Wealth of the Nations Part 1 of 3

Adam Smith’s pioneering book on economics, The Wealth of Nations (1776), is one of the world’s most important books. I pioneered the concepts of specialization, Natural Price, GDP etc,  new principles that we still use fruitfully today. Smith outlined the concept of gross domestic product as the measurement of national wealth; he identified the huge productivity gains made possible by specialization; he recognized that both sides benefited from trade, not just the seller; he realized that the market was an automatic mechanism that allocated resources with great efficiency; he understood the wide and fertile collaboration between different producers that this mechanism made possible. All these ideas remain part of the basic fabric of economic science, over two centuries later.

According to Smith, a nation’s wealth is its per capita national product – the amount that the average person actually produces for any given mix of natural resources that a country might possess.

If we go one step further and extend the question of the natural price and thereby “natural costs” we need to take into account natural resources that a country might possess, the cost of the natural resource ( for example manufacturing processes using water seldom cost for that water) as well as the opportunity cost of the natural resource. For instance, when we deplete the resource, is it possible to rebuild it and if so what is the cost of that ? And if it is not possible to rebuild it, somewhere that cost, which may be borne later, needs to figure as well.  This would figure in with his earlier writing - The Theory of Moral Sentiments where he mentions something called  ‘prudence’. And he stresses that ‘justice’ – not harming others – is fundamental to a healthy human society. Not harming others can also be viewed as “not harming other generations” as well.

Thus, when we talk of the wealth of the Nations, not as a book but as a concept,  measuring the GDP alone  is not enough.  We have more pressing problems and challenges like socioeconomic and environmental justice.

Development and sustainable development.

In the 18^th , 19^th and 20^th centuries, while the world made great strides in development, the concern is – was our development really sustainable ? Or do we need to change the way we view and measure development.

Sustainable development is now become a catchword. The stakeholder theory also redefines business performance in line with sustainability and justice. The challenge remains on it’s measurement .  Many NGOs and economists including, Amartya Sen worked  hard to develop more holistic, inclusive standards and indicators of overall national health and well-being that consider social, natural resource and ecosystems health in addition to economic growth.

One of the models that seemed practical and holistic is the UN University’s first Inclusive Wealth Indictor (IWI) report,introduced during the June 2012 Rio+20 UN Conference on Sustainable Development. The Inclusive Wealth Report measures the wealth of nations by analyzing a country’s capital assets, including manufactured, human and natural capital, and their corresponding values. Reproduced below, one can see the changes in the ranking and index points in comparison to GDP rankings and ratings.

Credit: UNEP, UNU-IHDP

Despite its predominance and universal use, the limitations of GDP as an overall indicator of health and well-being have long been recognized by those working in a range of fields. As Hunter Lovins is fond of saying, cancer is great for GDP, but it ain’t great for the patient!

People , Planet and Profit- Part 2 of 3

People Planet & Profit : The Triple Bottom Line

In traditional business accounting, the "bottom line" refers to the sum of revenue minus expenses, which is either "loss" if negative, or "profit" if positive. The term originated because profit is always shown as the very "bottom line" on a statement of revenue and expenses. Over the last 50 years, environmentalists and social justice advocates have struggled to bring a broader definition of "bottom line" into public consciousness, by introducing full cost accounting. For example, if a corporation shows a monetary profit, but their asbestos mine causes thousands of deaths from asbestosis, and their copper mine pollutes a river, and the government ends up spending taxpayer money on health care and river clean-up, how do we perform a full societal cost benefit analysis?

The concept of a triple bottom line (TBL) adds two more "bottom lines"; social and environmental concerns. The three together are often paraphrased as "Profit, People, Planet".

The phrase, Triple Bottom Line,  was coined by John Elkington in his 1997 book Cannibals with Forks: the Triple Bottom Line of 21st Century Business . Sustainability, itself, was first defined by the Brundtland Commission of the United Nations in 1987.

The concept of TBL demands that a company's responsibility lies with stakeholders rather than shareholders. This seems to be in line with Adam Smith’s Theory of Moral Sentiments where he mentions something called  ‘prudence’. And he stresses that ‘justice’ – not harming others – is fundamental to a healthy human society. Not harming others can also be viewed as “not harming other generations” as well.  In this case, "stakeholders" refers to anyone who is influenced, either directly or indirectly, by the actions of the firm.

 According to the stakeholder theory, the business entity should be used as a vehicle for coordinating stakeholder interests, instead of maximizing shareholder (owner) profit.

Sustainability

The approach of "People, planet and profit" succinctly describes the triple bottom lines and the goal of sustainability.

"People" pertains to fair and beneficial business practices toward labour and the community and region in which a corporation conducts its business. A TBL company conceives a reciprocal social structure in which the well-being of corporate, labor and other stakeholder interests are interdependent.

"Planet" (natural capital) refers to sustainable environmental practices. A TBL company endeavors to benefit the natural order as much as possible or at the least do no harm and minimize environmental impact by, among other things, carefully managing its consumption of energy and non-renewable resources and reducing manufacturing waste as well as rendering waste less toxic before disposing of it in a safe and legal manner. Thi sis called the "Cradle to grave" approach and can be measured by the use of the life cycle assessment of products ( of which I talked about in m earlier post)  to determine what the true environmental cost is from the growth and harvesting of raw materials to manufacture to distribution to eventual disposal by the end user

"Profit" is the economic value created by the organization after deducting the cost of all inputs, including the cost of the capital tied up. It therefore differs from traditional accounting definitions of profit. In the original concept, within a sustainability framework, the "profit" aspect needs to be seen as the real economic benefit enjoyed by the host society. It is the real economic impact the organization has on its economic environment. This is often confused to be limited to the internal profit made by a company or organization (which nevertheless remains an essential starting point for the computation

An example of an organization seeking a triple bottom line would be a social enterprise run as a non-profit, but earning income by offering opportunities for handicapped people who have been labeled "unemployable", to earn a living recycling. The organization earns a profit, which is controlled by a volunteer Board, and ploughed back into the community. The social benefit is the meaningful employment of disadvantaged citizens, and the reduction in the society's welfare or disability costs. The environmental benefit comes from the recycling accomplished.

“Only when companies measure their social and environmental impact will we have socially and environmentally responsible organizations.”

The Emergence of the New Enterprise - Part 3 of 3

Emergence of the new Enterprise

Given the compulsions of the world we have created and the world we leave behind, the emergence of the new enterprise was only a matter of time. The triple bottom line approach and theory, while being instituted in the 1990s, ignored mainly in the rest of the century, is now gaining momentum.

The stakeholder theory, as compared to the shareholder theory is gaining more and more acceptance. The emergence of the Social Enterprise will sooner or later become a threat to the traditional enterprise. In India, we will all remember the famous social enterprise of the 70s – AMUL.  Even today , AMUL is a huge threat and a powerful competition to modern day enterprises in the same industry.

We have to change the way we look, the way we act and the way we do our business. It is a radical change and as with every radical change there is an interim “change platform”.  In the case that platform can be the corporate social responsibility programs and policies of the enterprises.  

CSR RESPONSIBILITY AND THE TRIPLE BOTTOM LINE

In the private sector, a commitment to corporate social responsibility (CSR) implies a commitment to some form of TBL reporting. This is distinct from the more limited changes required to deal only with ecological issues.

For reporting their efforts companies may demonstrate their commitment to CSR through the following:

·         Top-level involvement (CEO, Board of Directors)

·         Policy Investments

·         Programs

·         Signatories to voluntary standards

·         Principles (UN Global Compact-Ceres Principles)

·         Reporting (Global Reporting Initiative)

Triple bottom line (TBL) accounting expands the traditional reporting framework to take into account social and environmental performance in addition to financial performance.

Corporate Social Responsibility (CSR)

The aptly named CSR view is that corporations are members of the moral community and these responsibilities fall into four groups: 

ü  Economic Responsibility

ü  Legal Responsibility

ü  Ethical Responsibility

ü  Philanthropic Responsibility

The Economic Responsibility is the responsibility of a business to make money

The Legal Responsibility is the responsibility to obey the law of the land as a proactive duty.

The Ethical Responsibility is the responsibility to do the right thing even when neither the spirit nor the letter of the law apply to the situation.

The Philanthropic Responsibility, is a responsibility "to contribute to society's projects even when they're independent of the particular business."

Triple Bottom Line Approach

Another theory of corporate social responsibility is the Triple Bottom Line. Like the CSR theory we just discussed, Triple Bottom Line works on the assumption that the corporation is a member of the moral community, and this gives it social responsibilities. This theory focuses on sustainability, and requires that any company weigh its actions on three independent scales: economic sustainability, social sustainability, and environmental sustainability.

These three tabulations are all aimed at long-term sustainability. 

Economic sustainability must focus on the long term because this is the nature of a persistent company. A decision which creates an economic boon in the short-term but causes long-term harm, would likely reduce this bottom line to such a degree that the action would be untenable.

Social sustainability gives precedence on the balance of economic power in the society. Competition in the business arena is common, and encouraged, behavior, but maximizing the bottom line in social terms requires that a business foster an environment in which all can succeed. This might seem counterintuitive, but in the big-picture it is better for a whole society to thrive than for one single corporation to thrive alone. “Co-optetion” rather than competition .

The requirement of environmental sustainability stems from the recognition that resources are not infinite, and leads to the reasoning that too much degradation will worsen the lives of us, our children and so on.

Business cannot operate in a world which is poisoned or "used up." Efforts have to be made to renew some of the environments that have been harmed in the past, and these environmental harms and gains belong on this bottom line.

The future enterprise lies in the triple Bottom line

If businesses calculate their gains and losses by  way of the TBL  they will be more likely to take actions which are to the benefit of both the business and the community.

The Triple Bottom Line requires that a business decision be composed of all of these elements from the beginning. When the data shows each of these dimensions along the same line, and measured with the same metric, it will be much easier to see the impact of a decision and to judge the fittingness of that decision.

This then is the future of businesses and enterprises. As we move forward we see more and more companies moving along the path from Traditional to CSR adoption and finally to the TBL approach. This is now not only limited to Social Enterprises but also to whole business ecosystem.