Increase Profits for Social Good - US Paper
16 June 2011 at 2:16 pm
Corporations should return to using the single bottom line to assess investments and achieve more social good, according to new paper by a US consultancy firm.
The paper, The Single Bottom Line, by Daniel Altman and Jonathan Berman from Dalberg Global Development Advisors says using a single bottom line allows companies to create social benefits in the most efficient way while continuing to maximise profits.
The authors say that moves by companies to adopt double and triple bottom lines, which add to profit the measures of a company’s social and environmental impact to evaluate performance, are distractions.
Put another way, the Paper says, the single bottom line keeps companies doing what they are good at and improves the overall efficiency of investments in society’s well-being.
It says this efficiency stems not just from companies’ improved selection of investments and sharper focus on their core operations, but also from their renewed adherence to the objective of profit.
It says for-profit companies are expected to maximise value for shareholders. To do otherwise without shareholders’ guidance would be to create agency problems and informational asymmetries.
Furthermore, it says a return to the single bottom line does not imply that companies’ involvement in activities that create social benefits will diminish.
On the contrary, the authors argue that these activities will become more common as companies make a case for them in terms of the single bottom line.
They say using the single bottom line will help companies to avoid mis-allocating resources and, with fewer unproductive projects on their balance sheet, likely increase their appetite for activities that create social benefit and using the single bottom line also makes investments that generate social benefit more sustainable.
They say if companies view social initiatives as costs rather than contributors to profitability, then these initiatives are likely to become procyclical, being cut in downturns and then reinstated when balance sheets are flush again. Their budgets will be arbitrary rather than being linked to a rate of return. As investments expected to be competitive and profitable, by contrast, social initiatives will enjoy more durable support from executives and become a core part of corporate operations.
The Parer says the main challenge facing the single bottom line is the issue of time horizons. Today’s publicly traded companies face unprecedented pressure to satisfy short-term expectations set on a quarterly basis.
Encouragingly, it says some companies – mainly European ones such as Nestle and AXA – have not been swept up in the quarterly earnings culture and publish results only annually.
Also, a positive aspect of the fallout from the recent financial crisis has been the reorientation of some executives’ pay packages to focus their efforts on longterm results.
But, the paper says, a more fundamental change in shareholder attitudes, linking rewards for executives to long-term performance and ceasing to punish those who accept upfront sacrifices for long-term gains, may be necessary before the single bottom line yields its greatest rewards for both companies and society.
Download the paper at http://dalberg.com/sites/dalberg.com/files/sblfinal.pdf