How to get businesses to make investments that benefit everyone

Regulators often punish companies for bad behavior, such as fining them if they pollute the environment. But instead of focusing on what business leaders are doing wrong and constantly slapping themselves, government officials should look to rewarding companies that make a positive contribution to society, says Harvard professor Frank Nagle. Business School.

It will encourage companies to spend more time working to make the world a better place, he says. Nagle emphasizes 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 devices is widely available and is often used as a springboard for developers to innovate further, share ideas, and create new products for everyone to use. . Everybody wins.

“In economics we talk more about how to deter the negatives. We talk less about how we can encourage the positives.”

Creating virtuous cycles like free software involves rewiring existing market inefficiencies, which produce too many negative side effects and too few positive effects, Nagle says. This is a particularly good time to offer companies financial incentives that encourage them to give back, as skepticism of US businesses remains high and the world faces widespread global challenges brought on by COVID-19 and change. climate.

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

A virtuous circle of social good

Nagle, an assistant professor of business administration in the Strategy Unit at HBS, explains that externalities – that is, actions taken by one company that create unintended consequences for others – can be good or bad. An example of a positive externality is the reduction in healthcare costs for everyone when employees need to be vaccinated against COVID-19. A negative externality can be poor water quality for everyone if a business pollutes.

The benefits of creating good are often not obvious to businesses because they often do not reap the rewards. Thus, many tend to practice “loss aversion”, avoiding a known disadvantage rather than taking the risk of creating an even better advantage. It is difficult to measure the benefit of doing something positive, as few benefits tend to flow onto companies’ balance sheets.

To that end, Nagle says, “Can we design systems and regulations to enable a business to achieve some of these benefits?” “

A model for the future: free and open source software

Building on his previous career in cybersecurity, 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 the company code relying on the shared system.

If it seems like free and open source software companies are giving out almost all new code, they are. Nagle says the practice effectively solved the employee benefits problem.

“The hope is that more people will always be encouraged to do this, even if it is not altruistic.”

“One of the most common reasons a developer contributes to free software is that they need a particular feature that doesn’t currently exist,” he writes. “So, by writing this code, they get a direct benefit while creating a positive externality: anyone else can also access this functionality at no (or little) cost.” And this is done on a global platform that is 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 big for a single company or country to tackle. “Distributed problems require distributed solutions,” Nagle explains.

A roadmap for social good

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

Align incentives, otherwise known as a “win-win solution”. A forestry company gets a carbon credit for planting more trees, which allows it to capture the benefit of doing something good for the planet on its bottom line.

Reduce the cost of participation like FOSS does. Free and open source software allows new users to contribute other than by writing code, allowing those with less experience to add value while learning more advanced coding.

Building shared platforms like the Accelerator Labs of the United Nations Development Program. This network of small teams exchange information to tackle a range of issues, from food shortages in Zimbabwe to plastic waste in Vietnam. Learning at the local level can easily be shared more widely.

Limit the power of the Guardians. Look at 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, prohibited military activities, and established collective governance. In contrast, Nagle argues, the Amazon rainforest is under the control of a guardian, Brazilian President Jair Bolsonaro, who must weigh national policy with environmental protection when faced with challenges such as the fires of forest and logging within the borders of Brazil.

Challenges in solving social problems

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

Take the issue of free tuition at community colleges, for example. More college-educated students will benefit the economy as a whole, and students won’t have to take on huge debt. But removing this burden on students ends up costing taxpayers dearly, and this is met with resistance.

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

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