Why Businesses Need to Embrace Externalities

At the first minute of this clip, Christopher Meyer of Monitor Talent states that:

In my mind, this clip leads to discussion of whether or not CSR is little more than window dressing that diverts the attention (of external stakeholders) away but ultimately does not serve the firm over the long run. That, instead of donating money to causes whose only direct link would be one of market demographics, firms would be best positioned to focus on their business models, make material improvements in areas like materials, labor conditions, etc where the core of the firm is ultimately strengthened by reducing the size/ number of externalities that pose a long term risk to the firm.

In Meyer’s view:

Meyer argues that businesses don’t have to be responsible for society, only for themselves and their own externalities

Which then leads to a technical / operational discussion of what are the real impacts of firm when decisions are made. Is Wal-Mart responsible for the economic in-balances that occur when mom and pop stores are closed when a Wal-Mart opens? Is that “their” externality to own? Are designers and manufacturers of hybrid cars owners of the environmental damage causes in the processing of rare earth metals industry, and do they own the externality of recent trade disputes?

How far does it go, and how firms should firms go?

For many in the board room, this is tough, but necessary, and in the last few weeks alone I have had several conversations to this point with firms who were considered “leaders” in CSR, but were struggling to understand the material benefit to the firm. Sure, there was a measurable impact of the program, and people benefited, but they were still struggling to balance that with the externalities (environmental and social) that their business models created.

A fact highlighted by the recent WSJ article Patagonia’s Founder Is America’s Most Unlikely Business Guru

A more systemic transformation of the company began in 1991, after a sudden slowdown following years of overambitious growth threw Patagonia into turmoil. [..] Chouinard got his books in order. He vowed to run the company debt-free, which he now does. Then he looked at everything Patagonia made, shipped or processed, and resolved to do it all more responsibly. He changed materials, switching in 1996 from conventional to organic cotton—despite the fact that it initially tripled his supply costs—because it was less harmful to the environment. He created fleece jackets made entirely from recycled soda bottles. He vowed to create products durable enough and timeless enough that people could replace them less often, reducing waste. He put “The Footprint Chronicles” up on Patagonia’s website, exhaustively cataloging the environmental damage done by his own company. He now takes responsibility for every item Patagonia has ever made—promising either to replace it if the customer is dissatisfied, repair it (for a reasonable fee), help resell it (Patagonia facilitates exchanges of used clothes on its website), or recycle it when at last it’s no longer wearable.

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