27th November 2023

The Perfect Trinomial: Economic, Environmental and Social Value

Gisela Sánchez Maroto
Chief Strategy and Corporate Affairs in BAC Central America

It is wise and visionary to recognize that the original definition of the 16th century capitalist economic system is incomplete and does not represent a holistic vision of what capitalism can achieve in the 21st century.

This system that emerged in some cities in northern Italy, spread throughout Europe and the world, building thousands of companies in its path, and generating an economic model whose sole objective was that “people could pursue their own well-being through owning goods, tangible and intangible. Based on this concept, it was established that the ultimate goal of a company was to "maximize the economic value for its owners."

This capitalist model that has endured throughout the centuries is incomplete and it is imperative to complete it.

The positive thing is that we don't need to invent anything new to complete the concept of capitalism and make it holistic. We just need to incorporate Adam Smith's theory that "people have a natural tendency to care about the welfare of others for no other reason than the pleasure one derives from seeing them happy." This theory of Smith (father of Capitalism) was embodied in his book "The Theory of Moral Sentiments". The irony is that this book was written by him 17 years before he wrote "The Wealth of Nations" and that it represented a fundamental pillar of the economic model by stating that "in a free market, people will pursue their own interest to grow and prosper and this will also make the nations prosper.”

If in the study of the economy, the definition of capitalism had contemplated both Adam Smith's theories as complementary, we would have had a perfect trinomial model for several centuries. This model must contemplate 3 main objectives of a company and not just one: maximizing economic value, maximizing environmental value, and maximizing social value, all at the same time and with the same rigor and excellence.

It is key to highlight that the business model of a company must take care not only of the prosperity of the owners of the company (its shareholders), but of all its stakeholders (employees, suppliers, NGOs, government, media, etc.)

The reasons why this change must occur and must happen quickly within companies are compelling:

  • Clients want it: when clients are consulted about what weighs more in the value proposition of a product or service, the answer is not monothematic but rather, it includes 3 components:

o Functional value: 37% has to do with the functional value, that is, how useful the product or service is, its price, quality, convenience it offers, etc.). The interesting thing is that this value is losing relevance over time.

o Personal value: Another 33% has to do with what this product or service does to improve “my quality of life”. This component is going up at the expense of functional value.

o Environmental and social value: Finally, the remaining 30% has to do with what the company is doing to generate value for society and the planet, and this is also increasing its relevance at the expense of functional value.

  • Employees committed from their fibers: the financial compensation of employees is necessary but not sufficient to keep them satisfied and committed. What really makes it possible to have committed employees is connecting with them from their essence, that is, connecting with their purpose as human beings. This is why a company that has a higher purpose and objectives in the 3 dimensions (economic, social and environmental) has a greater probability of having truly committed employees, that is, human beings committed from their core (emotional fibers).

 

  • Synergies between dimensions: the economic, social and environmental dimensions of an organization complement and reinforce each other. Nothing in the world happens in silos or in isolation. To the extent that a company pursues its objectives in all 3 dimensions at the same time, it becomes an overall more successful, more resilient and competitive enterprise, because it does not leave issues unattended or loose ends, but instead, becomes a virtuous business model (robust and flexible at the same time).

 

  • License to operate: as Adam Smith said, the secret of the wealth of nations is to allow companies and people to operate freely. This is achieved by having companies that incorporate sustainability into their day-to-day business model and activities and therefore do not require the government to over-regulate or limit them for fear that they will not behave correctly.

 

  • Better reputation: hand in hand with the license to operate, a better reputation is built. This intangible asset is essential to win the preference of customers, the passion of employees and the positive opinion of all stakeholders.

Maximizing a company's profitability is a key objective, but it is a terrible mistake for a CEO to make it the only one. It is essential that this business objective is complemented with two additional objectives: maximizing environmental value and maximizing social value (for employees and for society in general). This is the only way to build a truly successful company, a resilient and competitive organization that can continue to grow and develop to its full potential.