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Jul 06, 2010 Bahar Gidwani

The Virtuous Quadrant

Can businesses maximize both their profits and the social benefits they create?  Or, do economic and social profits compete with one another?  100+ years of literature and lore have trained us to believe that businesses can’t optimize both their profits and their social benefits.  From Upton Sinclair (e.g., The Jungle) and Charles Dickens (A Christmas Story), through Erin Brockovich and The Informant!, we have heard of countless examples of horrors that can be caused by corporate greed and money-grubbing.However, a number of people seem to believe that this paradigm can be broken.

A few weeks ago, I attended a Harvard Business School of New York seminar called Green Private Equity: Investing in Our Future that discussed Private Equity’s involvement in encouraging sustainability.  The session was led by Diana Glassman of EBG Capital and the panel included one of McKinsey’s better-known former partners, Carter Bales.

I had known Carter when he was one of the top partners at McKinsey’s New York office.  I reconnected with him recently, when I learned that he had started a PE group targeted on sustainability and energy-efficiency issues called NewWorld Capital Group.  During the talk, Carter referred to the area he works in as “the Virtuous Quadrant.”  He seemed to believe that he could generate above-average returns, by investing in and supporting socially-positive businesses.Virtuous Quadrant Illustration

I came home and researched the term “virtuous quadrant.”  I was pleased to see that the first mention I could find was from a scientific paper on Land Use that was written in 1996 by another old friend of mine from McKinsey, Dr. Alistair (Ali) M. Hanna.  He used the term so casually that I suspect it may have been a term of art within at least the New York office of McKinsey for some time, before this.I’ve now found many mentions of the term, and a number of other articles and papers that support the thesis that lies behind it. For instance, two Swiss professors, Andreas Georg Scherer and Guido Palazzo, wrote a paper last September that contained references to around two hundred studies that support the view that “Many business firms have started to assume social and political responsibilities that go beyond legal requirements and fill the regulatory vacuum in global governance.”  (They don’t want links to their draft—I assume because it has not been published, yet.)

The Environmental Defense Fund has been spearheading an effort to get private equity firms to integrate CSR issues into their investment practices.  Our friend Greg Andeck at EDF sent me a recent New York Times article about how well KKR had done by encouraging its portfolio companies to set sustainability goals and Carter’s fund seems to be moving ahead well.  So, perhaps we are at a tipping point in how business people think about their role in society—and in what society expects and demands from businesses?  If so, I hope that CSRHUB can play a role in revealing this progress, through the ratings we generate and the information we expose.

Published by Bahar Gidwani July 6, 2010