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[MUSIC PLAYING] RAVI KANBUR: So let me welcome you to this faculty panel on Shareholder Value and Social Values-- Friends or Foes? By shareholder value, we mean not just narrowly defined shareholder value per se, but more generally we also mean the pursuit of private profit and the private good. And by social values, we mean a range of perspectives, including concerns about inequality and poverty, discrimination and social inclusion, and environmental degradation and so on.
Cast in these general terms, this panel, Shareholder Value and Social Values, is surely one of the central intellectual questions facing a college of business, particularly the College of Business at Cornell with its land grant mission and with its mission of knowledge with a public purpose.
So the question for us is, how is the pursuit of private profit and the private good related to, is it compatible with, is it supportive of the pursuit of social good? This is a question which all business colleges, business college students, and their teachers should be asking.
We have a great panel today to help us articulate the questions and hopefully provide some answers. We have Bob Frank from the Johnson School, who is well-known for his work questioning the rational choice premise of much of economic analysis. We have Eva Steiner from the Hotel School, who is a real estate expert but also works on and interested in the environmental dimensions of real estate development.
And we have Lynn Wooten, who is the dean of the Dyson School, who is an expert in human resource management, and of course works on-- and has worked on workforce diversity and competitive advantage among the many things that she has worked on. So we want to move on because we've lost a bit of time. So let me move straight away, then, to Bob Frank to start off this thing. I was going to say a few things, but I'll hold back, and you must know how difficult that is for me to do.
[LAUGHTER]
And Bob, over to you. And about 15 to 20 minutes, and I'll give this sort of warning.
ROBERT FRANK: OK. Thank you very much, Ravi, for inviting me to participate. I will try to speak quickly. I understand we're short of time. Let me just say by way of spoiler alert, the answer I'm going to try to defend to Ravi's question is that they are neither friends nor foes. I'm going to say that these two entities are frenemies. The private for profit firm is not nearly as much in harmony with society's interest as many free marketeers presume it to be. On the other hand, private for profit firms are capable of far more in terms of promoting society's ends than many skeptics might believe.
Milton Friedman was probably the first one to bring wide notice to the free marketeer's view that you're just flapping your gums in the breeze if you say that firms have a social responsibility. No, he said. Their responsibility is to obey the law, and beyond that, try to earn as much of a return for shareholders as the law permits. If they claim to be doing good, sure, in repeated games, maybe you do good to avoid antagonizing future transactions.
But it's not really right to call that ethical behavior. That's merely prudent behavior. And so Friedman, I think, is the clear champion of the view that we don't need to worry about this. He wasn't naive to the fact that markets didn't do everything right. He thought we needed laws to regulate pollution and monopoly and other market failures. But if you're obeying the law, that's all you need do as a CEO.
The free marketeers invoke Adam Smith. I think we do a disservice to our students if we don't teach them what a remarkable insight the invisible hand mechanism is. The wealth of the world is due almost entirely to it. Firms look for cost saving innovations and product design developments that consumers will like, and then competition drives profits down to the minimum amount necessary to cover costs. Everybody benefits in the long run.
It's a really quite remarkable mechanism, but I think many of Smith's modern defenders were unaware that he himself was far more circumspect about its power than they are. What amazed him was that you often got good results from the perspective of society as a whole when you turn firms loose to seek their gains in the market. In fact, he argued very forcefully in his 1759 book published well before The Wealth of Nations that markets can't function unless they rest on a foundation of laws and ethical norms.
Not all business practices are ethical. Martin Shkreli, the CEO of Turing Pharmaceutical company, didn't break any law when he raised the price of their anti-parasite drug from $13.50 a pill to over $750 a pill, but he did cause some deaths in the process that could have been avoided. There were no laws broken in many cases when insufficiently secured loans were sold forward during the housing bubble.
Brokerage firms were recommending that their clients buy stocks in firms that they themselves were shorting on their account. The firms break no law when they fire an employee for complaining about an activity of the firm that's completely legal but not ethical, and so on.
So the real question is, is it possible for firms to behave according to a higher ethical standard than the law requires and still remain in business? This is the standard argument. It would be nice if everybody were good, but if some are good and others aren't good, the ones who aren't good will have lower costs and they will drive the good ones out of business. So that's really the logical foundation of Friedman's view in the end.
I'm going to challenge that view. And I'll cite here the work of my intellectual hero, Tom Schelling. He pointed out in his writings that there were many goals that purely self-interested persons were not very good at achieving by virtue of the fact that they were believed to be self-interested. He talked about classic problems that I call under the broad label commitment problems.
Many economists call them pre-commitment problems and say you need pre-commitment devices in order to solve them. I think that's an odd locution. If you're going to commit to something, you can do it only in advance of the thing, so pre-commitment, in my view, is redundant. It's a commitment problem, not a pre-commitment problem. I think I've lost that rhetorical battle, but I like to throw that out from time to time.
Here's an example of a commitment problem. The pencil seller hopes to sell more pencils by having a whip in his hand. The skeptical customer reasons, soundly, why would he use a whip if we didn't buy a pencil? If he used a whip, he would spend 10 years in jail for assault. That wouldn't be a rational act for somebody to sell an extra $0.50 pencil.
OK, but we're worried here that the pencil seller might not be behaving according to the predictions of the rational choice model. The fact that he has a sign around his neck saying that he's irrational actually detracts from his ability to make that point. If he's so smart that he knows that sign helps, maybe he's pretty rational after all.
The real evidence that makes us worry he might use the whip is contained in the expression, drawn so economically by the cartoonist, that really does suggest at a glance that this man might not be playing with a full deck. Go home tonight. Try to manifest that expression in the mirror. I hope you won't be able to do it. If you're of normal mind, you surely won't be able to manifest that expression. But the beauty of the commitment device is that if the potential buyer knows he might use the whip, he won't have to use it. He gets to sell more pencils without having to incur the cost of--
So suppose we could signal to others that we were honest. Imagine a world where honest people were born into it with a birthmark on their foreheads in the form of a C, indicating "I'm of co-operative temperament." Then, such people could interact selectively with one another in these multi-person social dilemmas. They would reap the gains from co-operation.
The ones who lack a C would want to interact with them too, but why should the people with Cs interact with them? They know they'll be exploited if they interact with them. They'll be left to interact with one another. And so the Cs get the higher payoffs associated with cooperation. The people without them get the lower payoffs. And in time, the people without Cs would be driven to extinction.
We know that hasn't happened. There are many people out there, some of them holding high office, that are without scruples, and so we know that the people without Cs have not yet been driven to extinction. And a keen theoretical assessment of the forces at work suggests that they never will be driven to extinction.
How might an honest person identify himself to another honest person? If you're going to do the right thing when no one is looking, it's not because you think you'll get ahead by doing it, it's because you have some moral inhibition against doing the wrong thing or some moral inner urging to do the right thing.
This is from Darwin's 1872 book, The Expression of Emotion in Man and Animals. It's the same dog portrayed by an artist in two different situations. In the right panel, he's greeting his master. Notice that in the left panel, every element of his posture is different from in the right panel. He's preparing to do battle with another dog over a resource in the left panel. His fangs are bared. His ears are pricked forward. The hairs on his back are standing on end to make him appear larger. He's ready to spring forward. His eyes are darting about.
Each and every one of those details is serviceable in the act of doing battle for an important resource. If he had to work his way through a checklist-- let's see, are the tiny non-striated muscles that surround the hair follicles on my back constricted thereby to elevate the hairs? Yep. Fangs bared? Yep. If he went through a checklist through conscious deliberation, he would lose the battle in an instant. You have to be able to do this very quickly.
And so evolution saw to it that the emotion of arousal to do battle was hard wired to all these postural elements. And Darwin's conclusion was that it was as if we had a window into the dog's brain. We could tell by his quick manifestation of these elements that he is aroused to do battle. If you could actually measure the level of arousal and different parts of the brain, you could confirm that there was a clear link between those two.
There are also clear links between emotional states and the brain of the human and involuntary muscle configurations of the human face. So here, I'll point to one particular example, the pyramidal muscles, those of the bridge of the nose, and the corrugator muscles, those in the center of the brow.
Go home tonight and try to create this expression on your face, where the brows are elevated in the middle and you've got these ridges deeply furrowed in the middle of your brow. Unless you're feeling sad or concerned or guilty about something, you probably won't be able to do it. These muscle muscles will respond in such a way that this expression appears spontaneously when you feel those emotions.
I made that slide with no prior training in art. I can show it in any country on the globe, and people will guess roughly-- what's this person feeling? They'll come pretty close in their descriptions of the emotions that correspond. Actors can mimic these expressions. Often, they do it by summoning the memory of some vivid occasion that was associated with the actual experience of that emotion.
But not many people can do that, and even the most gifted actors can't respond to cues that come at them in real time. So if you're on a hike and you stub your toe and you're hiking companion manifest that expression, you can feel reasonably confident that she feels sympathy for your pain at that moment. If she doesn't manifest that expression, you might want to rethink the nature of your relationship with her.
This slide didn't reproduce very well, but it's a boy accompanying his dog to the vet. At the moment the shot was snapped, the vet was plunging a syringe into the dog's shoulder. It turns out that the dogs feel no pain when the vets do that. They don't seem to mind getting a syringe. But the boy who can't see the expression on the dog's face thinks that his dog is in pain, and he is experiencing the dog's pain vicariously.
Does anyone think that he's pretending to experience the dog's pain vicariously? He is communicating credibly to us that he feels sympathy for his dog's interests. That's the key emotion in this argument. Why don't you cheat your trading partner when you could with no probability of detection? Because you feel sympathy for the interests of your trading partner.
Here's a thought experiment. If you don't think you can identify this quality in other people, try this. You've just gotten home from a crowded concert. You discover you've lost a $10,000 bundle of cash in an envelope with your name and address on it. You were getting ready to buy a car the next morning. The seller wanted cash. You get home. The envelope's not in your pocket. You just remember that sound that must have been the envelope falling from your pocket as you left the concert.
Can you think of anyone not related to you by blood or marriage who you feel certain would return your cash if he or she found it? Most people say, yeah, I can think of several people I would feel-- whether you're right or wrong, most people say they-- If you don't think you know somebody who would return your cash in this situation, you might want to rethink how you've set up your social arrangements in your life. The normal human being has relationships with people that would lead him or her to think that there are many people in his circle of acquaintance who would return the cash.
How do you know this person would return the cash? Well, you just feel you can make a reasonable enough assessment of how she would feel if she didn't return your-- she wouldn't even think of not returning it probably, but if she did think, she would feel terrible and therefore not be motivated to do it.
This slide here is a slide like I urged my graduate students never to include in a presentation. And yet day in and day out, they go out and give presentations with 10 bullet points that they just read off. Don't even look at these. I'll tell you that on this slide are five different ways that people who are motivated to do the right thing might be able to organize firms that would compete successfully with firms that were more opportunistic in their approach to things.
I'll focus on only one avenue because it's the most important. There are compensating differentials for all sorts of conditions in the workplace. Economists have long known that if a job is unpleasant, you have to pay people more to get them to do it. Well, one thing that's unpleasant about a job is causing harm to other people. If you're a normal human being, you don't like to do that. Martin Shkreli seemed to have very weak inhibitions about doing that, but most people don't want to do that and are willing to take a pay cut for a job that doesn't require that of them.
I'll tell you only about one example. There were 10 different pairs of jobs that we surveyed seniors at Cornell about in an experiment. So one pair-- and the only one I'll describe specifically was to ask them to imagine that they were planning to pursue a career in advertising. They had two job offers. One, they could write copy for the American Cancer Society urging teens not to smoke. Same office, same salary, same chances for travel and advancement as if they took the other job, which was to write ad copy for RJR in a campaign urging teens to smoke camels.
Which would you take? Well, 90% of the students said they would take the American Cancer Society job if the pay were the same. The next question was, how much extra would they have to pay you in order to get you to switch? And it was a greater than 50% pay premium in this sample.
You could say, cheap talk. I mention this just in passing. There are volumes of data suggesting that one of the biggest compensating wage differences we see in the labor market is for this particular trait. The biggest differences, bigger the noise, bigger than safety, bigger than most other conditions are compensating differentials for a job that lets you say at the end of the day, I feel pretty good about what I did today. Employees can be recruited on much more favorable terms if a firm enables them to say that on the way out the door.
I'll close by reminding you that all isn't as well as we might hope it to be. In an environment where everybody was honest, nobody would ever install security cameras in a home or a burglar alarm. That expense would be a waste if nobody-- if there'd never been a burglar in the last 100 years, why would you spend thousands of dollars on a security system? If everybody's honest, no one's vigilant.
That's an environment where a dishonest person could succeed with certainty because nobody's looking out for the possibility of being cheated. And so any stable equilibrium we know has to contain a mixed population, some opportunists, some honest people. The Milton Friedman view of the world says we can expect a population consisting only of opportunists, those who will push the law to the limit in every single case.
So it's glass half full, glass half empty. You take your pick how you want to view this. I think it's basically a more optimistic vision of the world than my home discipline presents on average, but many people hope for more than this. I don't think we can realistically hope for too much more. We need laws. We need enforcement. We need to be vigilant. The world will always be vulnerable. But we can hope that people will do better than what the law allows. Thank you.
[APPLAUSE]
EVA STEINER: All right. Well, thank you very much for the opportunity to speak as part of this faculty panel on Shareholder Value and Social Values-- Friends or Foes? My name is Eva Steiner, and I'm an assistant professor of real estate at the School of Hotel Administration. Now, given my background, I would like to contribute to our discussion on the tensions and complementarities between shareholder value and social values from the perspective of the built environment.
In particular, I'm going to interpret shareholder value as the profit objective of real estate investors, and I'm going to focus on environmental sustainability within the built environment as an increasingly important social value. I'm going to argue that in real estate, those two might be more compatible than we may think, but I'm going to end by highlighting some of the challenges that we still face in this respect.
So let me begin with the environmental perspective. Why do we care about real estate in this context? Well, the behavior of the building and real estate sectors is actually very important in matters of environmental sustainability. In the US, the building sector, the built environment, accounts for about 80% of electricity consumption.
More than half of the timber that is not used as fuel goes into construction. Globally, the built environment and the associated construction activity account for about 40% of consumption of raw materials and energy. And globally, about 30% of greenhouse gases are attributable to the built environment and the associated construction activity.
As a result, there are actually a lot of influential studies that have emphasized that the built environment offers great potential for greenhouse gas abatement. And with projected trends for urban growth in developed countries and urbanization in developing nations, the issue of environmental sustainability in the built environment is only going to become more important.
So where does shareholder value come in? Where does the profit objective of investors in real estate come in? Well, energy is typically not only the single largest but also one of the most manageable operating expenses in many buildings. That means that the energy efficiency of a building directly impacts the financial bottom line of investors as well as occupiers.
For example, in a typical office building in the US, energy costs account for about 30% of all operating expenses. That means that by making buildings more environmentally sustainable, more energy efficient, we may just be able to accomplish an environmental objective, and work towards achieving a social goal, and we might also be able to benefit investors in order to help incentivize private sector investment in real capital.
So if you think about it, the environmental performance of a building is a function of its design and its operation. And in order to improve the environmental footprint of a building, we have to start by measuring that footprint. In recognition of that fact, government and industry have developed environmental certification systems for buildings. So those certification systems assess the environmental sustainability of buildings from a design standpoint and from an operations standpoint.
The push towards sustainable design began in the 1990s with the creation of BREEAM, that is, the Building Research Establishments Environmental Assessment Method, an environmental certification system for buildings created in the UK. And you can see using the examples on this slide that many other countries in the following years have followed suit and have created their own similar certification programs.
In the US, there are two dominant programs. One is the Environmental Protection Agency's Energy Star certification. So that's a public sector sponsored initiative. The second one is an initiative that originates in the private sector. It's the USGBC, the US Green Building Council's Leadership in Energy and Environmental Design certification. And I believe we actually are in a LEED platinum certified building right now.
These two programs differ. And I'm going to talk a little bit about their features to give you a flavor of how we think about the environmental sustainability of buildings. The Energy Star certification focuses on the operation of a building. So a building can qualify as Energy Star certified if it is more energy efficient than 75% of comparable buildings in this country.
Now, given that the certification is based on operations, the certification has to be renewed in five-year intervals. And Energy Star uses third party engineers and architects in order to verify the successful inclusion of energy efficiency features in the operation of the buildings that seek certification.
The LEED program is different. The LEED program was developed in the late 1990s in order to give owners and occupiers a toolkit for assessing environmental aspects in design as well as operation. And under the LEED concept, buildings can certify in different categories, ranging from location and transport to resource and raw material usage, water efficiency, energy efficiency, and others.
There are then two ways to certify under LEED. One would be based on design. So that type of certification is typically sought at the stage of developing or refurbishing a building and lasts for the lifetime of a building. The second type of certification is based on the operation of a building and has to be renewed every five years. Now for example, this program for certifying the operational efficiency of buildings under the LEED system was only launched in 2008, so that gives you an insight into how recent some of these efforts actually are.
One important question is, what are the benefits of environmentally certified buildings? So first of all, we have to wonder, is a building that is environmentally certified actually more environmentally friendly? Is it more energy efficient? Here, the core of the push towards environmental sustainability in the built environment is centered around resource usage and greenhouse gas emissions.
So the first most direct benefit that we should be able to notice from environmentally certified building activity is on the level of savings in terms of resource and energy usage. Here, the evidence suggests that environmentally certified buildings are indeed more energy efficient. In terms of savings on electricity, those are estimated to range between 20% to 40% as compared to conventional buildings. And there are also savings in terms of water usage, which can amount to up to 40% as compared to conventional buildings.
So there is some evidence that there is actually an environmental benefit to environmentally certified buildings. But what about the economic benefit? From an investor standpoint, the two most important parameters defining an investment project in real estate are the rent, which generates the ongoing income that the investor receives during the holding period, and the transaction value, so the amount of money that the building is most likely to fetch when sold.
Now, there is evidence of significant premiums in terms of rental values as well as transaction values for environmentally certified buildings. In the residential sector, transaction value premiums of up to 16% have been documented in empirical studies. And in the commercial sector, there are rental premiums ranging from 10% to 30% as compared to conventional buildings and transaction value premiums ranging from about 10% to 20% as compared to conventional buildings.
So we see that there is not only an environmental benefit to investing in environmentally certified buildings, there also seems to be an economic benefit. However, the diffusion of energy efficient building technology is painfully slow. That is a bit of a puzzle. So let me tell you where we stand. Currently, if you look at the office sector for example, about 5% of all office stock in the UK would qualify as environmentally sustainable. And these percentages are even lower for other sectors.
The construction industry is slowly moving towards adopting clean building technologies, but still progress is slow. Although about 40% of current construction in this country is earmarked as environmentally sustainable, only about 12% of construction sector jobs actually have anything to do with sustainable clean building technology.
So although we see environmental benefits and some economic benefits of environmentally sustainable buildings, the diffusion of that clean building technology is slow, and actually so is the absorption of these environmental building certifications. Here, I show you the example of LEED certifications in North America over the time period 2000 to 2016 where the maroon colored bars, so the darker bars, show you the total number of LEED projects that exist cumulatively, where you can see that in 2016 we were up to about 45,000 individual buildings in the US.
And you can see that the diffusion or the absorption of these certifications follows that typical S shape that has been documented in the adoption of new technology in economics more widely. Now, what is interesting is if you look at the red colored bars that measure the new certifications in every year, you can see that the number of new certifications actually peaked in 2013 and has declined ever since, with actually quite a low number of new certifications in 2016.
So we know about the environmental benefits of these certification schemes. We know there is some evidence of economic benefits. What is hampering progress? Well, one of the reasons is that, so far, there is actually very little systematic research to assess the marginal cost of green construction over conventional construction projects. That might lead to poor levels of information among developers, investors, and policymakers, which might hamper the diffusion of clean building technology and thereby delay the necessary mitigation of the carbon externality generated by the built environment.
There is some evidence, however, on the marginal cost of green construction. A recent study found that overall construction costs are not necessarily higher for green buildings as compared to conventional buildings, but there are some elements of the construction process that are more costly. For example, design fees for environmentally sustainable buildings can be up to 65% higher than for conventional buildings.
Design fees overall only make up about 3% of total construction costs, so you could say, maybe that shouldn't matter. However, design fees are often paid upfront and paid out of the developer's equity, so they might nonetheless play a disproportionate role in their decision making process.
Another reason why green construction may be more expensive is because-- or may not be adopted as quickly as expected is because green construction projects actually take much longer. And construction times are also more volatile than for conventional projects.
So with all of this, another interesting question is, how do real estate investment firms actually position themselves in this situation, Real estate investment firms that are acutely aware of shareholder demands and that are active in a sector that generates-- that makes a large contribution to the environmental challenge that we face? Well, here we see that real estate investment firms around the globe actually increasingly commit to sustainability goals, with some evidence of financial benefit for those firms as well.
Now, before I end, I just want to highlight that the next challenge that we face going forward is actually in an area that we might not necessarily expect, namely, it is in emerging markets. This is the area where globally construction activity is going to be concentrated over the next few decades. And it is expected that the three largest construction markets in the world, that is, the US, China, and India, are going to contribute 57% of the total growth in the construction industry globally over the time period between now and 2030.
And especially India is going to contribute about $1 trillion worth of growth in the construction engineering industry globally, meaning that, whether or not we achieve environmental sustainability in the built environment on a global scale is going to be determined largely by the practices adopted in those countries where the bulk of construction activity is going to be concentrated in the future.
So on balance, we see that there are some environmental as well as economic benefits to investing in clean construction technology. But nonetheless, some challenges remain, and those are largely concentrated in those countries where building activity is going to be largest in the future. Thank you.
[APPLAUSE]
LYNN WOOTEN: So I think I bring a unique perspective to this debate, thinking about it in two lenses. One is that my major research domain is positive organizational scholarship. And so we think about excellence and what makes organizations great instead of thinking about what makes organizations dysfunctional. But I've also thought about this topic a lot as being an educational administrator and a teacher. What do I want the next generation of leaders to think about, and how would I approach it as an educator?
So I'm going to give away my party line before I start. I really do believe that the answer is friend, that you can create shareholder value and social value and that their friends. So for the last 25 years, I've taught the core corporate strategy class. I've done curriculum redesign for several universities.
And I've often thought about-- we begin teaching our students when they enter a business school this notion of, OK, is the role of the manager really to focus on maximizing shareholders' wealth? Or is the role to think about the stakeholder perspective and a diversity of objectives? And how do you slice that pie and make that pie bigger for all stakeholders?
And so if you take any management 100 class, even if you take your first economics class, you're constantly thinking about-- as our first speaker discussed, one is-- Friedman says, the classic model is the company makes profits, and then these profits are redistributed to their shareholders. Ed Freeman, who's at the Darden School of University of Virginia, really tried to advance this debate and started to get us to think about the corporate social responsibility model.
There's the company, and the company thinks about its stakeholders. And based on the investment that it makes in the stakeholders, whether it be employees or customers or the environment, it makes a set of managerial decisions, and from there the leftover profit is distributed and earned.
And so when you're thinking about teaching them the perspective-- and even when I think about my research, I used to think about, OK, so there's the shareholder value and there's the stakeholder value. And of course, as I gave away my party line, I lean towards the stakeholder value. How do we create sustainable companies?
As leaders and managers, every day, when we think about our purpose, how do we think about all the stakeholders-- the communities we live in, our shareholders, our customers, our relationships with governments? And so it's a very multi-dimensional approach. And early on in my career, this is what guided, stakeholder value. And even, for example, my dissertation looked at stakeholders from the perspective of the firm, the customer, and the employee, and saw that firms that were able to balance all three stakeholders had a higher level of profits.
I would say maybe 15 years ago, though, I started thinking differently and even took a more radical approach, a new mindset. And the new mindset approach that I started to embrace is very much aligned with the conscious capitalism movement. Many of you may have heard this. This is by a colleague. I think Raj is at Washington University now, and he wrote this book with the CEO of Whole Foods.
And so conscious capitalism argues that even beyond corporate social responsibility, if an organization is going to create social value, and create social value and focus on profits, there are six major stakeholder groups which they focus on-- customers, employers, suppliers, investors, society, and the environment.
And when we're young in the field or young in any profession, we think of these as independent groups. But conscious capitalism argues that if a firm is going to create social value, one of the first tenets is it has to think of these as interdependent groups. So when I do good things for my customers, I make more profit. When I do good things for my customers, I'm a better employer. So this is an example interdependent.
Now realize, sometimes my friends say I have such a positive attitude they call me Mary Poppins and think I do hokey pokey kumbaya stuff. But I acknowledge that conscious capitalism-- the world is not perfect. And if we're going to create this shareholder value, we really have to think about the trade-offs between the major stakeholder groups. But the ultimate task for advancing human society, I think, is to embrace these stakeholder groups and really think about how we create a value that's a win-win-win situation.
So to be a friend, you have to have this ethos that maybe doing good is also doing well. Its profits with a purpose. So how do we move along the spectrum beyond corporate social responsibility to really being a conscious business? Similar to corporate social responsibility, my stance is that both for stakeholder oriented. But when we talk about corporate social responsibility, very often we're not talking about a higher purpose.
And so I really do believe in this particular world that capitalism and the firms that believe in it have to have a higher purpose. And this higher purpose is achieved by reconciling caring and profitability. It's all about synergies. Even my economist friend would say it's about economies of scale and scope. That's what synergies are.
Many people will argue if you take the corporate social responsibility approach, it's a PR stunt. Well, conscious capitalism is not about PR. It is a social responsibility model at the core of it, but it's a business model that embraces responsibility for the entire company. It's a genuine transformation way about how we think about doing business. It's not just doing good deeds. It's doing good deeds to advance the mission of the company.
So there are four tenets of conscious capitalism, because it doesn't automatically work. If social value, the creation of social value is going to be a friend, I'd like to argue that we have to have these four tenets. I already talked about this notion of a higher purpose. It's a strategy that has a set of values and defines and guides why the firms exist.
I mentioned stakeholder integration. And interestingly, in the book, they talk about-- if you think about the word corporation, it comes from corpus. And what does corpus mean? Corpus is a single body holistically functioning together, the way your heart, your kidney, and your brains function together. If we think about the corporation as a corpus, it entails those six integrated stakeholder groups.
And then the managerial scholar in me really advocates for-- it doesn't just happen. You need conscious leadership, and unique conscious culture and management. What does conscious leadership look like? Well, they are emotionally intelligent. These leaders invest in systems thinking so they can see the big picture and do not create the corporation as an island.
They're servant leaders in the broad sense about thinking about their job and how they want to advance society. They lead with integrity and have a caring attitude. Likewise, a conscious culture in management employs practices of trust, accountability, transparency, loyalty, and equal [INAUDIBLE].
When you think about purposeful profits, there are multiple pathways for strategies where the intersection of profit and creating social value. On one is improving the lives of others. Many of you may have seen yesterday in the news that Amazon, a health care company, and Chase JP Morgan are coming together to use their wisdom and their expertise to think about how we can reduce health care costs in this country.
A second purposeful pathway is discovering and furthering human knowledge. In no stretch of the imagination do we think of Google as this glorious company, but Google has had the purpose of advancing knowledge. Many of us in the room are so seasoned are so glad that our children and grandchildren will not have to go to that set of encyclopedias the way I did because of Google. It's advancing and furthering information and knowledge.
Other companies have thought about passion with a purpose because they've thought about excellence in the creation of beauty. I would have guessed that the majority of the people in this room have an iPhone. Apple has had a passion and a purpose for design and the beauty of what their products look like.
And then there are firms that really are thinking about the courage to do what is right and change and improve the world. So how do we do something better? And the example, of course, in the book is Whole Foods talks a lot about that. But even when I was first here, Dean Boor had the honor of scheduling an agricultural tour for me, and we went to four different companies. I'm going to talk about one in a minute. But we went to the Noble Farm and the Noble Farm is a large commercial agricultural farm here in upstate New York that's doing very well.
But in addition to their profit from agriculture is two things that stuck out to me is the way they're thinking about conscious capitalism. One is very much recycling, the environment. Their major clients include McDonald's and Chick-fil-A, where they take their waste and use it for fertilizer and recycling the environment. The other thing that stood out to me while we were on the Nobles farms is the people they hire. They are actually very intentional about hiring people who have physical and mental disabilities to come work with their firm as a way of creating value for society.
When I write about this, often I cite the research and the empirical evidence. And so one of the reasons why I can strongly say that it is a friend is because there are many streams of research that have documented this based on theory and empirical evidence. If you want to read the research on triple bottom line, the new version of corporate social responsibility or stakeholder theory, my colleague from the University of Michigan Kim Cameron has created a link between virtuous organizations and profits.
I have written extensively about high performance work cultures and how they create profits. And then there are things in ethics. And even in my husband's discipline of marketing, they're starting to write about how a customer orientation and being very purposeful and passionate can lead to profits.
If you don't want to hear the empirical theory, is there anyone in this room who hasn't been to Wegmans? Wegmans definitely exemplifies-- and in a newer book about conscious capitalism, Firms of Endearment, they're featured highly as a case study of living the talk of conscious capitalism. The book highlights its purpose-driven strategy, how it manages multiple stakeholders through an integrative perspective, and it talks about leadership of the Wegman family and the work culture that it's created. And if you've checked out a Wegmans, I think we can all attest to that they're probably making a profit from our grocery bills.
So what does that look like in performance metrics, once again, this notion of being friend? Consistently, time and time again, Wegmans is producing the results of creating social value. Excellence as an employer. It's been one of the best places to work for the last two decades. Wegmans is known for diversity, equity, and inclusion. And just as important, it invests in organizational learnings.
Last Saturday, I was there and I saw a chart that said, we're only at number 30 right now. We need to be doing better in how fast we get the customer out the checkout line. So I stopped and I talked to the manager, and we talked about the metrics and the things that the local Ithaca store was doing for organizational learning.
Likewise, their performance has paid off in the retailer set. Number one in Consumer Reports for a grocery store, a regional chain. They beat out everyone. They've even beat out Whole Foods now. Their quality, their customer service, how they manage their supply chain. And then as a community member, very focused on how they create value for society. One is education. A second one is waste recycling, reduction. Of course, there's food banks and a lot of investment in minority business development.
If you want to see the big picture about these firms of endearment who have adopted conscious capitalism, there's data in the book here that really shows these firms featured in the book have performed the S&P 500 by 14 times. They've outperformed it. They've even done better in good to great companies. And so if you look at the top orange line here-- 15 years, 10 years, 5 years, 3 years-- they're doing very well at outperforming. So you can be a friend. You can have profits and conscious capitalism.
In closing, once again I want to put on my educator hat and think about why it's so important that we embrace the friends perspective is that many of us in this room are charged with creating the next generation of leaders. And here at the Dyson School, we think a lot about conscious capitalism and social value.
There's this quote here. "The United Nations Sustainable Development Goals call for a system where inclusive growth, financial inclusion, gender equality, and above all social economic sustainability around the world are accomplished. One of the major obstacles facing this achievement of these goals are financing." This is maybe we're conscious capitalism can be a solution, where we can advance the notion of friends.
And so as we proceed to the panel, one last thought I want to give-- and maybe this can start this discussion. You can tell me this is a stupid quote or you agree with this quote, or maybe you have a powerful solution. "Capitalism is the only society in human history in which neither tradition nor conscious direction supervises the total effort of the community. It is the only society in which the future needs for the tomorrow are entirely left to an automatic system." So is that good or bad? And what does that mean for conscious capitalism and friend or foe? Do we leave this to just a automatic system? Thank you.
[APPLAUSE]
RAVI KANBUR: So let's start with questions, comments, observations from members of the audience. Yes, Ed. Ed Mabaya.
ED MABAYA: Thank you very much for a very insightful panel discussion. I think we live in an increasingly data-driven world where most decisions are being made based on metrics and most decisions are made by artificial intelligence. Computers are making these decisions for us. So in that space where you have a conflict between profits and doing good, where profits can you quantified, doing good does not always lend itself into metrics. It's not always easy to measure.
What's going to happen in a future where we have to make decisions where we're making trade-offs between doing good and making a profit where one of the is measurable, quantifiable, and the other side is not? Thank you.
RAVI KANBUR: If you want to, yes.
LYNN WOOTEN: I'll start, and I hope others can chime in for their domains-- for example, real estate. Is that we're going to have to have concrete metrics of doing good, and we're going to-- I always think of Jerry Maguire said, "Show me the money." I think we're going to have to have the line, "Show me the data." And I see a couple PhD students and students in the audience and hope that they start thinking about this as a research topic.
But you can show metrics. You can show metrics about employee well-being, your contributions to society. But similar to how we look at our stock prices in our portfolio and return on investments, we need more scorecards to document these metrics, and then we need to educate society why they're important.
Because the metrics do exist. The big data is there. No one's formalized in a lot of these dimensions, and people just don't know about it. And so when you go to a store, are you looking to see, are they a great place to work or what they contribute to the community now? The same way people look at Consumer Reports when they buy a product.
RAVI KANBUR: Lynn? Eva I mean. Sorry.
EVA STEINER: Thank you. Yeah. From a real estate perspective, actually a growing number of firms, for example in the private sector in real estate and real estate investment firms, commit to having their businesses scrutinized, either by signing up to the UN Charter on Principles of Responsible Investment or by more specific organizations, such as the Global Real Estate Sustainability Benchmark. So the number of firms that has agreed to have their businesses scrutinized by the Global Real Estate Sustainability Benchmark actually has increased substantially and now represents like trillions of dollars worth of capital.
And the objective of these organizations is precisely what you are pointing out, that is, creating and documenting and monitoring metrics that provide transparency in terms of sustainability efforts and that allow for benchmarking through time. So I think the efforts are there. Of course, it's not a solved problem, but I think in the real estate industry it's something that people are aware of. And there is demand for that kind of monitoring and analysis from an investor standpoint as well as from a manager standpoint.
RAVI KANBUR: Bob?
ROBERT FRANK: Yeah, profit is something that has to be there for any firm to continue. And so a firm has to ask the question, if we do this, how will it affect our bottom line? And they do try to measure that, and they have to try to measure that. But law firms in New York at one point began offering new associates six weeks off in the summer to do pro bono work for any client of their choosing. I think they had come to understand that people so disliked working for the clients that they were being asked to work for that they were willing to take pay cuts of often up to a third to go work for public interest law firms.
So to continue to be able to compete for those highly talented law graduates, they offered them the opportunity to do something they could feel good about. And so they were using metrics to assess their ability to recruit quality employees by the month. They were looking at those. And if they couldn't recruit quality employees, they wouldn't have any profit. So no, it's not like you don't measure profit and the contribution of various things you do to it.
And let me just give objective to Ravi's characterization of me as a friend proponent. I tried my best--
RAVI KANBUR: It's a spectrum.
ROBERT FRANK: --steer a middle ground.
RAVI KANBUR: I was saying on a spectrum, sorry. I will come back to this, but we had Ralph, then Cynthia, Isaac, and--
RALPH: Ravi, thanks. Excellent panel discussion. I enjoyed all of the presentations. I thought they were all very, very good. With Bob's correction about Bob being a frenemy, perhaps we have one frenemy and two friends here. But that said, if all companies in society were friends or frenemies, will there still be a need for regulation? And I think we all would say perhaps yes.
So then, for us to move toward a world that is only teaching our students and having organizations, it seems to me that still we need this regulatory component. And I'm wondering whether in this new configuration of our university, where we have a whole business school with economist, is this perhaps the best way to organize ourselves, or should there be sharper lines driven between the regulation of economy versus friends and a frenemy approach to society?
LYNN WOOTEN: Ralph, that's a great question. And as an educator, when I teach the introduction and management seminar, I start with econ 101. And I challenged the students to say, OK, who steps in when markets fail? And I even try to bring in speakers through a variety of diversity of panels. And at first, the students will get government, but even beyond government I say especially what's more unique to American society is the nonprofit and philanthropic sector.
It's the intersection of government and nonprofit that steps in when markets fail. And I highly agree that in business schools there should not be these lines. We should be teaching our students about regulation, the role of government and how it's a complementor, and the role of the nonprofit philanthropic sector-- and in thinking about also getting them to use their talent and wisdom to pursue careers in that. So I agree with you totally.
ROBERT FRANK: I think it's a real danger that we underestimate the need to supervise and regulate. The free marketeers think that we don't need an EPA. The Friedman argument that if others are free to pollute and you don't, they'll have lower costs than you and there's a free rider problem for consumers-- whether I buy from the clean firm or not, the level of pollution is the same-- that's not a vacuous argument. And so we very much do need an EPA. And to paint a picture of the world where everything will just sort itself out because people are of goodwill is wrong headed and dangerous, in my opinion.
RAVI KANBUR: Eva, did you have a response to that?
EVA STEINER: Yeah. I agree with that, that we need both perspectives. But again, I think that actually, we see initiatives originating from the government side as well as from the private sector and the non for profit side. So I think, given the urgency with which we need to tackle this problem, it is right and important that we see initiatives originating from all these different parts of our society.
RAVI KANBUR: So with the time line, let's take two or three questions together and then you can respond rather than do it one at a time. There's Cynthia, Isaac, and then there.
CYNTHIA: Thank you Ravi and each of the panel for a very engaging discussion. And so I was very compelled by Dean Wooten's presentation especially of conscious capitalism. And as she was going through some of the tenets of conscious capitalism, including core values and the need for conscious leadership, conscious management, integrating stakeholders, I was reminded that under the leadership of Dyson School very much embodies these four tenets. And because of that, faculty members are extremely productive and we strive for excellence.
And I feel we're walking the walk as well as talking the talk. My question is related to following on the initial question that was raised about metrics. One thing that seems very appealing about the stakeholder value model, for better or worse, is that not only is there a metric and something quantified, but that's actually one metric, so that the bottom line or the income or that sort of thing that is directly related to what some people might care about.
Whereas with something that might be a better representation of success regarding multiple stakeholders and their values, not only do we have difficulty measuring and having metrics, but there are multiple of these, and they're not all gathered into something that will-- or one number that can be used to compare companies or assess various things. In the realm of environmental economics, there's this new realm. So if you think about how we measure different countries in the world, oftentimes we use something like the GDP to see the income and how well they're doing.
There's a new movement in environmental economics called green accounting, where they take, instead of having income or GDP as a measure of income, they actually use what they call a green measure of income, where based on economic theory about what makes countries sustainable, they subtract off-- for example, if a country, say Saudi Arabia, is making a lot of money because from oil but they're depleting their natural resources, this is not sustainable. And the green accounting measure of income would be lower, subtracting the natural resource [INAUDIBLE]. I was wondering if there's something like that-- towards that [INAUDIBLE].
RAVI KANBUR: Thanks. We have Isaac [INAUDIBLE].
ISAAC: But anyway, thank you as well for your oral presentations. The basic question I have, it's a multiple question, is we hear about companies can do well by doing good, which I believe wholeheartedly. There's a little bit of chicken and the egg problem because companies that have a great business model and are successful have the luxury to do good and to build in some of these socially responsible practices into their business model, whereas maybe others wouldn't succeed if they tried.
But my biggest question is, especially if you start getting measurable metrics, that then becomes a cost-benefit analysis, and certainly there will be times where it's not profitable to do the right thing. And if it's legal to do the wrong thing, is there any reason why a company wouldn't pursue the profitable strategy to survive?
And then, where is that line? Where's the balance between survival, or maybe they are thriving, but we give 1% of our profits to being dedicated to being socially responsible? Just if have thoughts on that, that there's a danger in really promoting the doing well by doing good argument because it means if we can't do well, then don't do good.
RAVI KANBUR: OK. So fine. Third question, then we'll have a round.
TODD: Mine relates back to the Ralph's question as far as the regulatory framework and the-- is that pushing to foe or friend? You'd expect friend, the EPA and things like that. But there's existing laws that may complicate that example. Let's talk-- I'll put it in the case of a agricultural cooperative, because that's the world I live in, who went on-- so agricultural cooperative, by definition, objective function, maximize benefit to their owners.
So good profit maximization, but not totally. They wanted to get B certification-- I'm not a lawyer or anything. They wanted to be B certified, Benefit certification, because they talked about primarily the impact it had on their community. Then they were considering going to become a B Corp, Benefit Corporation, and at that point, the ramifications of potentially having to respond to additional stakeholders-- I think it was a PR stunt, like you said, at the B certification part.
But then when they went to be a B Corp, they all of sudden had to be accountable to their community of which their competitors said, you are no longer covered under your limited antitrust exemptions under Capper-Volstead because you're now not just maximizing the benefit and you lose those antitrust exemptions. So you're making decisions in an environment with existing laws that may not actually make it frenemies.
RAVI KANBUR: Great. Thanks. Three great questions. I might abuse my position as moderator to also say a few things. I just want to give an example. I'm on the University's Financial Policies Committee. It's a faculty centered committee. And a couple of years ago, there was a proposal from faculty and students and so on for Cornell to divest from fossil fuels. We could say it's a major movement around campus and so on.
And the proposal made two types of arguments. One is it's the morally right thing for us to do, in some sense acknowledging that would be a cost-- lower endowment, lower salaries, lower student benefits, everything else-- and yet that's the right thing to do. That's what we should do. So you may do a sort of Kantian thing to say, well, it would be good if everybody divested, therefore I should divest even though it's costly to me.
The second strand of the argument was, you know, it's the smart thing to do to divest because coal is not the future. We're going to be-- in the financial portfolio terms, you're going to be left with stranded assets, and therefore, in fact, Cornell's endowment will benefit if we divest from this. I put that to you as an issue.
And my response was, if indeed it's the case that Cornell's endowment would benefit by divesting from fossil fuels, we should fire our investment managers because obviously, they have not been doing the smart thing. They have not been maximizing the value of-- so if there's no conflict, then there's no conflict in this setting.
So that's my question. If the right thing to do is also the smart thing to do and we have all these smart people around and we're churning out these smart people, why isn't the right thing done all the time? It's a sort of-- and maybe we're in this sort of equilibrium where in fact you have to have some people who are not doing the right thing, some people are not [INAUDIBLE].
So that's a sense in which I'm more on the foe end of the spectrum in an analytical sense than on the friend end of the spectrum. There's a fundamental analytical issue there, I think. Anyway, so you have four questions. Please respond. Let's start at that end. Eva? Take your pick. And so we have 10 minutes left.
EVA STEINER: I would actually like to follow onto the comments that you just made by saying that, as far as real estate environmental sustainability is concerned, I think we shouldn't underestimate the impact of technological innovation and technological progress that is going to facilitate the transition to cleaner building technology by-- once that technology matures, it is going to become more affordable.
And I understand that the real estate part of it is only a small portion of the type of issues that we're talking about. Nonetheless, one important aspect of it, I think, is technological progress and the benefits that we can reap from that once those cleaner building technologies mature.
RAVI KANBUR: Lynn? Pick any or all of the questions to respond to.
LYNN WOOTEN: Any of them. I do think that this notion of-- why don't smart people take on the tough challenges? And it's because it's hard work and it takes a lot of strategic intent. And so doing good and making a profit, it's like exercise. People don't want to invest the time and the energy in it. And those of us who are in the academy, I think it's giving them a pathway, a set of tools, and a set of criteria.
And like someone said, we don't want them to be the criteria where they start playing the game of, I just want to get this particular certification or be green for this. And so we have to make it rigorous and we have to make it the ethos that this is the right thing to do would be my thing.
RAVI KANBUR: There were other question. I'm sorry, I don't want to-- Bob?
ROBERT FRANK: Yeah. I think if doing the right thing, and put "right thing" in quotes, is cheaper than doing the wrong thing, it's hard to make a logical claim that you've done the right thing. You've just done what was prudent for you. I think companies can go beyond what's prudent for them. We see examples like Patagonia.
The firms that used dolphin-safe tuna nets were able to compensate for the higher costs they incurred in doing that by virtue of the fact that they made known the fact that they were doing it, and some consumers were willing to pay a premium for fish that was certified to have been caught that way.
So I think there is an appetite for doing the right thing. Doing the right thing means going beyond what you're required to do by law. The law can be more aggressive than it has been, certainly, and should be more aggressive than it has been. And we can continue to look to companies to plow new ground for showing how going beyond what the law requires can be sustainable by virtue of letting them certify their attractiveness to buyers or hire better employees for less money or whatever it might be.
RAVI KANBUR: And so Todd had a question. Do you have a response to Todd's point about--
TODD: Friend versus--
ROBERT FRANK: The regulatory environment is more important than we realize because of herd behavior.
LYNN WOOTEN: Right.
ROBERT FRANK: We know that when we cut the budget of the IRS, there's a muted response to that in the short run. People are used to being reasonably honest about their taxes, and they continue to file and declare income as usual. But over time, if you're sure you won't be audited, some people will stop doing that. Others will notice that they're living better than they are because they've stopped doing that, and they will feel like chumps if they don't do it.
And then, as more and more people do it, the restraint that kept people from doing it in the first place can evaporate very, very quickly. So the idea that we just rely on goodwill is-- that's an unrealistic vision of human nature, just as it's unrealistic to say everybody is an opportunist and will do the worst possible thing no matter what. We know the possibilities are better than that.
RAVI KANBUR: On the regulatory front, Todd, there's an interesting example from India of this group called SEWA, which works with informal sector women. And they run small microfinance, small insurance schemes for women and so on. And again, all this has to be done within a regulatory legal frame. And they come under the cooperatives act, and they do all this as cooperatives.
But then, as you expand-- and one of the things of insurance is you want to expand to get better coverage and so on. As they expand, cover more and more of these poor women, they cross the threshold and come into the realm of private insurance and the insurance regulator of India and so on. And those regulations are written not from a malevolent point of view, but they're written with massive insurance companies in mind-- the Life Insurance Corporation of India, the Railway Workers Insurance, and so on and so forth.
So the capital requirements and so on for those things are huge. So the Indian lawmakers are not particularly malevolent, I don't think. It's just that, to your point, Lynn, they haven't actually thought about-- they're smart people-- as to how they can bridge the gap between insurance regulations written for massive insurance companies and regulations written for these smaller companies as they expand into the middle ground. So I think regulation is extremely important. And yes?
SPEAKER 10: So I'm from Missouri, and I've spent a lot of time in rural areas with a lot of consumers who wouldn't describe Whole Foods or Patagonia as companies that are particularly for them. And I'm wondering if you think that this doing good and doing well has combined itself a little bit with elitism or urbanism and we could expand this conversation to people who are non-typical consumers of these products.
RAVI KANBUR: OK. Well, let's make that then the last question, and then we'll close the discussion of this. Bob? Oh, I'm sorry, it was--
LYNN WOOTEN: I'll start because I think that's a fabulous question, and I talk about-- when you think about Whole Foods-- and there was the Obama joke about arugula and how prices were going up or those type of things. And the ones that hit the media, that make the books that I cite and the research papers, tend to be the Whole Foods in Patagonia. But there are small everyday companies that are focusing both on rural America and urban America.
Last week, many of us were down in New York for a Cornell event for the food and the business of food thing. And I met a hotel alum from Cornell who opened up a coffee shop in Harlem. So he intentionally went to an under-served urban neighborhood to bring a coffee shop. And I asked him about, how is he sourcing his products? And similar to the example Ravi gives, he's using everyday, local entrepreneurs in Harvard. And Todd, a co-op of entrepreneurs, actually, who are sourcing his products.
And so I do think, as those of us in the academy, we have to think about more examples of really bringing to urban America and rural America and what conscious capital looks like every day. Now, I still-- you can't convince me that I'm not living in rural America right now. And so I think Wegmans is an example of someone who has at least broadened the perspective and has made Whole Foods prices and practices at least for the masses. And so that's one of the reasons why I'm very impressed with Wegmans.
RAVI KANBUR: Good. Any final observations Bob and Eva?
EVA STEINER: Oh, I'll just say, to your point, which again is an excellent question, but I agree that we just have to look around us. We live in a relatively small community here, and you see small community-driven businesses that focus very much on--
LYNN WOOTEN: GreenStar.
EVA STEINER: --local resources. GreenStar. Local cooperatives. So I think this is a grassroots movement kind of initiative that you're looking at here that I think we have a chance of seeing succeed.
RAVI KANBUR: Good. Well, let's draw this to a close. And just let me say thank you to our fabulous panelists, and I think these are the sorts of conversations that we should be having across the College of Business and across the different schools of the college. So let's thank our panelists.
LYNN WOOTEN: And Ravi, thank you.
[APPLAUSE]
Cornell SC Johnson College of Business faculty panel discussion on the tensions and complementarities between profit and shareholder value maximization and social values, held Feb. 1, 2018. Panelists Robert Frank (Johnson), Ravi Kanbur (Dyson, moderator), Eva Steiner (Hotel), and Lynn Wooten (Dyson) cover taxation, international development, human resource management, and real estate markets.
