The Triple Bottom Line Blog

By now, you've probably heard about the newsworthy speeches recently delivered by Lee Scott, the president of Wal-Mart, and Bill Gates, chairman of Microsoft. Scott was speaking at his company's annual start-of-the-year meeting, delivering what amounts to his "state of the company" address and setting corporate goals for the coming year. Gates was addressing the world's richest and most powerful business and political leaders at Davos. You can find the complete text of Scott's remarks here, Gates's comments here.

The speeches have gotten a lot of press because each, in its own way, offered a challenge to traditional views of capitalism and a call for a new direction, one that makes human, environmental, and social needs a corporate priority alongside profit.

Scott emphasized the leadership role that Wal-Mart can play in the world because of its vast size and influence:

It is important for all of us to understand that there are a number of issues facing the world that will profoundly affect our lives and our company. I am talking to you about issues like international trade, climate change, water shortages, social and economic inequities, infrastructure and foreign oil.

You may be wondering: "What can Wal-Mart do about issues as big as these? What can I do?" I will tell you that people have always looked at Wal-Mart as a problem solver. Over the course of nearly a half-century, we have helped hundreds of millions of people stretch their monthly budgets and make ends meet. But now people are looking at your company in a brand new light. They are seeing a retailer take on tough challenges and make a difference.

This is powerful for all of us. We live in a time when people are losing confidence in the ability of government to solve problems. But at Wal-Mart, we don't see the sidelines that politicians see. And we do not wait for someone else to solve problems that might hurt our business or affect our customers in a negative way. We have a culture of teamwork, a culture of innovation, and above all, a culture of action.

In the years ahead, we might not be able do everything that everyone wants us to do. But we will do things that need to be done and that you and your company can do. Wal-Mart can take a leadership role, get out in front of the future, and make a difference that is good for our business and the world.

Scott then went on to list a number of specific initiatives he was launching to help Wal-Mart fill this leadership role--by providing more affordable health care for its associates and customers, promoting energy-efficient appliances and fixtures, and improving control over its supply chain to ensure humane and sustainable production practices.

Gates's speech was more abstract and theoretical:

As I see it, there are two great forces of human nature: self-interest, and caring for others. Capitalism harnesses self-interest in a helpful and sustainable way, but only on behalf of those who can pay. Government aid and philanthropy channel our caring for those who can't pay. But to provide rapid improvement for the poor we need a system that draws in innovators and businesses in a far better way than we do today.
Such a system would have a twin mission: making profits and also improving lives of those who don't fully benefit from today's market forces. For sustainability we need to use profit incentives wherever we can. At the same time, profits are not always possible when business tries to serve the very poor. In such cases there needs to be another incentive, and that incentive is recognition. Recognition enhances a company's reputation and appeals to customers; above all, it attracts good people to an organization. As such, recognition triggers a market-based reward for good behavior. In markets where profits are not possible, recognition is a proxy; where profits are possible, recognition is an added incentive. . . .

I like to call this idea creative capitalism, an approach where governments, businesses, and nonprofits work together to stretch the reach of market forces so that more people can make a profit, or gain recognition, doing work that eases the world's inequities.

It's pretty remarkable that these two major business leaders are offering such similar, compatible messages at the same moment in history--a bellwether of changing attitudes that history may find significant.

And equally significant, I think, has been the reaction to the two speeches. Based on my scanning of the world's media, it is both overwhelmingly positive and surprisingly matter-of-fact. Few commentators are responding with shock or even surprise; a more common reaction is, "Of course, this makes sense, let's get on with it." It doesn't appear as though Scott and Gates are out in front of public opinion or even corporate opinion on this issue; rather, they are basically in tune with it and responding to it (which is of course exactly where smart leaders want to be).

Surprisingly few dissenting voices have been heard. In the Washington Times, unreconstructured free-marketeer Larry Kudlow offered a grouchy complaint about Gates's speech:

Bill Gates, bloviating at the World Economic Forum in Davos, Switzerland, is issuing a clarion call for a "kinder capitalism" to aid the world's poor. Mr. Gates says he has grown impatient with the shortcomings of capitalism. He thinks it's failing much of the world.

This, of course, from a guy who's worth around $35 billion (give or take a billion). Don't you just love it? A guy without a college degree who invented a new technology process in his garage that literally changed the entire world, a guy who took advantage of all the great opportunities that a free and capitalist society has to offer and got filthy rich in the process, is now trashing capitalism and telling us it doesn't work. What chutzpah.

Of course, one could easily turn the logic of Kudlow's column back on itself. Who better to offer a reasoned, informed critique of capitalism than the likes of Bill Gates and Lee Scott, two of its most successful practitioners? If these men, having both conquered and benefited from the world of traditional business, believe that a new frontier for capitalism offers even greater potential, who is Larry Kudlow to dismiss their insights as "bloviating"?

(And by the way, isn't it amusing to see someone like Kudlow, the arch-defender of capitalism, denouncing Gates for his wealth and his supposed hypocrisy with all the gusto of an old-time Marxist? I guess Kudlow admires successful entrepreneurs only so long as they agree with Kudlow about how the system is supposed to work.)

In fact, both speeches indirectly expose the self-contradictory nature of much free-market fundamentalism. Dogmatic defenders of laissez-faire, like Kudlow, insist that the only legitimate goal of business is profit maximization. They also insist that the best government is minimal government, which interferes with individual initiative as little as possible, keeps taxes to a bare-bones minimum, and leaves people in need either to fend for themselves or to rely on charity.

The problem with this philosophy is that, in effect, it provides no pathway by which society can pursue broader human, social, and environmental goals--feeding the poor, protecting the environment, educating and housing the needy, making health care universally affordable, and so on. Free-market dogma forbids businesses from pursuing these goals, and it forbids governments from pursuing them as well. Which leaves--who? The Salvation Army? The Red Cross? If groups like these were capable of solving the problems facing the world, and especially its bottom billion, those problems would have been solved by now.

After a generation of conservative ascendancy in government and business, the social void is too big to ignore. That's why business leaders like Gates and Scott are explicitly pointing to the failures of government and proposing that business step up to fill the gap.

Pace the Larry Kudlows, most people want to live in a world where basic human needs are met, the environment is protected, and extreme poverty and needless suffering are minimized. Gates and Scott are proposing that business can help us attain these objectives, and can do so by harnessing the creativity of the free market.

This belief, once on the fringe of corporate thinking, is now in the mainstream--and that simple, remarkable fact is the true significance of the Gates and Scott speeches.

Labels: Bill Gates, Lawrence Kudlow, Lee Scott, Microsoft, Role of Government, Wal-Mart

With Muhammad Yunus, founder of Grameen Bank and co-winner of the 2006 Nobel Peace Prize, currently touring the US to promote his new book (Creating a World Without Poverty, which I co-authored with him), this is a good moment to mention an important new report about the business prospects of microfinance.

Yunus, of course, is one of the creators of the microfinance concept, which has expanded from his native Bangladesh and now serves some 100 million clients around the world.

Linked via the invaluable WBCSD website, this report from Deutsche Bank details the growth of the microfinance sector, categorizes the many microcredit institutions around the world according to their profitability, and offers ideas concerning the future prospects of microfinance as an investment opportunity. Key findings include:

Amongst all SRIs [social responsible investments], microfinance investments increasingly attract institutional and individual investors due to their double bottom line. While they allow investors to adopt a social investment strategy geared toward poverty alleviation they offer an attractive risk-return profile at the same time. . . .

By 2015, we expect institutional and individual investments in microfinance to rise sharply to around USD 20 bn. The underlying assumptions are that (1) microfinance will gradually evolve into a niche investment product that will increasingly attract retail investors and benefit from the general strong rise in SRIs. Furthermore, it will appeal to a wider range of commercial investors as it might even be conducive to investors' portfolio diversification. (2) A critical mass of MFIs [microfinance institutions] will over time become capable of absorbing foreign funding.

The report goes on to list the world's fifty leading MFIs, beginning with Grameen Bank, with its almost seven million borrowers and a return on equity of over 22 percent, and including such well-known and financially successful institutions as Compartamos in Mexico, ACSI in Ethiopia, and Equity Bank in Kenya.

It's remarkable to see microcredit, which was born just a little over thirty years ago when an economics professor reached into his pocket for $27 to help a handful of starving villagers in Bangladesh, attracting this level of interest from the financial community while still maintaining its roots in the developing world and its historic role of helping poor people lift themselves and their families out of poverty.

As you might expect, the success of microcredit as a business response to social needs has attracted a few skeptics, especially those from what might be called the "anti-development-aid" community. Here are the latest comments I've seen from Thomas Dichter, author of Despite Good Intentions: Why Development Assistance to the Third World Has Failed and co-editor of a new book devoted to "debunking" microcredit:

"The biggest myth about this [microfinance] is that it goes to start a business," said Thomas Dichter, the co-editor of What's Wrong With Microfinance?

Borrowers use the money to survive, by earning a few pennies a day, selling bags of rice or cups of tea, he said.

"Let's not make the mistake that these are mini-entrepreneurs or future Bill Gateses. They are not," said Dichter, an international development consultant. "They are just trying to get by."

What strange comments these are from a supposed expert on microfinance. Concerning the comparison to Bill Gates: Check out the list of top-50 MFIs from the Deutsche Bank report. The last column of the table lists average loan sizes offered by the microfinance institutions listed. They range from $35 (from an MFI in Bangladesh) to $2,601 (from one in Chile). These loans would seem to be on the small size if the idea is to launch the next Microsoft or to create the next Bill Gates.

But, of course, no one associated with microfinance actually speaks in terms of creating the next mega-enterprise. The whole idea of microcredit is to help people start tiny businesses (micro, get it?) that will enable them to support themselves and their families in decent fashion.

If this involves "selling bags of rice or cups of tea"--activities that Dichter seems to regard with contempt--then so be it. Some people might consider that preferable to letting people starve.

And when the borrowers multiply until you have hundreds of thousands or millions of them--which has now actually happened in one country after another--you end up with financial institutions of respectable size, providing useful services, at a profit, to large customer bases.

The essence of sustainable business is thinking creatively--looking at actual conditions on the ground and letting those dictate the business strategy, rather than trying to solve a real-world problem by imposing preconceived definitions. Perhaps "experts" like Dichter are having trouble leaving behind their preconceived definitions of "business" and "entrepreneur" and recognizing that, in a poor village in Pakistan, South Africa, or Ecuador, a useful business might be one that sells rice or tea rather than computer software.

And as a result, these "experts" have trouble seeing that microfinance is turning into one of the most significant business success stories of our time. By contrast, the actual Bill Gates, through his foundation, is offering financial support to microfinance in Latin America.

Unlike Dichter, Gates knows a good business idea when he sees one.

Labels: Base of the Pyramid, Bill Gates, Deutsche Bank, Grameen Bank, Microsoft, Muhammad Yunus, Thomas Dichter