I’ve been the Gordon Gecko of many conferences on Impact Investing, most recently at the World Affairs Forum and broadcast on NPR. Impact investing, as you may know, is making investments in companies that achieve some social outcome. Gordon Gecko was Michael Douglas’ character in Wall Street, saying “Greed is good”. That’s me — less hair and star power, though.
The debate always seems to revolve around how unethical it is to make money while providing services to the poor. The alternative seems to be to make just enough money to break even, because that seems ethically pure. Profit is bad in this scenario, because it pulls money from the pockets of the poor and into the pockets of the companies and their investors.
I disagree, for the following three reasons:
97% of the economy is for profit.
We have some big social problems in the world that need solving. Education, environment, poverty, healthcare, sex trafficking, and Justin Bieber songs are all gigantic problems. Getting the US off of fossil fuels is estimated to cost TRILLIONS of dollars, (which used to be a number similar to Gazillions when I was a kid, but now we bandy it about readily. Just to write it out in old money, that $1,000,000,000,000.00. It will not fit on one of your personal checks).
As I’ve written before, the US non-profit economy — the do-good dollars that are addressing all those gigantic problems — is about $350 billion per year. And of course that includes non-profit causes that you may personally disagree with, like the National Rifle Association, Greenpeace, or music education programs that will train the next Justin Bieber. $350 billion sounds like a lot, but it’s only 3% of the US economy, which is $14 trillion dollars (again, that’s $14,000,000,000,000.00 in old money).
One of the things you learn in business, in school, or in life, is that you should spend your efforts on the things that really matter, and we’re not not doing that here. We’re spending 3% on things that really matter. Tricking the 97% of for-profit dollars to accidentally do something good would drastically increase the effort on things that really matter. Appeal to the greed to enable more good.
Investments minus returns = charity.
To appeal to the greedy, there has to be a return on investment. This word “investment” has been highly maligned. The government “invests” in education. We “invest” in our children. The returns are not truly financial, they are emotional or ephemeral. “Investment” means there must be more coming back than went in. You make an investment of one dollar, and later two dollars come back. You’ve made 2 times your money! If no money comes back, you can call it an investment if you want. But it’s really charity, and you won’t be able to tap that 97% of the economy, the for profit economy, that has made America great.
“Sustainable” companies miss more than profit
What’s the difference between a sustainable company, which manages its efforts to be 0% profit but to pay all expenses, and Fortune 500 companies? This is a question I ask my students, but I’m going to give you the answer anyway. The difference between a sustainable company and a Fortune 500 company is less than 7%. They are 7% different because that’s the highest the average profit margin of the Fortune 500.
Put another way, if the Fortune 500 lowered there prices by just 7%, they would all be sustainable companies. If “sustainable” companies increased their prices by just 7%, they would average the Fortune 500’s profit margins.
In exchange for an average 7% profit margin, a huge amount of capital is mobilized to focus on the efforts of the Fortune 500. The current market capitalization of the Fortune 500 is about $11 trillion dollars and they have revenues of $4 trillion per year. I hope I don’t have to write that out in old money for you to realize that that’s a lot of capital that we’d love to have targeted on social problems.
In exchange for an average 7% profit margin, these companies continually try to improve, focus on their customers, and provide better product. They innovate faster and have better operations (which is why you can buy a Coca Cola in Ghana nearly anywhere, but not a mosquito bed net.)
Profit motives will not create a 100% solution. There will be problems. There will be excess. But this is true of all solutions to all problems. The internet is a fabulous invention. Twitter and Facebook have contributed to the fall of despotic regimes. They have also contributed to childhood bullying and marital infidelity. Automobiles allow us to get to work and play, but 40,000 people a year are killed by them. Profits in the service of social good will revolutionize the lives of the poor — but not all of them will benefit. In fact, some will be harmed.
Rather than argue against profit, we should work on making sure profit harms the fewest people possible. Every capitalist economy does not let capitalism roam completely unfettered. So let’s talk about what restraints we put on profits, rather than the absolutist notion that profits are “bad”.
Sean Foote's Blog 