How to get companies to make investments that benefit everyone

The benefits of creating good aren’t often apparent to companies, since they often don’t reap the rewards
Image: Shutterstock

Regulators often punish companies for bad behavior—for instance, by fining them if they pollute the environment. But instead of focusing on what business leaders are doing wrong and constantly slapping their hands, government officials should shift to rewarding firms that make positive contributions to society, says Harvard Business School Assistant Professor Frank Nagle.

Doing so will encourage companies to spend more time working to make the world a better place, he says. Nagle points to the use of free and open source software, known as FOSS, to illustrate the power of rewarding good behavior. In fact, the code responsible for creating many consumer electronics is widely available and is often used as a springboard for developers to further innovate, sharing ideas and crafting new products for all to use. Everyone wins.

Creating virtuous cycles like FOSS involves rewiring existing market inefficiencies, which produce too many negative side effects and too few positive ones, Nagle says. It’s an especially good time to provide companies with financial incentives that encourage them to give back, as skepticism about corporate America remains high and the world faces widespread global challenges brought on by COVID-19 and climate change.

“In economics we talk more about how to deter the negatives,” says Nagle, who discusses the problem and offers some solutions in a new Stanford Social Innovation Review article, The Problem of Social Benefit. “We talk less about how we can encourage positive spillovers.”

A virtuous cycle of social good

Nagle, a professor of business administration in the Strategy Unit at HBS, explains that externalities—actions a company takes that create unintended consequences for others—can be good or bad. An example of a positive externality is reduced healthcare costs for everyone when employees are required to get Covid-19 vaccines. A negative externality might be poor water quality for everyone if a company pollutes.

The benefits of creating good aren’t often apparent to companies, since they often don’t reap the rewards. Thus, many tend to practice “loss aversion,” avoiding a known downside rather than taking the risk of creating an even better upside. It’s hard to measure the benefit of doing something positive, since little of the upside tends to flow back onto corporate balance sheets.

To that end, Nagle says, “Can we design systems and regulations to allow a company to get some of those benefits?”

One model for the future: Free and open source software

Drawing on his previous career in cyber security, Nagle says the software industry’s reliance on free and open source software is the clearest example of how this “virtuous cycle” can work. The digital economy runs on FOSS, with 75 percent of corporate code reliant on the shared system.

If it looks like FOSS companies are giving away almost every new code, they are. Nagle says the practice has effectively solved the social-benefit problem.

“One of the most common reasons a developer contributes to FOSS is that they need a particular feature that does not currently exist,” he writes. “Thus, by writing this code, they obtain a direct benefit while creating a positive externality: Anyone else can also have access to this feature for no (or little) cost.” And this is done on a global platform that’s maintained by everyone.

The software industry is ideal for such a shared system, he says. Open-source and shared-platform models are most effective when the problem, such as climate change or ransomware, is too large for a single company or nation to tackle. “Distributed problems require distributed solutions,” Nagle says.

A roadmap for social good

To encourage more companies to develop solutions that benefit communities, Nagle presents four potential strategies policymakers and organizations should consider:

Align the incentives, otherwise known as the “win-win solution.” A lumber company gets a carbon credit to plant more trees, allowing it to capture the benefit of doing something good for the planet on its balance sheet.

Reduce the participation cost like FOSS does. Free and open source software allows newer individuals to contribute in ways other than writing code, which allows those with less experience to add value while learning more advanced coding.

Build shared platforms like the United Nations Development Programme’s Accelerator Labs. This network of small teams exchange information to combat a range of problems, from food shortages in Zimbabwe to plastic waste in Vietnam. The learning at the local level can be easily shared more broadly.

Limit the power of gatekeepers. Look to Antarctica, not the Amazon. Both ecosystems are of vital importance to the global community. In the case of Antarctica, a 1961 agreement known as the Antarctic Treaty System made the continent accessible to researchers, banned military activity and put in place collective governance. By contrast, Nagle argues, the Amazon rainforest is subject to control by a gatekeeper—Brazil’s president Jair Bolsonaro, who must weigh national politics with environmental protections when confronting challenges such as forest fires and logging within Brazil’s borders.

Challenges to solving social problems

It won’t be easy to replicate successes like FOSS, says Nagle, who points to a number of likely complications.

Take the question of free community-college tuition, for instance. More college-educated students will benefit the economy as a whole, and the students won’t have to take on huge debts. But removing that burden for students ends up costing taxpayers up front, which meets resistance.

Solving social problems longer term involves appealing to both companies’ altruism and their self-interests, Nagle says. “The hope is that more people will still be incentivized to do it, even if it’s not altruistic,” he says. “There can be different reasons why people get involved, but we should still make it easier.”

[This article was provided with permission from Harvard Business School Working Knowledge.]