NANCY’S BLOG: Ripple Effects – What Responsibilities Do Corporations Have To Consider “Externalities”?

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Last weekend I celebrated my oldest child’s high school graduation. Watching him join 600+ proud students cross the stage—while listening to those optimistic (yet interestingly pragmatic) speeches about the future, changing the world and embracing your unique gifts—made me think more deeply about the ripple effects of our actions.

I’m not sure when the concept of “externalities” entered business lexicon, but in a controversial Harvard Business Review article back in 2010, it was defined and thoughtfully explored. Whether negative or positive:

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’re 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 a growing question in this 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, greater transparency, and societal pain—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 more paying attention to now (obesity, inequality, and more), but it also raises complex questions of what is fair to hold enterprise leaders accountable for? Just how far does the ripple effect extend?

Importantly, what can we do to create safe spaces for these multi-layered issues to be explored together? To get more tangible, here are some ways this ripple effect is playing out right now:

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

As weed-killer Roundup was recently classified as a “probable carcinogen” and linked directly to several forms of cancer by the World Health Organization, 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.”

Really?? I’ll admit, this makes me cra-zy every I read it! 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 potentially very positive ways!

So here’s the really big question we want to tackle: 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.

That said, tackling this is tricky work. For instance, if we jump back to the world of food production and consider what it will take to feed a fast growing planet and rising middle class population, we’ll have to make some challenging decisions.

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.”

Others would say there is much land currently underutilized that if put to use could ease some of the food burden. And of course we recently discussed the problem of food waste (which in a landmark move France has declared illegal).

So yes, knowing which actions to take is not always clear, but we still have to dive in and consider the ripple effects of these choices – across stakeholders and across Time. As the rapid collapse of bee colonies signaled to us, we have no real choice, do we? And I continue to advocate, taking this broader “what is in the best interest of society, long term” perspective, allows the most sustainable answers to become more evident.

How many slaves work for you?

An important new project has come our way and forced us to consider that 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. And 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.

Turns Out, Where Something Comes From Does Matter.

 In 2011, global consumers spent $6.6 billion on fair trade certified products—coffee represents the largest segment of the market, alongside many others including tea, sugar, bananas, cocoa and wine.

Today, Fair Trade USA, works with 740 companies, including Starbucks, Costco, Sam’s Club, Whole Foods, Ben & Jerry’s, Green Mountain Coffee (the largest purchaser of fair-trade coffee beans), Dunkin’ Donuts and more, to support 1.2 million farmers and their families across 70 countries, and build ethical networks. Fair Trade compliance covers the entire supply chain and is not the sole responsibility of producers. As a World Bank Development Report states:

“In 2005 alone, $100 million was provided to fair trade producers and their communities above and beyond the conventional price for fair trade goods. This money remains with fair trade producers to build community, grower, and worker livelihood capacities, through, for example, everything from providing access to clean water and the purchase of household implements, to the support of transportation and community infrastructure, to the education of producers’ children”.

Building networks and benchmarks that both catalyze and facilitate change are hugely important in changing mindsets and practices. Collaborating with others gives also give us confidence, as well as the ability to address the issues much more holistically. How can we create more of these opportunities? 

So, What Does a Responsible Company Look Like?

According to research, 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 the questions this raises for us, is what does a “responsible company” look like? And how will that continue to shift and change?

The HBR article mentioned at the beginning of this essay, Leadership in the Age of Transparency, sums it up this way:

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.

As public sentiment on these issues continues to evolve, leaders (and Boards) will have important choices and trade-offs to make, as they are held ever more accountable to a broader set of expectations. So how do you build a company with an ethos to manage that?

The Magic Of Kindness. 

While there are many ways to consider externalities and the impact we each have, seems at the root are both awareness and empathy.

Random acts of kindness contain so much power and magic, the ripple effect of which touches countless people on a day to day basis—in ways that are often far beyond expectation or measure. Whether done on a corporate level, as airline KLM has done so brilliantly over the years, or more personally, we should never doubt the impact one act can have on another.

In that spirit, we wish you another inspired week and invite each of you to consider the externalities in your life you may not have ever considered before. Can you imagine the ripple effects of your actions (on all levels)?

For feel good inspiration, here’s a lovely 5min video on the Kindness boomerang put together by Orly Wahba, founder of Life Vest Inside, the organization she founded “because kindness keeps the world afloat.”

Given that you often can’t always see the ripple effect, this seems a solid place to start. And something we hope our children learn from all of you.

Xo,

Nancy + Emma

Stories we pinpointed this week:

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

How many slaves work for you? 

Turns Out, Where Something Comes From Does Matter 

The Magic Of Kindness

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