“Double Bottom Line” needs to be retired

“Double Bottom Line” is a phrase that needs to be retired.  Ditto for “Triple Bottom Line”, “Quadruple Bottom Line”.  In fact, every multiple of “Bottom Line” needs to be put out to pasture.  As I stated in my last post, it’s not realistic and leads to muddy thinking.

I suggested, rather than trying to maximize a multi-variable equation, to hold one variable constant and maximize the other.  So, “maximize profit in the helping people space” is a great example.  As long as it benefits society, maximize profit.  With THAT I can figure out how to invest.  (Hey, I also blogged about that on the Accion website, go check it out.)

So, I’m starting a branding campaign.  Feel free to pass it along.  We’re not attempting “double bottom line” businesses.

It’s “Better Bottom Line” businesses.  The goal is to maximize the bottom line that comes from doing good.

“Better Bottom Line”.  It works for multiple reasons:

1) It’s more actionable.  It breaks the tension of maximizing two things.

2) It’s profit-oriented.  This works for a capitalist like me.  But still,  organizations that have no intention of making a profit can use it.  Their “Better Bottom Line”, however, will show a loss — the cost of doing better things in the world.  For them “double bottom line” essentially means reducing their yearly charitable fundraising, so this is the same approach at today’s “double bottom line” for them with a slightly different name.

3) It’s measurable.  Measuring social outcomes is incredibly difficult.  It makes the “double bottom line” calculation of profit versus social outcomes even more impossible. With the “Better Bottom Line” approach, social outcome is a thumbs up or down decision.  It’s much easier to make the binary categorization.  Auditors could audit it.  (Of course, organizations will still want to measure their social impact for fundraising and marketing.  Donors will still care about outcomes.  But let’s be clear, we’re breaking the false trade0ff between doing good in the world and making money)

4) It’s widely applicable.  Every public company, every profit minded entity could report their “Better Bottom Line”.  It could show up on Yahoo!Finance next to the P/E ratio.  Stockholders could make a decision on what stocks they would like to hold by thinking about the percent of a company’s profit that comes from the “Better Bottom Line” versus the regular old “Bottom Line”.

What do you think?

GM – the latest double bottom line business

GM now has to serve two masters — profit and politics.  It’s a great but different example of the problems of “double bottom line”.

In my microfinance class I spend some time talking about double bottom line.  The theory is that an organization, typically one with social goals, tries to maximize both profit and “doing good.”

The bottom line on double bottom line is it’s impossible as a metric.  Here’s the challenge.  Pretend you are an investor or a manager and you are asked to pick between two opportunities.  One generates $100,000 per year in profit and helps 2,000 people.  The other generates $20,000 per year in profit and helps 10,000 people.  Which should you pick?  A strict “double bottom line” goal of maximizing both doesn’t help with this decision.  They are both equally attractive.

And so, repeated many times over, the company under-delivers on both criteria, and the trade-offs start to lose their intellectual rigor in exchange for horse-trading, political favors, or emotional attachment to the ideas.  Not a good way to run a company.

Any companies that serve two goals typically struggle.  Corporate VC, for example, are short-lived.  They try to provide financial return and strategic objectives.  Since they can’t maximize both, at some point the corporate overlords declare failure and close the fund.  (And VCs call them “dumb money” from their purely profit driven perspectives).  Non-profits with “double bottom lines” typically try to do the maximum good while earning enough to reduce their yearly charitable fundraising targets.

And now GM, which will struggle mightily to serve two masters and will fail at both.

There is one wrinkle with GM that bears comment.  The TARP money was a loan.  The original AIG bailout was non-voting preferred stock.  Neither of those investment vehicles provides the investor with any say in the running of the company.  It is only when the government converted the loans to common stock that they gained voting rights and became the true decision makers.  As I tell my VC class – don’t confuse ownership percentage with control.

So GM is getting slammed in the press for this double goal.  This should be a cautionary tale for everyone thinking about “double bottom line”.

The only solution that works for me for “double bottom line” investors and operators is to hold one dimension constant while allowing the other to vary.  So, something like “within the field of investments which will help people, we will maximize profit.” or “As long as it breaks even as an investment, we will maximize helping people.”  The challenge with the latter option, where profit is the static dimension, is that investments are risky.  You’re often wrong, and the operator or investor will probably undershoot the hurdle rate.  So consider that when setting the goal.