Make Michigan Best Place to Attract Socially Conscious Business Investment

Guest Column
by Bob Leonard

July 16, 2010

Some estimates of the market for “friendly” capital put the total available to environmentally and socially conscious businesses above three-trillion dollars. It could make a big difference for Michigan if we could attract even a small portion of capital looking for a “friendly” climate for investing.

We’d have to make some changes, of course, but it might be a lot easier than you think. It would mainly require that we remember how to lead the nation again, and wouldn’t that be a welcome change.

Capital loves the next big thing, and one version of that is so-called “friendly” businesses supported by “friendly” capital (i.e. socially conscious investors). And, so far anyway, no region has made a concerted effort to target it.

So how can Michigan benefit from the movement in this direction?

Essentially, the answer lies in getting ahead of this curve and becoming a welcoming haven for this movement.

It would not be very difficult to do, but the window of opportunity will close if others get there first.

The first step would be to pass legislation to permit (but not require) companies to register as a (people and planet) “friendly” business. A friendly business is a business that looks out for people and the planet and not just profit. The term for businesses that approach their work in this “friendly” manner is “3P.”

This type of “friendly” business legislation has already been drafted and is currently gaining sponsors in the Michigan Legislature. The concept has few natural enemies, as it mainly just adds options for businesses. It does not harm or alarm anyone, so it stands a better than average chance of passage.

Also, there is precedent here. In 2009 Michigan passed similar legislation permitting a new form of LLC partnership — called an L3C. This was a huge step in the right direction, but the next step is a corporate version. This would allow public listing of these companies and, thus, investment by the public via a stock market.

Creating this type of legal legitimacy or “cover” for so-called 3P corporate entities to do the right thing would help them. But in order to benefit us, Michigan should consider encouraging these businesses to also locate here.

To promote that, the legislature should consider playing “let’s make a deal” with business over the notion of the business “climate” in the state.

It is a given that the Michigan business community feels it needs a better climate in terms of taxation and regulation. Perhaps the main way to attract friendly capital would be to strike a deal with business.

This would be the deal: we’ll give you a friendly business climate (i.e. lower taxes and less regulation), but you have to show us that you can run your business in a people- and planet-friendly manner.

The idea would be to encourage businesses that are friendly to the environment and society by rewarding them with the type of business friendly tax and regulatory climate that business wants.

Even without such support there are a growing number of businesses that operate in this 3P way. (Another term that describes these companies is “triple bottom line” companies.) Increasingly, the angst about the way Wall Street does business is causing capital to rush to support these new-wave businesses.

Business and consumers alike are catching on to the advantages of these 3P business practices, and there are well-established (and growing) criteria that define what qualifies. Without much cost, effort or consternation, Michigan could be the beneficiary of this fast growing approach.

It’s not that profit is bad, but current means of pursuing it leave much room for improvement.

In human and environmental terms, increasingly we are seeing that the untrammeled pursuit of profit, in isolation from other factors, can have some very undesirable consequences. In other words, while the pursuit of profit can be a very good thing, keeping it a good thing is not as simple as it may seem.

It is helpful to consider that the calculation of profit is not nearly as clear-cut, formulaic or objective a process as it may seem. The numbers are fungible over time. That’s because it is much easier to show a profit if one can make unfettered tradeoffs that delay expenses. It is much easier to claim profitability if one is free to ignore the long-term consequences of one’s actions (or inactions).

Expenses deferred enhance profits. To illustrate, think of a business that uses a machine to generate revenue. Profits (in the near term) look better when maintenance on that machine is delayed. Eventually, the machine will fail, of course, but that does not affect the appearance of profit in the short run.

Many other types of expense can also be deferred, in some cases for generations.

For example, in the short run it is cheaper to pollute than to treat waste, but there are consequences (and costs) in the long run. Wall Street bankers’ actions provide another example. Risks that blow up later can make “profits” (and bonuses) look great in the short run, yet threaten the very existence of the bank and even damage the Main Street economy.

These types of timing-tradeoff dynamics are why it can be misleading to view profit in isolation or only in the short run and why the other two Ps in 3P matter. It is becoming increasingly apparent that companies that pursue only profit are more likely to have costly impacts on the environment and on society.

Unfortunately, under the current system, businesses and managers can gain by gaming the system, cheating or otherwise seeking loopholes, political influence or other forms of relief that maximize profits.

In fact, the problem is exacerbated by the very nature of our current corporate statutes. Current laws actually encourage some such bad behaviors by exposing managers to legal action or loss of investor support if they do not aggressively seek means to maximize profit.

Profitable operations are desirable, but often there is more to “profitable” than meets the eye. As we have all seen, there is incentive to “kick” various expense cans (such as environmental and societal costs) down the road.

Some experimentation along the lines of the friendly-climate-for-friendly-business-practices deal mentioned above might be just what is needed to add more balance.

Michigan should take this bet, since doing so might persuade some desperately needed sources of capital to fall in love with our new “climate.”

Why not try something new? Obviously, the old ways are failing us. Any takers?

Bob Leonard has 30 years experience as an entrepreneur in manufacturing (automotive supply) and is president of a family business. He can be reached by e-mail.