#119—Christopher Marquis: Re-examining Business Externalities for Social Good

Christopher Marquis, the Sinyi Professor at the University of Cambridge Judge School of Business. Chris writes a regular column for Forbes and his work has appeared in the Boston Globe, Washington Post, Fortune, TIME, Foreign Policy, and Harvard Business Review. He is also author of Better Business: How the B Corp is Remaking Capitalism  and Mao and Markets,  which made the  Financial Times “Best Book of 2022,” list.

Christopher takes on topics that are, or should be, important for companies and society. In this episode, we dive into concepts from his newest book, The Profiteers: How Business Privatizes Profits and Socializes Costs

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In this episode, Christopher shares: 

• The underlying premise that drove him to write his new book—the fact that companies often pass on the hidden negative costs of their business onto society and the environment, while keeping the benefits and profits for themselves 
• Why this is changing now, thanks to broad systemic changes underway with investors, consumers, employees, and governments 
• Evidence that a group of pioneers taking actions to minimize their negative impacts and turning that into a competitive advantage 
• Upcoming policy changes that business strategists should keep top of mind, that will impact all businesses—and how jumping on this curve serves to potentially reward those who do 

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Episode Timeline:
00:00—Highlight from today's episode
1:19—Introducing Chris + the topic of today’s episode
3:05—Chis shares what lead him to the subject of his latest book
5:46—The cost of externalities
11:21—EU's CSRD policy, a seismic shift in corporate sustainability reporting
15:33—Regional competition and policy differences
19:51—Regenerative business models
26:48—Starting points for corporate strategists
28:53— How can people follow you and continue learning from you?
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Additional Resources:
Personal site: https://chrismarquis.com/
Link to book: The Profiteers How Business Privatizes Profits and Socializes Cost
LinkedIn: https://www.linkedin.com/in/christopher-marquis-3884834/
Twitter: https://x.com/Chris_Marquis_

Thank you to our guest. Thank you to our executive producer, Karina Reyes, our editor, Zach Ness, and the rest of the team. If you like what you heard, please follow, download, and subscribe. I'm your host, Kaihan Krippendorff. Thank you for listening.

Follow us at outthinkernetworks.com/podcast

Transcript

Kaihan Krippendorff: Well, Chris, thank you so much for being back on the podcast. We are eager to get you to share the content of this next book. You know, last time we talked about the b corporation and the movement, and you very quickly out of the gates came with his other book. I know you've been working on it for a while, but just tell us how did you decide to look at this topic.
 
 Christopher Marquis: Yeah. There's a couple things. And so you know, many people have said to me, the profiteers, that sounds very different than better business, which was the b core title. And, you know, they are actually more related than you might think. You know?
 
 Basically, the underlying thesis of both is that you know, business has a huge and important and powerful role to play in the world for social and environmental good. But there's very strong headwinds in many cases. And how to actually help business get around those headwinds is really where I focus a lot of my attention. And in this profiteers, I really examined much more, like, what are a lot of the systemic features of the economy and society that actually make it a challenge for business to do good. And so Yeah.
 
 So it sounds a little more critical, but, actually, the underlying message is not that different.
 
 Kaihan Krippendorff: That's great. So you're kind of addressing the issue, not by asking businesses to act against their self-interest, but you are looking at what are the system designs. Right. Great. Yeah.
 
 Christopher Marquis: And I and I do we and I do dive in a lot into actually how can business sort of innovate and in some ways be looking around the corner. And I think that as strategists, which I know your audience is a lot of that's actually what the main role is. Like, how can you see what's gonna be coming next? And I do think that the last 50 years and the next 50 years might actually look fundamentally different. And so thinking about maybe the constraints that have really limited how business can engage with communities and societies in the environment.
 
 I think we're gonna need to be breaking out of that really because of 1 issue is what's increasingly obvious with climate damage, with challenges around inequality that, you know, governments, consumers, investors are probably gonna be demanding more of companies And if you wanna be competing in this next phase, you know, the issues of how to be an innovative and effective company with an environmental social mission, I think, will be tremendously impactful.
 
 Kaihan Krippendorff: I wanna unpeel that, but maybe we start first with the cost Right? So you you cover that there are costs that we don't know of or that are external and who pays for them is maybe not the entities that actually create them. You talk about carbon emission, damage to the earth, cheap goods, cheap labor? Which would you like to start by?
 
 Christopher Marquis: I'll start in general, I guess, in some ways. And so, you know, the subtitle of the book is you know, how business privatizes profit and socializes cost, which really probably encapsulates the theme of the book a little better than even the main title, the profit tiers, that actually describes a con concept economics called externality, which are, you know, cost to society or the environment that are sort of from business or some other entity, but that actually the business is not responsible for. And why I think it's important to think about these is that for, you know, I guess, time of memorial possibly, you know, these external externalities happen. You know, carbon emissions is probably the most famous of these nowadays, you know, business for decades plus centuries now, I guess. Has been spewing carbon into the atmosphere.
 
 For most of that time, the air is sort of a free entity, free landfill. In recent decades, that certainly there's been increasing regulations. A lot of discussions now, things like, you know, carbon taxes, carbon markets, and those are ways to actually internalize have business and internalize those costs. I mean, so that's 1 example, but, actually, it's know, this is something that's really pervasive. 1 of the stories that really resonated with me when I was doing research actually following my first book Better Business, was a company growth called growth Collaborative who, you know, produces market sales, you know, home goods, like, you know, soaps, shampoos, hand washing, liquid, and the CEO told me, you know, the biggest externality of our business is plastic.
 
 And I need to be thinking about how to actually reduce plastic as if I'm gonna be a socially responsible company. I never thought of actually companies thinking about externalities as part of their as part of their social mission until that that, you know, entrepreneur told me this. What he meant by this, and I'd never even thought about plastic as an externality either. I mean, obviously, plastic waste is a problem, you know, in our world. That we see these sort of clumps in the ocean and lots of sort of disposable plastic, disposable issues.
 
 But to use version versus non version plastic is cheaper. Because it's easier to work through machines. So that's sort of 1 example where, you know, if you make the choice for price actually because it's actually very, you know, damaging environment, you know, because plastic is made through petrochemicals to produce plastic. But then also, you know, just to choice of, you know, using products at a plastic because after it goes to the factory gates, the company has no cost for it. So it doesn't get recycled sadly.
 
 I mean, we all are sort of sorting our plastic into bins these days, but I think it's become increasingly known actually. Actually, most of that plastic does not get recycled. So this is another area where this is something where companies can make choices for cost, but, actually, it's the society and the environment that end up paying for that. So a reason why I think this is so important, and a lot of the examples I give in the book are not criticisms of these who pays, but actually how thinking deeply about it can sort of unlock innovation and new thinking. So the CEO, Steve Lansberg, as his name, just told to me, he said, when we sort of shifted to really think about really trying to reduce plastic is our key responsibility.
 
 You know, it enabled us to think about ways of reformulating our products. And so now, they have bar shampoos as opposed to liquid shampoos, and this has been a product category that they pioneered and have won awards for, and they've, like, really gained as a result of this. They've created a lot of new business process innovation. So they created a internal carbon tax. So for P and Ls within their company, their, you know, business leaders have to be thinking about that that is part of their you know, as they're developing and rolling out products.
 
 And then also recently created a badging system for products on their website because they don't just sell their products. They actually have Marketplace that sells, like, seventh generation, missus Myers, like, you know, doctor Bonner sort of responsible. Companies in their category so the consumers can actually understand how their choices, you know, or, you know, how plastic is part of the choices they make. So I think this idea of actually considering the core impact of the company is a way to actually also unlock innovation. And in the future, this is something that's gonna be hugely important for producers.
 
 And because, you know, governments are taking increasing scrutiny on this consumers are gonna be interested in this and also, you know, just to be responsible as a business.
 
 Kaihan Krippendorff: So what I'm hearing you say is that these externalities are gonna become internalized, and so companies have to be preparing for that. And by the way, doing it now even if under the current system, those externalities are not hit their bottom line. There are benefits of doing it now because Out of necessity comes innovation, innovation can lead to better products, can lead to healthier companies.
 
 Christopher Marquis: They totally. Exactly. That's the exact message.
 
 Kaihan Krippendorff: Yeah. Got it. I love it. What are some of the factors that are driving? Like, I'm imagining a strategist sitting with leadership.
 
 And saying, look, I know this doesn't impact our gap accounting based profit, which our investors measure us on when we do our earnings announcement next quarter, But these externalities are going to come in what's going to cause that to happen.
 
 Christopher Marquis: So 1 of the things that I think is gonna be a game changer in many ways around accountability on these issues is a lot of the laws that are being currently implemented and introduced in the EU. So the folks in your network and your listeners may be aware of these. 1 of the biggest ones is called CSRD, which is corporate sustainability reporting directive. This actually for large European companies is actually 20 24 data they're gonna have to be reporting on 20 25. And of many people from the US, this you know, the, you know, the US SEC recently went through a process and was criticized by some of the environmental you know, environmental movement for really watering down the environmental accountability for companies.
 
 But, actually, CSRD not to get I mean, I know if policy stuff can get a little boring, but I do think it because I think it's gonna be coming, it's important to discuss a bit. There's a couple aspects of it that I think are really crucial to understand as companies are looking forward. So 1 is around materiality. So traditionally, these corporate accountability systems have focused on financial materiality. This actually has what is known as double materiality as impact materiality.
 
 So things are actually beyond what might have a financial bottom line impact. Actually, or, you know, companies are gonna be actually accountable to report on there's companies can be held legally liable if they're not accurate on this. So the directors and managers can be sued and have, you know, legal repercussions on this. So whereas so much reporting in the past has been voluntary, this will be mandatory and, you know, at the level of, like, financial reporting, they can be held legally liable. And I think the thing that that is most compelling about this is that, actually, the way the EU designed this to be rolled out is that, firstly, all large companies in the world are gonna be subject to this because it's by, like, 20 28, you know, data, it's gonna be required for basically, any company of pretty medium size that does business in the EU and their entire parent company.
 
 So if you're, you know, Nike, for instance, which is actually a large business, I but it's 1 of the people know. You know, I'm sure Nike has an EU subsidiary it won't just be the EU subsidiary that has to report, but they're gonna be actually on the line for Nike Global. So I think all of these areas suggest that, you know, these issues or things that our companies are gonna be need to be very, very aware of. Governments are gonna be scrutinizing them they're gonna be held liable for them. And, you know, this really means that, you know, it's not gonna be like in the past you know, I have a huge respect for the GRI, SaaS b, all these different systems that are put in place, but they're voluntary.
 
 And I think because they're a voluntary and there was not really any sort of legal bite, people might not have actually paid as much attention to them. I think this next phase is gonna be very, very different. And so, you know, your CFO, strategist, I think are gonna need to be working on how to actually get their head around, you know, what the business actually is doing in these realms. I should also note scope 3. So that's refers mainly to supply chain people typically think about.
 
 So companies will be will need to be get gathering this data from their extended supply chain, and probably will in the future, we'll be considering these items when they're actually choosing suppliers. So it's gonna be game changer, I think.
 
 Kaihan Krippendorff: So do you think then that we'll start seeing or that competition between regions. I wonder how it evolves. Like, United States, we got California versus Texas. They have very different policies, and their goal is to whatever they're optimizing for individually. But how do you see that playing?
 
 Yeah.
 
 Christopher Marquis: I mean, it's interesting because, you know, a lot of times, that's something company or, you know, governments are really very much worried about, like, okay. Will this just drive companies to other locations? And I think the EU is very in all of its environmental regulations has been very, very thoughtful in in designing it in a way that actually it's it'll raise the floor for the entire world. It won't just sort of push people out. So 1 sort of related example to that is, you know, they have this thing called the carbon border adjustment mechanism.
 
 So, you know, this is where, you know, if you in certain industries and it's in you know, there's some sort of phase in schedule where it's sort of increasing the types of, you know, types of industries that are under scope. But, like, let's say you're a steel producer in China, and you wanna actually have your steel used in in the EU, you have to pay in a carbon adjustment because European steelmakers are subject to carbon taxes, but Chinese steelmakers are not. So this is 1 way it sort of equalizes
 
 Kaihan Krippendorff: equalizes. Yeah. Uh-huh.
 
 Christopher Marquis: But another thing that is really important, and this relates to the supply chain aspect of it. So it's not just the comp where the companies are located. But for instance, I was in Malaysia at the end of this past year 20 23. And I was there talking to, like, YPO groups and giving a conference at a university. And 1 of the trade ministers sort of summoned me to his office.
 
 He had heard that I was in in the Kuala Poor and then I had done some work on sort of corporate accountability. And Malaysia, as a country, actually, has decided that with this new incoming, you know, sort of European program, this is a way for them to actually leapfrog many other countries in as a supplier for European companies. So
 
 Kaihan Krippendorff: so they can be more competitive by getting ahead of I see.
 
 Christopher Marquis: So he so he was in the process of working through, you know, Malaysia has so many small medium sized enterprises that are in these, you know, extended supply chains. And working through how they could create a program for their small, medium sized enterprises to both assess themselves on ESG matters and then also improve. So, you know, they had we're developing a small grants program to actually develop some consulting expertise in the country to actually help their small, medium sized enterprises on these topics. So they'd be more competitive to the European companies now that this new regulation is in place.
 
 Kaihan Krippendorff: That's great. And I guess, yeah, Europe has a lot of power because it represents a very valuable market, very valuable audience. And they're sort of saying, if you want access to this audience, then this is what Yep. Yep. Do you foresee then any regions doing the opposite?
 
 Being the we're gonna be the polluters. This is where you can come and do yeah.
 
 Christopher Marquis: Well, I mean, I think the US is a little bit is, you know, not in a strong way, although certain region regions of the US or states are taking a little stronger position on sort of whether they're they want companies to be or investors to be focused on ESG or not. But, you know, the thing is that know, I know there's been deglobalization in recent years, but at the large company or even medium sized comp company level, I think there's still a tremendous amount through supply chains, through actually companies trying to do business in other countries. There's incredible density in the in the global networks. And so my sense is that it's gonna be it's very different than the past where, you know, you could do sort of race to the bottom in your, you know, just go and find factories and offshore the pollution. I think that, you know, the way that that the EU has designed this, and California actually has some similar type of type of laws that they're putting in place, that it's gonna be hard for companies to really escape a lot of this accountability.
 
 Kaihan Krippendorff: Okay. So talk to us a little about this session. You talk about governments just now and usually say, oh, there's consumers and investors. What what's the causeality between that? Like, for example, I mean, my not very deeply educated view is consumers don't pay a margin are really willing to pay a margin for better business But they do vote.
 
 So maybe they influence the governments, and that's what does it. What's the causeality between those 3 agents or
 
 Christopher Marquis: Yeah. Yeah. I think that's I would agree with you. I mean, I think, you know, I'm am I thinking probably on this has changed over time? You know, there has always there's been decades of like surveys, let's say people, you know, people will buy green, and now we have millennials and gen x's.
 
 And I think, you know, I I don't know if I agree with that anymore. I think that it's very much wishful thinking. I think that that while people in general may be do have that interest. I think that there's been so many large companies over the years that have been be learned as very sophisticated sort of production and marketing technique. So I'm thinking, like, in the fashion business, she and you know, there's a lot of people that are buying this fast fashion that is in environmentally, hugely destructive.
 
 You know, I'm sure
 
 Kaihan Krippendorff: shipping, flying stuff, really quickly Yeah. Across great distances.
 
 Christopher Marquis: Exactly. Yeah. And so I think that the consumers maybe voting might be a good way that the average person kinda is gonna have an impact. I think I think, actually, companies you know, sort of social mission companies play a very big role here. I don't think this is something where they were gonna change through voluntary action.
 
 But I do think you know, I mentioned growth collaborative. And there are you know, my experience with entrepreneurs and corporate leaders is that they actually many of them wanna really do I mean, they wanna do the right environmental thing, and there's so much innovation in in the area. And I so I so I see business really and entrepreneurs providing tremendous innovation. Just made
 
 Kaihan Krippendorff: an example of that. You know, like, people often will say, Oh, we want to be the Apple of, you know, real estate or whatever that is. Right? What is the blank of blank? What's an exemplar company that has this regenerative business model that is doing the right thing?
 
 That we can learn for. Can I think I think we if we can if we can create an example of, hey, they're doing the right thing and they're more competitive because of it.
 
 Christopher Marquis: Well, I mean, the most well known ex example, and I I know you're you don't YouTube this either, but I'm wearing a Patagonia jacket right now. Mean, so Patagonia is, I think, a great example of this. And maybe it's too much of a good example, but I think for this purpose, maybe I'll say a little bit about it because they are 1 of the companies that I did spend some time doing some research with for the book. And I think, particularly, Raju mentioned the word regenerative, and I think that that is actually, I think, gonna be in a much more important word in the future too. So sure.
 
 For decades now, we've been talking about sustainability. You know, you have the UN sustainable development goals. But sustainability, for a long time has been really very much about do less harm. Read ideas of regeneration are about actually how to repair, restore, actually have, through business production, making the world better. And this is something and I think where I think Patagonia is a really important example because, actually, they had a light bulb moment on this, and it will which I'll say let me say a little bit about So Patagonia as you may know or may not know because it's not a big part of their business, actually, is in the food business.
 
 Yeah. They have, like, a product line called Patagonia provisions. And this, they do a variety of sorta naturally and regeneratively produced food products. They have actually some very good beer. That is produced through a regeneratively produced grain called Kienza.
 
 I I think I think it's called, which is sort of inter interesting. So this is a this is a grain that actually when actually grown, you know, gives more back to the soil and biodiversity environment than actually takes from it. And what I learned from the leaders of Patagonia when I was researching them for the book. They said, you know, when we got into Patagonia provisions, we realized that that that actually we could have a positive influence on the world, not just actually an extractive 1 like so much of business is and at the time, Patagonia's mission statement was, you know, had the clause in it, like, and do no unnecessary harm. And they said, you know, we realized by saying that, we were acknowledging in our mission statement that we were doing harm.
 
 Doing harm. Have we had Right. Right. And they're like, this is crazy. I mean, our business is all about the environment, and we're acknowledging our mission statement that we do harm.
 
 So they totally underwent a, you know, a long process and they change their mission statement to, you know, learn business to save our home planet. They you know, if you think about so I think that what's really important and we talked a bit about this with this scope 3 idea, which is about, like, really the parts of the value chain that are really outside the direct control of the company. You think about, like, upstream. Like, how do you influence sort of upstream? I mean, it's sort of through your purchasing and materials, and so they made a real conscious effort around you know, regenerative cotton and regenerative other materials.
 
 And I think the where the Patagonia case is really unique. Is because a lot of times companies forget about their not exactly forget about, but don't think it's their responsibility after the product leaves the factory gates. Is, okay. How do we continue engaging with our consumers to extend the life and use of our products? And, again, to help them understand that you know, we have built quality products that we want you to just buy 1 and maintain it.
 
 And not necessarily, you know, buy a lot like for Sheehan. So they implemented all kinds of repair. I mean, I've
 
 Kaihan Krippendorff: Which is which is which is fascinating because most a pair of retailers, they want you to just buy, throw away, buy. That's how they get a churn product. And they're actually saying don't buy.
 
 Christopher Marquis: Don't buy. And I think, you know, it's interesting. I don't think this is necessarily I mean, maybe it's part of why they do this, but if part of your brand proposition is quality, actually, have it having things that show that you are invested in that object, that product afterwards I think reinforces that. And the fact that repairs are free, it's like, you know, people people know. This is this is a cost to the firm.
 
 And the fact that they're willing to repair it really tells me that they're they're investing that product. So I think it I think it's a it's a nice way to subtly communicate the, you know, core value of the product.
 
 Kaihan Krippendorff: I love that. Yeah. There's a business rationale for that. We stand for quality. This aligns with quality, customer lifetime value.
 
 We wanna have long term customers instead of churning customers. And then on the investor side, they took their whole ownership and made it. Right. So we have 3 kind of starting points that that they represent, the Patagonia represents. Where does someone that influences the strategy of a firm, what are their options to start?
 
 Like, we laid out 3 here.
 
 Christopher Marquis: I'll say 1 thing. It's the first thing comes to mind. I think given the state of the world and the state of sort of the regulatory landscape, I think that risk mitigation is, I think, at the top line for this. I think if I'm thinking about having discussions with the CEO you know, this is something where we wanna be prepared for the future, and these are issues that mean, are only gonna be increasingly important and to get ahead of our competitors on this. So I think that's sort of number 1.
 
 Kaihan Krippendorff: Yes. Yeah. I love that. I love fraying as risk because risk can travel through time. Profite can't really when you think profit you think this yeah.
 
 When you think risk you think You can think 5 years, think 10 years.
 
 Christopher Marquis: Yeah. Oh, yeah. Yeah. So I think that's Okay. That's a big 1.
 
 But, you know, I think also, I think inside the firm also, we haven't talked a bit about that. And I know some a lot of times, like, strategist are thinking about, you know, competitive positioning for the firm and future, but, you know, like human capital and the war for talent, I mean, is also totally hugely long term thing. And I think that's something where I think much more than, like, the consumer business case. I think, you know I mean, I know from my students. I mean, they wanna work for companies that have a mission, that have a purpose, that that means something, and they're not embarrassed to tell their friends and parents that they're working for, you know, Exxon.
 
 I mean, that's an extreme example. But, anyway, so I think that's another really big thing as the company thinks about its image in the world, who will come work for it is a really important aspect to.
 
 Kaihan Krippendorff: That's a great point. Yeah. That's a whole other stakeholder that we hadn't included yet, government, consumers, investors, but also talent. Excellent. So much more to unpeel.
 
 I I know that you've given you gave this guy a simplified few starting points of a complex system and people should definitely buy the book and educate themselves, how else can people engage in this topic with you.
 
 Christopher Marquis: Sure. I mean, like, my website is my name, Chris Marquis dot com. Please feel free to go there and, you know, I mean, I'm someone who I mean, part of this work, I mean, I'm not I'm much more of an academic, you know, researcher and writer on the topic. So I'm delighted when people reach out and wanna tell me, you know, what their business is working on and their story. So They should feel very, very it's very easy to find my email.
 
 They should feel very free to be in touch.
 
 Kaihan Krippendorff: Yeah. Great. I love that about your work. You've got questions and questions and not always yeah. That's great.
 
 Thank you so much for doing all the work for this to develop this for packaging it for us. And I'm sure it's gonna have a huge impact on society. Thank you for being here.
 
 Christopher Marquis: You know? Kaihan always love talking to you.
 
 Kaihan Krippendorff: Thank you to our guest. Thank you to our executive producer, Karina Reyes, our editor, Zach Ness, and the rest of the team. If you like what you heard, please follow, download in some scribe. I'm your host, Kaihan Krippendorff. Thank you for listening.
 
 We'll catch you soon with another episode of Out Thinkers.