Business and Proximity – A Look at Cost of Social Detachment

Posted on March 17th, by Mats Comments Off on Business and Proximity – A Look at Cost of Social Detachment

This blog was originally posted on LRN’s website

What’s going on?

It is a scary feeling when the ground underneath you is giving way. We may like it for a millisecond – like when we are on a rollercoaster. But we only like the thrill because we are absolutely sure that we will soon be safe from harm.

The world economy is now going through one of these freefalls. And we certainly haven’t found the bottom yet. It is unsettling, to say the least, and there has been all sorts of speculation as to why this happened, how it happened and – in an unfortunately characteristic sign of our times – whose fault it is.

Personally, I am less interested in “the blame game.” But if you are, you are likely looking the hardest at the people blaming the loudest. People pointing fingers at others always have three fingers pointing back at them, as the saying goes. That’s because the Creator wanted to biologically remind us – so we wouldn’t forget – the importance of humility.

Enviromentalist and writer Paul Hawken said to me many years ago: “There is nothing wrong with capitalism. We just haven’t tried it yet”. As with many things Paul has done during his career, this was particularly insightful – especially since it was almost 20 years ago. What Paul was referring to was the lack of representation, in the world of business, of other important aspects of our economy, such as human capital, natural capital and social capital.

Exploring Social Capital
It is believed that in communities where fathers build ships for their sons to hunt or fight in, quality is never a problem. Proximity, while not a guarantee, is at least good enough insurance against real quality problems. That’s why understanding how your products and services affect your customers and the broader society is paramount to avoiding huge problems. Look at Iceland, as an example. How can a small country let a few banks rack up over $300,000 in debt per inhabitant? How is that possible? The same is true for most of our recent troubles. Look at the MBS (mortgage backed securities), CDOs (collateralized debt obligations) and all other complicated forms of financial instruments. They call this type of activity “securitization.” The idea is, of course, that you are trying to pool and package risks together, thereby lowering the default risk on individual assets. But by removing the individual, you are actually increasing another type of risk – call this “proximity” risk. You lose the visibility of what it is that you are actually buying. With each degree of separation, this proximity risk increases. When you pool so much money, the absolute dollars are staggering, and before you know it, a country has amassed 850 percent of its GDP in debt!!

A fellow board member of BSR recently talked about this phenomenon known as “social detachment.” I like the terminology. The price of being too distant and too removed from your community and your customers has recently increased. Better understanding of how your product and services truly impact your community is perhaps one of the best forms of brand insurance a company can buy.

BSR provides such insurance to many of large Fortune 500 companies. What’s encouraging is that it has found that despite the economic crisis, more and more organizations have realized that while many costs need to be cut, the social responsibility activities of companies should be expanded. Many companies buy traditional insurance – and it may make sense to do so – but I would argue that buying social insurance by getting closer to the end-users of your products is even more important. A building or a machine can be replaced, but many of the companies, and perhaps countries, that got lost in translation in this crisis will most likely never stand up again. At least not any time soon.

Here are three good questions to ask yourself about your business:

1. Can you explain to a 10-year-old what your product is actually doing and why there is social value in you succeeding?

2. Do you know who your customers are and whether they are truly benefitting from your products?

3. Is compensation reasonable both in the short- and long-term? In other words, if you succeed, do all of your stakeholders benefit?

I like the sound of this new and perhaps real form of capitalism when companies compete on delivering real value in its broadest sense. The only way companies will recover the trust they have lost is to earn it. The hard way.