Business at a crossroads: Are the right Incentives in place?

by Expat Life

by Chris Cracknell 

Economists often say that the private sector is more efficient than government. This may be true, but it feels like a half-finished thought: More efficient at what? 

Government has certain freedoms that most businesses can only dream of, such as the ability to think on longer timescales, change the rules of the economy, or pursue ambitious projects without any plan to monetise them. Although government has the power to fine tune the system of incentives across society – a delicate responsibility, if ever there was one – business can satisfy those incentives more efficiently than any other entity.

Stepping back from the day-to-day challenges of navigating through an economic crisis, the key questions become clear. Are the right incentives in place to achieve sustainable prosperity for all of society? And if not, then what do we intend to do about it?

Where profit and values merge

Sweeping generalisations about business are bound to mislead. Companies have dumped chemicals into rivers, cut down rainforests, and led us down the path of global warming… while other companies have made farmland vastly more productive, developed ingenious methods of recycling, and invested in charitable endeavours the world over.

The acceleration of technological progress in the modern era is well known, but a similar trend has followed in its wake in comparative silence. Environmental awareness and social responsibility now figure far more prominently in corporate boardrooms than they did a generation ago – driven partly by genuine concerns, and partly by the need to demonstrate purpose driven leadership to an energised community of employees and customers who demand real initiative on issues in the public eye.

For varying reasons, the COVID-19 crisis has brought renewed attention to many of the Sustainable Development Goals outlined by the United Nations. A 2019 business survey by Euromonitor found that 53.2% of respondents had plans to develop sustainable products, and 48% intended to invest in sustainable sourcing of materials. The same survey conducted one year later saw these numbers jump to 68.1% and 60.1%, respectively.

The context of these developments makes the numbers even more striking, as a recessionary period normally puts massive pressure on businesses to focus on their own bottom line to the exclusion of longer term goals.

Other findings from the Euromonitor survey shed light on the reasons for this shift in the business world toward greater social and environmental progress. When asked in 2019 about the barriers to sustainable investment, “lack of senior/board commitment” was near the top of the list – cited by 29.5% of all respondents. In 2020, only 24.7% gave this response. Another explanation, “lack of awareness”, fell from 23.1% to 17.1% during the same period. “Weak regulatory incentive/legal risks” dropped from 19.2% to 13.0%. “Does not create value for consumer” decreased from 14.7% to just 8.2% of responses.

Business finance man calculating budget numbers, Invoices and financial adviser working.

Here, as elsewhere, culture is the prime mover. Society’s newly awakened concerns about sustainability have been clarified and amplified through social media, translating to public policy incentives geared toward greater responsibility. As incentives shift, businesses follow suit – just like a flower angling towards sunlight through the changing seasons.

Though many executives must continue to devote their efforts to surviving the current crisis, the path forward is increasingly centred around holistic measurements of success.

The other sustainability

The UN’s Sustainable Development Goals are as much about social improvement as they are about environmental responsibility. Here, too, we find competing sets of incentives for business.

Public companies answer to their stockholders, whose emphasis on quarterly profits has historically tended to overshadow other priorities. On the other hand, even this long term trend seems to be undergoing a correction: Multiple surveys have found investors to be increasingly selective, putting their money into companies whose core values they share.

Moreover, other types of businesses have more nuanced priorities than solely maximising the bottom line at the expense of everything else. For example, family run businesses are often beholden to shareholders who are looking for a wider form of success. The priorities of these businesses are often driven from within the community in which they operate, and their fortunes may depend on maintaining harmony and good will within that community.

Just as importantly, private sector profit depends on a healthy and stable society. If inequality becomes too severe, jealousy will creep in. If personal debt grows too high – a very real concern in Thailand today – the resulting instability is likely to threaten market health as well. The danger is compounded by an increasing wealth gap between rich and poor around the world, a gap that is being accelerated by the economic challenges caused by the COVID-19 pandemic. If left unchecked, the combination of these economic failures can only result in disharmony and social unrest.

One of the key lessons of the COVID-19 period is that we all share a common trajectory. Together we breathe the same air, work within the same economy, and determine what kind of environment our children will call home. These widespread realisations may have been prompted by the pandemic, but they increasingly hold true in a connected world such as ours.

We must preserve these insights, or together suffer their loss. As argued above, business is extraordinarily effective at chasing incentives. Everyone else – employees, customers, governments, the general public – is in a better position to shape those incentives and ensure that they remain directed toward the greater good over the long term.

Business finance man calculating budget numbers, Invoices and financial adviser working.

Fault lines and foundations

Each of us must take this responsibility of global citizenship very seriously indeed, as failing to maintain balance will sooner or later bring unfortunate consequences for us all. We see glimpses of such failures each time we open a newspaper, and we would be wise to learn from them.

If the upper class (for example) holds on too tightly to its gains, social unrest will surely follow. This new movement will usher in its own excesses, causing society to tilt too far in another direction. As the centre loses ground, each oscillation adds friction to the entire system.

Here, as elsewhere, prevention is easier and far more preferable than a cure. All we need to do, to encourage thrivability for us all, is to make sure the right incentives are really in place. Let us celebrate genuine CSR efforts from businesses, and reward those companies that work for the public good. Let us demand social and environmental progress from businesses that can afford to invest in these types of improvements.

The way forward is through purpose driven leadership, guided by shared values. But it isn’t just the elected or the powerful who can lead: In a connected world, where every voice makes a difference, we must all show the way forward.

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