Building H #95: If You Are Pro-Health, Are You Anti-Capitalist?

In 1961, Raymond Baumhart, a Catholic priest getting his PhD in business at Harvard, published a study in the Harvard Business Review titled, bluntly, “How Ethical are Businessmen?” Baumhart had surveyed 1,700 American businessmen (businesswomen being then in short supply, we expect), and asked them to evaluate their own ethical positions, as well as those of their peers. A majority of respondents said that they considered themselves to be highly ethical - but did not believe that other executives were of the same moral standing. 

A majority of respondents expected that the “average” businessman would have no problem trading on inside information, conducting corporate espionage, cheating on expense accounts, handing out bribes, or fixing prices. Nor would they be surprised if other businessmen went so far as to hire prostitutes to win the favor of clients. "In America, there is widespread acceptance among businessmen of the handful of general ethical principles,” wrote Baumhart. “But between these general principles (such as 'Thou shalt not steal') and the concrete problems of the businessman (such as whether or not price-fixing is stealing from customers), a wide gap appears." 

Baumhart (a remarkable man who went on to serve as president of Loyola University in Chicago for 23 years) was among the first to consider whether corporations and their leaders have an obligation to act responsibly, or whether they might bear any responsibility to society at large. And perhaps it wasn’t surprising that it took a priest to broach these questions; in post-war America, after all, business was blithely assumed to be a force for social progress and common good. What Baumhart revealed, though, is that behind the chrome-fendered gleam of America’s consumer economy, there were likely many dark alleys of moral compromise. 

Whether companies owe any sort of ethical obligation to the public, especially insofar as their products affect the public health is, of course, the crux of what we do at Building H. But while we insist that companies must “own their outcome,” how real is that obligation? How reasonable is it to expect that corporations will act in the best interests of society - or even just of their customers - when there might be no legal or financial incentive to doing so? After all, for many companies (fast food is the most obvious example) all the incentives are pushing the other way - the less healthy we become, the more wealthy they become. 

We’re trying to be honest about this question, but we’re also trying to be creative about finding answers. So what sort of mechanisms might exist for actually changing those corporate incentives? Are they ever likely to meaningfully change corporate behavior? Which leads us to the ultimate question: Is asking these companies to prioritize human health inherently asking them to shirk profits, or to compromise capitalism? In Baumhart’s words, is asking businesspeople to behave ethically ultimately asking them the impossible? 

The obvious model here is sustainability and environmental impact, which is in 2024 a widely recognized obligation of corporate governance. 83% of Fortune 500 companies have set climate-related targets, according to a 2022 McKinsey review, with many making longer term commitments to renewable energy and such.

Companies seem to largely accept that they can’t evade their impact on the environment, not just directly through, say, pollution but more broadly through their water use or their packaging or supply chain sourcing. At these companies, the impact has been likely “priced in” to the cost of doing business. These choices aren’t just driven by pure-of-heart ethical considerations. There are real consequences to impacting the environment, whether its carbon taxes or regulatory penalties or PR considerations. Nobody wants to end up on lists like this.

So how to leverage the success (relatively speaking, of course) of environmental sustainability to other areas? The most prominent example is so-called ESG reporting - where companies choose to disclose their Environmental, Sustainability, and Governance practices, with an eye towards attracting investors that emphasize social responsibility. As a rubric, ESG emerged about 20 years ago, and quickly became a widely shared framework for evaluating companies. It gained traction among the Davos set and auditors and consultancies - the Bains and PriceWaterhouseCoopers and McKinseys - all jumped in with teams ready to help companies consider ESG standards, self-report, and prepare for third-party evaluations. ESG includes environmental impacts, but it also considers labor practices, supply chain practices, and good governance like board structures, risk management, and tax reporting.

By the the last 2010s, it was generally considered simply best practice for companies to have a sound ESG strategy, lest they be poorly ranked and avoided by influential institutional investors (which used ESG to manage more than $33 trillion, nearly ¼ of all global assets, in 2022, according to one report.)

Then of course, came the ESG backlash, starting in 2022, where the efforts to improve corporate behavior were viewed largely through a political lens. The pushback has cooled the fervor for ESG investing in some circles, even as doubts are growing whether ESG is having the intended impact at all. Still, ESG remains a big part of the global investment landscape, even under different terminology.

Another shift we’ve been watching is the emergence of B Corps as an alternative to the traditional C Corp structure. Unlike a C Corp, which incentives company leaders and board members to deliver for their investors (what is often referred to, not entirely accurately, as executives’ “fiduciary responsibility” to extract “maximum shareholder value”), a B Corp is required to equally pursue both a corporate mission and profit.

Since the first B Corps were certified by the B Lab in 2007, there has been a huge wave of companies choosing to register as B Corps - more than 8,000 today. B Corps still pursue returns and pay taxes, but they are also free to take a longer term, more socially minded approach to the impact of their products and services on society (including their employees). Successful B Corps include Cotapaxi, Athleta, Warby Parker, Allbirds, Ben and Jerry’s and Seventh Generation. B Corps represent a potentially common audience for emphasizing health, alongside sustainability and employee wellbeing - and we’re eagerly learning from their playbook. 

It’s essential though, to reach beyond the converted, and find ways to motivate companies to own their health outcomes one way or another. And to date, human health - aside from employee health, or immediate health impacts from water pollution or such - has been an afterthought even among well-intentioned investors or executives.

Thus, the quandary: So long as companies are free to dump the costs of their health impacts onto society - costs that in the US in 2022 amounted to much of the $4.5 trillion spent on healthcare - few have incentives to do otherwisel. Because so much of human disease is the direct consequence of human behavior, corporate America is able to point to the bedrock principle of American capitalism - consumers’ freedom of choice - and thus wave away their own responsibility and obligations. (Worth noting here: the war against tobacco wasn’t won until there was clear evidence that second-hand smoke was dangerous, which nullified tobacco’s companies longstanding argument that smokers’ freedom of choice was impacting alone.) 

Which almost leaves us in the despondent position of saying that the free market has created this problem, and - unless there’s some climate-crisis like tipping point in social consciousness - the free market is unlikely to ever solve the problem on its own accord (about which honestly, if the fact that about two-fifths of the world population is overweight or obese and that lifespan is falling in the US doesn’t qualify as a tipping point… ugh don’t get us started).

Of course, we’re not the first to point out that capitalism is not a perfect system. In the case of negative health externalities, this is basically a classic market failure -- when the free market fails to equitably allocate costs and benefits. The market fails to keep our society healthy because it fails to capture the externality of consumer health behaviors. We’re not advocating overturning the system -- we're advocating acknowledging that the system has fallen short here.

The classic tool to respond to market failure is government regulation. But quite deliberately, we’ve avoided calling for policy changes or regulatory measures - those are the traditional levers to protect consumers from commercial harms, and while they are surely necessary here, we’ll let others fight on those battlefields. Instead, we will continue to point our pens at those companies that are actually creating the problem. 

But we’re not entirely wide-eyed here. We see this as a muti-stage process:

1. Educate: For many, the very notion of corporate accountability for the health impacts of commercial products is a new and radical idea. So just getting this idea (which to us is obvious as climate change!) into circulation is an important first step.

2. Evaluate: We want to hold companies accountable, but we need to do so through a rigorous and thoughtful methodology. That’s what our Building H Index is designed to do, and we’re excited to get our next installment out in the weeks ahead. As part of that work, it’s essential that we:

a. Recognize the best actors. Where companies are having a positive impact on human health, or where they are actively working to mitigate their negative impacts, we want to celebrate that.

b. Show others how to do better. For all companies, especially those that fall short, we work with industry experts to identify practical but possible improvements to their products that would mitigate negative health impacts.

c. Quantify the impact in real money. It’s important to measure health impacts in real economic terms on a per-company and per-product basis (where possible).

3. Incentivize: Given the free market, we want our work to persuade investors - through ESG and other frameworks - that human health is too real an output to ignore, and thus motivate companies to consider how to offer healthier products to consumers. Dollars move decisions.

So where has Building H gotten so far? Well, we’ve made progress on 1 (thank you  newsletter subscribers!), we have successfully prototyped 2, 2a and 2b, and are about to begin 2c (with this recent grant from the National Academies of Medicine). As for 3, it’s something we hope to begin on later this year.  

We take some heart from Raymond Baumhart’s example here. When he first put the question of ethics in business on the table in 1961, it was a radical idea, an unexpected peek inside the conscience of American enterprise. In the more than 60 years since then, the idea of ethical governance and social responsibility for mainstream corporations has become widely accepted. Let’s just hope it doesn’t take until 2080 until the idea of health is recognized the same way.

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