What’s the Best Bottom Line?

Most investors believe businesses should focus on the traditional, strictly financial bottom line on companies’ income statements; that’s that. However, increasing attention paid to corporate social responsibility efforts takes a different bottom line into account: the social one.

In the last several years, many big, well-known businesses have greatly disappointed the public when it comes to their impacts on greater society. It’s the perfect time to discuss whether multiple types of “bottom lines” should be essential in business and investing.

Seeds of good
Earlier this week, The New York Times posed the idea that good corporate citizens “should just focus on the bottom line.” The article covered a recent paper from Dalberg Global Development Advisors, which describes itself as “a strategic advisory firm that works to raise living standards in developing countries and address global challenges.”

Consultants Daniel Altman and Jonathan Berman released the argument in the paper The Single Bottom Line, dismissing double- or triple-bottom line strategies some companies pursue in philanthropic and corporate social responsibility, or CSR, initiatives as distractions.

The argument that many businesses do generate significant social good simply by focusing on generating profits is a sound one, but I’d argue it’s too easily misconstrued or mishandled by many investors and way too many corporate management teams.

Granted, the very best corporate citizens do plant the seeds for positive end results for society at large. The article cited Berkshire Hathaway’s Charlie Munger, who once said, “Costco (Nasdaq: COST  ) does more for civilization than the Rockefeller Foundation.” (I agree that Costco is a very socially responsible company; the creation of retail jobs with high-quality worker benefits and low-priced goods that help small businesses operate more profitably are among the reasons why.)

Berman's examples: Cargill, which gives African cotton farmers seeds to grow food; and ExxonMobil’s (NYSE: XOM  ) incorporation of safety considerations when pondering new exploration.

When the bottom line is a race to the bottom
Then again, the flat, blind “go out there and pursue profit at all costs” mandate (similar to a common Milton Friedman quote I poked at in 2008) has been abused many, many times in our marketplace.

We all know there are too many examples to count, especially in the ugly last several years. The explosion (and worker deaths) at Massey Energy’s Upper Big Branch mine in West Virginia last year has been attributed to negligence arguably tied to the pursuit of profit. An independent investigation blamed the company’s safety failings, such as inadequate ventilation in the mine.

Meanwhile, I’d have to agree with critics of Massey’s recent acquisition by Alpha Natural Resources (NYSE: ANR  ) . The sense that quite a few people have in fact profited off the acquisition of what looks like a poorly run and unsafe company is gut-wrenchingly awful, and certainly doesn’t give any warm and fuzzy feeling of widespread “social good.” Some shareholders are suing Massey’s officers and directors for breaching fiduciary duty and recently lost a legal attempt in a Delaware court to block the deal.

Last spring’s Deepwater Horizon disaster in the Gulf of Mexico disaster is another easy example. Although BP (NYSE: BP  ) and the other companies involved would like to direct blame at one another, too much went terribly wrong and wrought a heck of a lot of damage, including 11 worker deaths and the sense that nobody had a decent plan for a worst-case scenario as oil gushed into the Gulf.

The fact that one of the involved companies, Transocean (NYSE: RIG  ) , tried to pass off 2010 as a “the best year in safety performance in our company’s history” this past spring just underlined how clueless (and dishonorable) some corporate managements can be when supposedly pursuing that “single bottom line” (maybe especially the one that lines their own pocketbooks).

Is it too much to ask?
I agree with the idea that the best companies out there operate in a good, ethical, socially beneficial manner and therefore have a better chance of reaping copious profits.

Proponents of conscious capitalism or stakeholder capitalism argue that operating a truly good business that generates goodwill and loyalty among employees and customers does enrich that one important financial bottom line; it doesn’t have to be an either/or proposition.

Until more corporate management teams can distinguish between greedy, negative self interest that tears away at social good and enlightened, positive self interest that increases it, maybe corporations should obsess about juggling a bunch of different bottom lines. Or maybe they could just realize that if they incorporate social good into their missions and purpose, maybe life would be a heck of a lot better for all of us.

We shareholders need to ask this of corporations, too, and demand merit, good business practice, and long-term thinking. As Altman’s and Berman’s paper concludes: “The main challenge facing the single bottom line is the issue of time horizons ... But 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.”

Is it too much to ask? Share your thoughts on this topic in the comments box below. What’s the “best” bottom line?

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.

The Motley Fool owns shares of Costco and Transocean. Motley Fool newsletter services have recommended buying shares of Costco. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. For more on this and other topics, check back at Fool.com, or follow her on Twitter: @AlyceLomax. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On June 18, 2011, at 7:45 AM, skypilot2005 wrote:

    Alyce,

    “The argument that many businesses do generate significant social good simply by focusing on generating profits is a sound one,”

    I agree. You lost me with the rest of the sentence.

    “(I agree that Costco is a very socially responsible company; the creation of retail jobs with high-quality worker benefits and low-priced goods that help small businesses operate more profitably are among the reasons why.”

    I agree.

    You also wrote:

    “Or maybe they could just realize that if they incorporate social good into their missions and purpose, maybe life would be a heck of a lot better for all of us.”

    Some specific examples would be nice. I am not sure what you mean here by “social good”.

    Will you “throw” some examples up in the comments section?

    I’ll tell you what I think should be done.

    Every year shareholders of all public corporations should be made aware of top level executive total compensation packages AND be able to vote for or against them.

    Surprised you didn’t I? :)

    But, that’s how I feel. As a shareholder, it’s my money they are spending.

    Sky Pilot

  • Report this Comment On June 19, 2011, at 10:13 AM, TMFLomax wrote:

    Hi Sky Pilot! I think some examples of companies that have social good in their DNA would be Whole Foods Market, Starbucks, Chipotle, Panera, and Google. (Disclosure, I personally own shares of Whole Foods and Starbucks, and bought shares of Whole Foods and Google for the Rising Stars portfolio for Fool.com.) I think all of those have something in their mission that allows for social good, and it's actually not really a "separate" bottom line, and that for the most part, shareholders are aware of it since it was made pretty clear from the get-go in their filings or their stated missions; for example, donations of percentages of their profits to philanthropic or community efforts is sort of built-in, they've made it clear they want to do their business in environmentally sound and sustainable ways, etc...

    Hope that helps clarify! Thanks for the comment!

    Alyce

  • Report this Comment On June 20, 2011, at 2:10 PM, stan8331 wrote:

    I think time horizon has to be a huge part of this discussion. It's possible to do all sorts of shady, damaging, unethical things to generate higher profits in the short term. There's a compelling argument to be made that those practices usually end up harming the companies who engage in them, but when the investor community is primarily concerned with the next quarter's results, it creates an incentive structure that often benefits the bad corporate citizens in the here and now and only rewards the good ones in the distant future.

    I'm not sure what the ultimate answer is, but fundamentally changing the nature of executive compensation to be much more dependent on the health of the company over a longer time horizon has to play a large role. As long as executives have an opportunity to get their money now and leave a mess behind for someone else to clean up, a certain percentage will avail themselves of that option.

  • Report this Comment On June 20, 2011, at 9:01 PM, skypilot2005 wrote:

    Alyce wrote:

    "for example, donations of percentages of their profits to philanthropic or community efforts is sort of built-in, they've made it clear they want to do their business in environmentally sound and sustainable ways, etc... "

    Would helping United Way raise funds be an example?

    I can get behind that and I feel it does add value to a company's "image" and that adds value for shareholders. Sometimes it adds a great deal of value.

    BTW: You wrote: "and that for the most part, shareholders are aware of it since it was made pretty clear from the get-go in their filings or their stated missions; "

    That is an excellent point and one that did not occur to me. Thanks.

    I do like to gain perspective on something I had not thought of.

    Sky Pilot

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