The extraordinary conundrum of social cost

At B-school we are taught that maximizing shareholder value is the focus of every organization. Or should be. And indeed every entrepreneur who is in there for the long term has to do this or the markets will punish him sooner or later. (More posts on this topic soon).

But now here is the classic conundrum that pop’s up ever so often. What is the social cost of your business? In the case of asbestos and aluminium – the wonder products of my parent’s generation it took a long time to figure out the cost.

And now here is an interesting article that starts with the following lines:

On the evening of April 8, 1999, a long line of Town Cars and taxis pulled up to the Minneapolis headquarters of Pillsbury and discharged 11 men who controlled America’s largest food companies. Nestlé was in attendance, as were Kraft and Nabisco, General Mills and Procter & Gamble, Coca-Cola and Mars. Rivals any other day, the C.E.O.’s and company presidents had come together for a rare, private meeting.

Sounds like the starting of a conspiracy thriller, doesn’t it? The cause of this meeting apparently was anything but conspiratorial. To me it sounds downright noble (if not a bit idealistic)- to figure out how the food industry can help counter the increasing obesity that is destroying the present and future generations. (This article refers particularly to the US, but I could easily map the story to fast growing country like India as well)

Somewhere along the line one of the CEO’s reportedly tells the gathering what he sees the consumers as says (the very people whose health the gathering is worried about): “Don’t talk to me about nutrition,Talk to me about taste, and if this stuff tastes better, don’t run around trying to sell stuff that doesn’t taste good.”

Now it doesn’t matter who said this. (read the article and the book when it comes out, links at the bottom of this post) and it would be easy to go hammer and tongs against this leader calling him as someone with no conscience or worse. (I am sure this will happen in a B-school discussion if this becomes a case study) And now I am going to say something which would be extremely controversial in such a classroom exchange – its not his fault.

The CEO’s, and indeed the entire organizations, focus typically is to deliver the maximum value to the ultimate bosses – the shareholders. And if nutritious food is not going to get him the sales numbers, in the short term it makes no sense for him. Now this meeting was held to see if the industry as a whole could agree to cut back on the salt, sugar and fat content in the products. A very interesting and noble gesture (repeating the noble part here because I am duly impressed that this ever happened) – lots and lots of short term pain for a better future.

The problem as always is convoluted. Executive compensation is usually determined by their short term gains. For someone whose bonus is a function on revenue or profitability, biting the bullet to reduce sales by 50% in the short term so that people will be less obese 10 years down the line is not really much of a choice now, is it? Will shareholders ‘understand’ the long term game and not punish the stock if the sales fall by 20% or 50% next quarter? Can the government level the playing field by stepping in and put a ‘sugar tax’? There will be pain, but then the pain is evenly distributed. Maybe, maybe not. Increasingly the strategy seems to be to play across the spectrum. Keep sugary unhealth(ier) products on offer while introducing health(ier) products and hope that consumers will compensate by shifting their spend not reducing it.

There is no easy solution for these problems anyway you look at it. It’s one thing to sit in a classroom and pontificate on how the company should ‘take the plunge’ or ‘bite the bullet’. But as along as the shareholders want extraordinary returns on their investment (and rightfully so, its their hard earned money) and executives want their bonus (and again rightfully so, they aren’t working for charity) and long-term is not really anybody’s strong point guess what is the first thing that gets thrown out of the options list in the strategy meetings?

The original article on which this convoluted post is based appeared in the NYTimes- The Extraordinary Science of Addictive Junk Food which itself is an adaptation based on the upcoming book which I eagerly look forward to reading to better understand the stakes in what I am sure is going to a long drawn out battle – Salt Sugar Fat: How the Food Giants Hooked Us.

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