What Is The Role Of Business In A Shifting Society To Consider Externalities?

Jul 02 2019

Back in the 1790’s, the Industrial Revolution was underway. Artisans making one product gave way to mechanization with companies making multiple products. In the 1830’s, US railroad companies became the first truly modern management organizations. Those early superhighways lowered the cost of moving goods and information, and by the 1920’s, a new type of professionally managed corporation owned by retail investors and run by powerful executives, replaced the early founder-led firms. Management suddenly became a career. Focus on rapid expansion, mass production and meeting increasing mass demand created sprawling conglomerates with giant interdependencies and unprecedented levels of complexity. Along the way we didn’t stop to measure the cost of it all...

Fast forward to today - where now there is no choice.

Externalities is the term economists use when they talk about the side effects—or in the positive case, the spillover effects—of a business’s operations. They are the impacts that a business has on its broader milieu, either directly or indirectly, but is not obliged to pay for or otherwise take into account in its decision making. This word opens up growing questions in a new era of business leadership:


// What responsibility do enterprises have to consider “externalities”? How will this shift as an increasingly empowered civil society takes stock of the impacts of massive scale, exponential technologies, environmental damage, greater transparency, and societal inequity—and thus continue to shine a bright spotlight on corporate decision-making? //


And how do we then manage these new tensions: on the one hand, we want to hold someone responsible for the environmental and societal assaults we’re all paying attention to now more than ever (obesity, inequality, anxiety, climate change, and more), but it also raises complex questions of what is fair to hold enterprise leaders accountable for? 


“As divisions continue to deepen, companies must demonstrate their commitment to the countries, regions, and communities where they operate, particularly on issues central to the world’s future prosperity. Companies cannot solve every issue of public importance, but there are many – from retirement to infrastructure to preparing workers for the jobs of the future – that cannot be solved without corporate leadership.” — Larry Fink, CEO, BlackRock


The erosion of trust in governments and institutions has impacted public confidence to the point where we no longer believe they hold the solutions. Seventy five percent of people surveyed in the Edelman Trust Barometer say they trust their employers to do the right thing, and if they don’t, as recently demonstrated in an open letter to Jeff Bezos and Amazon Board of Directors — signed by more than 8,000 employees disgruntled by the companies stance on climate action — they’re going to demand it. The stakes have been raised for corporations and local government to step in and lead the charge toward a future of prosperity.


So what can we do to create safe spaces for these multi-layered issues to be explored together? And how exactly can we meet the needs and expectations of this and future generations without large enterprises acknowledging the interdependencies all along their supply and usage chains?


As hyperbolic as it sounds, we’re beginning to see how connected it all is; how these choices envelope our entire human ecosystem. To get tangible, here are some ways this ripple effect is playing out right now…


“We Never Thought About Our Place In The Food Chain”.

Weed-killer Roundup was recently classified as a “probable carcinogen”, linked directly to several forms of cancer by the World Health Organization and recently found in boxes of Cheerios and Nature Valley products. Monsanto CEO, Hugh Grant, stated in an interview:


“[But] we were so far removed from that supermarket shelf, that was never something we gave a lot of thought to. We never thought about our place in the food chain.”


How does a seed and pesticide company, not actively consider its role in the food chain? And how many other industry leaders are still oblivious to their place in society — from cosmetic and pharma to trucking and energy (and ALL the rest) — in both detrimental, and very positive ways?


If we jump back to the world of food production and consider what it will take to feed a fast growing planet and rising population, we’ll face some challenging choices. On the one hand, says the FAO (Food & Agriculture Organization for the UN):


“If you look at (farming) growth in the last 15 years, about 70 per cent came from new land cultivation. When you go from six to nine billion over the next 30/40 years there is no new land. Can you do it without biotech? I don’t think so.”


On the other, many would say there is much land currently underutilized that if put to use could ease some of the food burden. It’s also not just an issue of food production, but also the problem of food waste (which in a landmark move in 2015, France declared illegal). In this excerpt from our recent blog post we describe an optimistic future in which we imagine:


“Traditional mega-grocery stores have given way to Holo (a community powered cryptocurrency) enabled CFCs: Community Food Co-ops, that provide a locally curated, wide range of vertically farmed produce, and easily digestible, brain-boosting grains, as well as all new kinds of freshly produced plant, insect, and algae proteins. Solar powered LEDs coax plants to full growth in repurposed manufacturing facilities at 15x the efficiency of horizontal land farming, and cell-cloned forms of clean meat and dairy are now grown in a range of high tech, neighborhood “barns”. An AI application, affectionately named Guissepe, that was created in Chile in the early 2000’s, has become a widely accepted way to balance the natural resources of a local geography with the nutritional needs and taste desires of that community, ensuring ecological balance and cultural integrity.”


Too good to be true? The reality of this scenario is playing out as we speak. Over $1.45B was invested across 247 food and beverage industry deals in 2018, with plant-centric alternatives to meat and dairy accounting for one-third of total investment in food and beverage startups in 2018, and the vertical farming industry is estimated to be worth as much as $5.8 billion by 2022.


From Supply Chain To Chain Stores.

Apparel is the second largest consumer industry after packaged food. The rise of fast fashion, globalization and manic overproduction of ever cheaper clothes and ever changing fashion has led to vast levels of overconsumption, with over eighty billion pieces of clothing produced worldwide per year. The waste, the cost and the human impacts are considerable, as described by the Global Wellness Summit trends overview:


“[the]garment workers (mostly women) get paid 40–60 cents/hour in places such as Bangladesh or Vietnam. Every second, the equivalent of one garbage truck of textiles is landfilled or burned. Three in five garments bought end up in a landfill/burned within a year. Less than 1 percent of clothing material is ever recycled. This “take-make-dispose” model creates a staggering 1.2 billion tons of greenhouse gas emissions annually and dumps 20 percent of all global wastewater, and if nothing changes, the fashion industry will use up more than 25 percent of the world’s entire carbon budget by 2050.”


Research shows that 94% of consumers are likely to switch brands, assuming price and quality are similar, to one that is associated with a good cause. Further, 9-in-10 consumers expect companies to do more than make a profit, but also operate responsibly to address social and environmental issues that affect the quality of life locally and advance economic development. So how are companies responding?


Grappling with a decrease in sales (the first in two decades) and low share price, H&M has declared that by 2030 it aims to use only recycled or other sustainably sourced materials, and by 2040 it wants to be 100% climate positive. The second largest clothing retailer in the world currently sources 35% of it’s materials from sustainable or recycled sources. Similarly, Levi’s have announced that they will shift to 100% cottonized hemp products in about five years. The process uses significantly less water and chemicals than cotton during cultivation and takes hemp from a rough, fibrous textile to having a softness that resembles cotton. Head of Global Product Innovation, Paul Dillinger states:


"It's great that it's resonating with the consumer, but it's more important that it's helping to future-proof our supply chain.”


URBN too is challenging our ideas about the role of retail. Rather than be threatened by the concept of renting vs buying, URBN is a portfolio of global consumer brands including Urban Outfitters, Anthropologie and Free People, that have fully embraced the idea with their new subscription platform, Nuuly. Set to launch in Summer 2019, for $88 a month you choose six items to rent from a collection of up-and-coming designers, iconic labels, one-of-a-kind vintage pieces and items from their own brands.  


As much as traditional retail still exists (for now), a new era of 3D printing technology, AI and VR is also enabling us to explore radical new approaches to the way we shop, causing us to question whether in the future there will even be a need for mass retail stores to exist? Or will they be replaced instead by experiential environments using mixed reality to browse garments; like Change of Paradigm, in which you can try before you buy. Or how about a clothing-on-demand service that sends you a free biometric suit with 300 sensors to capture your exact measurements, then makes you custom-fit clothing? Although the service no longer exists, it portends to a future in which technology advancements are spurring new waves of innovation that have the potential to completely disrupt how, why, what and where we consume.


There Is No Such Thing As Cheap.

That smart phone, that new t-shirt, the juice you drink for breakfast; for every product manufactured there are wide economic impacts, one of which is the approximately: 29 million slaves in the world today.  


Many are forced to work in the sex industry, but the majority are being used in what ultimately ends up at the bottom of the corporate supply chain; sewing, farming, fishing and more, to the tune of what is estimated to be $150 billion in profit. When you consider that $88 trillion is spend per year on procurement of goods, services and commodities vs $120 million on philanthropic efforts to help fight human trafficking and slavery, you begin to imagine the broader impacts and responsibilities that large enterprises and corporations have toward supply accountability and transparency.


Made In A Free World has built the world’s first software that is able to determine the risk of forced labor and child slavery. Called FRDM (Forced Labor Risk Determination & Mitigation), it allows suppliers and buyers to identify hot spots in their supply chain, comparing purchase data against the FRDM database of 54,000 goods, services and commodities, then provides a real-time, customized dashboard with an actionable plan built around “strengthening vendor agreements, analyzing supplier data, and when necessary, audits.”

While legislation is starting to play a role in making these corporate practices less opaque, ultimately we are all responsible. You can determine your own slavery footprint (and yes, like it or not you do have one); this quick, smart tool will help you figure it out. Not to make you feel badly, but so you can open a dialogue with brands about where their raw materials come from, and in doing so help save the lives of millions around the world.


So What Does A “Responsible Company” Look Like?

A recent survey by Deloitte highlights that 63% of millennial workers believe that the primary purpose of businesses should be improving society vs generating profit. What constitutes a “responsible corporation” in an era of advanced scale, sensors, and sensibilities?


We would submit that it is as simple as this: Stakeholders regard a company as responsible when they perceive that it is steadily internalizing externalities—that is, using sensing capabilities to measure and manage its impacts on society. Conversely, when the public perceives that a company is producing an externality that it could take greater responsibility for but isn’t, that’s when mechanisms of compulsion are brought to bear, from regulation to riots.


We’ve recently witnessed several examples of this; when dozens of employees at Google resigned in opposition to the firm’s involvement with Project Maven, a Pentagon drone warfare initiative. Salesforce employees petitioned to end a contract with CPB (Customs and Border Control), after learning that children and parents were being separated. Microsoft employees asked to cut ties with ICE (Immigration and Customs Enforcement) over their Azure cloud software being used to enable ICE to deliver services like accelerating facial recognition and identification. All have pushed back on their companies contracts with military and government agencies, and as a testament to how the mobilization of concerned workers can impact outcomes, Google has announced they will not renew their Pentagon contract due to the overwhelming backlash.


The story doesn’t end here. As we dive into Part Two of this article, we’ll explore what happens when technologies unlock previously unimaginable transformation. What might the future look like 20 years from now, or 50, or even 100? No-one knows. We have no historical precedent for how to adapt to an exponentially evolving world, but we do know this… almost every industry, in every country will be affected in some way or form. Entire systems of governance, production, management will shift, forcing us to rethink the way we do things and to consciously consider how we want to shape the future to be inclusive, thriving and more human than ever.