Monday
July 11
2011

Josh Cleveland

The Argument for a Single Bottom Line

If you’re an advocate for market-based strategies for international development, chances are high you have some experience speaking about the business case for base of the pyramid engagement. And if you’ve had enough of those conversations, I’m willing to bet you’ve begun to believe that (with some notable exceptions) large corporations care solely about making more money. Despite the obvious debates on the ethicality of that position (we’ll leave that discussion to other forums here, here, and here), this reality creates formidable barriers for anyone advocating a double or triple bottom line. But what if those bottom lines didn’t diverge? What if you were able to link social investments to bottom line ROI?

Jonathan Berman, a partner at Dalberg Global Development Advisors, and Daniel Altman, the firm’s director of Thought Leadership, recently presented this argument in “The Single Bottom Line.” From their point of view, companies don’t need to focus on a double or triple bottom line in order to justify doing ’good’ – if they change their time horizon for return on investment (ROI). Indeed, they claim that the average large public company that extends its time perspective for measuring ROI will see these bottom lines converge. When this happens, companies can often justify a greater outlay on social investments, simplify decision making, and manage towards a single bottom line.

Berman and Altman took some time to walk me through this perspective recently and presented some compelling arguments for the single-bottom line approach.

Why should this matter for you, your company, or your cause?

“Across multiple sectors social investments have an artificial ceiling,” says Berman: “They’re thought of as cost centers. And expenditures are capped accordingly.” When companies adopt short-term horizons, returns for such investments are usually measured according to a double or triple bottom line with social outcomes separate from financial outcomes. Some big problems can emerge when managers have to use double or triple bottom lines to justify an investment. Objectives aren’t always clear and programs can become removed from a company’s core operations. Shareholders aren’t always keen on the idea either. This leaves a murky decision-making process around resource allocation and strategy.

Yet for companies with a short time horizon, double and triple bottom lines may be the only tool available to account for social investments. In order to measure the true return on a social investment, a company must use a longer time horizon for ROI. Unless you think about a social initiative in terms of years instead of quarters, the payback will likely be overshadowed by other more immediate priorities.

Berman and Altman give several excellent examples in the paper, which I suggest you peruse as well. Here is one example that we discussed in more depth:

Say attaching a sanitation program to a roads project would improve by 5% a company’s chance of winning another roads project that may be put up for bid in 10 years’ time with 50% probability. If the future project would generate $20 million in profits, and we use a discount rate of 8% (3% time preference and 5% inflation) then the expected return from the sanitation program is roughly $230,000 [$20 million * .5 *.05 * 1/(1.08^10)]; the company should only invest in the program if it costs less than that amount.

Better still, these social initiatives could produce calculable paybacks in brand equity and organizational development that benefit the company in other countries and markets as well.

Not rocket science, right? The director of CSR at Berman and Altman’s hypothetical construction company mentioned above doesn’t argue foremost in terms of livelihoods improved or environmental areas maintained: he speaks the language of publicly traded companies the world over: profit first. Is the result the same? It might actually be better. And this is where the authors think the approach could make an impact. Let’s face it; it’s easy to cut a corporate program that has an ill-defined social return on investment (SROI) and shows up on the balance sheet as a cost. But cutting funding for a surefire way to increase the likelihood that you’ll win a bid by 5% or even 10%? Don’t count on it: that investment is here to stay. And that is precisely the point that Altman and Berman are driving towards. To be clear, Berman and Altman do not advocate against the measurement of social impact. Their goal is to increase the budgets for social investments by fully capturing their long-term benefits with more accurate rates of return.

Sure, probabilities are hard to measure and like any investment, payback is uncertain – especially with longer time horizons. Yet as the authors reiterated in our conversation: “assessing probabilities of outcomes is what companies do to make money – it’s nothing new.”

Thinking long-term

As you might be thinking, walking into a meeting with a senior exec in your company to make the case for a social investment with the “let’s do it because it will pay off in the long run” argument might not go over so well. I brought this up to Berman and Altman and as you’d expect, having been in numerous corporate client engagements, they were not oblivious to the difficulties involved in getting a longer-term, single-bottom line focus implemented.

“Our goal is to help managers simplify the decision making process around investments with social impact,” says Altman. “We want to enable companies to see the justifications for the initiatives in a different and more powerful way.” And often times, as their paper reminds us, “even if the private benefits attached to social initiatives take a long time to accrue or accrue with low probability, their size may mean that they represent a substantial contribution (in expectation) to the single bottom line.”

Cultural barriers also stand in the way of integrating social investment into a single bottom line. Companies are often organized to believe that social impact is a philanthropic goal that just doesn’t fit in with bottom line calculations. Ridding companies of that legacy thinking isn’t easy work but it’s a necessary component of encouraging more investment in socially impactful programs. Again, Berman and Altman argue that equipping managers with the right tools to make the argument in profit-maximizing terms can help change this mindset.

Where to now?

In case you’re wondering, neither this author nor the authors of the paper are naïve enough to think that this article alone is going to move the community of multinational corporations in the U.S. from a short-term focus to a longer-term one. But this working paper should stimulate more discussion around the approach, especially in regards to the applicability of long-term perspectives and a single-bottom line approach to companies in developing countries where they note that a double bottom line may be more applicable. Above all, the authors think that their approach will elevate the status of social investment within corporations and spur more corporate investment in social initiatives. Here’s to hoping they’re right.

Please like NextBillion on Facebook and follow us on Twitter.

Categories
Entrepreneurship
Tags
investment fund, profits