Can companies be idealistic?

Do companies behave ethically and sustainably because clients expect them to, or because they are convinced it’s the right thing to do? This question brings to mind a particularly heated discussion a friend and I had on this topic some fifteen years ago.

By Teunis Brosens, senior economist, ING Economics Department

 

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A passionate friend, always more of an idealist than I, argued that times were really changing. In his view, companies were starting to realise the value of the environment - and of being rooted in their social surroundings.

Representing the 'dismal science' that economics is often accused of being, I countered that companies were merely maximising profits. If and when their clients wanted them to be responsible and engage with their environment, then sure - they would. But the minute their clients’ attention turned elsewhere, they would drop their responsible mask and hurry back to business as usual.

Brosens

With hindsight, my friend was probably too idealistic. But I must admit that I was too cynical. People and companies can, and do, really change their behaviour.

In the economists’ framework, it all starts with incentives. The first incentives that come to mind are enforcement, law, order, compliance and punishment. These are the incentives that governments, companies and parents have relied on for thousands of years.

However a vast body of research, popularised in books such as ‘Thinking, fast and slow’ by Daniel Kahneman and ‘Nudge’ by Cass Sunstein and Richard Thaler, shows that more subtle ways often work better. The desired behaviour should become the default, easy behaviour, while undesired behaviour should be made difficult. In this way, people and companies retain the possibility to choose, but are gently pushed in the wanted direction.

A well-known example is organ donation. The Netherlands and Belgium are culturally similar. But the Netherlands has an opt-in system for organ donation, while Belgium uses an opt-out system. Nowadays the Belgian organ donation rate is almost twice as high as in the Netherlands.

An ethically less contested example is the effort by Dutch tax authorities to present taxpayers with a draft declaration that is already filled out. Taxpayers still have to review and sign the declaration, but in this way it is made very easy to declare taxes honestly – provided the tax authorities did their homework thoroughly, of course.

What determines behaviour even more than deterrence and being nudged in the right direction is observing the behaviour of others.

When streets are littered, people - often subconsciously - conclude that deposing trash properly is not the norm, and don’t feel so bad about littering themselves. So setting the right example can start a self-reinforcing virtuous circle. But it does matter who sets the example. In social contexts, people tend to look at the leaders. The ‘tone at the top’ counts.

Research by psychologists and behavioural economists over recent decades has highlighted that changing behaviour, and making those changes last, involves multiple instruments that have to be engaged simultaneously. From credible deterrence via creating opportunities, to convincing key players to do the ‘right’ thing. Only when all of these are aligned does the best motivator for behaviour come into sight: internalised values.

Because in the end, there is an idealist hidden in all of us. We just need to wake and nurture him.

 

Teunis Brosens

Teunis Brosens is a senior member of ING Bank’s Economics Department in Amsterdam since 2010. Having found that the financial system, which is the plumbing of the economy, is little understood, he has made it his mission to explain the workings of money and credit and the interplay with the real economy. His current topics of interest include money creation, cryptocurrencies, and the effects of deleveraging on economic growth. Before joining ING, Teunis worked at the Dutch Authority for the Financial Markets and the Dutch Central Bank. He holds MA degrees in both Economics and Philosophy of Science.