Monday, August 10, 2015

How to Evaluate Corporate Sustainability Reports

In today’s business environment, there has emerged an unprecedented expectation on companies to provide explicit information on their performance across the triple bottom line.  Consumers, employees, investors, civil society, government, and the media are increasingly interested in knowing how companies shape up when it comes to things like resolving social issues, reversing environmental degrading, and stemming unethical practices in their supply chain.  In response, many companies now publish Sustainability Reports (also called Corporate Social Responsibility Reports or Corporate Citizenship Reports) that, in theory, set out to mimic the highly institutionalized and reliable financial statements by presenting their performance along non-financial indicators. 

In the last decade alone, the number of companies listed on the S&P 500 index publishing sustainability reports increased from 47% in 2005 to 92% in 2015.  According to KPMG, whereas only 25% of the top 250 companies reported on sustainability in 1999, 93% of these companies report on sustainability as of 2013.  The increase has been truly unprecedented.  By region, sustainability reporting has increased dramatically in Asia Pacific over the last 2 years with 71 percent of companies now publishing reports (an increase of 22 percent since 2011 when only 49 percent did so).  Due to an increase in reporting by companies in Latin America, the Americas have now surpassed Europe as the leading reporting region where 76 percent of companies now report, followed closely behind by 73 percent in Europe and 71 percent in Asia Pacific.  KPMG concludes that sustainability reporting “is now undeniably a mainstream business practice worldwide, with 71 percent of the top 100 companies across 41 countries reporting on sustainability.  Whereas in 2011 less than half of the sectors in the world could claim that 50 percent of their companies reported on sustainability, by 2013 all sectors have reported that at least half of all top companies in each sector report on sustainability.  Major gains were seen by the automotive and telecommunications & media sectors with increases of 28 percentage points in both sectors. 

A KPMG survey conducted two years earlier asked CEOs to identify what was motivating them to report on sustainability and found that the primary motivation was reputation and brand (67% of respondents indicated this reason), followed by ethical considerations (58%), employee motivation, and innovation and learning (44%).  Other popular motivations included risk management or risk reduction, access to capital or increased shareholder value (32%) and economic considerations (32%).

But the growth of sustainability reporting has been met with an onslaught of criticism by anti-corporate groups and civil society organizations who claim that companies are using these reports to green wash what is otherwise business as usual, thereby disguising their destructive behaviour.  Some of these criticisms are not necessarily unfounded.  A quick look on the first few pages of mainstream sustainability reports and the reader will be bombarded with large high gloss pictures of the rural poor, for example, smiling ear to ear for all the wonderful things the company has done for them or of green pastures fronted by a farmer and his/her partner with seemingly content pigs and cows enjoying life as they collectively watch the beautiful sunset. 

Yet these same companies find themselves on the front pages charged with complicity in major social, ecological, and governance issues like the death of over 1100 people in the 2011 collapsed Bangladeshi garment factory (Loblaw, Wal-Mart), the mistreatment of animals revealed through undercover videos (Tyson Foods), the contamination of natural ecosystems (DuPont), the laundering of money for terrorist groups (HSBC), or the rigging of centralized interest rates by inflating or deflating their own rates to profit from trades (major banks).  If you look at the sustainability reports of the companies associated with these charges, you’ll find a completely different story, one that conveys the firm as a beacon for corporate responsibility. 

With these inherent contradictions growing in number, there is a widespread need across multiple stakeholders to effectively evaluate a sustainability report to see whether the claims embodied in the report are in fact testament to their commitment to sustainability.  How does an analyst distinguish rhetoric from reality when assessing whether a company is prepared for increased environmental regulation?  How can the consumer figure out which sustainability report is in fact a reflection of a serious commitment to sustainability rather than greenwashing?  How can an investor, concerned about the risk associated with investing in a firm that overlooks social and ecological externalities, figure out which sustainability reporting firm is more or less risky?  And how would an NGO know which firm is legitimately addressing issues?  In the absence of available information, all of these stakeholders want to know how to objectively evaluate a company’s adoption level of sustainability using the information provided in the report.

This feels like a daunting challenge considering the millions of dollars allocated to marketing and brand development that include reporting tactics meant to convince the reader that their commitment to sustainability is genuine.  What is more, unlike the institutionalized nature of financial statements that multiple stakeholders can rely on as a means of comparison, there is virtually no legitimate and substantive equivalent for non-financial indicators.  While there is growing commitment to the Global Reporting Initiative – a standard set of non-financial measures companies agree to provide to be a member – the measures are regularly criticized because they are self-reported and require no substantive basis upon which to demonstrate authenticity in the commitment to sustainability. For instance, one of the required measures under the social dimension is to indicate whether the company provides employees with training on human rights.  A simple ‘yes’ or ‘no’ question means that the company is not obliged to indicate the content of the training, how long it lasts, whether it was provided by professional independent bodies and, perhaps most importantly, whether there is any enforcement of employee behaviour based on this training. 

Despite these challenges, a growing repository of tools is emerging to assist readers in conducting evaluations of companies along non-financial indicators.  Introduced here are four such criteria one can consider when reading a sustainability report.  Incidentally, an important and often overlooked consideration across these criteria is to assign as much value to what is missing from the report as to what is in it.  Let’s look at the four criteria in more detail:

1.  Purpose of Reporting

The reader should begin by trying to uncover the overarching purpose of the report.  This is less difficult than it might seem.  To simplify, imagine a continuum that reflects the purpose of reporting where on one side the main purpose is for marketing and public relations while on the other side the main purpose is organizational development and change towards sustainability where only what is measured can be managed.  These are highly different objectives and there are signals in the report to help the reader position the report on this continuum and simultaneously determine their commitment to sustainability.  Let’s consider the first side of the continuum. Most companies still use the report for the purpose of marketing.  The company’s objective in this instance is to paint a positive picture of their relationship with society and the environment, oftentimes to deflect any negative publicity they might have received.  Signals of this in the report will be obvious, such as the fact that the company doesn’t report on anything negative, doesn’t acknowledge any bad publicity they might have received or, more importantly, on what they are trying to do to rectify issues or criticism they are facing.  The reader will also get the impression that much of what they’re presenting in the report has very little to do with their core business.  Much of the content will discuss their philanthropic endeavors and charity giving.  For instance, a mining company might avoid reporting on its actual relationship with the community but will instead report on the amount of money donated for community causes.  Similarly, a bank will disclose how much they have spent on charitable groups but will avoid presenting the extent to which their daily business decisions that can affect these very charitable groups are considering social and ecological issues, such as whether they are curbing the provision of finance to companies with poor environmental records.  With this in mind, readers of a report that is on the marketing side of the continuum will perceive an alarming sense of hypocrisy in what is presented.  From a stakeholder perspective, the company’s objective in reporting is to appease concerns, to quell criticism, and to defend their behaviour by providing evidence of positive contributions to the groups these stakeholders care about.  Fundamental, like many marketing strategies, the purpose is to divert attention away from relevant social and ecological issues to give investors, consumers and government the impression that the company “can’t be that bad.  After all, look at all the good they are doing”. 

On the flip side, companies may also use the report to facilitate organizational change towards greater performance in sustainability.  Here companies hold employees and managers accountable by reporting on performance levels across non-financial indicators.  Now made public, there is greater pressure by these organizational members to demonstrate improvement.  It also sends an important signal to employees that the company is closely monitoring social and ecological performance as a fundamental attribute of their organizational processes.  At the extreme, companies would use this report as one of many mechanisms to transition the company where sustainability is fundamental to its existence.  With this in mind, the focus of the report is less on philanthropic initiatives and more on the performance along social and ecological dimensions as they relate to the core business of the firm.  Readers therefore get the sense that the company is reporting comprehensively.  That is, rather than presenting small parts of their business that might be doing well, they are reporting across all dimensions of the business.  From a stakeholder perspective, the goal is not to appease stakeholders but instead to engage them.  More progressive reports provide detailed accounts of stakeholder interactions, publishing stakeholder input and providing avenues through which stakeholders can get involved in the company’s performance.  Put another way, the report’s purpose is not to report on the past but to facilitate a platform for discussion in the present.  A fundamental difference between these two objectives is that the second is using this report as a mechanism for change, to hold those in decision-making authority accountable for these issues by explicitly reporting them. 

2.  Metrics and Performance

The second criterion used to evaluate a sustainability report is perhaps the most intuitive of the four.  It asks what the company is measuring and how well they are performing on these measurements.  Again, we can use a continuum to understand the disparity in reporting practices.  On the one hand, companies with poor reports provide stories and anecdotes while listing the many awards they have received related to social and environmental performance.  Importantly, these stories and anecdotes are just that – they are not representative of the performance of the firm more broadly.  The report will be full of ‘feel-good statements’ as proxies for performance levels.  If the company on this end of the continuum did use measures, they would be very vague and ad hoc, likely customized in such a way that they can demonstrate positive performance.  For instance, a product’s environmental footprint encompasses a wide range of components including its carbon footprint, water footprint, materials footprint, among others.  But companies may choose to only report on those components of the environmental footprint that improved while omitting others.  At the same time, measures they are using for one of these footprint components are not provided within any context.  For instance, a company may indicate that its water usage has decreased by 2,000,000 litres or its carbon footprint has been reduced by 25%.  In the first instance, there is no reference point to gauge how much of a drop this represents.  For the second, without the use of a benchmark such as sales or number of employees, both of which are common proxies for company size, this percentage drop is meaningless.  Omitting this information leaves open the possibility that the company got smaller by 30%, indicating that its carbon footprint as a percentage of dollars sold or employees actually increased.  Similarly, companies often fail to provide historical performance levels, from which readers can assess performance over time.   

Companies on the other side of the continuum provide readers with a comprehensive snapshot of their performance over long periods of time (or at least when they starting reporting on these items).  Highly progressive companies will also provide performance indicators on the entire supply chain rather than on the firm exclusively.  Although a more daunting feat, several companies are doing this now to provide readers with the full product life cycle analysis that includes the social and ecological footprint of the raw materials all the way to the disposal of the product.   Apple, for instance, provides the ecological footprint of all components and stages of the product’s manufacturing, including those activities done by contractors used to make the product.  That said, they are not yet able to include the environmental footprint of second and third tier suppliers with any level of accuracy.  More obviously, the reader is easily able to see improvements in the company’s performance over time or, perhaps less ideal, transparency in the areas where they need improvement.  Apparel company Patagonia pioneered an initiative that provided consumers with a detailed breakdown on the carbon footprint of their products.  Incidentally, their honesty was more important to the consumer than any claims that they had the lowest carbon footprint among competitors. 

3.  Future Commitment and Progress

The third criterion readers should consider when evaluating a sustainability report is the extent to which the company provides future targets and reports on progress to these targets.  Because many companies consider sustainability reporting as a marketing initiative, readers are often frustrated with a lack of information on what they plan on accomplishing in future years.  Equally frustrating is when companies provide numerical or qualitative targets but give little or no action plan on how they plan on achieving those targets.  Naturally questions of concern emerge such as how executives are going to make sure that these targets are achieved, how are they being worked into their performance evaluation, who is overseeing these targets, what resources have been expended for the achievement of these targets, how will the firm ensure that employees are involved at contributing to these targets, and what happens if they don’t meet these targets.  With this in mind, targets would need to be incorporated into the existing management systems of the firm.  The reader needs to know how and to what extent these targets are incorporated into executive level decision-making.   Are these non-financial measures prioritized alongside other traditional employee, manager, director, and VP performance expectations or does it reside exclusively with the CSR manager?  These sorts of questions are instrumental and should be laid out in the report because they give the reader some sense of how feasible it will be to achieve these targets.   

In addition, the company often fails to provide detailed summarizes of how well they’ve progressed on targets they’ve set in the past, with details on how and why they’ve struggled to meet their targets and what they intend to do to make up for the failure.  All of this information is pivotal for any reader to make a sound judgment about whether sustainability is being taken seriously by and in the firm.  Oftentimes, employees see progress on non-financial measures in the same sustainability reports read by external stakeholders, meaning that they don’t feel any sense of urgency in the need to achieve these targets in their everyday behaviour.  Although this goes without saying, the targets set out by the firm should be stretch targets that demonstrate that the firm is interested in pursuing radical change towards sustainability.  Incremental changes, while still improvements, are less demonstrative of a company’s commitment to sustainability than those targets that push the company into thinking of radical ways of operating.  That said, the fact that they set targets represents more of a commitment than not revealing any targets at all. 

4.  Legitimacy

The final criterion relates to the legitimacy of the report.  The more obvious indicator of this criterion is whether the report is audited by an external, objective organization.  That said, auditing doesn’t evaluate the performance of the company along non-financial measures, nor does it evaluate the types of measures used.  It only verifies that what the company is saying in its report is accurate.  This is indeed a start no doubt.  But measuring the legitimacy of the report goes beyond whether it was audited.  The reader needs to ascertain whether the company selected its non-financial measures or whether they got their measures from an established source or is using measures that have become standard by external stakeholders.  Too often, readers are fooled by impressive numbers without realizing that the company made up particular measures that allowed them to bend their data in ways that looked good.  Consider an oil and gas company’s efforts to report on their community commitment.  There are a number of social impact indicators out there along with many qualitative indicators the firm could rely on from independent organizations, however many of them use their own made up measures such as the number of children that have attended a particular school they support or the number of patients served at a hospital they support.  For the latter, while having a health facility available is important, there is no indication of whether the community is positively impacted by it partly because it neglects to consider that the increase in patients may not be due to the presence of the facility but instead by the absence of education and preventative measures that are more effectively at improving social welfare. 

Low levels of reporting legitimacy are also associated with high level performance indicators that lack the raw data through which readers can follow the trail of how the measure was calculated.  Readers of progressive companies are able to verify the claims put forward by companies.  Balancing the need for more raw data is an effort to make the report user friendly for the reader.  Believe it or not, some reports are so poorly formatted and disorganized that the reader is unable to find critical information within a reasonable amount of time.  Legitimacy also represents the extent to which external stakeholders are involved in the creation of the report.  Very seldom do companies present data they collected with those critical of their performance.  Although some NGOs are hostile, most are very eager to work alongside the company to collect and measure performance levels.  Their involvement provides a fundamental source of legitimacy.  Finally, as already mentioned, legitimacy stems from the incorporation of reporting measures into the systems, processes, policies, and procedures that already exist in the firm so that it garners as much attention from key decision-makers to those at the front lines as other business activities. 

In sum, sustainability reporting among companies is at unprecedented levels.  Yet our ability to assess these reports in such a way that we can confidently and objectively determine performance levels to compare firms with one another is very limited.  The above four criteria represent a starting point in this direction. 

i)  KPMG International Corporate Responsibility Reporting Survey, 2011; KPMG:  Accessed July 17th, 2012:

ii) The KPMG Survey of Corporate Responsibility Reporting 2013:  KPMG.  Accessed August 10th, 2015:

Monday, June 8, 2015

Uber: Supply and Demand Versus Fairness

Why is it that an explosion of complaints ensues when Uber’s price “surges” during something like the Toronto Commuter Crisis yesterday?  After all, the price increase is only a reflection of the most basic of economic models, supply’s attempt to match a surge in demand.  The commuter crisis created a surge in demand that cannot be met by the existing supply.  As a result, prices increase to lower demand and at the same time create an incentive among Uber or non-Uber drivers to become a supplier and drive.  This is the market mechanism at work.  Why are people so upset?

When you think about it, Uber is an amazing innovation because it demonstrates how we can now use the internet to fundamentally challenge the oligopolistic taxi industry, which has moved at a snail’s pace to adjust supply to meet demand, if it attempts to do so at all.  But with Uber, demand and supply remain in sync as real time information is communicated instantaneously.  This means that there is no evil wizard CEO behind the curtain indirectly fluctuating prices, as we see in so many other industries, but instead a raw and authentic market mechanism at work that is adjusting the amount of supply to demand. 

If Uber didn’t exist, why wouldn’t people be complaining about the lack of taxis available?  Why is it that people instead understand that the crisis likely created an unavailability of taxis?  What’s the difference?  Why are we okay with taxi companies not being able to meet demand at a time like this, while putting forth immense and oftentimes inappropriate vitriol when a company like Uber is able to meet demand quicker than even replacement TTC Buses? 

This is a fundamental question that gets to one of the central explanations of human behaviour that, since the industrial revolution if not before, has stood to challenge conventional market logic.  A series of studies done over the last several decades has shown that people are much less accepting of behaviour that conforms to market rationality than they are of behaviour that is perceived as fair.  The reason why consumers lash out at Uber is that most people perceive their price increases to be unfair and exploitative of a large group of consumers who are vulnerable.  This is no different than consumers lashing out at hardware store managers for raising prices of shovels following a major snow storm even though the store managers are simply trying to do what Uber is doing.  That is, they’re trying to lower demand for the shovels to meet supply.  But this logic is unacceptable to the consumer and as a result the hardware store’s goodwill and reputation deteriorates as mistrust settles in. 

There has been a deluge of experiments that prove the above behaviour almost every time.  Predicting this behaviour is equity theory.  Equity theory suggests that people come to expect a certain level of fairness when comparing the investment (effort/time/resources) they put into something and the outcome they receive such that if they put more investment into something, they should receive a greater outcome than someone who put in less.  Perceptions of unfairness come along when, despite putting in the same level of investment, two people diverge in the outcomes they receive OR despite variations in the level of investment, two people get similar outcomes.  We’ve all experienced this whether it be a job promotion that we feel we should have received but instead went to someone who didn't deserve it or waiting an exceptionally long period of time for a gas pump only to have Johnny in his pickup stream in at the last minute and scoop up your spot. 

We can apply this same theory to the hardware store managers.  They didn’t have to give up anything (time, resources, profit) to justify an increase in price of the shovel.  Yet you as the consumer had to forego more of your money than normal to get the shovel.  This means that the store manager gains something at your expense.  We find this inherently unfair as humans.  But once we learn that the hardware store manager increased the price because of higher costs from her supplier of shovels, we’re okay because the manager lost as much as we did.

The same logic applies to Uber.  In a situation like the commuter crisis in Toronto, Uber benefited with higher prices at the expense of the consumer who lost money.  This is perceived as unfair and as a consequence has received a large amount of attention.  If we were all undying supporters of the market logic, you wouldn’t hear a peep from anyone, because this is the market mechanism at work. 

Our response to Uber is just another social experiment to help us understand what we expect from others in society.  It provides an important lesson to those individuals and companies who mistakenly rely on people to employ a market logic (i.e. consumers will pay higher prices when supply drops or demand increases) when evaluating the integrity of their behaviour.  In other words, trying to justify higher prices based on surges in demand or based on a lack of supply, while completely logical to some, is not acceptable to many.  There are a number of industries out there that struggle to grasp this idea and as a result suffer from an irreparable stain on their reputations.  Telecommunications, airlines, banks and oil and gas companies are among them.  Many of these companies take advantage of these sorts of crises and fluctuate their prices at the frustration of the consumer. 

As consumers of Uber, we need to make a decision. We can either accept Uber for what it is – an alternative transportation mechanism that instantaneously adjusts supply with demand – and suck it up or we can send a message to future entrepreneurs and business owners that developing a business that relies on the market mechanism alone, while ignoring equity theory, will be done at your own peril.  For companies, the advice is this:  a company like Uber needs to help the consumer understand that it is in fact losing something with the price increase; it needs to find and incentivize drivers to fill demand.  But the only way it can do that is to pay them more.  If the consumer understood this, we wouldn't think Uber was unfair and we'd see less lashing out at the company.  

Thursday, April 23, 2015

8 Struggles of the Conscious Consumer

It’s hard to be a conscious consumer!

We all know that higher prices prohibit us from consuming sustainably.  But the barriers facing the conscious consumer go well beyond costs and need to be considered from the perspective of a highly resilient system of interconnected forces that collectively make consumer responsibility analogous to climbing the proverbial waterfall. 

Aside from higher costs, here is a list of some of the barriers I’ve faced on a regular basis:

1)  Transferability:  being able to consume responsibly depends on whether the product in question can be used in other contexts.   Consider the use of non-disposable diapers that have important benefits for the health of children not to mention environmental benefits if washed properly.  While a conscious consumer may decide to use these at home, they may not be permitted at a daycare where children spend a majority of their waking hours.  Although my daycare does change our reusable diapers, no matter how much we try to educate them, they continue to send the diapers home to us in layers and layers of plastic bags with the diaper covers mixed in with the soiled diapers.  So not only are we disposing of the bags but we’re having to soak and wash the diaper covers in hot water; nullifying a good portion of the environmental benefits originally gained.  Also, traveling with reusable diapers is a huge hassle as baby change rooms and stations are equipped to make the change process as smooth as possible only if you’re using disposable diapers.   The broader point here is that the responsible consumer is a bit of an outcast where any effort to extend their behaviour to other contexts is often met with resistance from those more comfortable with the existing system of behaviour. 

2)  Standard Differentials:  Sticking with the daycare theme, there is no doubt that the diet served at daycares is an important criterion for parents when choosing which daycare to leave their children at.  However, interpretations of what is healthy or environmental vary substantially, meaning that highly progressive consumers will likely have to accept the fact that their daycare’s version of healthy and sustainable food options is of a much lower standard at best or misinformed at worst.  It drives me nuts that my son has two arrowroot cookies, caked with sugar, on a daily basis.  Do I prohibit them from feeding him these cookies at the expense of isolating him from his friends, making him a target for bullying down the road?

3) Peer Pressure to be Irresponsible: this brings me to my next point.  While still on children, no matter how environmental we want to be as parents, we have to respect the importance of our son feeling accepted by his peers.  Kids will be judged on what brand names they have in their lunches or on the clothes they’re wearing and thus a target of bullying for being different.  Despite how much we might teach our kids to be responsible, what do we do when they need to decide between responsible and bullied?  Even as adults, this peer pressure exists.  We are often perceived as stubborn environmentalists because we supposedly impose inconveniences on our peers and colleagues to the point where we often find it easier to temporarily do away with our principles.  It’s so much easier to join the fun and stuff our faces with bacon and balk at those picky eaters with their pesky principles.

4)  Gifts:  We all enjoy getting gifts. But oftentimes the gifts we receive are from people who might not be aware of one’s environmental and social standards.  We regularly receive articles of clothing for our kids with messages pushing inappropriate stereotypes that we would prefer to avoid.  These gestures are not at all insincere, they are instead a product of a perverse and highly complicated system of misinformation or lack thereof that even the most environmentally aware of us struggles to decipher.  My mother has worked so hard to find the products for our little guy that conform to certain standards but no doubt it’s a lot of effort because this information is not readily available.  You really have to dig and then once you’ve dug to identify the products' chemical ingredients, for example, you then have to dig further to figure out what they are and whether they have been tested for safety.  So the gift receiver faces a dilemma.  Do we insult our gift givers by giving away these gifts or telling them that we would prefer that they do more research before buying us anything.  Or do we lower our standards and suck it up?

5)  Living Arrangements:  I live in an apartment that doesn’t yet have the composting infrastructure necessary to avoid throwing food waste in the trash unnecessarily.  We tried a number of ways to conveniently dispose of our compost.  I first trucked our weekly bag of compost up to my place of employment, which has compost bins scattered around the property.  But they are not set up for such large disposals.  I then set out to get my hands on a Toronto Green bin only to learn that you need to provide explicit proof that you live in a residence (not an apartment).

As another example, today’s modern residential development is designed around the operation of a motor vehicle.  Unlike decades ago when neighbourhoods were designed along a grid formation with small retail villages nearby at walking distance, today’s subdivisions are massive plots of land with an intricate network of circular roads all leading to a common exit to the main road.  This oasis of houses means that catching public transit requires a 20-25 minute walk to this main road while finding basic sustenance requires a 30-40 minute walk to get to one of a dozen box stores at the corner of a major intersection.  These massive complexes require an additional 10 minutes just to walk across the massive parking lot and another 20 minutes to get to the other side of the complex.  Can you picture your neighbour passing you in her car wondering why you’re walking like a homeless person to the store while she’s moving her car down the parking lot as she makes her way from store to store?

6)  Lack of Availability:  I’ve found it difficult on many occasions to simply find retail locations that have sustainable products, leaving us at the mercy of what products exist on the shelves.  Although there are many green brands out there, many of them purposefully choose not to have bulk containers, forcing you to purchase their smaller plastic equivalent on a regular basis.  In a previous blog post, I’ve discussed the challenges of finding something healthy to eat walking down most streets.  Try stopping at any of the major service stations on major highways and you’re locked in a bubble of toxic processed fast food with the healthiest option being Subway’s sugar infused bread that smells like, as Jon Stewart once said, like a loaf of bread vomited.  Or you've likely found yourself at the mercy of the choices available at the mall food court.  Imagine a single parent with very little time and two or three starving kids.  He's staring at the options in the food court trying to figure out which represents the best of all unhealthy evils contributing to his children's level of obesity.  It's either let them starve or have them eat toxic food.  

7)  Information Asymmetry:  Consider how hard it is to find information about a product or service to learn about its social and environmental consequences.  Consider cosmetics where companies hide behind the veil of their rights to protect intellectual property to avoid displaying the ingredients of their products.  What is more, because entire industries adopt this practice, the above issue of availability emerges again as consumers are left without other options.  What’s worse is when companies attempt to improve their products yet create more problems than it resolves.  I’ve heard countless stories from consumers who talk about the fact that they thought they were buying the responsible product or service yet only learned later that it was worse than the original.  In their efforts to respond to growing demand for more sustainable products, companies use a reductionist approach by isolating and replacing the toxic chemical of the day and replacing it with something else.  Yet the something else is likely understudied and/or it produces unintended consequences as it reacts with other ingredients. 

8)  Poor Infrastructure:  Don’t you find it so tempting to toss recycled waste or compost into the trash bin? We build kitchens with the trash bin conveniently located under the sink most often with the recycle bin in the garage or outside.  On top of that, we need to sort out the recycle and deal with rinsing out the containers.  Why bother?  This is a major hindrance in apartment buildings where walking your recycle bin all the way downstairs and disposing it in a large bin in your underwear at -30 degrees is killer next to throwing it all down the garbage chute 10 steps down the hall. Perhaps this one is similar to added cost but the point is that our infrastructure today was mostly built at a time of waste, waste, waste. 

Many conscious consumers are at the mercy of the substandard building code of decades past as they literally feel the warm air in the winter and the cooler air in the summer escape outside.  It drives me absolutely bonkers that my son’s bedroom is 28 degrees in the middle of winter, requiring that I turn on the air conditioner.  Can you believe that?  Air conditioner in February?  Opening the window isn’t an option because it invites immense amounts of condensation and moisture resulting in mold. 

Leaving aside those consumes who prefer to be irresponsible, people often wonder why well-intended consumers don’t more actively vote with their dollars. The problem is that shifting disposable income to more sustainable products is only one piece of the puzzle.  Consumers need to take on a system that has multiple highly interconnected parts that reinforce each other to produce a pattern of unsustainable behaviour.  Consider for instance the amount of time, effort, and inconvenience it would take for a consumer to overcome the above challenges?  Add to this a highly competitive workplace environment where a responsible consumer is competing against people who are completely fine with being irresponsible. 

The good news is that once enough consumers climb the proverbial waterfall, a tipping point will ensue where the system shifts in a way that fosters supportive infrastructure, the availability of information, the availability of sustainable products and services and an increase in general standards. We’re just not there yet. 

Sunday, March 22, 2015

The Paradox of Corporate Philanthropy

I sympathize with companies that do their best to demonstrate to society that they are good corporate citizens.  In the past, the norm was for companies to contribute to any possible charity to demonstrate that they have a conscience, despite heavy criticism for the negative impacts their business has on society.  But these companies have received a lot of slack for contributing to causes that have little or nothing to do with their business, claiming that they are doing so as a cover up for what constitutes their daily core operations as a business.  In response, companies have worked to connect their philanthropic endeavors with their core products and services.  Wal-Mart gives millions in grants to nonprofit organizations to provide training and education for their retail workers to help address the chronic problem of low pay in the retail sector. Coca-Cola has as its priority areas water conservation in response to the drain their core operations have on water resources.  They have recycling programs to counter the negative environmental impact of waste their products produce.  They also promote active healthy living to counter the association of their products to obesity.  In both cases, their philanthropic endeavors are aiming to address major social or environmental issues for which their company and industry are largely responsible.

Ironically, doing so oftentimes illuminates the corrosive nature of their business.  This is because companies typically justify why they are contributing to a particular cause by explaining how pervasive and serious the issue is.  But they rarely connect the severity of the issue they are trying to address with their own operations, leaving them quite vulnerable to criticism as eager corporate critics pounce on the hypocrisy.  The anti-corporate message is appealing because it criticizes companies for contributing residual profits to a cause that their own operations is helping to create rather than looking in the mirror at their own operations to curb the impact they have on these issues.  These companies continue to use the old wealth distribution model where they set out to maximize profit levels and then from those profits donate a small percentage to address the negative externalities they helped to create.  Dow Chemicals is one such example where they contributed to a charity organized by Al Gore to improve clean drinking water.  But a major cause of polluted drinking water is the many chemicals developed and produced by Dow Chemical that ends up in water systems.  

The Dow Chemical example is a bit more discreet unlike other examples where companies are a bit blind by the hypocrisy of their efforts.  Consider Tim Horton’s SmileCookie program that aims to raise money by contributing 100% of the proceeds from cookies sold to children food nutrition programs.  In this example, Tim Horton’s is aware of the obesity issue but rather than focus on exercise and healthy living as the charity of choice, they target the lack of nutritional knowledge associated with the very crap that can be found in their food.  But the ironic thing is that they do this by selling the very product that spawns the need for the charity.  This is a comedy skit waiting to happen. 

While the above is quite comical, there is a darker side to recent philanthropic trends that I think was brought out in a report criticizing the Ronald McDonald’s Children’s Charity. Companies are constantly criticized for marketing products that create high levels of environmental and social harm in some cases to the point where they are prohibited from doing so.  Marketing fast food to children, for instance, has become a marketing faux pas.  The report I mention above found that the Ronald McDonald’s Children’s Charity is a sneaky yet affective way to overcome McDonald’s inability to market to children directly.  Like the Tim Horton’s example above, McDonald’s can promote its products under the guise of a charity because it’s suggesting that by purchasing their products, people are contributing to a worthy cause. 

So how do companies avoid the onslaught of criticism that ultimately comes back to haunt their brand down the road?  Or, perhaps more importantly, how do employees of these companies that aren’t particularly comfortable by this hypocrisy go about changing this?  Companies need to realize that philanthropy – whether it’s related or unrelated to its core business – will always be ripe for criticism.  And while it might provide companies with a temporary marketing edge, not only can it be easily replicated by competitors, the downside risk of the above hypocrisy is massive.  Companies need to stop trying to have their cake and eat it too by making billions off of the backs of society yet looking good through charitable donations. Consumers, employees, and shareholders are increasingly seeing through it. 

The opportunity for strategic competitive advantage comes to those companies that climb the proverbial waterfall and make a genuine effort to address the underlying cause of the issue they are proclaiming to address.  This means challenging norms in their industry, revolutionizing the existing product or service portfolio, creating industry level social and environmental standards, building networks of actors who possess the necessary complementary capabilities to shift the system of activity that is highly entrenched in their industry.  Those companies that take on these tasks have figured out how to embed sustainability and corporate responsibility into whatever they do.  Philanthropy doesn’t make much sense to them because they would rather use those resources to further entrench a competitive position that leaves their competitors relying on a philanthropy strategy that is highly replicable.

Wednesday, February 11, 2015

Student Stress in Business Schools: For What?!

This week my students wrote their midterm exams.  The exams only take up half of the class, so I used the rest of the class to discuss the topic of stress in the workplace. No doubt the onslaught of exams and assignments due right now provided them with a way to personalize the key messages of the textbook.  I began the discussion with an alarming study done by the Association of Universities and Colleges of Canada where they found that of 30,000 post-secondary students surveyed:

  • 89% were overwhelmed by obligations
  • 54% have feelings of hopelessness
  • 64% felt lonely in the last 12 months
  • 56% felt overwhelming anxiety
  • 10% seriously considered suicide

Even more interesting was that the study attributed stress and anxiety as the two main causes of poor academic performance, each explaining 39% and 28% respectively. 

What struck a chord with me is that my students didn’t seem at all surprised by these statistics.  In this backdrop of unprecedented student stress, I then asked them to think about what might be causing this level of stress in their lives and of the lives of a good chunk of the 30,000 students in the study.  I was quite taken by the honesty of the opinions put forward by my students.  But I was more importantly concerned by what they were telling me.  What came from this discussion was an expression of immense pressure imposed on them by those who ironically were meant to support and nurture them.  Students discussed the role of their parents in setting expectations that were highly unrealistic, such as the need to maintain the 91% average that got them into university even though the expected average of undergraduate students during the program is 77%.  In addition, although business programs tend to admit students on the basis of a balance between good grades and a demonstration of leadership, commitment to extracurricular activities, and community involvement - the very things that might reduce their stress level - these very programs all but snuff out these latter qualities by failing to reward them for continuing along these lines.

Another point of discussion was the stress levels associated with getting good grades that impact their ability to get a job upon graduation.  There is a sense among students that their grades are paramount in determining whether or not they will succeed in life, despite the fact that a majority of employers do not look at grades.  In my teaching career, and even compared with my own time as a business student, I have witnessed an increase among students in the prioritization of getting a job and a simultaneous relegation of what many would argue is the spirit of university life: to learn, contribute to a learning community, develop as a person, give back to the community. 

I worry that this has particularly important consequence for business students.

Consider a recent US study done that compared satisfaction levels of university/college graduates across different degrees (e.g. business, humanities, science).  They found that only 37% of business graduates were deeply interested in the work that they do, which is significantly lower than graduates in non-business disciplines where 45% were deeply interested.  What is particularly striking is that business graduates lag behind their non-business peers in “liking what they do each day and being motivated to achieve their goals”.  And all of this comes with a slap in the face as business graduates are not making any more than their non-business counterparts. While this is a US study, I have a sinking suspicion that the same results would emerge in Canada.

So if I were a business student, I’d be asking, "Why am I going through all this stress when it’s only going to lead to huge dissatisfaction in the job I’m in afterwards in comparison with my non-business peers?".  These studies suggest to me that we have imposed on our students an expectation that they endure high levels of stress and anxiety for jobs that they don’t really care about doing. 

To this very point, I was in a meeting a couple of years back when one of my colleagues was befuddled by the fact that a majority of our undergraduate students go on to jobs in what are known as the ABCs – Accounting, Banking, and Consulting.  He wondered why so few of our graduates are interested in jobs at Google, Amazon, Apple, Facebook or their equivalents.  Notice that unlike the ABCs, these jobs create new value for society by introducing products or services that have the potential to revolutionize how we live and resolve some of the most important problems we endure today.   In fact, a study done a few years ago by economists Stephen Cecchetti and Enisse Kharroubi found in a 2012 study that when too many business graduates go to the finance sector, economies decline because strong talent is wasted for financial projects that don't do much to create growth over the long haul.  

At the beginning of the term, I asked students to fill out a profile card to tell me a bit about them.  During the coffee breaks of each class, I ask students one-on-one for elaboration of what they’ve written on their profile.  From these conversations, I’m constantly amazed by the passion they exude for particular things, their diverse backgrounds, interests, hobbies, uniqueness and their general perspective.  But there is a sad but real disconnect between these characteristics and what they indicate, in the same stroke of their pen, as their area of intended specialization in business - the ABCs - even though they are passionate to do much more.

Rarely do business students get credit for engaging in activities that do not fall within a narrowly defined scope of business acumen, a model of curricula that predates even my time.  When I think of it this way, I’m not entirely surprised by the stress and anxiety levels of students and the lack of satisfaction and meaning they get from their jobs post-graduation. 

To any business students reading this right now, in the midst of the daily pressure of writing your exams and completing your assignments, try to infuse your time here with what university was meant to be about – self-development, learning, harnessing your passion, and finding meaning.  Not only will this help manage your stress level, it will also ensure that you find yourself in a career that is meaningful, has purpose and interests you to your core. 

Saturday, October 25, 2014

Tim Hortons: Hiding Behind A Façade of Corporate Citizenship

Tim Horton’s is an iconic Canadian brand, known for its doughnuts and signature coffee that I’ve recently learned is a top secret recipe known only by three people.  Indeed, it’s critical for Tim Horton’s to keep this intellectual property out of the hands of competitors especially given the fact that many visitors to  Canada liken the coffee to the liquid that would ring out of soaked dirty dress socks. 

This past week, I attended a presentation by the manager of sustainability at Tim Horton’s that outlined the many impressive initiatives the company pursues across social, ecological and economic dimensions.  They have a coffee partnership with coffee farmers, an aboriginal community initiative called Horizons, LEED-certified retail stores, an alternative hen housing system for 12 million sourced eggs, and millions of dollars donated to various charities including Timbits Sports.

But there were a few things that left me puzzled.

Canada’s largest fast food service chain touts the range of healthy options they provide consumers.  Yogurt, soups, sandwiches and “fresh” fruit smoothies.  An added benefit is that the smoothies are void of any fibre and protein, which we all know are two destructive ingredients to the human body.

Wait, what? 

No fibre or protein in the smoothie means that Tim Horton’s doesn’t put any fresh fruit into the blender.  Nope, why use fresh fruit when they can just use purees and juices, which slow down the pace at which consumers assimilate the sugar that fruit naturally contains.  No doubt our society is facing a major epidemic of skinniness because we are assimilating sugar too quickly.  So thank you Tim Horton’s for doing your part to slow things down and fatten us up a bit. 

So what if the Smoothies’ 30 grams of sugar is more than the sugar content of a Tim Horton’s doughnut!  In comparison to all those sugary drinks and sports drinks on the market today, Tim Horton’s smoothies are technically healthier.  I can just see the marketing slogan now, “Drink Tim Horton’s Smoothies, we only shorten your life by 15 years not 20 like leading competitor brands”, or how about, “Tim Horton’s Smoothies, not as bad as soda”.  

Then there is the yogurt.  Plain Greek yogurt has 6.5 grams of sugar per 6 ounces of yogurt while regular plain yogurt has 12 grams of sugar per 6 ounces.  Tim Horton’s yogurt has 25 grams of sugar per 6 ounces of yogurt.  To put this into perspective, a can of Coca-Cola has 19.5 grams of sugar per 6 ounce.  Or take something of similar substance to yogurt like chocolate pudding.  There are approximately 30 grams of sugar per 6 ounces of chocolate pudding.  You mean to tell me that all this time I’ve been eating yogurt and fruit when I could have been eating chocolate pudding?!?!

But nothing shows Tim Hortons “commitment” to the community than its Smile Cookie program.  At the beginning of a video clip I posted below, the caption reads: “Tim Horton’s believes it has a positive role to play in enabling communities to thrive and grow”. 

The once a year event sees franchise owners bake and sell chocolate chip cookies with icing happy faces.   100% of the proceeds go to over 500 charities. The charity chosen by the franchisee in the video is…

Wait for it…

Here it comes…

“Nutrition for Learning”. 

Later in the video, Brian Banks, Community Development Officer of Nutrition for Learning, struggles with the hypocrisy of the whole initiative when he says, “Nutrition for learning is all about enhancing the ability of every student to get a proper education by having the proper nutrition throughout the day”. 
There are comedians out there praising their own god for this sort of hypocrisy because they honestly couldn’t write anything better than this.  The video continues with: “Over 3200 students will have the proper nutrition throughout the day to make sure that they can focus on learning”. 

Are you kidding me????!!!?!?!? 

Let me put this simply:  You’re selling cookies – the same sort of products that dominate the shelves in your 4592 stores across Canada that likely have the same or similar nutritional value as your unhealthiest donuts that contribute to a national obesity epidemic – to raise money for nutritional education among children.  Do you realize how hilarious this is? 

The Smile Cookie Program is like Air Canada giving away free flights to help educate air travelers of the worst possible service experience in the airline industry.  Or AT&T or Verizon in the US or Rogers and Bell in Canada contributing a portion of their internet service fees to fund a consumer education program about how much consumers “get it up the ass” on a consistent basis from the telecommunications industry.

Here’s some advice Tim Horton’s…how about you shift the program to one where you try to sell as many cookies as possible to show the negative effects of these cookies on society as the means by which you educate children.

In other words, sell the cookies to show children that you really shouldn't eat these cookies!

Here's the video, that will surely warm your heart.

What gets me the most about Tim Horton’s is that they proclaim to be a company that delivers quality products to communities.  But do we understand the real impact that Tim Horton’s has on their communities?  They use a classic profit distribution approach to corporate citizenship where they make huge sums of money off the backs of the obese and then use part of that money to resolve any pent up guilt or stakeholder pressure to stop by contributing money to charity. 

This is no different from my post on CIBC’s Run for the Cure program where the bank claims to support cancer research yet continues to provide capital to the very companies producing or emitting the chemicals that cause cancer.   Tim Horton’s has done a great job at marketing a façade of corporate citizenship that masks their underlying business model which, unfortunately, will go down in history as one of the major contributors to Canadian obesity in the 21st century. 

I get very frustrated as a business professor when companies aim to have their pie and eat it too in the sense that they get to bathe in the profits that come from their core operations that cause harm to society yet at the same time disguise this very act through impressive marketing campaigns that show how wonderful they are to the community.

At the end of the day, I don’t mind that there are companies out there that provide consumers with unhealthy food or toxic products that leach into their bodies, or banks that loan to dirty companies.  What gets me is when trained marketers of these very companies – or more egregious the social responsibility employees in these marketing departments – create the image in the minds of consumers that they have made dramatic improvements and that they are taking sustainability and social responsibility seriously. 

That’s the problem. 

There is no doubt in my mind that when looking at the net impact companies have on society, those that are honest and transparent about who they are and what they represent, even if they produce toxic products, are better for society than those who are dishonest about who they really are.  In other words, Harvey’s doesn’t hide the fact that they are the unhealthy option but a company like Tim Horton’s, in their broad market pitch about community commitment, is dishonest about its role in society when you net out the negative effect of their products with their seemingly positive effects of the charity programs and social responsibility efforts. 

Sunday, September 7, 2014

I’m Starving!

Last Thursday afternoon, having forgotten my lunch at home, I spent an hour trying to find something to eat.  I walked and drove up and down a number of streets in a small corner of the GTA, passing by 4 Tim Hortons, 3 Pizza Pizzas, 8 Subways, a Wendy’s, a KFC, 2 McDonald’s, and a Pizza Hut.  One day later, driving north from Toronto on highway 400, I was overtaken again by hunger.  I passed a couple of large service stations that had a wide array of food options from Pizza Pizza to Starbucks to Wendy’s to McDonald’s to Tim Hortons.  Avoiding these, I then I took a number of exits between Toronto and Barrie but had no luck in finding something that would cure my appetite. 
Some might say that my ravenous hunger was left unresolved because of the overwhelming selection that paralyzed me with decision anxiety.  Others might say that I must just be an elitist food snob who just can’t bring himself to fast food outlets unless they serve lattés and filet mignon.  Nope, that’s not it.  I just prefer not stuff my body with food that will kill me prematurely!

Over the last several years, it seems harder and harder to find something relatively quick to eat that doesn’t involve ingesting crap!  There are several reasons for this difficulty, but here are two:  First, knowledge of what constitutes unhealthy food has grown substantially in the last decade so people's awareness of what to stay away from now casts a fairly wide net around many food outlets.  Oh, how the phrase “ignorance is bliss” carries particular relevance right now.  Second, major routes and populated areas are overwhelmed with a relatively small number of familiar brands that may seem diverse on the surface (pizza versus subs versus hamburgers) but are in fact identical in the egregious ingredients that make up their menus. 

If one wants a legitimate reason why obesity has become such a major issue in our society, you only need to consider that, in the two scenarios above, my options are to starve myself or succumb to what is available to the mainstream public.  I balk at those pundits, especially those from the food and beverage outlets themselves, who argue that obesity is a matter of personal responsibility where consumers need to simply choose those foods that are healthy for them.  But this argument assumes that consumers do have a choice in the market.  Consider a young family or single mom in a suburban neighborhood with their children famished after a day of school shopping.  What are the parents’ options?  How can they be responsible when their options are 1) to feed them this deplorable food or 2) to avoid these outlets and let them starve?

An Ottawa food bank declined to provide those in need foods that don’t meet nutritional standards such as Kraft Dinner, hotdogs, pop, potato chips, candy among other foods.  Although the manager has received tremendous slack from critics arguing that some food is better than no food, she argues the whole point of helping people is to make sure that the food available to them isn’t going to make their situation worse.  First of all, shame on those donors who provide food banks with the bottom of the so-called nutrition barrel.  Ya, let’s stick it to those welfare leaches!!  Second of all, it’s no wonder that there is a strong correlation between income level and obesity rates when you have the cheapest unhealthy food widely available to the poor.  Third, recipients of the food bank are in an even more precarious position when it comes to food choice.  Blaming these people for being a burden on our health care system would be like the Police in a small Missouri town beating the crap out of an unarmed black man and then suing him for bleeding on their uniforms.  Oh wait, that already happened

In the fog of a totally screwed up restaurant industry, there is a beacon of hope and opportunity for those moral entrepreneurs who want to fill a clear void in healthy alternatives to match an ever-growing demand by increasingly educated consumers.  If you see a middle-aged Italian wondering the streets a bit pale with hunger, I’m interested in spending some cash for something, anything that doesn’t shorten my life or push me into the next weight bracket.

Tuesday, April 1, 2014

Thank You Menchie's for Promoting a Healthy Lifestyle

Just the other day, I took my family to Menchie’s, a new frozen yogurt franchise, among a growing number of self-serve frozen dessert locations popping up in and around the greater Toronto area.  While eating my pure chocolate and cupcake frozen yogurt covered with an array of toppings, my wife and I scanned the store and were pleased to note the many health claims of the Menchie's brand:

“Menchie’s yogurt comes from ‘Happy Canadian Cows’”

“Our frozen yogurt contains live and active cultures that promote a healthy lifestyle”

“Canadian milk contains protein and calcium for healthy lifestyles”

Finally, an alternative dessert option that really understands our values.  I mean who wants yogurt from those oppressed North Korean cows or those socialist French cows or those Chinese cows that are ruled under a dictatorship.  And unlike Canadian milk, cows in countries like Japan are stuffed with uranium and plutonium and those Italian cows, well, we know they are merely vessels to transport money, drugs and sopressata for the mafia. 

Menchie’s yogurt contains the live and active cultures found in real yogurt.  Never mind that it’s the 6th ingredient after sugar, corn syrup solids, skim powder and stabilizer.  That’s missing the point.  Menchie’s has worked hard to eliminate ingredients like high fructose corn syrup from its yogurt and instead has glucose-fructose, propylene glycol, citric acid, ethyl alcohol, and sodium benzoate. 

And to those cynics out there who proclaim that this is just as bad, let me remind you of the alternative socialist regime where options beyond sliced bread are limited.  A capitalist society requires that we forgo our health for the greater good…of Menchies.  Menchie’s has to have some unhealthy ingredients in its products, otherwise it would cease to exist.  I mean, there are no other options.

Think about it, natural yogurt ingredients are prohibitively expensive.  Why waste time with natural ingredients when we can replace them with cheap artificial ones?  Sure, corn isn’t a natural ingredient in yogurt but it’s really cheap so why not replace some of the more expensive natural ingredients with corn syrup solids and guar gum?  And to those leftists out there who argue that it’s not really yogurt anymore, all we need to do is add the vitamins and active cultures afterwards.  What’s the difference?

And what about the flavours?  One option is to use real food such as mango slices or pure mango juice in the yogurt.  But why do that when you can simply engineer flavours.  Let’s be honest, the 4 billion years it took to create the complex array of chemical components found in nature’s bounty is no match to the intellectual prowess we gained these last 200 years in chemical engineering.  That’s why Menchie’s prides itself on a team of taste engineers who can engineer flavours without having to resort to the use of natural ingredients.  Take blue raspberry, for example (what the f*&* is blue raspberry?).  Sure one option is to combine blueberries and raspberries to provide our customers with the nutritional value of real fruit, value that nature figured out a long time ago.  But that’s really expensive and difficult to work with.  Not only that, we’re way smarter than Mother Nature.  Another option is to create the impression of blue raspberry with a picture of a blue raspberry at the dispenser that disguises the fact that what constitutes the flavour is sugar, water, citric acid, natural and artificial flavours, potassium sorbate, sodium benzoate, and food colouring blue #1. 

Another reason why Menchies avoids the burden of nature’s bounty is because they are so very excited to see us again.  You see, nature doesn’t have the same level of addictive qualities found in refined sugar.  That’s why they have a wide array of toppings that, on the one hand are so incredibly cheap, but on the other psychologically wire you to come back for more.  And no doubt we as consumers are eager to return.  So why bother providing real fruit and real yogurt when all we’re going to do is return at a rate that would keep obesity levels at an all time low.  Who wants that? 

No, thank you Menchies…thank you for a revolutionary business model that reverse engineers Mother Nature and provide us with what we really need – ingredients that are as cheap in cost as they are in nutrition and that share addictive qualities of tobacco.

Monday, February 3, 2014

The Reinvention of Shoppers Drug Mart

Shoppers Drug Mart is no doubt an iconic brand here in Canada.  With over 1200 retail outlets across the country, Canadians can count on this leading drug store retailer to provide us with the vital medicines we all need to survive and flourish in the modern age.  Founder Murray Koffler’s ambition was to “build a national organization of pharmacies without sacrificing the personalized service of the local community pharmacist”.  Yes, indeed, it’s that personal touch we get from those community-oriented employees.  Never mind that these wages oftentimes prohibit them from living in the very community they work in. 

But that’s just the realities of the free market. We can’t obstruct that which has provided us with so much good.   As a reputable, responsible company, they can’t go around paying people community living wages and still benefit from sky high margins that come with pricing well beyond their competitors.  Where else can you see discrepancies in prices as high as 40-50% range compared with their competitors?

 And it’s indeed the spirit of this free market we so hold dear that brings us the many innovative and life-saving products that now populate today’s Shoppers Drug Mart.  Just walking through the doors, consumers are instantaneously greeted with the light aroma of toxic chemicals that pervade their cosmetics and beauty products section.  And at one-third of the store’s footprint, you can’t possibly miss it.  And what about all the wonderfully processed food that can wait months on shelves for us to purchase them, topped off by a barrage of refined sugar and salt packed confectionery products that together make up a second third of the store. 

But be weary of those liberal pinko critics who lambaste such a fine community citizen as Shoppers drug mart.  All we need to do is look at the remaining third of the store, spearheaded by a responsible pharmacy with professionals in lab coats meant to put to shame any claim of hypocrisy put forward by those leftist 'nutbars' as my idol Kevin O’Leary would likely put it.  Sure, it may be strategically placed so that you have to walk by the high margin beauty products on the way in accompanied by a barrage of advertisements telling you how unhealthy a lifestyle you lead or the high margin addictive salt, sugar and fat products you need to pass on the way out that are linked to one of society’s greatest health epidemics.  But that’s beside the point.

What’s important here is that Shoppers Drug Mart is there to provide you with all the health care products you need to cope with the irritated eyes and skin, headache, heart disease, stomach ache, diabetes and obesity that you’ll likely get as you consume the rest of the products in the store. 

Ladies and gentlemen, Shoppers Drug Mart is truly a pioneer in the one-stop shopping experience where you can literally start with products laced with cancer-causing chemicals then move on to the processed food aisles, not to fret because you can just pick up the health remedies you need to overcome the onslaught of destruction to your body.  Indeed, the free market is really the only mechanism where a company, calling itself a community citizen, can survive by bringing their consumers to the brink of death only to revive them for another round of shopping.  After all, who would buy their health products if its own consumers weren’t overwhelmed with addictive products, accompanied by coercive advertising?  We can’t have them promoting natural beauty or fresh fruits and vegetables.  Where’s the money in that?  More importantly, they’d be out of business if they didn't provide us consumers with the products with consequences that guarantee a market for expensive health care remedies.

Tuesday, November 12, 2013

Business' Role in Social Problems: Villain or Hero?

Business strategy scholar Michael Porter recently presented a TED Talk entitled “Why business can be good at solving social problems”.   While I admire his optimism, he tends to ignore some very fundamental business strategy frameworks that not only contributed to the social problems he’s talking about but would ultimately usurp any ambition to resolve them.  I present three of his main messages and then discuss what I believe he fundamentally overlooks.

1.  Business as Source of Problems:  Porter motivates his talk by remarking on the growing consensus that business is seen as the main contributor to today’s societal problems rather than the solution.  That said, he appears to struggle with “why we’re having so much trouble dealing with these problems”.  I’m fascinated by this because he fails to connect these social problems to the very frameworks that he devised three decades ago.  Back in the 1980s[1], Michael Porter started building an iconic name in business strategy when he flipped around the industrial organization (IO) model that associated firm conduct and performance with industry structure.  In this economic model, firm returns are a function of certain industry conditions such as entry barriers faced by entrepreneurs, the number and relative size of competitors, the existence and degree of product differentiation in the industry, the amount of power buyers and suppliers have in the industry and the number of substitutes available.  As business scholar Jay Barney explained in 1986[2], the IO model was developed to assist government policy makers to achieve “socially optimal levels of intra-industry competition” by devising regulation that would structure industries in ways that maximized benefits for society.

In his development of a normative theory of competitive strategy, Porter and other strategy scholars turned the policy objectives of this model upside down.  Rather than use this model to assist policy makers to keep industries more competitive, strategy was born with the idea that business, in their effort to generate greater profit, should focus on creating or modifying industry characteristics in ways that generate higher returns.  In effect, firms should create higher barriers to entry, reduce the number of competitors, reduce buyer power by increasing product differentiation, eliminate substitutes, and reduce supplier power by achieving market power or holding suppliers hostage.   We see this behaviour all the time as part of routine business practice.  The blatant irony in Porter’s talk is that the main reason why societal problems persist today is that business graduates enter management with an injection of competitive strategy thinking that advises them quite explicitly to appropriate the value that would have otherwise gone to society.

2)  Business as Part of the Solution:  Porter spends a lot of time explaining why business has to be part of the solution.  To do so, he tends to revert back to the bare bones of capitalism that Adam Smith introduced in the 1700s.  The whole point of capitalism is to represent an efficient mechanism through which resources can be allocated to address social issues/needs.  Porter explains that, unlike other actors in society, business is the only actor that can generate the wealth needed to scale the solution to social problems.  Profit, he states, is “magic” because it allows business to reinvest capital into a solution to a societal problem so that it can be sustained and scaled.  He brags that other actors in society, be they non-governmental or governmental organizations, are completely dependent on the business enterprise to generate this wealth that would then be distributed in the form of taxes to governments and donations to NGOs. 

While he acknowledges the unprecedented growth of NGOs in recent decades, he doesn’t at all attribute this growth to the fact that the conventional non-governmental actor – business – has failed to do its job as Adam Smith had intended.  Ironically, Porter advises that we go back to business as the solution, as it was originally intended, even though his teachings have instructed business on how to usurp this system for its own ends, which created the NGOs in the first place. 

Porter explains that NGOs and governments have not always appreciated the connection between social and economic value.  In his 2006 article entitled Strategy and Society [3], he explains that “if governments, NGOs, and other participants in civil society weaken the ability of business to operate productively, they may win battles but will lose the war, as corporate and regional competitiveness fade, wages stagnate, jobs disappear, and the wealth that pays taxes and supports nonprofit contributions evaporates” (pg. 83).  His point is that NGOs fail to grasp the idea that healthy societies need healthy business, explaining that “no social program can rival the business sector when it comes to creating jobs, wealth, and innovation that improves standards of living and social conditions over time”.  He explains that governments and NGOs forget the “basic truth” that “by providing jobs, investing capital, purchasing goods, and doing business every day, corporations have a profound and positive influence on society.  The most important thing a corporation can do for society, and for any community, is contribute to a prosperous economy”.  Porter appears to criticize non-business actors for not acknowledging the role of business in society, almost to suggest that had these non-business actors realized this, we wouldn’t have the problems we have today. 

What drives me absolutely bonkers about this rhetoric is that Porter’s referral back to basic capitalism ignores the very fact that despite this model being introduced in the 1700s, business strategists in the last few decades have advised managers on how to avoid creating value for society and to instead appropriate value from society.  Porter is silent on this and instead offers a Utopian solution that suggests that business should really do this because it makes business sense to do so.  But if it did, then why are so many businesses resisting?  Porter blames this on short-termism.   The reality is that since Porter’s scholarly work in the 1980s, business has grown quite effective at taking his teachings to an unprecedented level.  For instance, why bother pursuing the arduous task of addressing societal issues when you can create an industry structure that generates more profit?  Why bother meeting consumer needs when you can manipulate those needs or at the very least reduce consumer power and choice to products/services that allow you to capture more profit?  Porter essentially taught business to manipulate those very structures that were meant to encourage them to address social needs.  Interestingly, when we line up the key time periods when things when irreversibly ‘south’ for society, we see a rather striking correlation with the timing of Porter’s teachings (see adjacent figure below). 

3.  False Tradeoff.  Porter ends his talk by highlighting the false tradeoff that tends to exist in the minds of managers between profit and social good.  For instance, it is costly to create a safe working environment or to reduce pollution.  He argues that the reality is the opposite by referring to the proverbial low-hanging fruit where businesses can save on costs if they pollute less because they are more efficiently using resources or if they create a safe working environment because there are less accidents and productivity levels increase.  To Porter, there is a fundamental synergy between business and societal goals. 

No doubt there are many examples of business demonstrating this sort of synergy.  Scholars and practitioners have been talking about social entrepreneurship quite extensively for over a decade; much of what Porter is referring to is not new.  But let’s try to understand why these sorts of examples are not dominating business behaviour.   Again, it is important to go back to the fundamentals of strategic management that Porter helped establish.  One of the primary reasons social entrepreneurs and NGOs struggle is because they are typically up against a system that is rigged against them.  Consider entrepreneurs in green energy.  Despite climate change and our dependence on fossil fuel sources of energy representing a major social issue, these entrepreneurs are up against a very aggressive lobbying effort to erode any political effort to regulate fossil fuel intensive industries or to subsidize green energy initiatives.  Or consider Better Place, an innovative company that aims to establish a transportation platform that would replace the internal combustion engine.  There is no doubt that despite the fact that many of today’s social issues can be traced to oil, there have been and will continue to be a small group of very powerful interests that will work hard to make sure this business model doesn’t happen. 

Now where does this behaviour come from?  Remember how the industry-conduct-performance framework was meant to assist government in regulating industries so that they remain competitive and committed to societal interests?  Well corporate political activity, a branch of business strategy, studies how companies work to manipulate the political landscape in ways that favour their interests.  This is precisely what Michael Porter advised companies to do when he suggested that business should work to create favorable industry environments.  By favourable, one can easily extend that to favourable political environments.  Rather than sit passively and hope that such a regulatory environment will emerge for your business, managers have learned to create such environments.  This sort of behaviour takes place all over the world as many activists refer to crony capitalism and the realities of our plutocracy.    

As a business strategist myself, it’s repugnant to see Michael Porter standing up on TED touting the need to unleash the power of business and the capitalist system as if society was unaware of what this system was intended to accomplish, completely ignoring that it was his teachings and frameworks that played an important role in derailing this system.  The core issue is not that the model is wrong.  I agree with Porter that business can be a critical actor when it comes to social issues because it does have the power to generate the residual capital to reinvest and scale the solution to some of our most intractable problems.  The issue is that the power imbalance among societal actors, alongside the neoliberal ideology that dominates our global economy, has allowed business to usurp this model to achieve its own ends at the expense of society.  Before we arrogantly present business as the hero, we should first discuss how and why business has been, and continues to be, the villain.

[1] Porter, M. (1980). Competitive strategy:  Techniques for analyzing industries and competitors.  The Free Press:  New York, NY.
[2] Barney, J (1986).  Types of competition and the theory of strategy:  Toward and integrative framework.  Academy of Management Review, 1194): 791-800.
[3] Porter, M. & Kramer, M. (2006). Strategy and society:  The link between competitive advantage and corporate social responsibility.  Harvard Business Review (December: 78-92).