The Two Bottom Lines: Profits and People
Entrepreneurs are finding that their consciences can be a guide to growth
At Bagel Works Inc., a Keene (N.H.)-based chain of bagel stores, there's an unusual December ritual. At all nine outlets, employees sift through local charities that they think might deserve help, and come up with five nominees. The winners are selected by secret ballots -- cast in the stores by customers. For a year, the victors win financial support, promotional space at Bagel Works, and often free bagels.
To co-founders Richard French, 34, and Jennifer Pearl, 31, the elections are a winner on several levels. They help with marketing and community relations, and boost employee morale. But they also reflect the owners' commitment to running the business with an eye on values, not just the bottom line. At the 10-year-old, $5 million company, the 140 employees benefit from "open book"-style management, and environmental concerns guide day-to-day operations. Most striking, for the past three years, Bagel Works has donated 10% or more of pretax profits to charitable causes such as homeless shelters.
Sounds nice, but does it make business sense? "Some could argue that we may be able to make more money," concedes French. "But if we weren't doing some of those things, we might have a lesser quality of employee or more turnover." And, he adds, based on shoppers' responses, "it absolutely relates to customer loyalty."
French's instincts are well-intentioned, and they're also well-grounded. Consultants cite growing evidence that socially conscious behavior brings tangible rewards far in excess of foregone profits and time invested. The payoff can come in the form of higher productivity, because employees want to stick around -- a big bonus in a tight labor market. It could show up in new business, because you've helped build a stronger, and thus more economically vital, community. Or it could mean customers switching from one of your rivals simply because they admire your efforts -- a powerful competitive edge, says Brian Lunde, senior vice-president of Walker Information, an Indianapolis market-research firm. "A socially conscious company, all else being equal, is likely to be viewed more favorably," he says, citing studies of consumer behavior.
At the very least, there is no evidence that socially conscious businesses are less profitable as a group, and considerable evidence that they gain a special advantage, says Allan R. Cohen, a management professor at Babson College in Newton, Mass. "It doesn't subtract from the bottom line, it adds to the bottom line," says Robert W. MacGregor, president of a Minnesota coalition of socially responsible businesses.
Just how many entrepreneurs are socially conscious is hard to pin down, since the definition can vary so widely. But if you think it means a few idealists selling granola at a loss, think again. A broad swath of baby boomers have melded '60s idealism with the profit motive, and younger entrepreneurs are picking up the thread, too. "I hear a lot more now, 'How do I make this serve my passion and make it a success?' " says Kirk O. Hanson, a professor at Stanford University's business school.
For some, being socially conscious is the basis of the business itself, such as companies that make environmentally sound products. For others, like Bagel Works, it's the way they conduct business and relate to their community. But what unites these owners is the old cliché about doing good and doing well. "I have two bottom lines to my activities," says Tim Joukowsky, one of the founders of AquaFuture Inc. in Turners Falls, Mass. "Am I making money, and am I solving social problems?"
Joukowsky, 37, thinks he's on the threshold of doing both. AquaFuture grew out of a college project his buddy Josh Goldman did on sustainable fish-farming. The company was launched about 10 years ago and quickly garnered research grants. Its patented technology allows more fish to be raised in a single huge brewery-size tank than most fish farms produce on 400 acres, with low environmental impact. The business -- which he says can help increase the world's protein supply -- will chalk up about $1.7 million in revenues this year.
What about the tradeoffs? He concedes that being idealistic is not the fastest way to make money, and his company isn't profitable yet. But Joukowsky vows that it will be next year. He says he learned long ago that you can't make a sustainable contribution to the environment if you don't have a sustainable business.
For the growing number of small companies that outsource production abroad, social consciousness can mean trying to influence and improve working conditions in foreign countries, says Marc J. Epstein, a business professor at Rice University in Houston. Take Mark Juarez, 41, owner of San Leandro (Calif.)-based Tender Loving Things Inc., which markets bath products made in China. Juarez rejected several plants because of child labor and deplorable working conditions. But the ones he did select had problems, too. "You could almost fall over from the fumes," said Finance Director William L. Keyes. To help, the company set up a task force to improve processes and working conditions. The results so far: better sanitation, more safety equipment, and cutbacks in 16-hour days and 7-day weeks. Not by coincidence, product quality and productivity have improved, too.
Others see a direct marketing benefit. Hoboken (N.J.)-based Cloud Nine, which makes natural chocolates and confections, advertises on its packaging that 10% of its profits go to protect the Brazilian rain forest -- where most cocoa beans grow. President Joshua Taylor, an avid environmentalist, says the business has $10 million to $15 million in sales, thanks in part to customer support for its cause-based marketing. "It pays for itself," he says.
POPULAR CAUSE. Research supports Taylor's belief. In a 1996 survey of 2,000 people conducted by Roper Starch Worldwide Inc. and Cone Communications of Boston, 76% of the respondents said they'd switch from their current brand to one associated with a good cause if price and quality were equal. That's up from 66% in 1993, and new figures due out in January show the trend continuing.
Of course, linking your company to a cause can backfire if you pick one that isn't universally popular. Bagel Works' French remembers years ago when a local AIDS group they supported set up a table at one store for a day, where they distributed pamphlets, red ribbons -- and condoms. One mother called French to protest that she hadn't planned to turn an errand with her child into a sex education lecture. French apologized. "Early on, we were just these idealistic kids. We have matured a little bit," he says.
How much should a company give? Groups like the Minneapolis Keystone Club ask members to start at 2% of pretax profits. Others choose to donate time and expertise to nonprofit groups -- for instance, setting up a new purchasing system or designing new offices.
And martyrdom isn't required. Even the most ardent advocates say your first obligation to the community is to have a successful business. After all, it wouldn't be very socially conscious to throw everyone out of work. "There's an infinite amount of good to be done and only finite resources," says Cohen. "Think about issues that matter to people who work for you, the community you practice in, and your customers. What are appropriate causes that enhance your reputation with each of those constituents?" That's the difference between the new and the old idealists -- they're crunching numbers along with their granola.
By Robin D. Schatz in New York with Claire Poole in Houston
This article was originally published in the Dec. 7, 1998 print edition of Business Week's Enterprise.