How Companies Can Balance Social Impact and Financial Goals

Photo of a cactus with a pink flower on top against a teal background.

Republished with permission from The Harvard Business Review, who originally published the content by Marya BesharovWendy K. Smith and Michael L. Tushman here:

It’s notoriously difficult for organizations to keep faith with two equally important goals. A lot try. For-profit companies make grand pronouncements about social responsibility, but their resolve nearly always weakens when shareholder earnings are threatened. “Social” businesses and nonprofits often go in the opposite direction, privileging mission over financial viability.

Something similar often happens when companies try to invent new businesses while keeping the old ones going. They try to support both businesses, but when money’s tight, one of the two nearly always wins out.

We call these sorts of tradeoffs “strategic paradoxes.” To manage them effectively, leaders need more than just resolve. They also need a carefully designed framework of support. Our research suggests that this framework should include three important elements: organizational guardrailsdynamic decision making, and what we call both/and leadership.

Organizational guardrails are designed to ensure that, if one party has more power, the weaker party gets some extra protection. They can help in many different situations.

Consider what happened at Digital Divide Data (DDD), a social business that trains and hires underprivileged workers to do outsourced IT work. DDD’s founder and initial management team knew that they focused more energy on their mission than on making money, so they made sure that their board included some tough-minded, business-savvy members. That decision helped save the company. When one of those board members noticed some troubling patterns, he dug into the books and discovered that unless DDD got serious about making money, it would have to shut down in a matter of months. Senior leaders then made some tough but essential changes and turned DDD around.

Similarly, but at the opposite end of the spectrum, when Unilever approached Ben Cohen and Jerry Greenfield about acquiring Ben and Jerry’s, the two worried that the acquisition would compromise their company’s social-responsibility mission. So they negotiated for an independent board of directors that would keep an eye on their mission and think beyond just profits and growth.

The senior team at Corning, for its part, creates guardrails of a different kind. Aware that product groups have a tendency to kill innovations that they feel will cannibalize existing revenue streams, the senior team puts the most promising innovation projects under the protection of a general manager in a separate part of the company.

Organizational guardrails alone won’t do the trick. A springtime decision that pushes resources in one direction may need to be revised in the fall, when the context has changed. This requires dynamic decision making. The best leaders in dual-purpose organizations consider their high-level principles sacrosanct but their ground-level decisions provisional. This is especially important in organizations with social-vs-financial tradeoffs to make. DDD’s leaders initially hired profoundly disadvantaged people in Cambodia without much concern for their professional qualifications – women rescued from sex trafficking, for example, and people with serious physical disabilities. Great for the mission, but not the most efficient way to optimize profits. Since then, the company has modified its practices to better meet its financial objectives: it has stuck to its mission of hiring underprivileged workers, but now it also screens them for analytical skills and learning capacity. DDD also engages in dynamic decision making when selecting new work locations, with an eye to keeping the company both mission-driven and financially sustainable.

For-profit companies also find it essential to revise decisions as new opportunities arise and new problems emerge. Lululemon, the yoga apparel manufacturer, initially grew based on a decentralized, employee-centric culture. When a new CEO wanted to grow faster and take the company public, he brought in leaders with marketing and operations expertise, but their focus on growth and efficiency trampled on some of the firm’s core strengths. Eventually the firm changed direction again, recommitting to employee development and pulling back on the aggressive growth goals. In short, the company shifted dynamically over time—emphasizing first culture and then the business before ultimately finding a way to manage both.

Dual-purpose organizations need leaders who are committed to managing the built-in tradeoffs. This requires what we call both/and leadership, and not just on the part of the founder or the CEO. The whole senior team needs to embrace both/and thinking and convey its value to managers and employees throughout the organization. Otherwise, the inherent tensions between the organization’s two goals will be pushed underground, where they will fester. Leaders need to surface those tensions and adjudicate between them, adapting and adjusting constantly as the context changes. Initially, Jeremy Hockenstein, the founder of DDD, recruited senior leaders who embraced the paradoxes of the company’s two-pronged mission, and that worked well. But eventually some of his more business-focused executives grew dismissive of the social mission, and Hockenstein had to let them go. It was the right thing to do. Whole Foods initially tried promoting a mix of idealists and pragmatists into managerial positions, but over time its leaders realized that “hybrid” managers, who are equally aspirational and business-minded, perform best for the company, and the company changed its promotion practices accordingly.

In this article, we’ve described a number of dual-purpose organizations – big and small, for-profit and nonprofit – whose leaders have successfully navigated the strategic paradoxes of their missions. They’ve done so by creating organizational guardrails, making dynamic decisions, and embracing both/and leadership. Yet the truth is that such successes are rare. That’s because these practices are emotionally and cognitively challenging.

In the face of these challenges, leaders sometimes adopt just one or two practices. That’s often helpful, but adopting only one practice, in particular, can backfire. In DDD’s early years, for example, Hockenstein brought on senior managers and board members with both/and mindsets but didn’t build strong guardrails, and only recognized how far the organization had drifted off course when it was nearly bankrupt. Building guardrails without a both/and mindset can be equally risky, as leaders representing different priorities end up acting more like menacing guards than enabling guardrails.

Ultimately, what we’ve learned in our research is that the three practices we’ve discussed above work best in concert, because each naturally supports and strengthens the others. Making this work isn’t easy, but the payoff from doing so can be substantial for everybody involved.

Lerner College Honors 2024 Alumni Award Winners

The University of Delaware’s Alfred Lerner College of Business and Economics honored seven individuals during its annual Alumni Awards of Excellence ceremony on May 31 in Lerner Hall. Presented each year to select UD and Lerner College alumni, the awards recognize...

CEEE Stock Market Game Winners Honored

When it comes to investing in and trading stocks, it is important to adapt and be flexible. That’s what more than 1,300 Delaware elementary, middle and high school students discovered this spring by participating in the 10-week Stock Market Game (SMG), a national...

Congratulations 2024 Lerner Graduates

Congratulations to the graduates of the University of Delaware’s Alfred Lerner College of Business and Economics! It was a wonderful weekend celebrating our more than 1,300 Lerner College graduates from the Class of 2024 including undergraduate, master’s and doctoral...