How to go beyond shareholder primacy in good conscience

Corporations should apply evidence to measure their social impact

By Maryanne Hancock

In August, the Business Roundtable, an association of chief executives from US companies, officially shed Milton Friedman’s“shareholder primacy” doctrine — the notion that the sole purpose of an enterprise is to maximise financial returns — and embraced the belief that corporations can, and should, play a role in addressing global challenges. Sceptics understandably question whether it is possible for investors and companies to purposefully act in a way that makes a meaningful dent in the social and environmental challenges we face. The list of challenges is long. The difficulties in addressing them are real.

But the answer to the sceptics’ question is yes.

The solutions can be wide-ranging, stretching across industries and markets. We have seen first-hand the impact businesses can have: whether it is driving the implementation of new teaching methods for students in Fort Wayne, delivering desperately needed medical supplies in Rwanda, or reducing household electricity demand in Kansas City with smart thermostats.

We have the tools and capabilities required to make a difference. The key lies in applying evidence so we can effectively link financial decisions to positive social impacts.

In pursuit of this goal, there are a few simple rules that can guide us.

Harness evidence, do not rely on intuition

The best business leaders have an intuitive sense of what works, but they support their intuition with hard data and rigorous quantitative analysis.

As recognized in this year’s Nobel Prize in Economics, the need for this rigour is just as important when thinking about social impact.

For example, the potential of microcredit once captivated the world. It was thought to be a “silver bullet” in the fight to eliminate absolute poverty.

Microcredit lends itself to compelling narratives: some people who were once extremely poor took our microcredit loans and now they are no longer poor. Some even run thriving businesses. In retrospect, access to credit seems to have played an important role in their journey out of poverty.

But is microcredit actually a broadly effective tool for eliminating poverty?

When studied carefully, in locations from Morocco to India, from Mongolia to Mexico, the best evidence we have says that the average net effect is relatively small — sometimes positive, sometimes negative — for a host of reasons.

There is more to this story, with focused entrepreneurs finding solutions with real impact. However, it is a cautionary flag that reminds us that intuition is no substitute for evidence.

Impact is not binary

Imagine asking how your pension plan was performing and the manager responding curtly: “It is up.”

“That’s great. How much?” you reply.

“Don’t worry about it,” the manager assures you, “all you need to know is that it’s up.”

You would not manage your retirement account with qualitative scoring and you should not measure impact that way.

Suppose you care about improving children’s education in Kenya. You study the situation carefully and find that two significant impediments to education are the cost of uniforms and poor health.

Evidence shows that funding free school uniforms and providing deworming medicine to rural school kids both increase academic achievement.

To decide which to support you want to know the effectiveness of each.

Answer: you can generate one extra year of classroom time in Kenya by investing about $1,100 to support free school uniforms. The same amount invested in deworming medicine will generate an additional 132 years of schooling. Both work. One works better.

Measure to improve

Careful measurement enables much more than score keeping. It helps direct our efforts to where we can actually make a positive change.

Take the story of microcredit above: on average, it doesn’t seem to do very much. If that is where our knowledge ended, we would move on a bit wiser but also a bit sadder.

Fortunately, it doesn’t stop there. Digging deeper into the data, microcredit does have significant positive effects for a particular type of borrower.

For those who already have a small business and are keen to make it grow, access to a microloan is often transformative.

This specific effect can get lost when those owners are averaged with all the others for whom microloans are more of a mixed bag.

Measurement empowers us to do better. In this example, first, target those potential borrowers that will really benefit from traditional microloans.

Second, for all the rest, figure out why it was not working and try something else. Maybe it is microsavings. Maybe mobile payments. Or maybe something new that an entrepreneur is building as we speak.

Try it. Build the evidence. Value the impact. And make a difference.

Maryanne Hancock is the CEO of Y Analytics, a public benefit corporation founded by TPG and the Rise Fund. This piece was originally published in the Financial Times on October 21, 2019.