The 4th Stakeholder Framework

Article 14

The lack of a common denominator social impact metric

2-3 minute read

CAPSULE SUMMARY – In order to balance any given stakeholder, you need to be able to compare all of the varied tactics you are considering into a single prioritization view. Unlike the first three stakeholders, you cannot use a single success metric to find this trade-off for the 4th--despite our best efforts and intentions.

14.1 If you think about the maximization of any complex system, you first need to determine the output metric (or metrics) that you’re trying to improve. Without that clarity, you can’t possibly know whether you’re actually improving the system in question.

14.2 This holds particularly true for the societal goal we’re striving to achieve as described in Paper 1, which I will repeat here. The ultimate goal of 4th Stakeholder balance is the global maximization of societal good arising from the functioning of industry, coupled with the global minimization of anticipated or unanticipated societal harm arising from the functioning of industry.

14.3 Unfortunately, no singular, common denominator metric exists for the 4th stakeholder given the broad and dispersed nature of positive societal impacts and negative societal harms. The first three stakeholders have it much easier. All of them (shareholders, customers, and employees) can point to a fairly simple set of metrics that capture the general health of their constituency relative to the business.

14.4 Metrics of success for the 1st stakeholder (Shareholder) - Over the last century, we have  standardized a common set of financial health metrics which can be combined and recombined into myriad alternative forms and ratios. But they ultimately all stem from a simple truth: a financially healthy business is one that spends less money than it brings in and will generate positive cash flow over time. This singular success metric makes it simple to assess different shareholder priorities - you simply identify the tactics that have the highest Return on Investment.

14.5 Metrics of success for the 2nd stakeholder (Customers) – Although not quite as refined and universal as the financial metrics, Customer success metrics have been reduced down to a fairly common set that works broadly across multiple industries. Universal metrics like market share, customer churn, LTV (Life-Time Value), and more recently Net Promoter have taken center stage at varying points over the years. Companies will often pick one as their guiding light and will use that as the key measure for prioritization.

14.6 Metrics of success for the 3rd stakeholder (Employees) – Over the last twenty years we have also experienced a rapid evolution in tracking and transparency in terms of success metrics for how a company treats its employees. Employee surveys and real-time employee feedback have become de rigueur, and sites like Glassdoor ensure that this same feedback can’t stay buried. As a result, multiple employee outcome metrics have taken hold (employee retention and employee engagement are two of the most popular) to help measure overall employee health and facilitate prioritization decisions.

14.7 As we shift the spotlight to the 4th stakeholder, however, the ability to focus on a single success metric evaporates. This tends to push companies towards one of two different behaviors. Either: 1) they attempt to use financial ROI, despite its inherent flaws, as a way to prioritize social impact efforts (we will address the major flaws of this in the next article); or 2) they end up dispersing the company’s energy across a broad range of well-intentioned but potentially smaller priorities and miss or ignore the biggest levers.

14.8 In recognition of this measurement problem, there have been multiple recent attempts to define common “social accounting” methods to put social efforts into a common denominator. Unfortunately, because these approaches cannot capture the nuances of the broad range of both positive and negative first and second-order business impacts, they will miss the mark. We need to use a prioritization approach that can put tactics as varied and unrelated as the four examples below onto a single, unifying canvas:

• Directly causing the deaths of 100 people (1st order harm)

• Launching a new product line that will help people reduce stress (1st order benefit)

• Increasing teen depression across 25% of the population but via second-order impacts (2nd order harm)

• Redirecting 5% of profits into a non-profit that will help the poor (2nd order benefit)

14.9 Although it seems like an intractable problem, I’m here to tell you that a simple solution exists: we need to shift our goal from finding a single unifying metric to finding a viable optimization and prioritization matrix. That will be the topic of Paper 16. But first, we need to do a deep-dive into why financial ROI for social efforts can’t be that unifying magic-bullet measure.