Implementing New Impact Models

We need to change the way total profit is calculated. A new model must include a deeper understanding of economic, social, and environmental costs (hard and soft) that companies incur while doing business. In short, we need to consider profit in cooperation with society and the planet. If a company creates billions of dollars in negative environmental impact, that should be taken into account when assessing financial performance.

This idea of impact-weighted profit isn’t new, and there are multiple ways to go about it. Harvard published an impact-weighted account initiative that measured the environmental impact of 2,500 large companies based on public information. This is a solid start, but to achieve greater accountability, there needs to be increased business transparency to more fully understand social and environmental impact.

Companies like Volvo have increasingly accounted for social and environmental impact, and investors have taken notice. The stock has grown steadily over the past five years and recent headlines like "Buy 'Unicorn' Volvo Stock as the EV Market Grows" show a long-term trust in transparency. Consumers want well-made products, and they want to understand the larger impact of how they're made.

In addition to incentivizing cleaner business practices, this shift will also produce increased long-term profits. ESG portfolios outperform standard ones because investors flock to companies that have positive impact-weighted profits for sustainable, long-term bets. However, the systems aren’t currently in place to make this form of accounting—which requires high levels of transparency, tracking, and alignment—a more wide-spread reality. This challenge presents substantial opportunities to develop technology that can more effectively measure impact-weighted profit. An entire market could be born out of the start-ups, services, and products that would support organizations in accomplishing their goals and putting their purpose to work.

Partnerships between brands have traditionally been more hype than substance. Logos sit next to each other and brand purposes might overlap, but the union is typically short-lived and limited in scope. Combining two consumer bases to drive increased sales doesn’t move the needle on a societal level, and it’s ultimately constricting for the companies involved. But it’s a well-established model, and where there’s comfort, there’s repetition.

We need to be more ambitious. Beyond the confines of transactional brand partnerships lies the vast potential of large-scale cooperative ecosystems. Daring to think bigger and more cooperatively, these ecosystems would offer businesses and consumers greater freedoms to experiment, collaborate, and respond more quickly to changes in the world around us.

A recent partnership between Subaru and Toyota, and the time-tested cooperative Land O'Lakes are two examples of the potential of cooperative brand ecosystems.

To keep pace in the rapidly growing electric vehicle market, Toyota and Subaru joined forces to co-develop a new electric platform that will be utilized in vehicles from both companies. Rather than clamoring to get ahead in an emerging market, partnership treats the realm of electric vehicles as an ecosystem where brands can grow through interaction and exchange of ideas. Value comes from contributions to the ecosystem at large. In this instance, both companies recognize that a rising electric tide lifts all vehicles, and the growth of EV is ultimately in the best interest of both organizations, as well as society at large.

Land O'Lakes reminds us that there's nothing new age about cooperation. The century-old agricultural company operates with a cooperative business model that's made up of a complex ecosystem of businesses. When pandemic caused food shortages, the resilience of the ecosystem of thousands of member-owners was on display. The interconnected supply chain allowed for agricultural products to keep flowing and more effectively get to consumers that needed them. Contrast that with companies that were at a complete standstill due to COVID outbreaks in processing facilities. When some Land O'Lakes members paused production, others were able to fill in.

Building cooperation into the mindset and muscles of more businesses will allow for increased impact through combined expertise and experience. Talent will flow across industries to drive innovation. Increased experimentation and more fluid outcomes will generate a greater accumulated impact.

Taxation is a form of cooperation.

Communities provide the talent and resources that businesses need to grow, and in return, businesses pay taxes to support the community. Or at least they’re supposed to.

Large companies dodging federal and state taxes isn’t exactly a well-kept secret. It’s normalized. We pay our taxes as individuals and expect other people to do the same, but corporations, some of which receive taxpayer-funded subsidies, are given a pass when it comes to paying their fair share.

The federal corporate tax rate was lowered to 21% in 2017, but many companies still pay far below that through the use of stock options and tax credits to reduce taxable income.

It’s not illegal, so what’s the problem?

Selfishness is short-sighted. It always has been and always will be. While executives walk away with massive bonuses, communities are left with underfunded schools, infrastructure, and social services.

The Bay Area and Seattle have experienced a staggering influx of capital over the past decade with the meteoric growth of the tech industry. As the economy boomed, increased wealth drove up living costs and created two of the most severe housing crises in the country. However, efforts to raise taxes to fund affordable housing have been repeatedly squashed by businesses with effective tax rates that are already far below state and federal minimums. An equitable and sustainable society doesn't need corporate philanthropy. It needs tax accountability to adequately fund social programs.

Current corporate tax practices are a race to the bottom. The success of business enriches some and leads to the suffering of others. We don't have to live this way. Economic growth must provide benefits for more of society. Businesses and the communities they operate in can exist symbiotically, but it requires a balanced exchange. And that starts with paying a fair share of taxes.

Finding purpose elevated the potential of brands. Channeling that purpose into impact will elevate people, planet, and business. This is our opportunity to create the future we want to live in.

• HBR: A Framework for Product Impact-Weighted Accounts by George Serafeim and Katie Trinh
• 55 companies that made profits but paid no corporate taxes - Institute on taxation and economic policy
• How Wrong Was Milton Friedman? Harvard Team Quantifies the Ways - BLOOMBERG
• More Than 50 Major U.S. Corporations—Including Nike And FedEx—Paid No Federal Taxes Last Year - FORBES
• BLACKROCK - Larry Fink's Letter to CEOS