Those of you with an eye towards precision will immediately ask “what does social innovation mean in this context.” I’ll go ahead and stick a stake in the ground on this question and say that social innovation is a lot more than “Facebook+Twitter.” Social innovation, by my definition, is when one or more different types of innovation (technological innovation, market innovation, cultural innovation, design innovation, etc.) is highly leveraged by the power of a social network.

Even though Metcalfe’s Law was first articulated in 1980 (or 1993, depending on how pedantic you want to be), we have only really brushed the surface of how pervasive it truly is. It is possible to frame technological development in terms of progress as a function of largest polity in existence – from the rise of hunter-gatherer tribes to the first cities, to the multi-city civilization of the Sumerians. As the number of people in the network grew, so did the capacity for innovation of all stripes.

Once the telegraph, then the telephone, air travel, and eventually the internet made the world to become smaller, or rather, grew our networks larger, our capacity for innovation increased commensurately. The innovations the proceeded from this, I argue, were necessary to understand the different facets of sustainability and to develop strategies for getting there. One example of this was the Viridian movement, from which ground grew Worldchanging.

My argument Friday night will be that social innovation is absolutely required if we are to develop a civilization that is sustainable in all facets.  I think this is the case is because I am increasingly of the opinion that a lot of the necessary innovation for sustainability lies in the realm of design and cultural innovation. These innovations happen most rapidly when you build a critical mass of passionate people with similar ideas, a task that I believe requires social innovation.

The Deloitte Center for the Edge has published a report on the decline in the return on assets of American businesses over the past 40 years. Jon Taplin, a professor at USC, posted a very insightful summary of the report, likening this decline and how it was hidden to a shell game. What was interesting to me in his post was how the blind obedience to a particular metric has been in large part to blame for our current financial insanity.

What the Deloitte report points out is that companies have been able to “juice” their return-on-equity (ROE) numbers by consistently taking on more and more debt. Meanwhile, their return-on-assets (ROA) have fallen steadily. If you are even a casual investor or small businessperson, you’ve probably heard of ROE and why it is important. You may not have heard of ROA. Let me briefly explain the difference

Return on equity is a company’s annual net income divided by total shareholder equity. Shareholder equity is essentially how much money investors have put into your company, so ROE measures how effective you are at generating a return on invested funds.  Return on assets, on the other hand, is your annual net income divided by total assets. ROA, therefore, measures your effectiveness at generating a return on everything the company owns and is in the bank.

You may already be seeing the disconnect, just based on my choice of words when I defined ROE and ROA above. Let me give you an example: Let’s say you have two companies, A & B. Each of these companies generates 1 M$ per year in net income. Each of these companies has 5 M$ in equity on the books, meaning that the investors have 5 M$ in them. In each case, the ROE of the company is 20%. Not too shabby. But there is an important difference between them. Company B also has 5 M$ of debt outstanding. Company B will thus have 5 M$ more assets on the books than Company A, and thus their ROA will be lower.

If you’re a CEO and you’re managed by your board on the basis of your ROE, you thus have a substantial incentive to leverage your company with loads of debt in order to have more resources with which to expand your business, since that debt doesn’t show up directly on your measurements. People will still invest in your company on the basis of your keen ROE (so long as they don’t look at your debt-to-equity ratio, or your actual return on assets.)

The bottom line here is that a lot of people had a warning right in front of them about what was happening with GM and other companies, but couldn’t see it because one of their chief metrics hid it from them. As with so many other things, relying on a few simple metrics is dangerous and sloppy. Simple metrics are useful, but they must be cross-checked and reviewed with a constant eye on exactly what they tell you and what they do not.

My take on Carbon Goggles is something between “obvious” and “pointless.” Second Life has utterly failed to impress me in the suspension-of-disbelief department, thus I’m much more likely to be moved by data on carbon impact than on something that gimmicky. I suspect that while such gimmicks do tend to be effective in getting points across to folks who are not intimately familiar with the subject at hand, the Second Life audience is one that is not ill-educated on climate change.

I’m leaving Monday for Chicago again. We’ve decided to lease an apartment up there for the summer, since sublets are fairly cheap now. One of my teammates will be relocating for 2 months, which will mean a lot more work will get done in the lab in Chicago. It will present a logistical hurdle, one that we’ll certainly overcome. For the amount we’re saving, both in total dollars and in dollars per man-hour, it’s a win-win situation.