Wanted: Red in tooth and claw sustainable businesses
26 May 2017
Online artisan marketplace Etsy was the first public ‘B-Corp’. It was one of the companies putting forward the challenge to the notion of business-as-usual. Now, it is expected to let its B-Corp registration lapse as it focuses on boosting profits. A sell out? A tragedy? Or a challenge to the heart of B-Corps as a vision of what a socially responsible business should be?
What’s the background story? According to this recent piece in Forbes it’s a straightforward tale of capitalism injecting a dose of reality into a company that had taken its eye off the ball.
After all, if Etsy is an online marketplace like Ebay, then it should be able to as profitable as Ebay. And it wasn’t. Since its IPO, the company’s stock had declined disastrously. It’s steady growth in profits had been unspectacular when compared with like businesses. An activist shareholder launched an attack on the current management, and in double quick time 80 employees were laid off and the board fired the chairman.
The B-Corp is supposed to be the signal for a new way of doing business - one that creates value for society and not simply for shareholders. On that basis, what’s been happening at Etsy could be seen as a defeat for the new model by the “forces of reaction and greed”.
But it’s not that simple.
The focus of the attack wasn’t the company’s commitment to society. It was the fact that it had allowed its costs to get out of control (lots of people hired at terms more generous than the most profitable silicon valley companies were offering), and it wasn’t managing its platform with a view to its best growth potential.
In other words, it wasn’t being tightly managed. There’s nothing about being a socially responsible company that means you should waste money, and be lazy about developing your service to its full potential.
Socially responsible companies still need to be well-managed companies.
It provides an echo, of course, of the recent spat between Unilever and 3G/Kraft. The same principle. A business that is a champion of values and sustainability that is perceived to be fundamentally sound but underperforming by a potential predator who sees that as a situation for a short-term profit. In that case, Unilever fended off the attack, but quickly then took certain actions - selling off brands and reducing the central cost base - in a way that would make it more resistant to such approaches in the future. None of those actions have been at the expense of its commitment to long-term value creation and sustainability.
This is the problem with having a special class of companies called ‘B Corps’ that are supposed to operate to different rules. It suggests that normal businesses can’t be operated to the benefit of society - and that’s dangerous because the vast number of companies in the world are - and will remain - standard businesses. It’s the rules for the mainstream we want to see evolve.
In the immediate aftermath of the events at Etsy, one commenter suggested that it meant that there should be a special stock exchange for socially responsible businesses that wasn’t held to the same rules as the others. I could not disagree more.
The task isn’t to produce special unicorns, magical businesses that somehow exist outside the framework of capitalism, it’s to tame capitalism so that we benefit from its raw vibrant energy but deal with the fact that the marketplace isn’t capable of making long term or moral choices. That means that if your company produces a bad product, fails to change with the times, fails to control its costs, fails to delight customers – then you’re toast. No free passes for being cute and fluffy.
After all, we’re happy when it works for us. When Elon Musk comes along and transforms the transport industry with some seriously creative disruption. We’re delighted that he does it playing by the same rules as everyone else and shows how well it works. But then suddenly we want to insulate companies that have well-stated intentions so they can be protected from the consequences of poor management decisions?
We need businesses that are sustainable to be successful. That means skill in execution. That means that they out-compete, out-perform and out-innovate their competitors.
We want red-in-tooth-and-claw sustainable businesses. And those that are sustainably-minded but have poor execution should fail, just the same as businesses that ignore the changing nature of the context within which they operate deserve to fail.
There are a number of strengths in the B-Corp movement, and many of the individual B-Corps are fine businesses led by impressive, committed social entrepreneurs. But the weakness of the movement is that it isolates the socially-conscious businesses and labels them as special, different. That’s the exact opposite of what we want. We want it to become business as usual. That only happens by taking on the mainstream debate between the long-term value creators (the Unilevers of the world) and the short-term profit chasers.
We are part of a capitalist world, and there are many aspects of that which are good. Such a world is creative and innovative. Problems get solved. People get to choose. People are allowed to succeed.
The marketplace does not, however, make moral choices. It is only aware of market-based signals, and can miss important information that is outside of its terms of reference. It deals with people as consumers, but not as citizens. It is wholly dependent on the life support systems provided by the natural environment but fails to factor that into pricing models.
So we need a capitalism 2.0 - one that is an evolution of the old to enable us to build long-term sustainable wealth, rather than simply better castles in the shifting sands.
But let’s be clear. Although at the macro level that will be about moderated levels of wealth creation, at a micro level it will remain a case of survival of the fittest. That’s how it should be. No prizes for eighth place. No special unicorns. The fittest need to be the ones to disrupt their marketplace to become sustainable.
There’s everything to play for and no room for sentimentality.