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One Incentive to Rule Them All

By Taylor Gray, Ph.D. on May, 10 2021

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Taylor Gray, Ph.D.

The world is a better place when companies are good corporate citizens. I remain focused on developing meaningful and actionable insights from empirical data in pursuit of a better world.

There is a popular narrative that resurfaces every time someone talks about sustainability and the role of companies in trying to help us all reduce our impact on people and the planet. In short, the argument goes that companies will never truly help us be more sustainable because they simply don’t care about the well-being of others, they only care about profit and there is simply too much profit to be made by externalizing the impacts of business onto other people.

To this constant narrative almost always comes the countenance that we should not be overly critical of executives and the decision-makers at these companies. That yes, these companies are responsible for tremendously unsustainable impacts, but the people who work there are actual good people who care but who are simply constrained by the structure of business and the market. This narrative continues that it is not the fault of executives and decision-makers, but rather the fault of “the system”—that the market incentivizes the wrong types of decisions and outcomes.

The response has been to attempt to address incentives...but why not address profit instead?

 

It is About Incentives...

This is an odd narrative cycle as the reply does not actually counter the original accusation, but rather simply serves to assuage any guilt which may arise from such accusations. The reply is not that businesses can actually help us be more sustainable but rather simply to kick the can down toward “the system” and away from the decision-makers of these businesses.

And from this, much ink is spilled, much political capital expended, and much activist energy deployed to try to reform the system, to try to rearrange what types of decisions are incentivized by the system. The logic follows that if business leaders are making short-term decisions at the expense of longer-term sustainability because they have to report positive quarterly financial results then we should change the system and expectations around quarterly financial reporting. Or that if business leaders are making short-term decisions at the expense of longer-term sustainability because their own compensation is tied to business financial performance then we should change the system and expectations around executive compensation. Or that if business leaders are making short-term decisions at the expense of longer-term sustainability because they have ready access to financial information and analytics—and you manage what you measure—then we should change the structure and expectations around integrated business analytics and reporting, including issues of ESG.

The market is not some mythical beast to be tamed through careful political intermediations and incentivization.

 
...But Not the Ones You Think

Such systemic restructurings are certainly welcome and would serve as distinctly positive developments throughout the economy, but they do miss one important (and perhaps even fundamental) point. The original criticism is that the pursuit of profit is leading to an unsustainable state of affairs through the externalization of the impacts of business and consumerism. The suggested changes to incentive structures address how decision-makers benefit from the pursuit of profit in the hopes that certain impacts would in turn be internalized into the decision-making process, yet none of these changes actually address the core element that profit is derived from revenue and all revenue is derived from consumers.

We’ve said it before, and we will likely say it again: consumers are the most important stakeholder of any business. If we can make it easier for consumers to understand the impacts of businesses on the issues that matter to them then they can take these developments into consideration in their purchase decisions. Once consumers do this, what was formerly externalized becomes internalized and now business decision-makers are pushed to act on them even under current incentive structures.

Let the impacts of each product be as easily knowable as is the sale price and watch the world change for the better.

The original claim is that social and environmental impacts are born from the misguided incentive structure of business decision-making which prioritizes profit above all else. The response has been to attempt to address incentives...but why not address profit instead? Even at the best of times, the incentive structure is but an intermediation of the decision-making process geared toward profit, so why not address the foundation of it all?

 
Incentivize a Better Future

Shoppers are the source of all profit. Help shoppers change how they make decisions and you change the dynamics of profit generation. Change the dynamics of profit and you change the decision-making processes of business executives. It all starts with shoppers.

Changing quarterly reporting expectations or executive compensation schedules could be helpful, but pale in comparison to what could happen if we gave shoppers the information they need to make the decisions they actually want to make. Let the impacts of each product be as easily knowable as is the sale price and watch the world change for the better. This is the power of Democratic Capitalism, and it is unleashed through equitable and free access to information.

The market is not some mythical beast to be tamed through careful political intermediations and incentivization. Rather, it is simply the aggregation of all people who want and need products and services. Give people the information--truthfully and fully--to make the decisions they want to make in the ways they want to make them and the “system” becomes an ally in shaping the world we want rather than a beast to be perpetually and vainfully fought.

 


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