How Shifting Secular Trends are Transforming Business As We Know It

I have watched my boys run roughshod around our home in San Francisco, their energy more than the walls can accommodate; I have followed them down the street to the park and playground, observing their simple enjoyment of each moment. They jump from jungle gyms and swings, unconscious of the possibility of skinning a knee or twisting an ankle. Sweatshirts are abandoned at the foot of the slide; balls and bicycles are casually forgotten where they lie. What a trail of chaos they leave! Yet somehow, “magically,” clean clothes arrive back in drawers and toys arrive back on shelves.

Children have a limited understanding of the broader cultural and environmental systems of which we are all a part. They act without a thought of how their actions relate to the whole. Their blissful ignorance cannot and does not last, however. Awareness of the consequences of our actions increases slowly as we pass from childhood to adolescence and adulthood, and is ultimately something we come to own in the form of personal responsibility.

Like children on a playground, we have run roughshod on the planet, acting without an awareness of the depth and breadth of our actions. Like toddlers leaving our toys to be picked up by parents, we used and wasted resources without care for the effect; we focused on our own needs and wants at the cost of awareness of our consumption’s impact.

For some 200,000 years we have lived on this planet in a “childlike” state. We have lacked systemic awareness because our planet’s resources were abundant enough and because our communications and social connectivity were limited enough that knowledge of the true dynamics of these systems was elusive or avoidable. At present, that state of “childhood” is rapidly ending. Human consciousness as a whole has begun to enter its own adolescence.

The Business Implications of Increased Connectivity

Until very recently our communications and social connectivity have been so local and limited as to prevent us from realizing the true dynamics of the entire system — the global consequences of our local actions. With the advent of unprecedented access to internet connectivity (smartphones are only 7 years old!) and the information it carries, the global consequences of our social, political, environmental actions have become readily apparent and the consequences of our actions impossible to ignore.

It has become impossible to ignore human rights violations, poverty or environmental disasters across the world. The human population is exploding as our supplies of water, arable land, and other non-regenerative resources are increasingly stressed. Climate change and its accompanying severe weather events, like droughts, more intense storms, and floods, will only make matters worse in the decades to come. And interestingly, climate will also further tie social and environmental issues together as infrastructure development, energy regulation, agriculture and resource scarcity—all of which climate directly and significantly impacts—also link to social issues like poverty, urban development and inequality.

Consciousness—in the sense of awareness of, and access to, information—is emerging on a global scale, and with it, for the first time in history, the ability to harness global human resources and capital of all kinds: to create some semblance of shared purpose.

The evidence is decisive. Polling data from HBR, Nielsen, Cone Communications, Deloitte, PriceWaterhouse, and others demonstrate among other findings that:

• 67% of people would prefer to work for socially responsible companies.
• 55% report a willingness to pay extra for products from companies committed to positive social or environmental impact. And this has increased 10% in the just the past three years.
• 91% of people would switch brands to one associated with a good cause given comparable price and quality.
• 90% of people would boycott a brand if it acted irresponsibly. (You can be sure VW is sweating that number about now.)

The bottom line across all of these studies is that virtually limitless access to information is increasingly giving us the freedom and ability to make purchasing choices that align with our personal values. An October 2015 Nielsen report on rapidly shifting consumer behavior summarizes this well:

“The hierarchy among drivers of consumer loyalty and brand performance is changing. Commitment to social and environmental responsibility is surpassing some of the more traditional influences for many consumers. Brands that fail to take this into account will likely fall behind.”

This same influence is similarly affecting the inside of organizations of all stripes, and should be a preeminent concern for those fighting for talent and struggling to keep it. A recent Harvard Business Review study reported employees who derive meaning and significance from their work were 300% more likely to stay with their organizations, had 170% higher job satisfaction, and were 140% more engaged at work.

This is not a trend, a major underlying cultural shift. The increasing interconnectedness of our world has made us aware of the complexity of the systems in which we live. By understanding the shifts in thinking and decision-making that fuel this feeling of increased responsibility, companies can prepare themselves for the coming golden age of socially conscious and environmentally responsible business.

Farewell, Yuppie Values

The western business world has been dominated by so-called “yuppie values,” such as unwavering pursuit of the high-income occupations as a path to self-worth, the McMansion in the hills and the shiny sports car. Yet as these outward demonstrations of opulence contrast ever more sharply with the immense global problems we face, the things so many believed would bring satisfaction are increasingly becoming less culturally dominant—primarily because they don’t capture what fundamentally makes us happy as human beings. In fact, an increasing number of studies have shown these values are actually frequently linked to personal unhappiness.

That’s especially true in countries with developed economies, where a majority of citizens’ deficiency needs are met. Multiple studies over the past two decades have shown that material wealth does have a correlation to life satisfaction—but only in countries with less than ~$10,000 per capita GDP. After that the correlation is weak to non-existent, and recent data suggest a possible negative correlation in countries where per capita GDP is above $40,000.

What actually makes us happy? Studies in this field have found that the most durable basis for happiness is what professor Martin Seligman, calls “the meaningful life”: a life driven by a sense of greater purpose in which we are able to leverage our personal strengths in pursuit of meaningful work, rather than pursuit of simple pleasure alone.

Studies also show the importance of the ability to be in control of our lives, through self-determination: to have the freedom and personal capacity to make decisions, and to be capable of effecting internal and external change. In other words, we are most satisfied when we make big decisions—including financial ones—based on our desire to make a difference.

Millennials (and Boomers): The Driving Force of Change

Millennials have matured in a world where access to instant, global information is ubiquitous. This generation is the primary driver of this global shift: they see the global nature of the problems clearly, realize the consequences to the world they will inherit and are demanding of immediate change. Millennials are three times more likely to seek employment based on a company’s position on social issues. Over half report a company’s environmental or social impact affects their purchasing decisions.

Social responsibility is also reflected in their investment decisions. Millenials are twice as likely than the population at large to to use their investment dollars to reflect their social conciseness. “Impact Investing” describes this fast-emerging direction of investment toward businesses that provide measurable social or environmental impacts as well as financial returns. You can be sure this influenced Goldman Sachs’ recent purchase of $550 million environmental, social, and governance (ESG) asset manager, Imprint Capital. BlackRock, the world’s largest asset management firm, announced the launch of BlackRock Impact, an impact investing initiative, in February. And Bain Capital hired former Massachusetts governor Deval Patrick last year to launch a new business unit that will focus on delivering attractive financial returns by investing in projects with significant, measurable social impact.

So what is “impact investing” and just how significant is it? One industry association, the Forum for Sustainable and Responsible Investment, using a broad definition, believes it is already a $6.5 trillion business in the U.S. already, having grown 76% from 2012 to 2014. The World Economic Forum far more narrowly defines impact investing (largely excluding public securities) and by its definition sees the industry as closer to $40 billion. What is undoubtedly clear is that an entire spectrum has emerged between the traditional “economics-only” approach to investing and traditional philanthropy.

The graphic below, adapted from the United Nations’ Principles for Responsible Investment (UNPRI), illustrates that range: from early forms of impact investing such as exclusionary screens, often in the public markets, on one end; out to concessionary investments closer to philanthropy in their approach on the other; and with funds such as my own (The Builders Fund) somewhere in the middle, seeking to leverage business to solve social and environmental problems through “non-concessionary” or market rates of return.

Regardless of size and definition, the future of responsible business practices in this country, driven by millennials, looks fairly bright. Much has been made of the upcoming wealth transfer to this generation: over the next 30 to 40 years, experts anticipate millennials will inherit over $30 trillion from baby boomers. Since 45% of millennials say they want to use their wealth to help others, those same experts believe impact investment will continue to experience strong and steady growth. After all, millennials already make up the majority of the workforce in America:

Interestingly, though, baby boomers are also reflecting a greater tendency toward a more socially-conscious use of capital. Having devoted much of their lives to making money, boomers are increasingly focused on their legacies and are now the biggest charitable givers as a percentage of the population at large. A recent Morgan Stanley-sponsored survey found that 84% of millennial investors and 66% of baby boomers are interested in the framework of sustainable investing. The idea of pursuing happiness by making a difference through conscious purchasing and impact investing is no longer a hallmark of youth culture and idealism alone—it’s an issue of legacy.

The shocking fact that this generation may be the first to leave the world in a worse state for its children than they received it in is a powerful call to action.

The Business Case for a Shift to Systems Thinking

“Systems thinking” asks us to re-evaluate problems more holistically, abandon myopic focus on individual components of ecosystems in isolation, and realize that these components must be thought of as part of a larger, often complex system.

Most modern societies were focused narrowly on the inputs and outputs of the industrial system—ignoring the larger global systems of which it is a part.

The reality is that in the process of making and consuming stuff, we also generate waste—and this waste can damage or limit the ability of nature to replenish resources. That system also sits within a larger social system of communities, families, and society at large. Just as overproduction and waste can damage natural systems, mis-managed production can also cause anxiety, inequity, and stresses within our social systems. [1]

So, in essence, our old way of thinking was to focus on a “system-within-a-system,” instead of the entire system.

Take the western industrialized food system as an example. For too long that industry has prized centralization and efficiency with (at best) ignorance of its impacts on health and the environment. The system today is proving rapidly antiquated, and is visibly killing us and the planet. Soil degradation, obesity, inflammatory diseases, food deserts, and water shortages are just some of the spreading symptoms. Driven by the negative effects of that system, the US is facing an obesity and preventable chronic disease crisis. Over 70% of Americans are overweight—40% are obese. In the past 30 years alone, the prevalence of obesity in the US has tripled.

There is a related explosion of chronic and inflammatory diseases. The current cost to treat these preventable diseases is $1.3 trillion/year and is expected to rise to $4.2 trillion by 2023.

Challenges like these now confront us with a global mandate to change course and embrace a new way of thinking that balances the needs of the entire system. Major companies must reinvent their portfolios and push to organic, nutrient dense, fresh, clean ingredient profiles. This wholesale refactoring creates compelling investment opportunities along the entire value chain. And that is what impact investing is also ultimately all about: how we can collectively reimagine every industry and every company to take a “systems-aware” approach to building businesses, and to operate in ways that do not fundamentally damage the overall system.

This approach also seeks for opportunities for shared value creation inside the larger corporate “ecosystem,” while incorporating social and environmental externalities. Companies take into account other stakeholders- including employees, communities, customers, and partners; while also broadening the scope of value creation toward a longer time horizon.

This approach is finding its way into the boardroom more frequently, and winning in the marketplace. Unilever, the parent company of hundreds of brands, such as household staples Dove and Lipton tea, is one company publically committing to systems thinking. CEO Paul Polman recently stated, “Future leaders will be systems thinkers. It is inconceivable that anyone will successfully steer companies, or countries, through our volatile world without understanding the inter-dependencies between the systems on which we depend.” Polman is not running a charity; his philosophy is based on his belief that this is the best course for Unilever to take to ensure long-term competitive market advantage.

Increasingly, entrepreneurs and business executives are becoming aware that holistic, systems-based approaches create competitive advantages by helping them balance current actions against long-term outcomes. In the process, they reduce risk, engender trust from their customers, attract and retain better talent, build stronger partnerships, and, ultimately, create more value.

As far back as the late ’90s, James Heskett and a group of his colleagues wrote extensively about the “service-profit chain,” which established early evidence of the relationships between profitability and customer loyalty on the one hand, and employee satisfaction, retention, and productivity on the other — all laid on the foundation of culture and a greater sense of purpose:

“Profit and growth are stimulated primarily by customer loyalty. Loyalty is a direct result of customer satisfaction. Satisfaction is largely influenced by the value of services provided to customers. Value is created by satisfied, loyal, and productive employees.”

Heskett’s work has come to life before our eyes as shifts around connectivity and transparency and a Millennial generation that grew up in that environment have increasingly influenced the marketplace. Take some of the findings mentioned above into account with Heskett’s value chain, and powerful, and data driven competitive advantages emerge.

Authentic, mission-driven cultures built around purposes beyond profit attract committed, values-aligned talent. Longer-tenured, more engaged employees create better partnerships, and employees with higher job satisfaction provide better customer service. Better customer service and better partnerships beget increased customer loyalty, which is a primary driver of growth. Similar links are apparent externally as values alignment is a primary catalyst to move customers up the so-called “engagement curve,” generating higher probabilities of repeat purchase, lower cost of customer acquisition, and higher net promoter scores. The simple fact is that purpose-driven companies — especially at the emerging growth stage of their evolution — are also winning in the marketplace.

A review of the mission statements of the leading international corporations of the past decade reflects an underlying values-driven approach: “Do no evil” (Google), believe in a “Shared Planet” (Starbucks), “Unite humanity” (Airbnb), and “Buy one to give one” (TOMS Shoes).

While celebrating the opportunity for profit to drive positive change through scale, it’s also important to note that the problems we face are not problems that business (or philanthropy or government) can solve alone. So-called “marketized philanthropy” is not the point. We can deride Business as transactional and dehumanizing, deride philanthropy as inefficient, or decry government as bureaucratic. Yet there are critical roles to play across each organizational structure. There are things that each can do which the others cannot. Rather than arguing one side’s superiority over the other, constituents should instead look for the so-called intellectual estuaries—areas of overlap where collaboration can occur—and ask the question: where can each work together to leverage relative strengths toward similar ends in a complex and interconnected system?

An Emerging Social Paradigm

Social scientists talk a great deal about the “dominant social paradigms”—the norms, beliefs, and values that comprise a culture’s worldview. Our dominant social paradigm has been shifting dramatically without most of us noticing. To compete in the new paradigm individuals and companies need to embrace change and quickly adapt.

Technology-enabled systems awareness is playing an increasingly prominent role in our approaches to business building and management. The political shift toward sustainable citizenship is also an indicator that the dominant social paradigm is shifting in developed countries toward a more holistic understanding of global systems. Where politicians may be slower than scientists deem necessary to direct the necessary legislation to divert our current path toward catastrophic atmospheric warming, huge strides are being made. This year has also seen some 148 countries voluntarily commit to reducing emissions.

The growth of impact investment is also a significant positive signal. UN-supported Principles for Responsible Investment initiative currently has 1,380 signatories, representing $59 trillion in assets under management. As we continue to be understand the inherent interconnectedness of global systems, and increasingly seek alignment of personal values with our money, we increasingly turn to investments that recognize systemic impact and seek to leverage the power of entrepreneurship, capital, and the flywheel of profit to improve the world at large.

The endemic challenges we face are scary and solutions will be complex. As we approach humanity’s “end of innocence,” however, there is much cause to be hopeful. There is a systems-driven awakening emerging on a global scale. We are beginning to comprehend the world around us and our place in it as a complex, regenerative, and dynamic system. As we continue down this path, the prospect of flourishing on this planet in its truest sense is becoming, for the first time, a real possibility.

With thanks to Gary Rosenberg and the contributions of Hippo Reads.

[1] See Peter Senge et al. and the Rocky Mountain Institute