24 May 2010

Triple Bottom Lines are bullshit

I gave a talk to sustainable MBA students last week [see this post for more] and said this as a warm-up. They did not agree, and I promised to bring the debate here, for you and for them.

Feel free to give examples, explanations and arguments for and against my position in the comments. Before you do, please read this:

I think that the triple bottom line (people-planet-profit) is BS because it's impossible to pursue three objectives at once (see these prior posts on greenwashing, farming efficiency and coequal goals.)

Try to date three people at once.

Try to deliver speed, quality and price.

Try to be smart, funny and charming.

Try to work, sleep and play.

Yes, I know that people can try to do all these things, but it's much easier to drop one or two of them and be single-minded about the remaining goal.

Want an example? Bill Gates made billions first, by being a ruthless capitalist. Then he decided to become a ruthless philanthropist. He did one thing well, and then went on to the next.

One speaker gave a spurious counter-example. He held up an iPhone, to indicate how technology could make things cheaper, smaller and faster -- compared to phones of 10 years ago. I agreed about that, but the relevant comparison is to phones today. I can get phones that are smaller or cheaper or faster than an iPhone now, but I can't get all three in one device. That's because making things smaller costs more, making things cheaper slows them down and making things faster makes them bigger. If you understand tradeoffs, you get it.

My point is not that we don't want to be nice to people or the planet -- that's why we have social and environmental organizations. My point is that a for-profit organization will not be able to add additional goals and still maintain maximum profits.

Bottom Line: Companies should make money first (by providing value). Distribute the profits and let shareholders make a thousand different decisions of how to spend them.

Addendum: I replied to the first 12 comments. Still no good reason to discard my headline. Some readers highlighted something I forgot, the problem of principal-agent dalliance with shareholder's money, either with BS "greenery" or with manipulation of quarterly results to get bonuses; see prior posts. Josh also provided a simplification: X + Y + Z = 100. If you want more Z, you must have less X or Y.

27 comments:

  1. Well, Walmart is going cleantech, renewable energy, less waste in packaging, etc. and forcing their suppliers to do the same. They probably mainstreamed CFLs when they said they would sell 100 million of them in 2007.

    Of course they are upfront in saying this saves them money, but it's still good for the planet.

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  2. I hoped that you were going to have more fun with this. So, I've taken the bait, and produced the following rant.

    The triple bottom line is BS for the same reason the single bottom line is BS- net income, by itself, doesn't matter. Any other so-called "bottom line" would be equally wrong.

    Even your suggestion: make money first (by providing value). Distribute the profits and let shareholders make a thousand different decisions is four different things: 1) create value 2)make money, 3) pay it as dividends, 4) let shareholders use it. There are a lot of moving pieces in that.

    Wow. So, you'd have to measure value, measure profit, measure dividends (paid), and assume (or measure in some way) that paid dividends are used.

    A focus on net income (or earnings) alone, is like focusing on breathing as the purpose of life. (Apologies to Peter Drucker for butchering his line). Profit is a sign that a firm is active, but alone, not much of a measure of whether the equity holders/owners are adequately compensated for their risk, or if management is making the best use of capital at risk.

    Funny that you mention Gates as an example. One could (I did) argue that Bill Gates did me no favors by holding onto as much of my cash as he did for the last two decades. Like you (I assume), I think that I am in a better position to deploy my cash than he was.

    In any case, I agree with you that the primary focus of any business is to create value for a customer. As an owner, I want compensation for supplying the capital that they place at risk, so generating a fair return is important. Financial statements provide an interesting narrative (if one-sided) that helps one judge how they're doing. The real information is in how the number relate to one another, not the single "bottom line" on the income statement.

    I have no problem if firms want to explore triple bottom lines, balanced scorecards, or other ways of describing the value they create. As an investor (and frequent subsidy provider), some of this is useful. Most of it, so far, is not. Sustainability reporting is too often the domain of public relations staff, and more spin than even the financial statements. Anything that attempts to be a single score- for people, for the planet, or for the investor- is not even data. Each are a "datum."

    Bottomline: Beware of single measures, even if they come in triplicate.

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  3. The primary purpose of business is not to create value for customers. The primary (only!) purpose of business is to create value for its owners.

    If a business talks about triple bottom line, sustainability, or anything else besides shareholder value, one of three things must be true.

    1. It is creating an image.

    2. It is rent seeking.

    3. It will soon be out of business.

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  4. David, your real point was in your second-to-last paragraph - that a company cannot do the two other things while still "maximizing profits." You could have much more simply summed up your argument with "X + Y + Z = 100, and if you want to give more to X, it has to come out of Y or Z."

    While true, there is a huge difference between maximizing profits and maximizing shareholder value. Also, there is a huge, vague realm within the word, "value."

    Current corporate climates have been built on a short-term profit-maximizing goal as a way to sell shareholders on the concept of value. But, that isn't the only game in town.

    Including other terms within "value" opens up the potential for a stabler corporation that will, probably, grow more slowly. However, it also may be mitigating future costs that could have hurt its prospects even more. For example, building a zero-waste plant is a good way to stay out of court over NEPA issues.

    When a company decides to open up its definition of shareholder value, it may definitely include these other concepts.

    Bottom line: It ain't always simple arithmetic.

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  5. I'm not smart enough to talk in the general terms of others, so what about this example:

    What if at my 4plex I can do two different things that each have the same ROI for me - so the money I make off the investment is the same. Lets say they each make the tenants and other people in the neighborhood just as happy. But what if they have very different effects on the environment? Say, one of the choices is to replace the boiler for a more efficient one, and the tenants themselves, who don't pay for gas, don't notice a functional change, and the other is coating the drives with something that saves money over time by preventing frost heave damage (I've made this up, but bear with me), again the tenants don't notice a change in day to day functioning, I've just improved my profit by lessening my maintenance costs. So if I have the ideology of the triple bottom line, then the options can be considered as unequal by this standard, even if equal in the others - then the triple bottom line just gives me another leg in the decision tree, although I expect it generally will be hierarchical, and then the first decision making point becomes the real bottom line and I have talked myself into you being right on.
    I have always managed to work, sleep, and have fun adequately, as long as I am not unhealthily excessive in either, and you mention it is possible to try, just not easy to accomplish any of your examples. Who said anything in life was easy :) I may not date three people, but I have three very good friends. The drilling company I work with up here have t-shirts that say "we're slow...but we're expensive." Different things work in different situations. I do very well by running a legitimately 'green' apartment building and touting it as such, and by taking care of my tenants. I'm not raking it in, but I think I do as well as any of the slum lord owners of like buildings in my area, perhaps better.

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  6. Sorry David, you are wrong. I could give you a hundred examples, but I will settle for one. At Hunt-Wesson Foods, we focused as sharply as humanly possible on our customers to give them the best tasting ketchup we could make. At the same time, we worked with growers to produce bigger, more favorful tomatoes which would require less land to produce the same volume of tomatoes. And at every step of the way, we watched the profit column to make as much profit as could make will balancing both of those tasks.

    I don't mean to suggest everyone or every company pursues all three goals simultaneously. In fact, there are a lot of really bad companies out there purposefully destroying the environment to make a profit. My point is that it is entirely possible to do all three jobs at once. And, as we go forward with fewer and fewer resources, hopefully we will weed out the bad companies. But then I also believe in fairies.

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  7. I'm afraid that this time your argument falls more in the category of "dog bites man". While Triple Bottom Lines or even double ones (like Jeremy Bentham's "Greatest Good for the Greatest Number"), are very difficult to achieve, they are a hell of a lot more interesting. As you know, there are a number of valid examples where multiple goals can be achieved simultaneously even if you are not maximizing each one. Most businesses continued to be profitable even while complying with environmental standards and most of us like to think that we can live moral lives while still pursuing happiness. Enlightened self interest has enabled efficient distributors to increase profits and market share precisely by providing less expensive goods for their consumers and even the "Evil" Wall Mart has reduced energy and packaging because it was trying to increase profits.

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  8. JWT, your example is specious. At best, it's specious. At worst it just proves David's point for him. We're supposed to believe that Hunts wanted to economize on farming production for some reason other than profitability? Why would we believe that complicated story when the simple one (growing more tomatoes, faster, in less land is CHEAPER)?

    In fact, isn't profitability the best explanation for Hunts' customer focus, too? They're not trying to make good ketchup because they're nice guys or because they want everyone's french fries to be as enjoyable as possible. They're doing it to make money.

    Occam's Razor.

    DAF, your examples do not contradict David's point in the slightest. The fact that environmental laws didn't drive everyone out of business doesn't change the fact that the laws were necessary to coerce companies into doing things against their interest. And I assume that leading a moral life is one of the methods by which your happiness is achieved, not a mutually exclusive option.

    I have to say, even if you can find some examples of companies acting altruistically, it doesn't change David's point very much. It's still the exception rather than the rule. And it's still not how we expect or even want corporations to act in general.

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  9. JWT: I acknowledge that elements of the tripple bottom line sometimes align in synergistic ways, but your example is probably more complicated than it appears. How were yields improved? Are we talking crop rotation and organic farming or petrochemical fertilizers and/or genetic manipulation? And, did the tomato growers really grow the same amount on less land, or did they grow more on the same land? I think the how may make all the difference here.

    So if companies, in their quest to maximize profit, adapt to prevailing social norms by adopting green(er) technologies, is that TBL or is that profit maximization? If they sell more with a green marketing ploy then I would suggest the only interest is profit maximization.

    Intentions are great on a personal level, but the intention test falls flat at the social level. Just think about racism or environmental justice issues like disparate impacts. So isn't CSR, when used as a marketing and PR tool, an attempt to maximize profits? As a former business owner I know the motivation iterations are probably infinite, but when I think of environmental impacts and corporations I think of multinationals and large public companies. As a small private business owner I can get away with donating half my profits to whatever cause for which my heart bleeds, but that comes at a personal cost to me. And, I'm not the CEO of a company that operates 75 chemical manufacturing plants with a fiduciary duty to my shareholders or stakeholders. Some TBL companies thrive, but I think those are few and far between because it's a luxury afforded only to those that for whatever reason don't worry about competition, or perhaps in the course of doing business they also contribute to some environmental good.

    Ultimately, I think this complex issue comes down to the role of corporations and government in society. Corporations should stick to pursuing profits. Sometimes that may benefit our environment, and sometimes it may destroy it. Therefore, the role of government (society) is to set the framework within which corporations can do what they were designed to do, without wreaking environmental havoc in the process.

    We're facing environmental issues that will likely last for generations. I don't think there's any way in hell that solutions to environmental problems lie in the hands of corporations and CSR or TBL initiatives. The bottom line is that society, through government regulation, needs to set the ground rules by which corporations operate. Corporations can greenwash or TBL all they want as long as our interests are protected by regulations.

    It's crazy how it takes a financial or ecologic emergency to even begin to consider changing the status quo. We're there now, on both counts. Corporations are what we designed them to be, and no one should expect them to be any different. The question is what role will corporations play in our society, and that's an issue for us all to decide, collectively.

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  10. This comment has been removed by a blog administrator.

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  11. On Saturday, I rode my bike with a retired BOR environmental staffer. His comment was that agriculture would want 150% delivery regardless. His observation was agriculture would never settle for less water, which is your premise for the impossibility of co-equal goals objective in the delta.

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  12. @polizeros -- Walmart doesn't talk TBL. They do what makes profits.

    @David -- good point, but value drives demand drives prices drives profits. They are the same measure. Same for internal profits and dividends. Shareholders can burn the $$ if they want. Different decision.

    Profits are a good measure of success, in hiring, products, wate control, whatever, b/c they use the same common denominator -- money.

    (Aside: Economics talk about "utility" but that can't be measured. We know that it embodies many things besides money but we ALSO know that you cannot "make interpersonal comparisons of utility," which means that it's no good as a measuring stick for society or corporations. That's why choices are so useful.)

    I agree on your other points, and you hit the biggest one. TBL either confuses or distracts or hides actions by management that may serve them, instead of shareholders (principal agent problem). That's the biggest problem -- you can't measure performance if you've got no single stick.

    @Outsider -- ditto.

    @Josh -- thanks, that's clearer. I agree that LT value (the lifetime stream of dividends) is the real goal and that corps manipulate that (most obviously with quarterly games to increase bonuses). Henry Ford paid $5/day, but that wasn't TBL -- he wanted PR, the best employees and to sell more cars.

    @Michelle. Good thoughts, but remember that sustainable *is* the best for LT profits.

    @JWT -- see Outsider #2

    @DAF -- [written before I read Outsider #2, also valid] You miss my point. I didn't say NO profit, I said less profitable.

    Regulations lowered profits IF they required that the businesses change their decisions from the previous, profit maximizing ones...

    @andrew547 -- ditto (excellent!)

    @thomas -- keyword spam deleted

    @RM -- thanks for that REAL information :)

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  13. Thomas, while local impacts of coal mining are important, I would go further and include coal consumption in the social (legal) "framework" within which energy companies operate.

    The coal industry is a great example of greenwashing vs. sustainability. Unless and until "clean" coal is possible, and until the government creates a regulatory environment where coal companies must operate within safety standards or shut down, TBL and CSR efforts are a sham. Coal consumption is simply bad for the environment, but it's cheap, which apparently we like, and because so many people don't earn enough to feed themselves properly, many of us need.

    Coal mining companies - like Massey and its ruthless focus on the bottom line - are just doing what businesses do in competitive environments. Massey considered safety violation fines a cost of doing business. While extreme, and while not all coal companies go to this extreme, I would suggest that this is not entirely their fault. They are doing what successful companies do, which is maximize profits. That's their role, and it's our role to set the framework within which they are allowed to operate.

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  14. Actually David I still think there are examples out there, including some very interesting ones, where companies INCREASED their profits while INCREASING benefits to their customers and to the environment. This is rarely, if ever, seen in the short run but in the long run where externalities are internalized, multiple objectives can often be pursued simultaneously with considerable success.

    The classic example, of course, is in trade. As Richard Cobden and others in the Anti-Corn Law League recognized long ago, reduction in tariff barriers can benefit both buyers and sellers, producers and consumers. While you are obviously right that it will be practically impossible for a company to be able to simultaneously maximize benefits on more than one short run objective at the same time, I see no benefit in trying to persuade students that you can not / should not seek to pursue multiple objectives simultaneously (which I believe was the gist of your comment about Bill Gates).

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  15. David, I will just point out that Michelle's point was a straight-on example of TBL in practice, that it did hit it perfectly, and that your one-sentence comment was merely a redefining of the term. What you should have said is, "yes, Michelle, you are exactly right. And, some people use the TBL concept to focus their thinking to a benefit, and sometimes that benefit accrues across the board, too." She was giving a great example of the fact that it isn't just arithmetic; there are, indeed, synergistic (hate the term, love the idea) interplays between these choices.

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  16. @andrew -- sorry, I deleted that comment while you were responding.

    @DAF -- I agree that it's good to keep many things in play, and we agree on the importance of LT objectives, but neither of these support TBL. Internalized externalities (esp now b/c they will be priced later) is merely good business planning. But ALL these examples go to profits. There's no way of integrating "employee happiness" into the LT unless it feeds the bottom line. I'm hoping that students will keep their eyes on ONE measuring stick, so they do not get distracted by a three-way pull :)

    @Josh -- well, agreed, except that she said her "green" actions saved her $$...

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  17. DAF, one of the bottom lines in triple-bottom-line is not customers. Customer benefits are handled just fine with one bottom line.

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  18. I agree, intuitively, with the post title and with the bottom line, but I was not convinced by the logic in between, and so I will play devil's advocate:

    Why couldn't you have a company that simply sets standards for multiple measures at the same time? They are not necessarily doing a triple-maximization, just saying they need to be *good enough* in these three areas.

    For example, if I were a TBL company I could set goals like the following:
    People: Build products that help people without (intentionally) harming anyone.
    Planet: The combined effect of our resources should be to protect and restore the planet more than harm it.
    Profits: Be NET profitable.

    It's not maximizing anything, but still a reasonable target, no?

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  19. Sorry to comment twice in a row, but I want to add something else:

    Couldn't a TBL company maximize one of the three and simply set standards for the other two? And would there be anything wrong with that?

    I am thinking that a normal company maximized profits but then still should have standards for integrity and fair play -- why not have similar stands for people and planet?

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  20. Justin: That's why I find this to be a complex issue. In pursuit of the primary goal of profit I think companies have opportunities, at times, to do good (or at least less bad) with regard to people and planet.

    Google, for example, has fantastic employee benefits (people), and they installed expensive green energy power-generation equipment at their headquarters (planet). My understanding is that the green power units are in fact green, but more expensive than electricity on the grid.

    I would probably argue that the generous employee benefits are efficiency wages, which benefit the smartest and luckiest engineers as well as the company that relies on them to remain on the cutting edge. I would also argue that throwing money at environmental issues or clean technology is a combination of marketing - brand creation and goodwill - and something that makes the founders, the board, and maybe some shareholders happy. These aren’t hardcore business projects - they would probably never do them if they weren’t already wildly successful at creating shareholder value and far ahead of their competition.

    I’d love to hear a real-world example of successful TBL. In theory, I don’t think it’s possible in a pure sense - except perhaps by companies that improve the environment or empowers people while they pursue profit (perhaps recycling, alternative energy, local organic farming, etc.). But then again those companies aren‘t pursuing a TBL, just profit.

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  21. Perhaps, but that one yardstick can only be maximized subject to a variety of constraints (folkways, mores & laws) not to mention the fact that many firms already set a higher premium on increasing market share than on current profits.

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  22. Re: Triple Bottom Lines are bullshit.

    The economist, in this case Dr. Zetland, is correct. The MBA group fails this base economic axiom: finding the simplest and least expensive solution that actually solves a problem. If you can manage this exercise, which by the way is extremely difficult and may take a life time, you might find you do the world good and profit along the way. Then go onto problem number two.

    Dr. Zetland states: Bottom Line: Companies should make money first (by providing value)….

    For the enjoyment of the MBA group, as turn about is always fair play, Dr. Zetland has been hanging out with Milton Friedman. No way! Way!

    “So the question is, do corporate executives, provided they stay within the law, have responsibilities in their business activities other than to make as much money for their stockholders as possible? And my answer to that is, no they do not”- Milton Friedman

    Dr. Zetland also states: “…Distribute the profits and let shareholders make a thousand different decisions of how to spend them“. That is Hayek and Thomas Sowell.

    Good luck MBAs, but it much more fun to be an economist!

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  23. @Outsider -- yep.

    @Justin -- you are talking constrained optimization (ok) while TBL is triple-optimization (not ok). Setting a minimum for X and then maximizing Y is not hard, and is often done.

    @andrew -- you add additional flavor -- efficiency wages -- that it totally legit, since those actions serve profits.

    @DAF -- market share does not serve shareholders and the constraints are NOT targets for optimization :)

    @WEH -- well cited!

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  24. Hi David...

    Shareholders control decisions of value in this day and age?? No. Shareholders are marginalized as a class.

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  25. Rdan, that's not how it works. I'm sure if you asked shareholders how much influence they have over the companies whose shares they own, their answer would be, None whatsoever. However, when businesses make stupid decisions that do not maximize profits then the market punishes that company by reducing the price of its shares.

    Ultimately and collectively, the shareholders (and would-be shareholders) are very powerful.

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  26. @Rdan -- Outsider is right, but you're "this day and age" misses the increase in shareholder activism. They have gone from "totally" to "generally" ineffective :)

    http://www.economist.com/business-finance/printerfriendly.cfm?story_id=16116939

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  27. Alright, so I'm a bit late to this conversation! But I will add what I think has been stated but not emphasized: People, planet, and profit are three completely antagonistic entities. The laws of thermodynamics do not allow for a maximization of all three, only a balance. If we are to take physics seriously, then we need to admit the absurdity of maximizing all three categories in the "triple bottom line." We need to admit that a gain in one area is a loss in another.
    Once we have done so, we should then also realize that we cannot weigh those categories as if each are of equal importance. Profit (taken to be the most important thing in the business world) is ultimately merely an invention and servant of people. It doesn't have any meaning without us, and should not be set on the other side of the balance against us. But that is always the insidious unspoken element in any business. The implicit question is: how many OTHER people will pay, and in what manner, for MY (and my cronies') pursuit of profit. Finally, people obviously cannot stand on their own if you omit "planet," thus it is equally absurd to set it against people on a scale.
    Business has a fundamentally flawed system of values. The notion that the triple bottom line is a bit of self-deception engineered by well-meaning people seems close to the mark.

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