In this episode of Rule Breaker Investing: Authors in August, Motley Fool co-founder David Gardner chats with Jay Jakub, co-author of Completing Capitalism, about the core principles of Economics of Mutuality and how they create value for all stakeholders. Discover how expanding the concept of capital beyond money to other nonfinancial forms of capital benefits society and the environment as well as businesses.
Also, get a sneak peek at what's coming up next week on Authors in August and much more.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on August 4, 2020.
David Gardner: About 20 years ago, at a charity benefit supper, the host introduced my wife to the guest seated next to her. "He owns and helps run a sweet company," said the host, and my wife heard his name as Mr. Marsh. As casual conversation struck up, my wife then turned to Mr. Marsh and asked, "What kind of sweet company?" And he said, "We make dog food." It was only later, as we drove home, that we realized the initial introduction had been garbled and unclear. In fact, the man's name was not Mr. Marsh, but Mr. Mars, and it had been Forrest Mars, one of the leaders of Mars Corporation, with characteristic modesty deftly displaying some humorous tact.
And while dog food might sound like a joke, it wasn't even a white lie. It was the truth. As you'll find out this week, Mars Corporation has a huge pet care business, but it also has its own think tank, which you might not necessarily expect from a company made famous by Snickers and M&M's. And my guest this week has worked for that think tank since 2007.
So we're not here to talk dog food -- well, not really -- we're Completing Capitalism; that's the book authored by Bruno Roche and my guest this week, Jay Jakub. We're here to talk about what Jay calls the Economics of Mutuality; that's a way of doing business that does well by doing good, in part, by measuring three forms of capital that are often not measured at all, or nearly as much anyways, that fourth form that dominates our thinking, that would be financial capital. Jay is here to show you as an investor and/or a business professional that you're going to be scoring suboptimal results if you're only measuring profits. All that and more on this week's Rule Breaker Investing.
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Welcome back to Rule Breaker Investing. It is August and I'm rubbing my hands together a little bit, because it's Authors in August. Yep, for the last few years, whenever we turn the calendar page to August, we get to start talking to authors. Authors of books that interest me, authors of books on topics like investing or business or life. Yep, the three things that I focus Rule Breaker Investing on investing, business and life. We're going to have a heavy emphasis, this particular week, on business, with certainly some investing and life thrown in. My guest, coming up very shortly, is Jay Jakub, the author of the book Completing Capitalism.
Now, before I get started with this interview with Jay, I want to mention what's up for next week so you can buy the book and read ahead some. Next week, we're going to have author Jeremy Brown. He's not only the author of this book, Influenza: The Hundred-Year Hunt to Cure the Deadliest Disease in History, but Jeremy is also a veteran emergency room doctor but today serves as the Director of the Office of Emergency Care Research at the National Institute of Health. So we're going to get his insights on everything from the Spanish flu of 1918 to the COVID-19 flu of 2019, next week on Rule Breaker Investing.
But now, without further ado, let me welcome in my friend and guest, Jay Jakub and the Economics of Mutuality.
Jay Jakub joined Mars Catalyst in 2007, where he's been leading several critical components of the framework they call the Economics of Mutuality. Since 2014, for instance, he's directed the joint research partnership on the Economics of Mutuality that Catalyst has with Oxford University's Saïd Business School, where Jay is a regular guest lecturer. He is most relevantly, for this interview, the Co-Author with Bruno Roche of the Economics of Mutuality book, Completing Capitalism.
I should mention Jay attended American University just a couple of blocks from where I live right here in Washington, DC, before studying in England earning, eventually, a doctorate in modern history from Oxford University's St. John's College. He's based on the Mars Global Headquarters in McLean, Virginia, outside Washington DC. And finally, I want to mention that Jay is presently serving on the Forming Task Force here at the birth of our Motley Fool Foundation, of which I am the cChairman.
Jay, thanks for all your help, by the way, and welcome to Rule Breaker Investing.
Jay Jakub: Pleasure to be here, David. Thank you for inviting me.
Gardner: It's a delight. And, Jay, in many ways, I think your framework, which as I mentioned, you call the Economics of Mutuality, was prompted by one of the leaders of the Mars Corporation. Of course, many of us know the candy. You should also know, if you don't, dear listener, it's a pet food giant as well, but it's a massive private, family, multigenerational enterprise, and one of those family members, Jay, asked a beautiful question. What was that question?
Jakub: That question, David, was posed by John Mars, who's one of the three owners of the family at that time. And he asked simply, what should the right level of profit be for the company?
Gardner: And what year was that, Jay, and what did that spawn?
Jakub: He asked that question, what should the right level of profit be for the company, in late 2006, just as I was joining the company. And it was a fascinating question to get from a shareholder, because typically what's behind a question like that would be something like, how much can we possibly squeeze out of our value chain partners to get as much profit as we possibly can? But actually, what John Mars was asking, as CEO and as CFO at that time, was something quite different. And it was something he explained to us later as, we're only as strong as the weakest link in our value chain, and if we're taking too much, more than it is our right, others could become in need, and you can create a squeezing effect among your partners that actually creates a disequilibrium and disadvantages the company. So we really need to know if there is a right level of profit.
Gardner: And such a telling. The reason I called it a beautiful question, in addition to my love of The Book of Beautiful Questions, a previous author in August, but I love it when a beautiful questions asked it reframes the world and it probably, maybe, Jay, does take a long-term-oriented, perhaps private company, and often family multigenerational, to ask a beautiful question like that. Now, that was asked in front of or near you. And that touched off a lot of work for you over the coming decade.
Jakub: It did. Because the CEO and the CFO basically said, you know, if we go to one of the big banks like a Goldman Sachs or if we go to a McKinsey with that question, we know what the answer is, which is as much profit as you possibly can get. And that's not the answer to the question that we're really looking for. And so Bruno Roche who is my co-author in this book, also a great friend, in this work, and a partner on Economics of Mutuality in every sense, he's the chief economist of Mars, or was up until the end of last week, and also was the managing director of Catalyst. And that question was initially brought to him as the leader of the internal think tank of Mars, which we called Catalyst, which has been around since the 1960s, to challenge orthodox business practices. So it was a good place to kind of take up that research and start to look at the question of what the right level of profit should be. And for us, it was the kind of question that you would always dream about, and it really opened the door to do some very counterintuitive type of work into what a business model actually should look like playing by the rules of the game of the current economy as we move forward into it.
Gardner: And before we get into some of your answers and the way that you rethought capital -- we'll talk about that in just a sec. But before we go there, I am always interested in Mars. A lot of us in the DC area know vaguely that this very large corporation, that it has something like $38 billion in sales, and those of us who grew up with M&M's, we're big fans of a lot of your products, but it's always been described, to me anyways, a very secretive, a very private company, very family oriented. So, Jay, I'm wondering, could you just, kind of, briefly lay out, how is Mars organized? Because you're describing, it sounds like a think tank that operates autonomously within this large company that I didn't think was a think tank, I thought it was candy and pet food.
Jakub: Absolutely. And first of all, I'll actually address your comment about Mars being known as being secretive. You know, I think the Willy Wonka story was actually developed around Mars, just this idea of this family-owned, privately held business that makes chocolate and was very, very quiet. And the global headquarters is actually hidden away, and you've been there, David, in McLean, Virginia, which is just outside of Washington, DC. And we have as a neighbor, a mile up the street, the Central Intelligence Agency. And the joke in the area, that there's two secret organizations, but only one is discreet. And we know one that isn't. [laughs]
But with Mars, Mars is known for iconic chocolate brands, such as Snickers, M&M's, Twix, Galaxy, there's dozens and dozens of brands, including many billion-dollar ones. And also, Wrigley's was added to that portfolio in 2007-2008 with a really major acquisition with the big chewing gum and sweets confectionery company. But actually, the largest business segment at Mars -- and we're not really known for it as much -- is pet care, and pet care includes probably 50% pet food for all types of animals, but mostly for dogs and cats. So Pedigree, Whiskas, Cesar, Royal Canin, IAMS, I mean, there's just dozens of brands that are on the pet food side, including some very highly nutritious pet foods.
But then on the other side is pet health, and it's veterinary healthcare. So Banfield, BluePearl, these are some of the veterinary clinics for pets. And I think we've got the most of them, at least the largest number of them around. I say we, I have actually now moved from Mars, but we'll get into that later.
Gardner: We will get into that later, and I really was remiss, not saying pet care, because pet food is just half of that. Of course, pet services, pet care, not just huge for Mars, and it is, but such a huge category, a whole industry today, where there are some wonderful, and have been public companies that we've picked and recommended for some of our members over the course of time, so.
Jakub: Indeed, and I'll be remiss if I didn't mention we also have -- or Mars has a food segment built around rice and also organic seeds and pasta sauces, spices and so forth, but it's a smaller business segment. Mars really has this, kind of, two super segments. And Forrest Mars Sr., who is kind of the genius who owned and ran the company on his own for about 60 years, up until about 1970, he created this think tank unit, which is quite unique. And actually, there have been organizations that have come in and been hired to benchmark us against other companies' similar types of units, and they've never been able to do it successfully.
And basically, the way Catalyst functions is quite unique in many ways. One is that we have a failure metric. So here we're supposed to challenge orthodox business thinking. And we have a ring-fenced budget, so that gives us a lot of freedom to go out and find what the good next big ideas and then translate that into something that's very practical and apply it. But if we don't fail enough in doing that, we actually get penalized on our bonuses. And this is just extraordinary and very counterintuitive, but if you think about it, it's not so strange, because if you're going to be asked to have a breakthrough or transformational type of solution that you're delivering every time [laughs] you go out there, you've got to be incentivized to take the kind of risks that lead to, you know, nine failures and then the tenth one actually is going to move the needle in a huge way.
Gardner: And are every one of those failures, Jay, legitimate, or do you sometimes pad it with a totally ridiculous question or idea and get to chalk it up to a failure? [laughs]
Jakub: Well, I think we're pretty reserved in what we go after. We do our research, but we also know that a lot of the next big ideas for business, oddly enough, are in academia. And academics, typically have no idea, they're very theoretical and abstract in formulating these big ideas, and they have no idea, actually, how to practically apply it in a business sense. So we have to have really unique makeup in our team. And so, we have people that need to act as a bridge, who can have the credentials to be peers of academics, and we often have a lot of PhDs across different disciplines. And we co-publish on some of the things we co-develop with the academic partners, but we have to be really well grounded in business, and to have those relationships across the Mars Company, and now across other companies, that we're working with in the new setup, that enables us to really understand what the businesspeople need and how to go about practically applying what it is we do; otherwise there's no point.
Gardner: All right, thank you, Jay, and thank you for that overview of Mars and your experiences and where you came from. Let's go into the book now. Most of us, especially investors, when we hear "capital," we think of one type: money. What you call financial capital. But a keystone of Completing Capitalism, the book that you wrote with Bruno Roche, is your focus on the other three forms of capital. Now, what are they, and would you briefly explain each?
Jakub: Absolutely. If you look at the management literature, David, you'd actually find that there are references to human capital, social capital, and natural capital in addition to financial capital, so that's I think why financial capitalism is called what it is, just to set it apart. And yet, when people hear the word "capital" in a business context, they automatically think of money. We really want to expand that concept and expand the definition of performance as well to include nonfinancial forms of capital, which actually create great value for companies and for their stakeholders.
So I'll start with human capital and say a few words about that. Human capital is a form of people capital, of course, and it's expressed at an individual level in terms of well-being in the workplace. And so what we've been able to do with this new business model innovation we described in the book Completing Capitalism, which we call the Economics of Mutuality, is create a kind of a universal, relatively simple, easy-to-use, stable approach to collect and analyze the kind of data that will determine within any corporate cultural context, any cultural context, really, what the true drivers are of well-being among that particular workforce.
So every workforce is going to have a slightly different makeup and what is important to them will be slightly different. If you don't know what is important to your workforce, you can't really craft the interventions that you can once you do know that will grow the human capital in that company along those variables that are most important to that workforce, and by so doing, get payoffs like talent attraction, talent retention, and optimization of people's performance when they really feel purposeful and that their needs are being met.
The second form of capital is a much more complex one, and it's called social capital. But spending a number of years, actually working on trying to crack these forms of capitals in terms of how you measure them, simplistically, robustly, like you would measure financial capital but also in ways that are simple and stable and can be utilized in any business situation to make them practical for business people, they can't be too complex.
This social capital, actually when you first look at it, you find that there are maybe 60 to 70 different ways in which you can explain what social capital is, and that's far too complex for people, and so we were a bit intimidated by that at first, but we brought in some leading sociologists, cultural anthropologist, development economists, to help us kind of crack this. And when we did, we found that in all of the experiments that we ran in different markets around the world, from working with poor cocoa farmers in West Africa to poor coffee farmers in Africa and in places like Papua New Guinea to distributors of chewing gum in the cities and towns of Vietnam to looking at things in more developed context, full market context, we found the same results over and over: that there were only three variables to describe social capital that kept appearing, that together accounted for about 75% to 80% of what the social capital space were. And those are simplistically, as we have longer definitions, but trust, social cohesiveness in a community, and the capacity of that community to work collectively toward a common good.
Gardner: And we'll talk about it, in fact, we're going to talk about each of the measurements you have for these three forms in just a little bit. But what is the final nonfinancial type of capital that you've identified, explored, and defined?
Jakub: And that would be natural capital, and that's about environmental resources. But when corporations tend to look at natural capital, they tend to look at it in what's called an output approach, which is really about external reporting and benchmarking, and it's usually one metric, and it's carbon footprint. There's nothing wrong with carbon footprint, but in a business model innovation like this, we wanted to create tools and techniques that managers could actually use to proactively measure to more resource efficient productive outcomes while leaving a smaller environmental footprint. And so, we took an inputs approach, and with partners, we were able to find a number of metrics that were, again, simple and stable that would account for more than 80% of all of the natural resource inputs that go into the manufacture of anything.
Gardner: And so, Jay, I would say, one of the critical insights of Completing Capitalism is that each of these three additional forms of capital should not be measured by simply converting them back to dollars. In fact, Jay, you take the so-called triple-bottom-line company somewhat to task. These are companies, of course, that try to measure more than just their financial profits, but your criticism of them is that when trying to measure their social progress or their treatment of the environment, they're just trying to convert those measurements back into dollars.
Jakub: You've put your finger on something that's quite important that often confuses people about Economics of Mutuality when we first have a conversation. They may say, oh, isn't that just a triple bottom-line, and ultimately you just have financial conversions to account for the value of each form of capital. And actually, we find that to be very distorting of the approach. First of all, we found no accurate way in which you can possibly convert things like trust, social cohesiveness, capacity to work collectively, prospect of upward mobility, which is one of the metrics we used to measure human capital. I can go through all of these different variables that we use as our metrics, and trying to convert those into financial capital equivalence is just a guess, it's a wild guess.
More importantly, it actually creates a situation where you're putting way too much value and emphasis on one form of capital that's actually significantly diminishing in value vis-a-vis the others. And if you can bear with me for just a moment, I'll explain that.
When Milton Friedman introduced financial capitalism, exactly 50 years ago this year, it was because there was a form of scarcity that existed in the global economy, and that was money. But there was an excess of natural resources, there was an excess of labor. So it was a very different kind of form of scarcity than there is today.
Through Friedman's success in applying that model in businesses and business schools all over the world, that's still the No. 1 model that's used and taught everywhere. A huge amount of financial capital was able to be created in the system. And now, I don't know whether you agree, David, but I think there's a dysfunctional excess of financial capital in the system now, being exacerbated by these constant quantitative easings that have been going on.
Gardner: It does seem like there is a lot of financial capital out there these days, Jay. If we just look at our interest rates, which are near zero. I always thought of interest rates as the cost of money, so if interest rates are near zero, the world is awash in financial capital. And as you're pointing out, it's very different from 50 years ago and Milton Friedman.
Jakub: Yes, exactly. And you know, we're starting to see negative interest rates as the norm rather than the exception, as well, which is another huge warning sign that there's just far too much financial capital in the system. But here we've moved 50 years through that approach to try to fix the shortfall of financial capital, and we've really paid little to no attention to these other forms of value, these other forms of capital that I mentioned that are nonfinancial in nature.
Those are now, by many measures in significant deficit vis-a-vis financial capital, which is in significant dysfunctional excess. So just by the laws of supply and demand, social human and natural capital value is going way up at a time when you only manage what you measure in business, you probably heard that expression. And if you don't have the metrics to measure and the techniques to mobilize these nonfinancial forms of value in a business that are going up in value, you're going to be really operating suboptimally. So that's why we really need to broaden the definition of performance and add these new metrics, these new nonfinancial forms of capital to the equation for businesses that we left out.
Gardner: Yeah, you really can't, in the end, measure the environment through dollars, can you, triple bottom line, because you could end up just with a whole bunch of dollars and no environment left and you can't buy that environment back with those dollars. So these things really don't translate. I know a big focus of your work is making sure not only do we measure each of these forms of capital, which we're about to talk about, independently, but we also maybe need to pay with them, we need to remunerate them with like kind, you can't just pay off the green environment with greenbacks. Anyway, we'll get to that in a sec.
But, Jay, before you lay out for human capital, the way that you think business should be measuring human capital, how did you arrive at the right measurements? What's been the process by which you discovered the ways to measure human capital, social capital, natural capital?
Jakub: Well, again, one of the great benefits and advantages that we have in working for a company like Mars that we did at this time that we did this work was that, it was a very long-looking, kind of, corporate mindset. And so these were values that were instilled in the company from the very beginning, to really take a long perspective, which is why we have a Catalyst that's out there to challenge orthodox business thinking.
And so, we were given a lot of latitude to invest some of our resources in the internal think tank for actually five years in the beginning, just to crack the metrics pieces. And to do that, we could not do it alone. I mean, first, we start with a massive, kind of, literature review, to make sure we're not reinventing the wheel, that we can learn as much as we can from others that have worked in this space. Then we actually go out and we recruit the right, kind of, really substantive expertise as partners. And very often these are professors in universities.
I mentioned a little earlier, development economists have been our partners. And so we brought all this, kind of, expertise together along with anthropologists who we recruited from leading universities, that had spent many years living in the, kind of, coffee-growing areas or cocoa-growing areas that were relevant to our business but also would help us crack these things that were so difficult to actually measure in ways that were robust but also simplistic and stable and universal. And through working with those partners and doing five years, really, of experimental work in the field, we were able to crack these metrics.
Gardner: All right, Jay, so you've done a good job, kind of, laying out the three forms of capital besides financial capital, the one that most of us think of, financial capital. They are human capital, social capital, and natural capital. And, yes, I think you've, sort of, lightly referenced how you measure them, but I want to make sure for our listeners, many of whom are hearing this for the first time, I want to say one thing and then ask you to reiterate the measurements. The thing that I want to say is, that it's profound to me that each of these forms of capital can and should be measured on its own, have its own distinct measurements. And while not every one of us works at a multinational corporation, even for small to medium-size businesses, a lot of these are eye openers; at least they are to me, as I think about how we could measure The Motley Fool, and not just look at our financial bottom line.
So with that said, Jay, could you take us back real quick through the human capital measurements. I think there are five of them. What are we measuring?
Jakub: Yeah, that's a very good question. And actually, David, in human capital, unlike social and natural capital, it's not the metrics that are standard and universal, it's the methodology to arrive at those metrics of what the true drivers of well-being are in your particular workforce, in the cultural context of The Motley Fool, for example, as opposed to Mars Incorporated. So you're going to get some variation in what those metrics are. But the way that we look at human capital is that, we collect a significant amount of data that's already existing, including things that come from, like, the Gallup Q12 Survey of Engagement.
But we also know that the Gallup Q12 Survey comes up short in actually giving you something that you can work with to develop the interventions that you need to grow the human capital along those variables that are important to your workforce, because it doesn't tell you what is actually important. So for example, at Mars, we did an extensive amount of human capital work across its multiple segments, and we found a very strong, kind of, culture among Martians, as what we called ourselves, that basically the No. 1 driver of well-being in that particular workforce culture, we determine through our human capital methodology, was actually, do managers walk the talk of the values that they espouse? So it wasn't about, sort of, wage disparity or anything like that. It had to do with, do your managers, when they talk about the five principles of Mars, for example, and how they want to operate as a business, are they really doing that? Are they walking the talk? That was the No. 1 thing for Martians. So if you can find a way to address that, you actually can do some of those things that I mentioned earlier, which is drive up talent attraction, talent retention, and optimization of performance.
The second, for Martians, was something called the POUM affect, which is actually standing for prospect of upward mobility. Again, this wasn't about how much you pay somebody, but it was about, does somebody actually have a pathway of advancement that would give them more responsibility, more independence, more freedom to actually make decisions and manage and move up in the company. So it was really important to know that. And, again, you're going to find some of these are different depending on what kind of culture you've built at The Motley Fool, but ultimately, you can measure these in a relatively small number, no more than five variables, that together are going to account for what it is that you need to know.
Gardner: Yeah. And so, for each of these, I remember from the book, you're describing how you can't measure 100% of human capital with a few measures, or 100% of natural capital, but you've selected a few for each that capture about 80% to 90% of what you could measure, which, for most of us, tells us pretty much all we need to know and gives us the right true north for us to make better decisions toward better treatment of the environment or better treatment of our employees.
Jakub: That's a very good point, David, because very often, we run into this with our own team when we're working with academics, they want 99.9% absolute certainty. In businesses, people are making decisions based on their intuition or their experience, very often without a true understanding of what the data is telling you. So if we can capture 80% of what a particular social human or natural capital space looks like, that is a lot of very solid information to go on to make better business decisions.
Gardner: Thank you, Jay. Let's turn next to what I think of is my favorite here, which was social capital, something that I think we could do a better job with at The Motley Fool, and I want to start measuring it better. So you mentioned trust as a prominent part of it. I know there are three primary measures here. Could you just summarize them briefly? How can we measure the social capital that we're creating as enterprises?
Jakub: Yes, that's also a good question. And actually, when we started off, we knew that if the measurement technique we were going to use was going to be useful for businesses, it was going to have to be quantitative in nature. So we'd really have to rely on a survey instrument that was calibrated for the cultural norms of whatever community it was that we were trying to measure social capital in. And that's something that's really challenging, which is why we knew that we need this as a starting place, and the research on this, we have to look at qualitative research techniques.
Now, qualitative research techniques, you would be using sociologists and anthropologists. They might be sitting in a village in Papua New Guinea, watching coffee farmers for seven years before they could really tell you what social capital looks like and describe it. So what we did was, we brought in the anthropologists and sociologists to constantly challenge the development economists that were working with us on the accuracy of the survey instrument. We were fortunate, because we discovered through our research that the World Bank, in the late 1990s actually had tried to crack this with a survey instrument, and they created something that was quite a nice shell for us to start with, that we've significantly improved upon and we've modified to use for our purposes in making it more and more relevant to the context that we're facing.
But basically what we came out with, as we developed this survey instrument started to test it, was a methodology where we would actually calibrate the survey instrument to make sure that we were asking the questions in the right way to get the kind of answers that would help us understand social capital in a consistent way. Because sometimes, you know, you could be in a place like Papua New Guinea, which was the first place we did social capital experimentation, and there's something, like, 900 languages, and there's not one word that equates to "trust" in those languages, because of the peculiar cultural makeup of that society. So we really needed help in the beginning to bring in that kind of expertise on the qualitative side to help us understand the nuances of how to interpret data and also how to ask questions.
So to make a long story short, once we administered the survey among subsets of populations and communities that we wanted to survey, we looked at that data, and we were able to discover that actually trust, social cohesiveness in the community, and the capacity of that community to work collectively toward a common good were the three variables among the, say, 60 or 70 that existed, that always showed up in every experiment that we ran, as together accounting for about 75% to 80% of what the social capital space looked like. This was an enormous breakthrough, because something that looked impossibly complex before we started, where maybe you would get 8 to 12 variables that would describe social capital in one context and then maybe another different 8 to 12 variables in another context, how could you compare apples to oranges? You can't use it in business. But we consistently discovered that only those three variables were sufficient for us to understand and dissect the social capital space.
Gardner: Well, that's great. I will point out apples and oranges are both fruits, so we can find these commonalities, and that's basically what you did with social capital, Jay, so. And I'm fascinated by that, and I do want to mention an example, I'm thinking of my own company, because it's 20 years ago this month. Regulation FD, Fair Disclosure, was passed by the SEC, which basically mandated that Wall Street firms could not be given special information that the public, individual investors like you and me, would not be privy to; fair disclosure, everybody gets the same information. And that was spurred in small really by a Motley Fool write-in campaign, and the Chairman of the SEC at the time, Arthur Levitt, came to our offices the next day. He was excited because he had gotten it passed, and he credited, he said, something like 5,500 letters were sent in to the SEC, and the majority of them were people who came from The Motley Fool. So I think about that as an early example of social capital, where we spurred our community toward productive cooperation toward a good. So I think back proudly on that, 20 years ago this month. But you probably can never do enough of that as an enterprise; more is good.
Jakub: That's a great example.
Gardner: All right. And that brings us then to natural capital. You mentioned earlier, Jay, by focusing on the inputs, things like water and is it being used well or not, and what about soil degradation or plastic bottles, you're looking at the inputs not the outputs, which I thought was pretty brilliant, because if you try to measure outputs, it's so complex, there are so many factors, including time, it becomes too hard probably to isolate down, to figure out where did that carbon footprint come from. But instead, if you look at how do we treat the air up front, if we just look -- and I know you focus the book on a single sachet of coffee coming maybe from Colombia to the U.K., to a consumer in the U.K., and you look at the inputs and you encourage us as businesspeople to look at the inputs and score our natural capital.
Jakub: Yes. Natural capital really is divided into two schools of thought, David. And the majority of companies, maybe all of them, actually tend to take this output approach. But we've spent a lot of time working with our partners at the Wuppertal Institute in Germany, which have really pioneered this work on the inputs approach, which we think is a very practical way in which you can start to apply metrics to give you tools and techniques on the input side, what accounts for the vast majority of natural resources that go into the manufacture of anything, from a Mars Bar to a bag of rice and to an automobile, that we really discovered with the Wuppertal Institute, and published on this topic as well, that they are really five core metrics that account for about 80% or more of the natural capital space. And these are abiotic materials, biotic materials, soil erosion, as you mentioned, air, and water use. And not all of these metrics are actually actionable in every business activity, but the ones that are, actually can be very, very useful in helping managers understand what their options are to manage a more resource-efficient outcome.
So the example that you mentioned from the book was an early experiment we did in the space, but it was very simple and it gave us some great insights into how this can be useful to managers going forward. Basically, we were selling, at that time, we had a business segment that was a coffee segment, it's called the Mars Drink segment, and its flagship product really was a single-serve gourmet coffee machine. So we discovered, as we started to dig deeply into the value chain of one cup of single-serve gourmet coffee going through one of our machines, we actually discovered, through fairly rudimentary techniques of data analysis, that there was only one part of the value chain, and it was the single-serve pack of gourmet coffee that was made out of aluminum foil, and it was non-biodegradable, that was accounting for about 80% of the abiotic metric on the input side.
And so simply by discovering that and then by being able to point our business leaders to a technology that existed that actually could create a biodegradable pack that could withstand the high heat of a single-serve gourmet coffee system, we can address almost all of one of the metrics and really mitigate the footprint of that activity and make it more efficient.
So another way that we looked at natural capital use, David, as well -- and you and I have discussed this previously -- is that we just take a -- let's stick with coffee as an example. So coffee, as you're growing it out on a coffee plantation, it needs to be close to a lot of water, because it uses a lot of water. And one of the uses of the water in coffee harvesting is after you've harvested the beans, you lay them out to dry and then you extract water, so you extract natural capital from the local river, and you use it to wash the beans. And the reason you're washing the beans is to get all the acidity off of it. And then this massive amount of acidity pollutes the water that you then dump right back into the water table. So that makes you a net user of natural capital, and you're actually damaging that ecosystem.
And because we discovered that there's a relationship between these nonfinancial forms of value and one another and then between them and the release of financial capital, you're actually a drag on your financial capital, but you don't realize that, by damaging the water. And you're probably also making the well-being of people go down, so you're probably damaging the human capital. And in the community, maybe you're less trusted, because you're polluting their water as you're doing this.
So it's really important to know these things. So we've tried to incorporate this into the concept of a mutual profit in the management accounts, in the P&L. But once we were able to get an understanding of what we were doing to the water in a particular environment, as a hypothetical way in which we can address this through the Economics of Mutuality natural capital approach would be, for example, we discovered that there was a piece of technology that has a dual use, and the dual use is that it can create ethanol in the off season when you're not washing the beans with this water, and it can be used as a water filtration system to take the polluted water that's come off of the beans and clean it and actually dump cleaner water into the local resource, so you go from being a net user of natural capital to a net provider of natural capital, which has an impact across your different forms of capital.
Gardner: So even better water then came out of the river goes back in, and ethanol helps get created as well. That's probably the one that really jumped out to me in terms of an example that's so persuasive to me that, yeah, if you're not measuring what you're doing to that river, and you're just counting your profits, you look like a hero, until you start to account for all of the effects of the systems that are inside our businesses. And once you do that, you see, you know, there's an opportunity to do it even better, put better water back in the river and help create ethanol while we create more trust and certainly good PR for good reasons for our profitable enterprise. So love that example, Jay.
And I think I'm now going to go to the biggest aha! for me in your entire book, and you and I have talked about it offline. So I know you think I'm right to think that this is the big message from the book. Any gain in one form of these four types of capital helps the other three. It's not a world of trade-offs. So paying more attention to your employees helps your bottom line, your financial capital. Doing good for the environment helps your bottom line, it helps your human capital, because it pleases your employees, it says something great to your customers, who trust you more. So I think a lot of us assume that, you know, you're going to have to lose to win for the environment, you're going to lose some money to win for the environment, these are all trade-offs, but in fact, a gain in any one of these forms of capital lifts the other three. Jay, this is a powerful insight. I sure hope you're right, and you're telling me you are.
Jakub: Yeah. I mean, the first thing to really keep in mind, David, is that these are forms of capital, and they have value; human, social, and natural capital. Companies create human, social, and natural capital. They destroy it. And they could leverage it for the advantage of their stakeholders and their shareholders if they simply had the metrics and the management practices to mobilize these forms of capital.
So one of the biggest discoveries we found when we started the research side of this work early on, we started really in early 2007 on this. We were able to crack, as I said earlier, how to measure with robustness and simplicity and uniformity these nonfinancial forms of values, so that helped us quite a bit. But the bigger breakthrough was when we discovered a correlation, a very strong correlation between growing the nonfinancial forms of capital and releasing greater economic performance that then translates into financial capital. And why that was so important, and actually we are just completing now, what's called a randomized control trial, which is a very extensive, kind of, research technique with our Oxford University partners in one of the first businesses we set up using Economics of Mutuality to prove the causality. And we're finding lots of indications that we can actually prove aspects of the causality between these forms of capital and the release of financial capital.
So you can go into an environment where there's very low amounts of financial capital, almost invisible, like a slum area, for example, or you could go into a place that has a really damaged environment with limited natural resources, you could go into places that have low trust and social cohesiveness and capacity to work collectively, social capital, or even low human capital. And you can start to create interventions with your stakeholder partners to grow the social, human or natural capital. And what you will see, because we see this in the businesses we apply it to, is you see a healthier business ecosystem where obstacles start to get removed, to entrepreneurialism, and entrepreneurialism starts to flourish, and that releases financial capital. So suddenly you find your business to be of a higher level of performance holistically, but also financially. So in some of the businesses we started off with in this work, we've actually been able to provide 2X the retained earnings in the end, by not trying to [laughs] maximize our shareholder return, but simply by trying to reposition the business activity and solving the problems of the stakeholders within the business ecosystem of that business activity, rather than just try to extract as much value from the stakeholder as we can for ourselves. And we, kind of, supercharged that ecosystem and released financial value.
Gardner: Well, we're not going to have time for this full story for this interview, I definitely want the one minuter from you, but of course, a big part of your book was the case study in Kenya. And you called it maua, which is Swahili, as I recall, for flower or blossom. And through your Mars Wrigley gum, it's the Wrigley gum division, you began to go to some of the poorest of the poor areas of Kenya and galvanize, by building trust with people on bikes who could sell directly to consumers or to kiosks, people who were not part of the system before, who would have been cynical about this multinational corporation coming in with its product, all of a sudden, they're not just contributing to all forms of capital for that company, but they themselves are being lifted out of poverty. So it's a great story. We can't do it justice here, but that's in part why I love to do Authors in August, because a lot of people are hearing me right now, and should and will read that chapter in your book. But do you want to give one more minute on maua?
Jakub: Sure. I mean, it's a funny story, because once we knew how to use these nonfinancial forms of value as key performance indicators, that it would actually drive performance. To build them into the incentive system of business activities, the president of our Wrigley segment at that time, he said, OK, I love what you're doing, I love the idea. So now go and show me how it works, you know, set up a business. And I know it's a social business, so it doesn't have to necessarily be profitable, but to try to break even. So he sent us to East Africa, we started working in East Africa. And the Wrigley team there said, you know, we love what you're saying and it's exciting, but we don't want you to break our business. So we said, where can we operate? And they said, well, operate in the one place that we can't operate, and probably never will, which were the biggest slums in all of Africa happen to be outside of Nairobi, Kenya, and also some impoverished rural areas. So that's where we started, and we really had to take a different kind of approach.
So we started, first of all, by creating key performance indicators around human and social capital rather than sales and retained earnings, which we all track -- we track those things from a baseline, then we realized we needed nontraditional types of partners, we needed partners in these impoverished communities that actually had social capital, they had the trust of these communities. A Western multinational did not have that trust. So we had to partner with microfinance entities; we partnered with a big church that was there, because they had a lot of parishioners that came from these slums, they made great microentrepreneurs; an NGO that was trying to uplift impoverished single mothers from the streets.
And we were able to teach the business leaders, but also the citizen-sector organization partners, that it was really mutual for us to partner together to solve the problems of that ecosystem, to create conditions for entrepreneurialism to flourish and then to track what happened. And it created a very high-performing business model, that we're now, through the Mars Wrigley segment, are actually scaling up around the world.
Gardner: And let's talk about that next, Jay, because that is, in many ways, the case study or the proof positive of your Economics of Mutuality framework. I know you had a big day earlier this week. Could you describe how Monday this week was different from last Monday?
Jakub: Monday was the first day of the rest of my life, as they say. So for many years we've been talking to Mars about actually taking this iconic think tank inside Mars, that's been around for more than 50 years, outside of the company. And actually building it around the concept of the Economics of Mutuality as being a nonrival good, which, as you know in business, is that Mars, looking at Economics of Mutuality, is a nonrival good, would mean that you get more value from sharing it with others and going on that kind of journey of co-creation and discovery, than you would by creating all intellectual property around it.
So what the Mars family has done, and the Mars businesses, they've created an Economics of Mutuality Foundation in Geneva, Switzerland, that actually owns, in a hybrid way, a for-profit Economics of Mutuality solutions consultancy. And this entity is entirely independent of Mars and has to function in very different types of ways to meet the Swiss requirements and tax laws to be able to do something exciting like this.
And now we have the capability, through the foundation and the solutions business, to take what we've learned to other companies, other multinational corporations, to partner with academic institutions even beyond what we're doing now with Oxford and a number of other leading business schools, so that we can start introducing the curriculum around Economics of Mutuality and really build the learning database for this and share it.
Gardner: And I know some of us are listening to you excited by some of these insights, Jay, might want to reach out to you. What's the best way, if I'm hearing you right now and I want to start to incorporate the Economics of Mutuality maybe in my own enterprise, who do I talk to?
Jakub: Well, you reach out to me, but you can reach out, really, first through our website, which is Economics of Mutuality, the letters EOM is what it stands for. So the website is EOM.org, and that's very easy to understand. And really, you can submit a request there and get in touch with us and we can take it from there.
Gardner: I want to change gears briefly. Now, a lot of us, my regular listeners know Conscious Capitalism, and anybody can google that and read some more about the four foundations of Conscious Capitalism. Jay, the first way that I got to meet you and see you speak, was at a Conscious Capitalism conference. Can you give a brief compare/contrast between EOM, the Economics of Mutuality, and Conscious Capitalism?
Jakub: Well, Conscious Capitalism actually is a movement that's been around for a while, as you know; and I know that you're very heavily invested in it. I think that I didn't realize when I met the Conscious Capitalism folks and they took an interest in the Economics of Mutuality business model innovation that Mars actually was a member of the Conscious Capitalism movement. See we're very decentralized, so we don't always talk to each other. But here I was giving a keynote talk at that conference that you're at for Conscious Capitalism and representing Mars and not realizing we were a member.
But we actually found a lot of commonality in terms of the "why," so why is it that business needs to change, and what are the values that actually are driving those conversations? We were very well-aligned in that area. But where I think we had something that could be useful to the Conscious Capitalism movement was more in the area of how you do it. And so, we started to share as much as we could with Conscious Capitalism as we went forward. As a member it was easier to do that, because we also wanted to create some ownership of how you do it in practical application.
From day one, David, when we started this work, we realized that this has to be very, very practical, it can't be anything that looks philanthropic in nature, and we have to start to show results as quickly as we can. So I think working away in this, not secretive, but maybe discreet culture of Mars gave us a number of years of head start on doing the how piece.
Gardner: Thank you for that, Jay. Yeah. And a fellow member of the Washington, DC, chapter of Conscious Capitalism is my friend Dan Simons, and listeners will recognize Dan from just a few weeks ago, when he participated in our Uncomfortable Conversation. Dan overseas, helped co-found the Farmers Restaurant Group. And I just thought, part of your book, in Completing Capitalism, Jay, you're talking about, at one point, the supply chain for farmers versus, let's say, oil companies. You point out a big difference, which is that the oil companies, at the point of extraction, like, where the hard work happens, a lot of that money is earned by the company, whereas at the point of extraction for farm goods, farmers don't typically participate in as much of the value of what they're doing, so it ends up being Starbucks makes a lot more money off coffee than the farmer, for example. And I like Starbucks too, but it's an interesting contrast you mentioned in the book.
I was wondering if you knew what Farmers Restaurant Group did, because I think it's pretty cool. Dan, as he told me the story of his coming, the North Dakota Farmers Union which has +50,000 members, and he went and met with them with his co-founder, Michael Vucurevich, and they basically gave Farmers Restaurant Group, not just a deal to sell all their produce to Washington, DC, restaurants, but to actually own, in majority, Farmers Restaurant Group. So I thought it was kind of a beautiful example of Conscious Capitalism, where you start to share the value with the farmers themselves.
At one point in the book, Jay, either you or Bruno writes this, that farmers tend to be interested in the remuneration of their work, but not as much in a value-sharing type of proposition. You say this likely affects their behavior in ways we do not yet fully appreciate. Well, Dan, anyway, wanted to let you know that that's not always the case from his perspective, that in fact, farmers do want more value than that. And Farmers Restaurant Group is kind of a good example of the new model.
Jakub: No, I'm glad you raised that, and they're an impressive group, David. But you also reminded me, actually, when you started to quote from the book, of a piece of Economics of Mutuality that we didn't discuss. I can just spend a minute on it, if you don't mind, which is actually, what we call shared financial capital. So I think what you were alluding to when you used the energy sector versus the agricultural sector was, really, we decided to take a look at financial capital first, even before we started looking at human, social and natural capital. And the reason we wanted to do this is because we were looking at the supply chains in the coffee business of Mars that had to do with this drink segment. And we realized that, in cocoa, which is an iconic aspect of Mars' business. Cocoa, there's very limited places where you could get a supply of cocoa. So we have very limited options on where we could work, but actually in the drinks business, on coffee, we were a smaller player. So we could actually source coffee from wherever we wanted.
So what we wanted to do was give the leadership of the drinks segment some idea of what the distribution of value was, how it was shared across the value chain, from the farmer through the manufacturer in the middle, then the distributor, all the way to the consumer at the end. So from soup to nuts, basically, how value is distributed.
We adjusted that for what's called purchasing power parity, because the dollar is worth a different amount depending on where you are, and what kind of context that you're working in. We also made adjustments for the kind of risk that each member of the value chain would actually -- risk in investment in that activity. And what came out of this, very briefly, was just a curve of distribution that showed that the farmer was actually -- the steeper the curve of distribution, the worse off the value distribution was, the less equitable it was. And so it made the supply chain more unstable if the farmers were getting so little and the manufacturers were getting so much, or the distributors were getting even so much more than the manufacturer, there was a problem there. And that supply chain was probably unstable.
And so we offer the business, through a quick analysis like that, some options on what they could do, they could either take the management decision to create interventions to slightly flatten that curve, to make it a bit more equitable in terms of how value was distributed, to make it more stable and resilient, or they could just go and find another curve of distribution from a different supply source that looked better, that would give them a better opportunity to do that. So that's a part of Economics of Mutuality as well, that's embedded in this.
Gardner: Well, and maybe leave it to Mars, a company that's so long-term-minded to realize that its supply chains are critical to doing well. So the classic "squeeze your supplier to boost your financial profit," not a great idea. It is funny that we didn't talk too much about financial capital, that is the fourth type, [laughs] but of course, our focus this week has been on the other three, because I think that's the eye-opener for a lot of us.
Well, time is running out fast, Jay. I have maybe three quick questions to close with. The first is, maybe about the nature of multinational corporations versus government. So I think a lot of people, seem to me, increasingly disaffected in terms of thinking about their political leaders, there are a lot of questionable [laughs] political leaders worldwide, there's a lot of "I'm dissatisfied with Congress," this kind of a thing.
On the other hand, we're seeing the growth of multinational corporations. And traditionally, people don't like those usually. They're like, we don't like the big fat-cat corporations coming in here, but at least for me, some of my best stock picks, some of my favorite companies, companies that I buy happily from, like, Amazon, these companies are really powerful on their own.
Jay, at one point you quote, maybe you can update the numbers, of the world's largest economies, how many of them are not countries but corporations?
Jakub: I think the last time I looked at those numbers, David, was late in 2019, and it was at least 67, maybe 69, of the 100 largest economies of the world were actually multinational corporations. So if you go back to Milton Friedman and his financial capitalism approach, which is really about the sole social responsibility of a business being to maximize shareholder returns, that's the sole social responsibility of business. How could that be true when corporations are larger than nation-states in terms of the size and impact of their economies?
And because of globalization, they're the only entities that really have the ability to address meaningfully the biggest challenges of society and the environment that we're facing today. So they've got to step up to the plate. And Economics of Mutuality gives them the ability to do that in a way that's scalable and makes them even more resilient and profitable as they go forward.
Gardner: In fact, right near the end of the book, you say, the true purpose of what might be considered a great company in the future is not just to make money for shareholders alone, "it's more about how they can thoughtfully and intentionally consider what social problems they can solve by leveraging the power of their enterprise for this purpose."
And this is a commonplace, not just true of your book, but it's still insightful, I think, for a lot of us to remember that multinational corporations can go across any boundaries. They are not sovereign states limited to certain parts of the world. That's part of the power of business, it can span all borders.
Jakub: So one thing I just want to leave you with, David, and your listeners, is that, and maybe this is a bit provocative, but I think you'll find some truth in it, which is that the purpose of business is not to create profit, the purpose of business is to create profitable solutions to the problems of people and planet; not to profit by creating problems for people and planet. I think that's absolutely central to what it is that we're doing here.
Gardner: We should double-underline that in the transcribed version of this. Jay, before I let you go, I have to ask you as well about COVID. Now, COVID-19 has shown up since you published Completing Capitalism and there are points in the book in which you wonder aloud whether the system is going to buckle back upon itself or whether the whole thing needs to be thrown out and rethought. Do you see COVID playing a role in that now? Is this part of your view of the future, as you published the book in 2017, or is this a black swan for you too?
Jakub: Well, I think that we said in the book, we said quite a lot in the book, actually, about how the rules of the game of the global economy, which is now a knowledge economy, it's not a services or financial economy, have changed dramatically, along with the quantities of financial capital there in the system vis-a-vis what is needed for social, human, and natural capital. So we have a real dysfunction here where businesses are not moving fast enough to evolve their model, to create a more complete form of capitalism so that they can actually operate in the new context that we find ourselves in.
And I think Bruno and I had talked in the book a lot about a -- not a black swan event, per se, but there being an externality, something that could be a shock, maybe it would be a run on the banks in a country like Spain, that then was a contagion, or it might be a move to invade a country somewhere. We didn't know what that external shock would be. We certainly didn't think that it would be, or didn't predict that it would be a global pandemic. But we did predict that it would be an externality that would be global in nature, and it would actually tip the scales and force companies into a situation where if they wanted to survive -- and not just to thrive, but also to survive -- they really needed to adjust their models to account for the forms of value, these other forms of capital, that their current models don't allow them to manage in any way or to mobilize in any way, because they don't know how to do it, they don't have the metrics, they don't have the management practices.
So I think this COVID event, you know, you could call it a black swan, because nobody expected it to be so widespread and damaging to the economy, but it was going to happen, it was inevitable. And it just pushed us closer to the brink of having to do this right now and really not having a choice in the matter. We've got to change our models, we have to become more inclusive businesses, we have to expand our definition of performance to include nonfinancial forms of capital. And we don't have to trade anything to do that, because it also delivers financial capital, we found out.
Gardner: And it's a brilliant insight, and indeed it's an encouraging insight, during this time of a lot of questions about systems, whether it's systemic injustice or the system of capitalism and how to do it better. Certainly, those of us who love Conscious Capitalism, those of us who were publishing books about Economics of Mutuality years ago, I think, have foreseen what we need to do next. So I'm excited and enticed by that.
Last question for you, Jay. I love the analogy that you and Bruno have right at the end of the book, in the section entitled "The Responsibility of Knowledge," you talk about a progression in business consciousness with analogy toward astrology to astronomy. Can you just repaint that picture for my listeners as we conclude?
Jakub: Right. Well, the astrology-to-astronomy thing is Bruno's. So I don't think I can go into that too much in depth. But I think what he was talking about is moving from a situation where we're doing a lot of guessing and there maybe is a lot of superstition and just assumptions about the way things are to actually moving into something that is more scientifically provable.
And you know, when we talk about purpose, for example, when we start work on the Economics of Mutuality, the very first thing we have to do is convince the business leader that it's not the firm and its profit that's at the center of its business ecosystem, with the stakeholders on the outside, it's actually the sense of shared purpose that brings those stakeholders together that's important, and the firm is just one of many stakeholders.
Well, that's a Copernican revolution, if you want to go back to astronomy [laughs] and astrology. You know, if you remember, Copernicus was the one that said it was the sun that was at the center of the universe, not the earth, and then suddenly all the math made sense, and everything else made sense. And that's the way we see putting purpose into practice as strategy through this Economics of Mutuality going forward.
Gardner: Well, Jay Jakub, you've been very gracious with your insights. Thank you for sharing all of them this week on Rule Breaker Investing. We wish you the best in your new journey, an entrepreneur, if you will, a business consultant from academia now out there in the marketplace with a great system to help the marketplace. So we wish you the best with Economics of Mutuality.
Jakub: Thank you, David; it's been a privilege.
Gardner: Well, I hope you enjoyed that interview, I hope you learned as much as I did. I certainly recommend reading the book Completing Capitalism in full. It's a pretty quick read, very appropriate for August, very au courant with a lot of what's happening in our world today.
You know, right at the end, as you heard me, I asked Jay about that transition from astrology to astronomy. And he said, well, [laughs] that was Bruno's section. And as somebody has co-authored a bunch of books with his brother, I certainly understand that one guy takes one section and another takes another, but that section was called "The Responsibility of Knowledge." And one of the points made is simply that, once you do find out something, once you do know the truth, you have a responsibility to share that knowledge.
And as I think back on last week's mailbag, what was the title of last week's episode? It was called The Knowledge. And I think a lot of you, who were listening last week will know exactly what I mean, when I say that, when we get knowledge, we have a real responsibility at that point to share it and to improve the world around us.
Well, thank you again for joining me this week. A reminder again, Jeremy Brown, the author of the book, Influenza: The Hundred-Year Hunt to Cure the Deadliest Disease in History. And even as bad as COVID-19 is, I don't think it's going to get anywhere close to the Spanish flu of 1918. Jeremy Brown with both a historical perspective, but of course, as the Director of the Office of Emergency Care Research at NIH, the National Institute of Health, he will have some great insights about where we are with COVID in our world now.
So please join me and Jeremy next week. In the meantime, have a great week, and Fool on!
