Why Greed Might Do Us All a Lot of Good

Commentary about business and finance.
April 9 2012 10:14 AM

Greed for Good

Gordon Gekko was wrong. Greed isn’t good—but it could help solve some of the world’s toughest problems.

GE Chairman and CEO Jeffrey Immelt.
Can corporations be a force for good? GE's Jeff Immelt says "the era of free capitalism without consequences is over."

Chip Somodevilla/Getty Images.

Gordon Gekko was wrong, but not for the reason you think. It’s not that “Greed is good,” as the fictitious corporate raider famously intoned in the 1987 movie Wall Street. But it turns out that greed can be a force for good. In fact, there is reason to think that harnessing self-interest wisely is a necessary precondition for kick-starting the innovation revolution needed to tackle some of today’s most wicked problems like climate change, deadly pandemics, and the ongoing middle-class squeeze.

Consider two powerful forces with the potential to upend the global economy as we know it. The first trend is the dramatic transformation of the nonprofit world from sleepy, under-resourced, and inefficient to market-minded, well-funded, and eager to change the world. The second trend, driven in part by the first, is the emergence of the “philanthrocapitalist.” This new specimen of the global economy leads organizations that don’t fall neatly into either the for-profit or nonprofit worlds. Their companies are, in fact, a little bit of both. One example is Ashoka, a pioneering social-sector incubator that has helped hundreds of firms with hybrid business models take off. The new breed of market-minded “philanthrocapitalist” is also typified by New York’s Acumen Fund, which invests donor money not in old-fashioned NGOs but in social firms that have viable business models delivering both profits and social goods (like clean water or malaria protection). If companies like these continue to prosper, they could help the world tackle many of the difficult problems that governments and traditional businesses have failed to solve.

Even big multinationals are now acknowledging that the sort of profit-obsessed, short-term capitalism once advocated by GE’s former boss, Jack Welch—who earned the moniker Neutron Jack for sacking employees but leaving buildings standing—must give way to long-term capitalism that looks at the world’s wicked problems as opportunities to create sustainable new industries.

This trend is surely to be applauded, but here is the dirty little secret: Nobody really knows what works and what doesn’t. In conventional business, what matters gets measured and what’s measured gets managed—but this is not yet true in the nascent field of social enterprise. Most just lump profit and purpose into one business model without developing any meaningful metrics for social impact.

Until recently, traditional business models assumed everyone was motivated strictly by economic incentives. Behavioral studies suggest that unless people are working on rote mechanical tasks, simply paying more money will not yield more productivity. Since much of the world now lives in the “ideas economy,” employers clearly need to consider other ways of motivating talented workers. As most Slate readers would probably agree, knowledge workers crave independence from bosses and relish being very good at their chosen jobs. Purpose can indeed motivate people as powerfully as profit, as evidenced by the willingness of many people with day jobs to spend their precious free time working on projects like Wikipedia, Linux, and other open-source, collaborative ventures without pay.

But one difficulty that arises is figuring out if a social business is well-run. How can investors tell if a firm making a bit of profit and delivering some social value (say, selling anti-malarial bed nets) is actually a wonderfully run and efficient hybrid business—or a mismanaged and underperforming firm that will soon hit the rocks? Richard Lyons, dean of the Haas School of Business at the University of California at Berkeley, acknowledges that this is a significant problem that the social-enterprise movement—which he strongly supports—faces today: “We really need metrics.”

The good news is that there are some people now trying to get the philanthrocapitalist world to agree on the importance of metrics, and to move toward common standards for measuring social impact. Brian Trelstad, the chief investment officer of Acumen, is one such person. He has scrutinized the various efforts that now exist to quantify the social impact of hybrid enterprises and laments that the field has yet to develop independent measurement tools, standardized criteria, or even common definitions of terms. His team is developing a set of metrics and methods that it hopes will win wider acceptance. However, there is one problem: Most social businesses aren’t interested. Even more surprising, many donors—who you might think would welcome yardsticks to help gauge if their money is being well-spent—are generally uninterested, too.

Part of the explanation for this apathy is understandable: Our precision in measuring social impact is still so poor that embracing it would probably lead to false precision. Just measuring the output per dollar spent by a charity helping homeless people in Toronto get jobs as bike messengers, for example, may measure efficiency—but the better test of effectiveness would be a broader measure of results (say, how many people got off welfare and took on tax-paying jobs as a result of the program). According to Trelstad, donors often do not want to spend the money required to acquire hard evidence through randomized control trials, which are the gold standard advocated by development economists. “They’re mostly interested in stories, not data,” says Trelstad. Donors often want their dollars to go straight to charitable work, not to running expensive trials to measure impact.

While that may sound like the kinder, more charitable thing to do—it’s not. One philanthrocapitalist cites a real-world example of donors funding a new social business aiming at both profit and purpose for $150,000 a year. In that case, running proper trials to measure real-world impact would have cost $100,000. The donors refused, insisting that the money go straight to helping people in need, not measurement and metrics. While this sounds compassionate—even reasonable—it can be a dangerously unhelpful stance to take if that new social business was actually harming the people it sought to help, or even if it was just ineptly crowding out other social entrepreneurs or government agencies that could have done a better job.

Capitalism can transform from a model of greed is good to greed for good. Incentives and purpose matter, and enlightened corporations that take a long-term view will find taking on some of the world’s difficult global problems can be profitable. That does not mean that the role for government or the individual is diminished. Companies can’t solve all of society’s problems. But increasingly, enlightened firms will realize that by investing for the long term they can find profitable ways of meeting society’s greatest challenges. This change in mindset is best captured by GE’s current chairman, Jeff Immelt, who sums things up this way: “The era of free capitalism without consequences is over.” Gordon Gekko never saw that coming.

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