Why chasing GDP makes life worse, not better.

“We can no longer simply use GDP growth rates to decide who the [party] heroes are,”
President Xi Jinping speaking to party leaders in June 2014. [2]

Instead, China’s leaders are adopting a new Quality of Life [QOL]measure. This is a significant cultural, economic and ethical shift. It has potentially many far-reaching implications, not just for China’s people and companies, but around the world.

So far, the Chinese shift will be small scale, operating in only about 70 smaller cities. But it can potentially be expanded to larger ones if it starts to make an impact.  If it does though, it will face many vested interests.  Yet the existence of such decision is worth more than a passing consideration for ethical leaders everywhere.

China’s approach to  overseas development for example usually reflects a ruthless self-interest. Major resource projects abroad, such as mining, building dams, roads, and railways are often pursued with seemingly little or no regard for the local environment, quality of life or other negative impacts.

Burma damn projectFor example a Chinese electric power company was hell-bent on building the Upper Irrawaddy dam project in Burma and reaping the benefits. A 900-page environmental impact study by Chinese scientists warning of serious ecological damage made little headway. But when local activists succeeded in forcing the government to cancel the project the Chinese business leaders were seriously disconcerted. [4]

Other governments have toyed with adopting quality of life [QOL]measures. In 2011 the UK government issued a document on “mainstreaming sustainability”. Its indicators suggested “well being”, including GDP, the numbers living in fuel poverty, whether people felt they could trust their neighbours and even the health of sea birds.seagul

“Rather than deciding economic progress simply by profit margins and GDP, our yardstick must be the quality of human lives…whether young people have access to schooling from early childhood through university, whether workers earn a decent wages, and had have safe conditions at their jobs.”
Hillary Clinton, US Secretary of State, addressing a conference in El Salvadore 2009

While seeming sensible, QOL is hard to pin down and open to challenge—what exactly do we mean for example by “well being”, “ Sustainable development”, “human welfare,” or even happiness? [3].

Yet QOL is increasingly forcing itself onto national agendas because GDP is so patently limited in describing real progress. For instance, if you can hardly breathe in your capital city and need to wear masks to cope with the levels of pollution, data purporting to show a high level of “development” have little credibility.

child mortality rateLikewise with child mortality rates. If your spouse is having a baby where would you both most want to have it? In the USA with 5.2 infant deaths per 1000 live births or in Britain which has one of the highest death rates for infants and young children in western Europe, or in one of the 30 other countries including Cuba, France, Italy, Iceland and Japan with rather better rates? What use is a stunning GDP if it cannot also reflect such a basic issue as child mortality? [4]

Within the corporate world, there is an equivalent to the current single-minded approach of using GDP to measure progress. This is shareholder value. Until fairly recently the answer to the question “what is this company for?” used to be blindingly obvious: “To make as much money as possible for shareholders.”

That was certainly the confident assertion of that most contentious of economists Milton FriedmanFriedman and his ilk, who exercised an unhealthy levels of influence on actual policies. His core message was “the business of business is business.”

Yet even he came to realise this narrow approach for deciding corporate purpose was simply unrealistic and could not be sustained. So he modified his position– to the distress of some who prefer life as more black and white, and without the inconvenient intrusion of reality.

Their distress in the US has gained recent focus in the latest Supreme Court decision in the Hobby Lobby case. This case challenged the whole idea that companies must maximise profits and have an absolute legal responsibility to do so. This view of what companies are about hit a solid legal brick wall with a resounding thud. Outrage has been one reaction.

For in what amounts to a history-making judgement, the Supreme  Court roundly rejected the idea that corporations are legally required to maximize profits for shareholders. As others have argued, the purpose of a corporation is a strategic business choice, not one dictated by the law. 

So just as nations are waking up to the weakness of relying on GDP to describe progress, many companies are realising shareholder value can only be one indicator of success. Since the financial crisis many things have changed,  including the discovery that what seemed highly successful organisations were nothing of the sort.

Lying, cheating and short-termism now explain the apparent wealth and progress of many enterprises, particularly in the financial sector.  As Michael Porter, one of the most formidable thinkers about company strategy put it, companies must:

“…reconnect company success with social progress and reach beyond “social responsibility, “philanthropy” and sustainability to find a new way to achieve economic success. “ [5]

Translating this into more everyday language, we need ethically-minded leaders able to judge progress with new indicators.  These will be people who care about means, as much as the ends. People who ask “how” will we succeed, not just “what’s the target?

NOVO-NordiskTake for example Novo Nordisk, the Danish health care company that uses a triple bottom line reporting approach that takes into account not merely profit, but also environmental and social impacts. Nor is the company alone in adopting new measures of corporate “well being.” Unilever, M&S, Nestle, Coca-Cola, Johnson and Johnson have all found ways to do good while making a healthy profit. [6]

It’s true that re-defining the measure of corporate success is a radical change, just as QOL is one for entire countries. However, we need companies to pioneer new ways of working and to build new business models that do more than just generate revenue streams.

Most of all we need ethical leaders who do not see a conflict between profit and ethics.

 

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[1] G.Woldau, China puts quality of life ahead of GDP, FT 14th August 2014
[2] H.Clinton, Hard Choices, pages 110-111, Simon and Schuster 2014
[3] G. Jacobs and I. Šlaus Indicators of Economic Progress: The Power of Measurement and Human Welfare, MSS Research October 2010
[4] The U.S. Infant Mortality Rate: International, Comparisons, Underlying Factors, and Federal Programs. Congressional Research Service,  April 4, 2012
[5]M. Porter and M Kramer, Creating Shared Value, Harvard Business Review,  January 2011
[6] J. Hazlehurst, Be Good, Work, Issue 1, June 2014 CIPD 

 

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