book “The New Economics” is in truth misquoted. Deming actually suggests a broader path, “It is wrong to suppose that if you can’t measure it, you can’t manage it — a costly myth.” Deming certainly is not advocating ignorance of facts, he very much championed using data to confirm assumptions that led to strategy and management changes, he in fact, pioneered this approach in relation to managing organizations.
If Abramowitz’s goal is to improve Israel’s standing in the word community, one way to measure may be to look at voting records of the target countries (Rwanda) and in votes of other nations at the UN before and after his projects. As for return for Rwanda, beyond the direct energy impact Abramowitz also saw an increase in commerce and reduction in crime due to the availability of lighted streets at night. Obviously, purpose must have some trackable effect but at times, the legs of the triple bottom line can provide a runway for entrepreneurs to find traction and justification.
The evolution of monetary gain to include people and planet plots along a straightforward path. Interest in the triple bottom line has increased across for-profit, nonprofit and government verticals. Businesses and nonprofit organizations have adopted the TBL framework to evaluate their performance, and the model has gained purchase with governments at the federal, state, and local levels. If you include a new bottom line, then all lines should be positive. The trick with purpose isn’t just defining it but ultimately measuring it.
A 4BL company can articulate their purpose in a way that can eventually be broken down into measurable components. Is it in community health? Look at insurance claims or doctor visits or hospitalization stays. Is it in reducing poverty levels? Look at welfare claims, or employment participation rates or average income trends. Sustainability and social responsibility alone don’t make a viable business. Stakeholders must buy into the 4BL concept and how it’s measured. Investors must buy-in to purpose as well as the profit. Employees must get some “return on investment” from achieving the purpose goal in addition to the people goals. None of the individual elements can be ambiguous however, an aspirational purpose can find measurement along the way. Business must be able to measure and communicate the achievement in this area with no less rigor or transparency than it does its people, planet and profit data.
Purpose in the bottom line must coexist with people, profit and planet if a 4BL model is also to be successful. The most difficult dimension of this model is entrepreneurial intent which creates complications when we attempt to materially change the profitability model so the four lines can coexist. Social enterprises can produce a breadth of value around profit and be a force for good, so how can we engender entrepreneurs to pursue new profit models? As we explore the growth of purpose based business models, we discover behaviors play a key role however, the true tipping point is intent. Business strategies are transformed by social changes alongside innovation to accommodate new demands for purpose and profitability. While these two constructs have historically not played well together, a symbiosis can be achieved. Thomas Edison said, “Nearly every person who develops an idea works it up to the point where it looks impossible, and then they get discouraged. That’s not the place to become discouraged.” If our intent is to manifest a new business model like 4BL, purpose must not be a side project but an equal focus.
Jeff Heinzelman is the founder of MostlyWest with 25+ years of experience in leadership, business process, customer experience and product innovation. I have led teams in many sectors, relying on a personal philosophy of people, process, and technology to deliver innovative products. I am an advocate of customer-focused product management connected to data-driven results. I am also a husband and father of two boys, and live in Austin, Texas where I enjoy Tex-Mex, BBQ, and football. Not necessarily in that order.
