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.
Sean Foote's Blog 