Friday, December 31, 2010

Top CSR Stories of 2010

My colleagues Dirk Matten and Andy Crane posted their take on the top 10 CSR stories of 2010:

Looks like the BP Oil Spill is taking most of the votes.

Have a look and cast your vote

Monday, December 13, 2010

One Man's Quest to Change a Gasoline-Based Transportation System

Shai Agassi, CEO of Better Place, is calling for the end of gasoline cars by 2020. If you’ve ever heard this guy speak, I think you’d find yourself believing it.

I’ve blogged about Better Place before. They have raised $700 million from investors who see the potential in Agassi’s business model. Better Place is a global provider of electric vehicle infrastructure, network and services. The company isn’t in the car business nor is it in the fuel business. They are instead in the systems changing business.

I’m particularly impressed with this company because they demonstrate the capability of business to enact social change. This approach to sustainability is much different from what we hear of in a typical corporate social responsibility report where companies demonstrate their commitment to reducing CO2 emissions, waste or energy use by trivial amounts. Better Place’s version of sustainability is not about making incremental improvements to existing models; it is about trying to change the taken for granted and unsustainable transportation system that locks us into an oil-centric society.

There are many companies like these, companies that relentlessly work to change systems that many would argue are impossible to change due to the highly inertial and institutionalized norms associated with their existence. Grameen Bank, Interface Carpets, Patagonia, Terracycle (photo of founder to left). VanCity, and many others are doing hard work to change a highly established set of practices that lead to social inequity and environmental destruction.

But the challenges are enormous – more enormous than any typical entrepreneur would face. For this is not a matter of filling a small gap in the marketplace such as selling a new brand of detergent or opening a restaurant in a neglected area of the city. This is a matter of building new supply chains, unconventional partnerships, and new markets that did not exist before. Better Place needs to build up new suppliers to provide the vehicles to fill these stations, the batteries to fuel the vehicles, and the technology to provide the service. They also need to inspire the consumer to engage in this new system which is not just about purchasing an electric vehicle but about changing the way they think about refueling and driving more generally. They also need to build strong partnerships with unconventional actors like NGOs, communities, and governments. Without the Israeli, Danish and Australian governments’ buy-in, any system-changing endeavor like this one would be quickly disbanded.

Another challenge is the fact that they are facing a brick wall of embedded actors who would be severely threatened if something like this were to happen. Agassi mentions ‘oil’ as his primary competition. Courageous entrepreneurs like Agassi who meddle with a system that a small wealthy elite group has worked to institutionalize will face enormous resistance, much like the electric car industry faced in the 1990s.

So in effect, a firm like Better Place is thinking at the systems level rather than introducing a new product or accessing a new market within an existing system or supply chain. As John Elkington puts it, engaging in this type of entrepreneurship requires a special kind of person, one that is unreasonable and insanely ambitious.

Tuesday, December 7, 2010

Our Science-Based Society: Solution or Self-Fulfilling Prophecy

CBC aired a documentary called “Playing God with Planet Earth” where they explore the latest on geoengineering and engage in a very thoughtful debate about the potential opportunities and dangers of pursuing this highly controversial area of science.

I was particularly struck by the following quotation from scientist David Keith:

“These are technologies that give us enormous leverage over the planet where once you know how to put a kind of aerosol in the stratosphere, then an incredibly small amount of money allows you to manipulate the entire planet. It gives you enormous god-like powers”

During the documentary, there is a debate about whether we should use computer models to test the effects of geoengineering or whether we should conduct small-scale experiments to monitor their effects. Isn't this missing a bigger issue? On the one hand, computer models are limited to capturing the variables it is programmed to include. On the other hand, the use of experiments falls victim to a naïve assumption that the effects are merely small-scale versions of global phenomena – something that complexity theory would disagree with.

In both cases, it’s important to ask whether we have grown over-confident in our ability to use the scientific method to resolve global issues. The documentary nicely chronicles a geoengineering strategy off the coast of Senegal where government officials responded to flooding upstream by cutting a drainage canal in a sandbar that protected small villages from the strong ocean currents. Within a matter of months, the canal exploded in size from a few meters wide to several hundred meters. The resulting waves wreaked havoc on small villages ill-prepared for the onslaught. The point CBC was trying to make is that we are ill-equipped to fully understand our very simplistic responses to nature's complexity.

To explore this further, it may be worthwhile to consider the debate on what is meant by “sustainable development”. The “weak” interpretation of sustainable development is guided by a perspective that views humans as superior to nature and thus in a position to exploit the natural environment as part of an economically rationalized agenda. Here, sustainable development is overpowered by the scientific-industrial paradigm whereby development should be determined by science and economics. The very idea that we have control over nature and that the coveted scientific method will come to the rescue falls within our socially constructed worldview, resulting in, what some would argue, a self-fulfilling prophecy. Are we falling victim to what Einstein warned: “We can’t solve problems by using the same kind of thinking we used when we created them”

The “strong” interpretation of sustainable development views humans merely as one strand of the web of life with no privileged place in nature. Advocates of this perspective argue for changing the ends of social actions away from economic and scientific ideals to morals and values using participatory, transparent and democratic processes. The Dalai Lama, in a book called The Universe in a Single Atom: The Convergence of Science and Spirituality, argues that the separation of science and spiritually is a false distinction that must come to an end if we are to address some of the more complex phenomena in our society. Some physicists, stumped by the unpredictable and completely irrational nature of particles at the subatomic level, are beginning to turn to spirituality and non-science based thinking for answers.

Could a greater incorporation of non-science and non-rational based thinking play a critical role in highly complex decisions? Applying this question to geoengineering at a simplistic level might suggest that any scientific pursuit must be tempered by considering the behavioral element or, as the documentary calls it, our habitual addiction to activities that cause climate change. In other words, resorting to science as a panacea for these sorts of systemic issues is not only dangerously naïve but goes against the very fabric upon which we exist. It arguably omits a whole spectrum of non-science and non-rational responses that make up our society and the ecological environment in which we reside.

What are the implications for business? You could argue that the business version of the above discussion comes out in the overall purpose of why the business exists. The weak approach pushes for an economic-based business model while the strong approach pushes for a moral-based business model. Will the latter companies be better positioned to deal with complex issues such as climate change, poverty, and human rights? Time will tell.

Sunday, November 7, 2010

Geo-Engineering: The Ultimate Mask for the Elephant in the Room

I recall a couple of years ago reading an article in the Globe and Mail that I had originally thought to be a farce because it spoke of three geo-engineered solutions to combat global warming. One was to place giant mirrors in space to reflect the sun intermittently as needed. Another was to catalyze volcanic activity to spew sulphur into the atmosphere (sulphur acts like tiny mirrors, deflecting light and heat back into space) while the third was to launch dust particles in the atmosphere to weaken the sun’s intensity on the Earth’s surface. I never thought the day would come where such ideas would make the front page of The Economist (online version). Geo-engineering is the term used to describe man-made technologies meant to reverse global warming. But unlike any mitigation strategy that reduces emissions at its source, geo-engineering involves recognizing that global warming is inevitable and subsequently designing technological fixes to deal with it.

More and more scientists are taking this idea seriously. In addition to polluting the stratosphere with sulphuric acid, another more recent idea is to deposit lime into the oceans to free up space for carbon dioxide. The article also discusses the idea of locking sections of Greenland’s glaciers to prevent them from falling into the oceans.

The fact that these ideas represent serious conversations among some of the brightest minds out there may be a cause for concern. The very idea that they are using computer models to project the outcome of injecting large amounts of sulphuric acid into the atmosphere is a fine illustration of the pervasive anthropocentric worldview that dominates our civilization. We tend to think that we’ve mastered nature and through this mastery can develop technologies to manipulate the planet’s ecosystems in a way that will reverse any negative impacts we have on it. I don’t think there are many scientists out there that would disagree with the conjecture that nature is incredibly complex and that our understanding of such complexity has only reached tip of the proverbial iceberg.

In response to a limited understanding combined with an egocentric disposition, we engage in reductionism where we examine seemingly simplistic cause and effect relationships limited to a small number of nature’s systems. Launching sulphuric acid in the air or liming our oceans to combat global warming says nothing about the consequential impact on other systems on which we depend. These band aid-like solutions only address symptoms of a more fundamental and underlying issue, which quite naturally, results in the need for more band aid solutions as unpredictable outcomes emerge from the original uneducated and vain response.

What happens if we do find a solution that would combat global warming, then what? What symptoms arise next? Do we jump from band aid solution to band aid solution learning about the complexities of nature the hard way? And if we are successful, however temporarily, does that not send humanity the message: “keep on consuming, technology will always provide the solution”?

There’s an elephant in the room here that we keep avoiding – our behaviour. No one wants to talk about the fact that we simply cannot stop extracting, manufacturing, producing, packaging, consuming, and wasting nor can we develop the courage to make decisions that represent a change in lifestyle today for future generations. As a result we want the best of both worlds – we want to keep our behaviour the same and rely on technology to fix the consequential externalities. Is this any different than consuming to a state of obesity and then relying on a pill to make it all better or driving your SUV to the grocery story and then pulling reusable shopping bags out of the back or indulging in flights around the world only to buy offsets, or making millions of dollars in profits at the expense of indigenous communities only to donate to a charity that advocates for human rights?

One of my students rejects any notion that the issues we’re facing today are any different from the issues we’ve faced in the past and points to technology and human ingenuity as the savior to all our problems. To me, this is a specious argument and ultimately a further reflection of our anthropocentric worldview. While I acknowledge the strong powers of innovation, there comes a point where we can’t have everything; where there are limits to our consumption, limits to the Earth’s carrying capacity, limits to growth. To deny this is to deny our interdependence with nature and the corresponding limits it imposes on us.

Sunday, October 24, 2010

What is the Investor's Role in Sustainable Business?

A couple of days ago, my students and I attended a presentation by Bob Walker, Vice President of Ethical Funds Limited, a company that prides itself on being a leader on what is known as socially responsible investing (SRI). Unlike many other SRI fund houses that influence companies based on their decisions to invest or not invest in their business, Ethical Funds Limited invests in companies with the intention to influence their business through shareholder resolutions and a subsequent engagement process. One of my students felt that this was more of a marketing campaign than a positioning strategy.

So which has greater impact? Investing in a "not-so-good" company and using your role as an investor to change company behaviour OR pulling your investment as a message to the company that despite the potential return you would get, you will not stand for their activities?

Answering this question might depend on how much influence an investor can have. In his blog, Felix Salmon argues that at the end of the day, unless you’re a significant investor, your influence on a firm is minimal. Salmon nicely describes a 'slap in the face' scenario where a conscious investor who owns 1/220,000 of a company naively thinks that he's changing behaviour when all the while the company is using his money for a $4 million lobbying effort to void the firm from California’s 2006 Global Warming Solutions Act.

On the flip side, one can argue that pulling your investment likely doesn’t have that much of an impact either. So perhaps the question is not so much about impact as much as it is about leadership. Leadership to me is going against the mold by taking a courageous stance that conforms to your values in a way that aspires others to follow. Is Ethical Funds a leader?

Some would argue that Ethical Funds is having their cake and eating it too. A substantial investor in the oil sands affords the firm with massive returns on investment. Is their discreet shareholder activism merely a means to greenwash their greedy investment strategy? Does it afford them enormous returns while at the same time making it seem like they are doing good things to mask those 'dirty' returns? Is this any different from indulging in carbon intensive products and than purchasing offsets?

Or is this indeed a genuine effort on the part of an investor trying to make a difference in the behaviour of the companies in which it invests? I have a feeling this debate will grow in popularity as more and more investors get involved in this space.

Friday, October 22, 2010

Canadian Cosmetics Need a Makeover

You can't help but use the pun when these stories come up. The David Suzuki Foundation issued a report today saying that Canada needs stronger rules to keep toxic chemicals out of personal care products. The study asked 6200 consumers to inspect ingredient lists for 12 sets of potentially harmful chemicals used in cosmetics. Almost 80% of the products reportedly contained at least one of these dozen ingredients and more than half of all products reportedly contained multiple ingredients.

Pretty scary stuff.

Click here for more info on the study

Thursday, October 7, 2010

PepsiCo Pulls Sunchips

PepsiCo (aka Frito-Lay) recently pulled the plug on their compostable chip bags, changing back 5 of the 6 sun chips flavors to traditional packaging, citing noise complaints from consumers as the main reason. Seems like the ecological benefits of the chip bag trump the noise burden that comes with it. If we’re seeing resistance to what, comparatively speaking, is a trivial sacrifice for environmental benefit, imagine the kind of resistance we’d see from more fundamental changes.

The Colbert Report presented a rather amusing spoof on this, extending it to resistance to wind farms. He goes on to suggest that to avoid the noise, we should build quiet coal technologies, and breakthroughs in silent oil. And when the coastal cities are underwater from the arctic ice melt, their wish for being quiet will be fulfilled. Hilarious!

Friday, October 1, 2010

Rebooting How We See Things, says Hollywood Director James Cameron

"It's a Complete Reboot of How We See Things", says James Cameron, director of Avatar when commenting on the need to change how our industrialized society works. Having now watched Avatar, I can certainly add this film to the growing list of films that tend to vilify the private sector. I think Avatar does a fantastic job at illustrating the disassociation our society has with nature and indigenous people, their culture, way of life and the surrounding environment. Interestingly, the actor most disassociated was the business driving the military to blast their way to the centre of the Niva people. The movie nicely depicts our very human-centered or anthropocentric perspective where we, as humans, are superior to nature. Business is predicated on the notion that natural resources represent an infinite bucket of cost-free inputs, of which we have the ‘right’ to exploit because of our superiority and intellectual prowess. Indeed, scientists are now debating whether the last millennium should be called the anthropogenic era in light of humanity’s profound impact on the natural environment.

But clearly this is an exaggerated portrayal of business’ impact on indigenous communities and the environment, isn’t it?

In many ways, Avatar represents an amplification of much of what has already happened or is presently happening in many regions around the world. Not long ago, Shell applied to the Supreme Court of British Columbia to forcibly remove elders of the Tahltan who were blocking access to exploration sites. Shell claimed that the environmental risks on the community’s sacred headwaters were exaggerated and that government permission gave them rights to these lands. In Sudan, Talisman Oil was accused of playing an enabling role in civil strife that still exists today. In Nigeria, Shell recently settled out of court and paid $15.5 million dollars in damages to the Ogoni people in Nigeria. Although they never admitted guilt, there was public sentiment that Shell was at least complicit if not involved in the execution of 9 human rights activists, not to mention the environmental devastation imposed on the Niger Delta during their tenure there. Oil company Tullow Oil PLC has been keen on drilling for oil beneath Murchicson Falls National Park in Uganda. “We don’t sleep” says Akelo Oliver, a fisherwoman on the shores of Lake Albert on the outskirts of Buliisa. Standing in front of an oil rig she explains frustratingly that "No one has talked to me or told me about what they're doing."

What about Canada’s oil sands? In response to an invitation of First Nations activists in Fort Chipewyan, Hollywood powerhouse James Cameron visited the Alberta oil sands this week. Since filming Avatar, Cameron has been getting involved in a number of conflicts between industry and indigenous people. Visiting the Amazon to support a battle against a dam project, he said, “This is how the civilized world slowly, slowly pushes into the forest and takes away the world that used to be”.

Unfortunately most of the media in Canada covered extensively the first part of Cameron’s trip where he met with oil executives and government but barely touched upon the outcome of meetings with the aboriginals who invited him to the oil sands in the first place – at least not yet. Ironically, what was meant to be an opportunity to communicate the negative externalities of the oil sands to the rest of the world was somewhat hijacked by interests who felt that this was an opportunity to show the world that the oil sands is an excellent place to invest and source energy. Smaller media sources communicated that Cameron was quite adamant about the need to slow "the pace of oilsands development and to do more to protect the environment"

What caught my attention was Cameron’s reflection after meeting separately with the Canadian Association of Petroleum Producers, oil and gas companies like Synrude and Cenovus, and government. He said that “all of these sources have their own specific agenda” implying that they all wanted to show him things that would pull him to their side of the argument. This reflects an “us versus them” mentality that has pervaded the relationship between industry and community activists for decades. We see this all the time when business executives perceive certain stakeholders as a threat to the achievement of their objectives and vice versa. I see this mentality in my business students regularly who, to their defense, are trained to adopt a war-like mentality where any stakeholders that represent a threat to the objective of shareholder value should be approached as an enemy. This is no exaggeration. Business students, as part of their program requirements, take a course on strategic management, a topic that carries with it an underlying metaphor of war where customers, suppliers, government, communities, and the environment should be handled strategically as in warfare.

Clearly, what was portrayed in the Avatar movie was a war between business and indigenous people and by default, the environment. Perhaps this is what Cameron means by a reboot. CEOs, themselves, are becoming dissatisfied with how our industrialized society works. Consider these quotations:

“The way I’ve been running Interface is the way of the plunderer. Something that is not mine. The day must come when this is illegal, when plundering is not allowed. So I said to myself, ‘someday people like me will end up in jail’” (Ray Anderson, CEO, Interface)

“I am convinced that when our kids are fifty, and they look back at us they are going to ask” What were you thinking”…why were you so slow to do the right things?” (Jeff Immelt, CEO General Electric)

"The same stale, business-as-usual thinking that has driven us to our current state of emergency will continue to endanger our safety, our livelihoods, and our planet. We need new thinking, new leadership, and innovation to create a post-carbon economy" (Richard Branson, founder Virgin Group)

What is this telling us? I strongly believe that most actors – business, government, communities, consumers, investors – do not want to negatively impact the environment or the sacred traditions of indigenous peoples. But we keep on doing it. Is it inevitable? Are managers uncontrollably drawn into a zero sum game where tradeoffs are a natural part of development? In an increasingly complex operating environment where tradeoffs created by business start to become a reflection of an outdated simplified worldview rather than a natural consequence of modern capitalism, only those managers rebooting their worldview and their organization will survive.

Monday, September 20, 2010

Let's Brand Oil Sands as the Ethical Oil Source!

That's the argument put forth by Ezra Levant in his new book entitled "Ethical Oil" where he compares Fort McMurray to Saudi Arabia, Venezuela, Nigeria, and other oil rich parts of the world. His argument expressed in the Globe and Mail last week is that in comparison to a "fascist barrel from Saudi Arabia, a misogynist barrel from Iran and a dictatorial barrel from Venezuela", a barrel from Fort McMurray requires far less blood to be spilled. To Levant, that's how Canadians should sell the oil to countries like the US who have consistently argued for less dependence on oil coming from politically unstable and unethically oriented countries.

"Ethical Oil" does come across as oxymoronic when we consider the fact that systematic extraction of the oil from the earth's crust, regardless of its location, is unethical. The Star noted that recent studies on bird deaths in the oil sands were 30 times more impactful than what was previously estimated (official counts, by the way, were primarily based on oil company employees discovering dead birds). The Pembina Institute highlighted some of the significant environmental impacts, including “emissions of greenhouse gases and other pollutants, surface water withdrawals, contamination and disruption of groundwater, toxic seepage from tailing lakes into groundwater, habitat fragmentation and impacts on wildlife”. According to the Institute, the problem is that while the Alberta government collects a reclamation fee, it is not based on any knowledge of what the potential costs might be throughout the life of the mine. Selling the oil sands as being the ethical source of oil seems illogical when we don’t have any systems in place to mitigate the true and accurate environmental impacts. Therefore, imposing taxes on future generations in the form of pollution and environmental devastation doesn't sound very ethical to me.

But the counter argument here, posited by Levant, is that avoiding the extraction of oil from this location is unethical because it would mean more support for repressive regimes while severely disrupting our economic and social wellbeing in the West. That sounds unethical as well. But using a relative comparison like this invites an equally valid response. If I were representing governments in other countries, I would respond by branding my oil as the ecologically efficient option in light of the fact that oil sands production requires 2 to 3 times more energy to produce oil than its crude oil counterpart. Both arguments are valid only because they are relative in nature (one is better than the other). This is akin to promoting Canadian landmines as being more ethical because they only kill in a 10 meter radius rather than a 20 meter radius and, in response, international governments arguing that the material used in their landmines is much less ecologically harmful than what is used in Canada. Notice that this diverts our attention away from the larger issue of having landmines in society at all. The private sector does this all the time when competing on which product is greener (relative to the original toxic one) even though all of them still cause major ecological harm. I’ll get back to this larger issue but for now, let me discuss how this debate speaks to how society would define sustainability.

This debate nicely shows that the question of whether oil sands are sustainable is left open to interpretation and judgment. If I’m a strong environmentalist, then I completely disagree with Levant’s argument. Yet, if I’m a human rights activist or an NGO working to curb oppressive regimes, I might agree with Levant’s perspective. To me, this variation in interpretation is a reflection of the challenge associated with achieving a “sustainable society” where balance between economic, social, and ecological dimensions is achieved. What is balanced is largely subjective, highly dependent on the perspective of a given stakeholder. One would argue then that the only way that we will achieve a sustainable society is if stakeholders representing different systems have equal power to voice their concerns, the product of which theoretically represents a balance of perspectives and systems. The problem of course is that power across stakeholders is by no means balanced. Recognizing this, powerful stakeholders work to preserve their power to make sure that their perspective carries more weight than others.

In my view, power to influence decisions has resided with too few stakeholders for the last several decades, which helps to explain today’s predicament. While I recognize that there are local and global social and economic consequences of moving away from oil production in Alberta, we have to step back and understand why we are so dependent on oil in the first place. Canada has made and continues to make economic decisions that lock us into an over-reliance on our non-renewable resources. The same can be said for international oil production where a small and very powerful elite has worked very hard to ensure world dependence on oil. So to suggest that moving away from oil has greater social and economic consequences than it does ecological is naïve and perhaps another strategy through which powerful elites aim to continue world dependence on this substance.

Wednesday, September 1, 2010

WSJ Ignores the Growing Complexity of Corporations in Society

Recently, the Wall Street Journal published an article outlining the “case against corporate social responsibility”. This was well written and is indeed a provocative piece for students of business, practitioners, academic scholars, and even policy makers. While I think the author brings up some very important points with which I agree, there are some elements of his logic that I find disturbing, or at least misguided.

Where I Agree

First, the author states, “in cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant”. This is a very interesting and important point because it suggests that companies may be promoting themselves as responsible or doing something different when they are merely meeting market demands that have increasingly aligned with what is good for society. So DuPont’s claim that producing environmentally sustainable cleaning products is part of their new found responsibility could be perceived as a mirage because they are engaging in business behaviour that is no different than responding to any other market trend. To the author, these businesses merely advertise instances where their behaviour and society’s interest align and then label such behaviour as some kind of revolutionary shift. But there is an underlying assumption here that managers are at the mercy of their regulatory and market environments - something that I'll get to later.

Second, there is good logic behind the author’s and Milton Friedman’s argument that any activity taken on by the firm that is in direct opposition to shareholder value is NOT responsible. The author put it nicely when he said that CSR, when it is in opposition to creating shareholder wealth, is in violation of corporate governance whereby managers are accountable by law to the owners of the firm. One could argue that this usurps the very ideology of corporate social responsibility given that managers are breaking the law. This same argument was put forward by the Economist (see Profit and the Public Good) in 2005. Theoretically, spending money on some charity or social cause that has nothing to do with the company’s value proposition could have been money used for research and development of a more sustainable means of producing an existing product or the creation of a new product line that is more sustainable. I would agree that this could be irresponsible when these social causes are perhaps less urgent and there are other actors available with more skills to address them – again, two important assumptions that I get to later.

Third, the author realizes that solutions to social issues need to come from a mixed bag of actors – government, social activists, civil society organizations, and business – implying that business needs to be pushed in the right direction so that market and regulatory trends make it profitable for them to do so. This is important because the author recognizes the growing complexity of the different actors in society and the collaborative role needed to address these issues.

Where I Disagree

1) Business as Passive Recipient: My greatest concern with this article is the author’s presumption that business merely represents a passive recipient to market and regulatory trends as reflected in his examples of the auto sector and health food sector. We’ve known for quite some time though that companies have played a proactive role in shaping the market and regulation for food, vehicles, and many other products and services. General Motors played a very influential role in curbing government imposition of taxes on gasoline so that larger gas-guzzling vehicles would still be attractive to the market. The private sector’s role in ‘killing’ the electric car was, according to many, not a result of any lack of market demand but the preservation of corporate interests, suggesting that business exercises the power to build and dismantle markets. So while I agree that companies will respond when the market demands change, I disagree that companies sit by idly in response with no influence on this market and on public opinion through political lobbying or strong marketing.

While it is true that companies have adapted to the changing demands of consumers in, for example, healthier food, this was not without strong corporate interest in preventing such trends through strong lobbying for regulation that supports practices that undermine the health of consumers. Examples here include the subsidization of corn and soy to support the processed food industry and the strong lobbying for the allowance of trans fat in food. And as an aside, the author’s argument that social activists have had little impact on changing company ways is unfounded. Many would argue that civil society organizations, non-governmental organizations, and activists play an important role in shaping market demand and consumer behaviour in spite of corporate efforts to preserve the status quo. Consider Greenpeace’s ability to catalyze a massive boycott of Shell in 1995 or the Asian-American Free Labor Association’s ability to boycott Nike products in early 1990s. More recently, the New York Times reported that banks are becoming more wary about lending to mining companies in light of growing criticism by environmental advocates such as the Rainforest Action Network and Sierra Club.

2) Business as a Political Actor: I would argue that there are indeed situations when firms are best positioned to respond to social and ecological issues regardless of the relevance to business operations. This is especially the case in the global south where substantial public service gaps exist and companies have stepped in to fill governmental roles like, for example, the efforts of several multinational corporations in Kenya to address public service gaps after the post-election conflict in 2008. While I agree that in an ideal world, government or other public bodies may be best positioned, in reality these actors are not always available and it is instead business that finds itself better positioned (see Private, but Public WSJ, 2009). Regardless of the reality of the situation, the article implies that companies should stand by and do the responsible thing which is to continue with daily operations that maximizes profitability when its surrounding communities don’t, for example, have access to food and water.

But governmental gaps exist as a consequence of an increasingly complex socio-economic environment rather than because government has lost its capacity. Similar to the economic models that are built upon a ‘theoretical’ assumption of perfect competition, the ideal scenario of which the author speaks may not exist, however logical his argument might be. So while it is true that, in theory, “governments are a far more effective protector of the public good”, the reality is that their ability to do this is waning when we consider the rather pervasive loss of power of government to regulate and provide public services, the ability of corporations to transcend state level regulation, and the growing privatization of public services. We can either keep beating a dead horse and try to revert back to a simplistic design that relies on the separation of the public and private sectors or we can begin to adapt to the reality that these lines are blurred and business might have to be involved in the solution to these problems. This is a frightening thought of course because it suggests that a profit-making entity is influencing public discourse. The truth is that this has been happening for quite some time. Perhaps our efforts should be directed to understanding this growing phenomenon, building theories to guide it, and advising managers and policy makers how to use it to align corporate and public interests.

3) Managerial Choice to be Part of the Solution: Even when activists, NGOs, and civil society groups do exist to address some of these issues, we find that business is typically brought in as part of the solution. Many unique business models of the global south represent innovative responses, suggesting that business is not merely a passive recipient to market trends but an active player in the solution to these issues. The point is that firms represent architects in finding ways to align profit with social goals. This gets to an important presumption that the author makes regarding the view that managers do not have control over the alignment of profit with public goals and that factors beyond its control determine this alignment.

Exemplary scholars like Ed Freeman argue that it is the responsibility of business to migrate to areas that ultimately maximize value for multiple stakeholders, including shareholders, concurrently. Put another way, managerial options may not be limited to being responsible on the one hand and sacrificing profits on the other OR vice versa. A manager’s job is to think outside of the box to understand how profit maximization can take place in conjunction with the maximization of value for different stakeholders; stakeholders who represent social interests. So, for example, let’s say an automotive manufacturer is pondering their next line of vehicles to be designed and manufactured. The author’s view is that the firm can do one of two things – either ‘responsibly’ make a green car at the expense of profits because no market yet exists or maximize profitability and make an SUV where the market currently resides. As already mentioned, companies have a very strong ability to create new markets and influence public policy in a way that shapes society’s behaviours. To Freeman and others, the challenge of business is to find a way to make responsibility (or ethical behaviour) and profitability commensurable. So being responsible here may involve pushing for regulation that supports sustainable vehicles and building marketing campaigns that educate the market about such products and thus make such strategies profitable.

In sum, the views put forward in the WSJ article, while relevant at a time when public and private roles were distinct and clearly defined, are quite outdated. It may be time to let go of the theoretical niceties associated with pigeonholing roles and responsibilities to different actors and recognize that the blurring lines between them may represent a future reality that requires the attention of managers, business scholars, and policy makers.

Thursday, August 19, 2010

Africa's Growth Strategy According to McKinsey

The 2010 World Cup shifted the world’s gaze to Africa. According to many, Africa is considered the final frontier, the last remaining pocket of the world that is ripe for ambitious economic development much like its emerging economic predecessors: China, India and Brazil. Shortly after the World Cup, publications in highly recognized business and economics journals such as The McKinsey Quarterly and The Economist provided informative insight on the continent’s economic climate and the associated business opportunities and challenges. Following a highly prescribed formula, the authors advocated vigorously for neoliberal macroeconomic policies such as the privatization of public services, a focus on systemic exports, and an enabling environment for multinational corporation foreign direct investment. As somewhat of a combined silver bullet for economic development, many economists implicitly believe these policies will ultimately mend social, governance, and ecological issues in these regions. Many of these articles are written for managers of multinational companies to provide them with insights on how to successfully enter these markets, how to identify attractive competitive environments, and how to avoid political interference. They are also meant to advise policy makers in these regions on how to create enabling environments that would attract foreign business investment.

This neoliberal approach to development is tiring and in many ways frustrating. Has the severe backlash from the catastrophic effects of neoliberal policies imposed on emerging economies in the 1990s not rattled the seemingly impenetrable devotion to these macro level policies? Is our goal here to exhaust all remaining populated areas on the planet with this approach before we realize that we have it wrong? Even the highly sought for industrialized economy to which these authors encourage Africa to aspire is showing debilitating cracks in its armor as the West is embarrassingly recovering from the devastating impact of the very ideologies now slated for Africa. Joseph Stiglitz put it best when he said that due to the corruption and lack of transparency in US financial reform, the World Bank would deem the country uncreditworthy.

More generally, the economic woes caused by the worst financial meltdown in history, the ecological woes in the form of human-induced climate change, and the social woes in the form of obesity and disease all represent signals that perhaps the economic growth model slated for Africa may create a similar doom machine while affording other regions of the world with greater economic wealth. More shocking is the fact that these policies we’re encouraging Africa to adopt are the same ones that we’ve been using in the industrialized world that led to the many social and ecological issues in Africa. I’m referring to natural resource exploitation without representation, inequitable agriculture subsidies, and the use of intellectual property rights that preclude access to those most in need. Metaphorically, we’re giving Africa the stick we’ve been hitting them with for decades and advising them to use it on themselves.

Nowhere in these articles is there discussion of sustainable development; development that incorporates social, governance, and ecological issues to preserve the integrity of future generations across both space and time. For instance, the ecological effects of promoting the same old routine is astounding given that we know that if the 1 billion people living in Africa consumed at a rate equivalent to the West, we’d need several planets to sustain ourselves not to mention the fact that we’d severely compromise the need to reduce CO2 emissions by 80% by 2050. We’re already seeing this breach as a result of China and India’s development where I recently heard that 30% or 300,000,000 Chinese are expected to fly overseas in 2010. Cursed by tunnel-vision syndrome, these authors presume that the carrying capacity of the planet is limitless or at least will increase with traditional economic growth. As Thomas Friedman put it, Mother Nature doesn’t do bailouts.
Perhaps now’s the time to think of Africa as a beacon through which the rest of the world can look for a more sustainable form of development. Not only could this help the continent but it may represent part of the solution to the rest of the globe’s woes. Some of the most innovative business models are emerging in the global South, many in African countries such as Kenya, Tanzania, and Ghana. These business models are inclusive in nature, ecologically sustainable, and uniquely tailored to the needs of the local context. In other words, entrepreneurs in Africa are coming up with the solutions not some foreign multi-national corporation heavily guided by an arguably flawed system of economic development. This is not unlike James Howard Kunstler’s “World Made by Hand” which describes the near future in a small town in upstate New York where a chain of global crises has forced the community to fend for itself. Whereas the West needs to turn the 'titanic' to get there, Africa is perhaps less restricted from the institutional barriers to change evident in industrialized economies.

Tuesday, August 3, 2010

Bala Falls Energy Project: Model for Sustainability?

As a partial resident of Bala, Ontario and admittedly biased, I’ve become familiar with the highly contested Bala Falls Hydro project by Swift River Company that would generate 4.3 MW of power for the province yet would come at a fairly substantial social and economic cost to the town of Bala. The Star and the Globe and Mail have written stories on it.

On the one hand, this project is perceived by many to be a “Green Project” using renewable sources of energy as it would wean Ontario off the need for fossil fuels and nuclear energy (Quebec and BC are highly dependent on hydro for a majority of their power). On the other hand, the impact on the local community of Bala could be devastating. The project is expected to take 2 years to build which would sever the convenient thoroughfare cottagers use to get to and from their cottage. Moreover, the landmark Bala Falls that attract visitors would be all but destroyed not to mention the fact that environmentalists would argue that hydro should not be labeled green because of its disruptive effect on ecosystems. For instance, see the following:

Hydropower doesn't count as clean energy
Hydroelectric power's dirty secret revealed

With already 2 power stations, has Bala contributed enough? Oddly enough, Ontario has so much spare capacity on its grid that it sells a good chunk of its power to the US.

Any thoughts on this? Is hydro considered a green source of energy in your mind? Do we label projects as “green” based on their relative improvement (from coal for example) or more absolute contribution(i.e. whether they support the integrity of ecosystems)? Is this merely a “not in my backyard” scenario or something more? When those favoring the project call this “sustainable”, are they forgetting the social and economic pillars that would be impacted? Should we be concerned that we might be neglecting the demand side of energy, always obsessed with supply? Or is this simply a symbol of a social and economic inevitability for small communities?

Friday, July 23, 2010

Why has the BP gush not scared Canadians off of the oilsands?

The Toronto Star recently published a rather scathing article on the complacency of Canadians in light of increased US criticism of the oil industry. While the mainstream US population tends to attribute the massive oil gusher in the Gulf to BP’s poor safety record, many believe that it’s only a matter of time before American citizens begin to see that the social and ecological costs sustained by the gush ultimately represent the true cost of consuming fossil fuels. As the title of the Star article states: “As US awakens, Canada hits snooze on oil addiction”, Canada has certainly not realized this yet.

The article explains that Syncrude Canada, the biggest player in the $200 billion Alberta oil sands, displays images of forests and lakes, “as well as slick videos extolling the mining company’s wetland research and aid to native businesses”. Indeed, the Canadian Association of Petroleum Producers (CAPP) plays a big role in paying millions of dollars in advertisements denouncing environmentalist claims while promoting their environmental and social endeavors.

Shamefully, the Globe and Mail published an article written by Pierre Duhaime, President of SNC-Lavalin Group Inc., a large supplier of the oil and gas sector, encouraging support of the oil sands in light of the inescapable need for energy in the future, the dwindling supply of easy access to such oil, and the contribution it represents to the Canadian economy. I find it utterly distasteful that the top Canadian newspaper granted publication of an article conveying the CEO’s views on what should or should not represent Canada’s socio-political agenda in light of the fact that his remuneration is correlated to the systemic dependence on these natural resources.

What I find particularly distasteful is Duhaime’s claim that we need the oil sands because there are few alternatives available. On the surface, one reads this and thinks: “well, that’s true. I mean perhaps the solution is to extract the oil from this sand in a way that is more sustainable so that we can reduce environmental issues and not engage in too disruptive behaviour”. There are at least two issues with this. First, there is clear evidence that the oil and gas sector, for decades, as influenced public policy to ensure the security of oil as the primary source of demand for energy. Claims that they played a role in killing the electric vehicle, while not conclusive, represent one logical strategy for an industry seeking to survive over the long term. Allowing the president of a company inextricably tied to oil to put forth this rhetoric is repugnant because of the history of political lobbying that has resulted in secured dependence on this source of energy.

Second, change is difficult. Anyone who thinks that to sustain ourselves requires slight alterations to our behaviour is ‘nuts’ and ignorant of the real challenges that lie ahead of us. Anyone with children should be thinking of this because their children (your grandchildren) will be the ones dealing with the implications of the fact that our existing generation was unable to radically change their behaviour.

But let’s get back to the issue at hand. Several articles have discussed the seemingly pervasive parallel between the gulf gush and the oil sands. The difference is that while BP’s true costs are displayed in the form of massive blotches throughout the Gulf, loss of coastal jobs, and visible and permanent ecological damage, the oilsands’ true costs are less explicit yet equally impactful when we consider the 126 million gallons of scarce fresh water a day, the contribution of the intense processes to global warming, and several forms of ecological devastation.

We’re kidding ourselves when we say that these statistics are important because we care about the environment and the Earth. We should be concerned because without the very ecosystem services that these operations degrade, we will not survive as a species. This ecosystem-human survival relationship has been expressed countless times by the Millennium Ecosystem Assessment yet impressively suppressed and under-exposed to the average person. As many scientists have mentioned, the Earth will adapt to whatever we throw at it. Let’s stop pretending that we’re saving the environment. We’re trying to secure an environment that will not eat us up and spit us out as a soon to be extinct species.

While the Alberta Government uses the gush as a way to promote the oil sands, environmentalists use it as a way to illustrate the dangers of further extraction of the oil sands. Susan Casey-Lefkowitz said that "it's ironic that when the oil spill happened in the Gulf, the tar sands people were saying that it is safe". Mario Reynolds of the Pembina Institute argues that Canadians don’t really buy the ads put forth by the oil and gas industry advocating for the social, ecological, and economic benefits of the oil sands. But then why is it that Canadians are “snoozed” and support a government that believes the environmental issues clearly connected with the oil sands represent “side shows”. If anything, the BP oil spill should have woken Canadians up to the dangers of the oil sands. Our government should be finding a way to wean ourselves off our economic dependence on them. Instead, they constantly defend them as if they represent the solution to the planet’s woes…how well this parallel’s the SNC Lavalin President’s article. Embarrasingly for Canadians, American organizations and media are stepping up their campaigns against the oil sands, to which the Albertan government has aggressively responded with massive advertisements.

Should we not be concerned that the Harper government seeks counsel from the National Energy Board which excludes environmentalists, not to mention the fact that scientists rarely get a seat at the table? I’m most concerned with the fact that while everyone I speak with is against what this government is doing, 35-40% of Canadians seem to support them in the polls. Perhaps my colleagues have become what Leah McLaren believes to be “closet conservatives”.

Thursday, July 22, 2010

Canada's Top Performers in CSR: Use of Measures

Following up from my previous two posts on the Corporate Knights rankings, this final blog discusses in finer detail the methodology Corporate Knights uses to measure CSR and sustainability of firms. One could argue that the very methodology and ideology surrounding the measurement system fosters a reductionist approach to sustainability whereby companies receive accolades by focusing on isolated systems or even isolated parts of systems rather than understanding the interconnectivity of social, ecological, and governance systems.

First, let’s consider the measurement criteria they are using. Corporate Knights uses three broad measures for CSR: governance, social, and environmental indicators. Two posts ago, I discussed dangers of limiting a firm’s environmental performance based solely on the energy, carbon, water, and waste of company operations. As expressed in my blog about Loblaw, these measures ignore performance of the broader supply chain that these companies influence. The governance and social indicators Corporate Knights uses are inappropriate proxies for measuring the company’s contribution to the integrity of systems. ‘Sustainability leadership’ is measured based on whether the company has a “sustainability” board committee while ‘sustainability remuneration’ is based on whether one senior executive has a portion of his/her pay linked to sustainability issues. Now, hypothetically speaking, if I wanted to perform well on this exercise, I would arbitrarily create a board committee knowing that there is no due diligence on Corporate Knights’ part to evaluate the integrity of what this committee does and whether it is in the best interests of social, ecological, and governance systems. I would also allocate say 3% of the compensation of one of my senior executives to sustainability issues which would grant me a score of 100% against a company who received a score of 0 for allocating 0% of the compensation of an executive to sustainability issues. Governance is much more than measuring whether a board committee exists or whether there is diversity on the board. Governance is about measuring whether companies have organizational systems and structures that assure social and ecological systems are considered in their decision-making processes.

Social measures used by Corporate Knights are based on employee safety, percentage of tax paid, pension plans and pension funding which unfortunately overlook 99% of the social systems considered relevant to sustainability such as supply chain labour conditions, social equity, poverty, obesity, disease, malnutrition, and health systems. On the transparency measure, half the score is based on how many voluntary metrics are reported (only those Corporate Knights can measure) which on the one hand is the tip of the sustainability iceberg and on the other hand, more importantly, says nothing about the integrity of these measures. The other half of the transparency measure gives points for whether the company uses international standards such as GRI or uses a third party auditor. This doesn’t help much because internationally accepted reporting standards are heavily criticized because they only provide measures companies can use but leave any commitments up to the company.

What this is telling us is that we have a fundamental gap in our ability to measure company contribution to sustainability. On the one hand, I sympathize with Corporate Knights because they are doing what is possible given the tools available. But on the other hand, I criticize Corporate Knights because there is a massive disconnect between what they are claiming to measure (i.e. firm CSR) and what they are in fact measuring. This is misleading to readers who don’t have the time to verify the methods and associated measures and in fact encourages companies to engage in shoddy CSR efforts.

When evaluating the integrity of measurement systems like Corporate Knights, it’s important to consider the ramifications associated with company behaviour when responding to these evaluations. Due to the lack of a comprehensive measurement of systems, their instrument creates tunnel vision because companies are so deeply focused on say the reduction of water use that they fail to consider the fact that reducing water use requires heavy industrial chemicals that negatively impact other systems. This fosters a reductionist approach to sustainability where commitment is meant to be piecemeal rather than part of a company’s culture and way of thinking. This measurement tool also promotes incremental improvements or eco-efficiency which means that companies are encouraged to improve water, waste, carbon and energy within the existing mode of operations rather than reexamining the actual mode of operations itself.

In conclusion, I reiterate that the work that Corporate Knights is doing provides an important service to the business community and to society. But they should refrain from claiming that their work measures a company’s commitment to sustainability or corporate social responsibility. Based on the measures Corporate Knights is using, we should either change the definition of CSR or they should avoid the use of CSR as their dependent variable. To me, this initiative is not measuring CSR, it is measuring waste, carbon, energy, and water intensity, employee pay, safety, and pension, taxes paid, and whether the notion of sustainability is even thought about in an organization. These are either required by law or represent a very trivial voluntary effort. In other words, Corporate Knights needs to revisit what they claim to be measuring. Failure to do so will give an inaccurate depiction of what CSR and sustainability is and more importantly fuel the criticism and skepticism associated with the private sector contributing to a sustainable society.

Friday, July 9, 2010

Canada's Top Performers in CSR: Loblaw's False Impression

In my previous post, I began a series of three blogs on some of the limitations of the highly coveted Corporate Knights ranking of Canadian public companies. This next blog looks more closely at Loblaw and the fact that Corporate Knights rated them “top honours” (see article) on the corporate social responsibility front. I think it’s important to pick on Loblaw here because they received an impressive 81.81 percent, almost 10 percent higher than the runner up on the CSR measure. My objective in the discussion below is to show that while Loblaw may be performing well RELATIVE to other companies, they are failing when we examine their social and ecological performance more comprehensively from the perspective of multiple systems and our definition of sustainability from the previous blog.

To be blunt, one walk down the aisles of one of Loblaw’s grocery stores will perplex anyone trying to understand how it was possible that they received such a high rating. If CSR is based on a firm’s responsibility towards the negative externalities imposed on stakeholders stemming from their decisions and behaviours, Corporate Knights fails to consider the complexity of the food system and, more importantly, the complexity of what CSR actually represents.

To understand this, let’s make our way around the grocery store, starting with the produce section. A high majority (very difficult to find the exact percentage on Loblaw’s website) of the produce in Loblaw stores are from non-organic sources, caked with fertilizers and pesticides. As a large centralized retailer, the decision to purchase from suppliers that use these chemicals represents a substantial contribution to the degradation of ecological systems. The use of chemical fertilizers “is considered the major human-related cause of dead zones around the world” and causes farmland degradation, reduced soil fertility and biodiversity according to the UN assessment of Earth’s Ecosystems in 2005 and again in 2009. On the social systems side, growing consensus is emerging linking the excessive use of these chemicals to cancer and other diseases. A recent study summarized by CNN found that 12 products (the dirty dozen) carry more pesticide residue than any others resulting in as much as 67 pesticides remaining on non-organic food despite intense spraying with water. In my walk through a few stores these past few weeks, I was unable to find many of these 12 products in an organic form.

Unfortunately, Corporate Knights does not measure decisions related to what types of products Loblaw chooses to sell. This is an issue when we consider large public companies like Loblaw who 1) have a strong influence on public opinion related to food and 2) have strong power over suppliers. Scoring a firm’s CSR without considering these sorts of decisions is missing a fundamental component of what being responsible is all about. When Corporate Knights measures energy, waste, water, and carbon intensity of Loblaw’s stores, they are missing out on the fact that any improvements in operational waste, for example, is easily offset by the indirect effects of the chemicals ending up as waste in water systems or the carbon intensity of nitrogen found in fertilizers, or the energy required to produce these pesticides and fertilizers or the massive amounts of water required to feed non-organic produce. Is this not a contradiction when Corporate Knights lauds Loblaw for improvements in operational waste, energy, carbon, and water?

Next, let’s move on to the bulk and central part of the store – the processed food section – the section of the store several authors and a growing number of health advocates have warned consumers to stay away from (see Food Inc., Omnivore’s Dilemma, Food Matters). It does seem rather ironic that a company like Loblaw receives the highest grade despite the fact that 80% of its product offering is linked to major social and ecological issues. The invention of processed foods afforded food companies the ability to reach distant markets because the food can stay on the shelves much longer than perishable foods. But the only way to do this is to remove the ingredients of the food that attract bacteria. Well, like us, bacteria are attracted to nutrients. So we must remove nutrients to make food last longer and then reinsert them synthetically, with no guarantee that consumers will receive the same nutritional benefits. Moreover, any quick read of the ingredients list reveals massive amounts of sugar and derivatives of corn and soy drawn from a wet milling process which is incredibly energy intensive and unhealthy in its effect. The subsequent impact on the health system is monstrous when we consider the onset of diabetes in adults and now children, obesity, and heart disease. While there are subtle improvements in this area, Corporate Knights does not measure the degree to which Loblaw has made decisions to reflect responsibility for these effects. What about the intense waste created from the excessive packaging of the tens of thousands of processed products that end up in landfills and/or is incinerated? I can’t help but chuckle when I read the very narrow-minded praise for Loblaw’s diversion of 70% of its waste from landfills in 2009 when we consider that 77% of the plastic that packages the thousands of processed food Loblaw sells ends up in landfills. Again, the water, carbon, energy, and waste associated with these processed foods are not captured in the Corporate Knights measure.

Then we move onto the meat, poultry and seafood sections. I do commend Loblaw’s commitment to source 100% of their seafood from the Marine Stewardship Council by 2013. It certainly is a step in the right direction. But it’s not that impressive. Shouldn’t a large company like Loblaw be an active participant in its supply chain rather than a passive purchaser? And what is the company doing as a major purchaser of meat and poultry to stem some of the major human and animal health effects of the industrialized meat system, not to mention the ecological effects?

Critics of what I’m writing here will likely argue that it is not the responsibility of Loblaw to influence their supply chain and that what Loblaw does operationally in house in their little nook of the supply chain is all they should be responsible for. Unfortunately this is a very old logic, one that got the apparel sector in trouble during the 1990s when they said that exploitative labour conditions of their supplier factories were not their problem. When we look at the financial crisis that occurred in 2008, we see that this was a failure of a system, a complicated web of services that can only be blamed on a group of firms acting as suppliers and customers rather than on one section or organization of that supply chain. My point is that any attempt at addressing more systemic issues associated with externalities demands that firms see the bigger picture of that supply chain or the web of activities responsible for products and services. Any company that isolates itself in their supply chain without considering their responsibility across the supply chain is not committed to the true definition of sustainability and thus should receive a poor rating. As an important aside, I find it highly hypocritical that Corporate Knights praises Loblaw for sourcing 100% of their seafood from the Stewardship Marine Council in 2013 (as mentioned), yet does not extend this measure to the rest of its product lines like I’ve discussed above.

But what about the 1.3 billion plastic shopping bags that Loblaw prevented from entering landfills? Is that not something to be proud of? This does help of course but it would be equivalent to praising the consumer who brought his own reusable shopping bags only to pack them into his hummer to drive a few blocks home. Focusing on shopping bags afforded Loblaw good PR with consumers yet shifted consumer attention away from the billions of plastic material Loblaw uses in their operations and in the products that they purchase. They instead placed the onus on the consumer while affording the company extra revenue (reusable bags) and cost savings (reduction in plastic bags). Is this responsible? To me, being responsible means asking the more difficult questions about how to discontinue the selling of products laced with BPA, for example, that Health Canada has now earmarked as a chemical toxin dangerous to humans. This takes courage and represents the sort of decisions and behaviours that should be granting companies the score Loblaw received.

The Globe and Mail also touted the firm’s efforts to release an annual CSR report. The release of a CSR report should not be viewed as a commitment to sustainability because it creates an incentive to produce some kind of report with no guidance on what should be in the report and how its contents should be measured, evaluated, and monitored. I’ve read through hundreds of CSR reports and a majority of them are used for PR purposes and avoid any serious commitment to sustainability.

Thus the Globe and Mail’s claim that Loblaw has pushed to “do the right thing in an array of corporate social responsibility areas” is based on a very limited set of measures of what we mean by corporate social responsibility. While I appreciate the work that Corporate Knights is doing, until the measures used more accurately represent proxies for the true definition of sustainability and CSR, we should be careful of encouraging companies to aspire to the CSR performance of a company like Loblaw.

The inability to measure the more indirect effects I’ve discussed above is as critical as it is difficult. In my next blog, I’ll dive more deeply into the measures Corporate Knights uses. They are not the only one struggling with this. This is and will continue to be one of the most pressing challenges of the field of accounting and business more generally.

Tuesday, June 29, 2010

Canada's Top Performers in CSR: Lifting the Veil

Canadian Based Corporate Knights Research Group recently launched their annual report which ranks Canadian companies according to their commitment to corporate social responsibility and sustainability. Corporate Knights has developed a strong reputation as a source to which one can refer when evaluating the sustainability efforts of companies and even business schools in Canada. The Globe and Mail presented the results of their research in the following links. The links themselves are very informative for those of you wondering which companies are deemed leaders in Canada on the social responsibility front according to an independent third party. Thousands of potential and existing employees, shareholders, and other stakeholders refer to this ranking as a guide when developing their own evaluation of a company.

Report on Corporate Responsibility

However, the picture isn't as rosy as it may seem. This is the first of a series of three blog posts that aims to highlight some of the limitations of this reporting process that on the one hand inadvertently misleads readers and on the other paints a rather bleak picture of what we consider to be a leader in corporate social responsibility.

A hint of these limitations emerges when we consider that Corporate Knights’ gave Loblaw “top honours for corporate social responsibility” and ranked Bombardier “No. 1 for environmental practices”. I thought the two comments at the conclusion of the Bombardier article nicely captured the issue:

“…but when you stand back and figure it takes a thousand dead dinosaurs baked in the earth’s crust for a million years for enough fuel to make a flight on a little corporate jet from Toronto to Montreal, the term ‘environmental responsibility’ seems absurd”


“what total BS, Bombardier’s entire raison d’etre is building anti-environmental products”.

To understand the concerns, it’s important to start with definitions of sustainability and corporate social responsibility. Sustainability can be defined as the long-term maintenance of social, ecological, and economic systems. Examples of systems include the climate system, biodiversity, ocean systems, air systems, health systems, education systems, community systems, financial systems, social equity, and economic systems. To further define the concept, academic scholars tend to refer to 5 guiding principles that help maintain these systems: inclusiveness, connectivity, equity, prudence, and security. This means that commitment to sustainability is contingent on individuals or organizations considering multiple systems across both space and time, recognizing that these systems are interconnected and interdependent, avoiding and reducing inequity across geographic locations and generations, and keeping these systems resilient by preserving and maintaining them over time. Corporate social responsibility can then be defined as decisions and actions that ensure economic viability while operating within the capacity, or contributing to the integrity, of social, economic, and ecological systems by conforming to these principles.

Now let’s examine Bombardier and Loblaw (the two supposed leaders) against this sustainability backdrop. Three of the reasons Bombardier achieved top marks are because they reduced their water consumption by 35% relative to sales, energy consumption by 17% and GHGs by 10% between 2004 and 2009. There are three dangers associated with this performance measure. First, these are intensity based measures which preclude any consideration of absolute improvements. Energy, carbon, waste and water are measured based on a company’s output rather than against the available ecological carrying capacity afforded to the firm. Why is this an issue? Relying exclusively on intensity measures allows for an absolute increase in waste, carbon, and water and energy use despite the fact that a company may be more efficient. This means that companies merely have to use less energy and water and create less carbon and waste per unit of production rather than decrease these amounts in total. This is a major issue when we consider that scientists warn of the need to reduce, in absolute terms, 80% of carbon emissions by 2050 to avoid the 2 degree tipping point.

Second, Corporate Knights measures ecological performance against sales rather than against operational benchmarks. Bombardier’s overall GHG emissions may have increased by 25% but as a percentage of sales they may have decreased by 10%. This may not be because the company actually reduced its emissions but because sales may have increased dramatically on products and services that aren’t related to intense carbon emissions. Corporate Knights has no way of verifying this. What is more, similar to the creative accounting practices that companies have undertaken on the financial side, Corporate Knights can’t be sure that the company is recording revenue in the same period that it is recording the full emissions from that revenue. This means that we may not be seeing a true picture of the relative ecological costs of a given unit of sales.

Third, Corporate Knights compares company performance over different time periods and against other companies in their sector. For the first, rewarding companies on improvement over time means that those companies picking what we call the ‘low hanging fruit’ – simple changes that make significant improvements largely because the company’s performance was so poor initially – get the accolades while companies that started out with good sustainability performance and have no low hanging fruit are not recognized. For the second, while it’s always worthwhile to know which company is better than its competitors, this overlooks any measure of their absolute impact on systems, meaning that the best performer could still very well have a catastrophic impact on these ecological and social systems.

In my next two posts, I’ll dig deeper on two items. The second of this series will provide a more accurate measure of Loblaw’s CSR performance which would suggest that although they may be a leader among the small number of Canadian public grocery stores, they are far from adhering to principles of sustainability. In the third and final post of this series, I’ll discuss how the measures Corporate Knights uses is in no way representative of a company’s commitment to CSR and sustainability as I defined it above; suggesting that the claims made from the study may be misleading readers.

Stay tuned.

Monday, June 14, 2010

McDonald's Venture into Politics

McDonald's has been facing a lot of publicity after they launched their commercial in France depicting a young gay consumer talking to his boyfriend on the phone and subsequently hiding his sexuality from his father.

My colleagues, Dirk Matten and Andy Crane, discuss the dangers, or at least challenges, associated with companies inadvertently moving into the realm of politics in their quest for economic gains by, in this case, marketing to a progressive target market.

I find O'Reilly's homophobic response quite amusing.

BP - The Villain or the Victim?

The Obama Administration is starting to come down pretty hard on BP, demanding most recently that the company put 'substantial' funds into an "account to cover claims by Gulf Coast businesses and residents affected by the spill". The administration is also demanding that BP withhold its dividend payout for the second-quarter, a demand that sparked subtle resistance from the UK government. In the same way that companies are playing political roles (see following posting on Google and MNCs and diplomacy), governments are inkling their way into company level decisions. This dynamic is quite intriguing and reminscent of Obama's unprecedented firing of GM CEO Rick Wagoner in 2009.

But are we being too hard on BP here? Is our blame of BP really a simplistic response to a very complicated set of circumstances that led to this disaster (see my previous post)? Is this merely a political tactic to show the American public that something is being done, something observable?

What about the failure of regulatory bodies, in this case MMS, in doing their job to uphold certain standards companies need to follow so that these disasters don't happen? Can we expect companies to jump through the appropriate safety hoops when they don't feel regulatory pressure to do so in an environment that demands constant increases in returns? Are the Administration's efforts to influence BP's decisions merely addressing a symptom, placing the proverbial bandaid on a bigger issue related to a massive gap in systematic governmental oversight of the private sector?

Is BP the only villain here?

Thursday, June 3, 2010

Who Monitors the Monitors?

A growing flurry of criticisms has emerged of those organizations supposedly responsible for holding business accountable for their actions. The Minerals Management Service (MMS) has recently come under intense scrutiny as a regulatory body for not doing their job in ensuring that BP and other companies jump through the appropriate health, safety and environmental hoops to minimize catastrophes like the oil spill in the Gulf. Before the Obama Administration came on board, the Environmental Protection Agency (EPA) was consistently criticized for neglecting their job to protect the environment while the Securities Exchange Commission (SEC) was found to be completely clueless, not to mention distracted by porn, when they were consistently presented with damning evidence that the mortgage bond market might create one of the worst financial crises in history. Moody’s and Standard and Poor’s, two market-based bodies meant to protect investors by accurately rating bonds, were complicit in the financial crisis for rating garbage mortgage bonds Triple A’s – the highest possible rating. The Food and Drug Administration (FDA) has also been criticized for dropping the ball on the health effects of the food and drug sectors while, at the business level, boards of directors have been repeatedly chastised for failing to hold managers accountable to the owners of the firm. As many have asked, where were the boards of Enron, Goldman Sachs and Lehman Brothers in protecting shareholders from manager decisions?

Why do these monitoring bodies exist in the first place? The need for a firm to have a board of directors, for example, emerged because managers of large companies who typically have no ownership stake in the firm are not always motivated to make decisions in the best interests of the owners. As a result, boards were created to minimize agency problems by making sure that decisions are made with the interests of shareholders in mind. This same logic applies to society where monitoring bodies are required in situations where corporate interests are not aligned with society’s interests. Business' contribution to pollution, climate change, social inequity, disease, drought, the recent economic recession are all examples here. Often called negative externalities, these represent effects of a transaction between two parties on a third party who did not consent to the transaction. The third party is typically the public. Negative externalities are synonymous with market failures or instances where actions of business cause negative impacts on society. So, ultimately these monitoring bodies exist to reduce the occurrence of market failures.

So now why has there been such a dramatic failure in monitoring of the private sector? There are at least five reasons that I’ve come across in the last few months. First, there is growing evidence of a revolving door syndrome between government and the private sector. Nowhere is this more of a concern than in the food sector where a number of governmental officials responsible for the health and well-being of the American public have or have had huge stakes in the financial welfare of food companies like Monsanto, Cargill, and Archers Daniels Midland. Another example is the Bush Administration’s close ties with military contractors like Halliburton and Xe (formerly Blackwater) resulting in skepticism that military decisions are predicated on profit opportunities for these companies. So how can we expect these governing bodies to protect the public when their interests are inextricably tied to the company’s interests; interests that we know can lead to market failures?

Second and closely related to the first are the very cozy relationships between public officials and corporate managers where assessments are made perhaps less independently than they should be. These relationships likely softened the much needed public body push back and threat of penalty meant to balance the strong pressures companies face to reduce costs. These cozy relationships have been earmarked as one of the main reasons MMS overlooked the many shortcuts BP took in their oil wells. An investigation in the interaction between MMS and BP revealed that BP made an unprecedented number of requests that tweaked crucial aspects of the oil well’s design a week prior to the explosion on April 20th, 2010. MMS approved each request within only a few minutes of receiving them from BP. “Of the more than 2,200 wells that have been drilled in the Gulf since 2004, only 5% have had multiple permit revisions submitted to MMS within one calendar day”, according to a Wall Street Journal analysis of MMS records. The content of these revisions was related to the use of a single pipe which was much more cost efficient than the safer two-pipe system. BP wanted to use the single pipe all the way down the well shaft. Subsequent revisions were required because of BP’s miscalculations in what was already within the well and the width of the pipe they thought they could use. Whatever the issue under discussion, MMS is being criticized because their rapid response is suggestive of a lack of oversight that would typically be expected for what appeared to be rash and careless decisions on the part of the company.

Third are the incentive systems in place. One of the reasons why MMS was particularly negligent in the BP case was because their incentive system was based on the number of project approvals rather than any quality of environmental and safety assessment. This same problem was evident in the financial sector where S&P and Moody’s recognized that friendlier ratings of crappy bonds were associated with a greater guarantee of customer loyalty from the big investment firms like Goldman Sachs and Merrill Lynch.

It gets more complicated when we consider the difficulty in identifying appropriate incentive systems to reflect public welfare needs. There are so many confounding variables that it’s difficult to associate a reduction in health of the public, for example, to FDA decisions or the preservation of the environment to EPA decisions. So we resort to reducing down these grand objectives to measurable ones such as the number of foods certified or the number of coal projects evaluated. There are at least two problems with this. First, these reduced measures only represent a small part of the overall objective leading monitoring bodies to lose focus on the ends and over-achieve on the means. Second, companies have been very effective at finding loopholes or cracks in these measures, the result of which greatly hinders the overall objective despite the fact that they perform well on the measure.

Fourth, the same companies that need to be monitored are the ones either doing the monitoring or coming up with the approaches by which they are to be monitored. In some industries, companies have developed their own standards of monitoring to preempt government control while giving the impression that they are looking out for the best interests of the public. Processed food companies like Kellogg and PepsiCo developed the Smart Choices Program which was meant to create a third party that would independently certify processed foods so that consumers would have the luxury of looking for the certified checkmark rather than reading the lengthy ingredients list. The problem was that the companies were the ones determining the criteria for what was considered healthy and that the body they created was remunerated based on the number of products that they certified. So not only were the criteria flawed but the incentives used to apply these criteria were inappropriate. This is a particularly potent problem because food companies have strong incentives to maintain strong margins in an environment where unhealthy sugary ingredients and fortified foods provide low costs and higher revenues – the ‘perfect storm’ for a market failure. So we then have products like Fruit Loops receiving the Smart Choice seal and, hypothetically speaking, calcium fortified sawdust – if we were to brand such a product.

Finally, and most importantly, we might need to think about the broader historical context of the last 30 years to understand why monitoring bodies are failing in their jobs. Since the Reagan era, the West has undergone a dramatic movement towards neoliberalism where free market fundamentalists were given center stage for their advocacy in abolishing government intervention. This movement carried through the George H.W. Bush, Bill Clinton, and George W. Bush administrations. Over the course of these three decades, there was growing consensus that the free market will iron out any social, economic, and ecological issues on its own thus eliminating any need for government interference. Unfortunately we’re seeing the effects of this highly misguided ideology today. Over-reliance on the free market likely meant that key resources and control were removed from those regulatory agencies meant to monitor company decisions. Scales began to tip as the private sector developed strong depth in expertise that the public sector was unable match as monitors. As a result, quite ironically, companies began to be viewed as those best positioned to do the monitoring. Consider the following quotation from MMS in the oil and gas industry:

"The lessee or operator is in the best position to determine the environmental effects of its proposed activity based on whether the operation is routine or non-routine."

What is the point in having MMS if the monitoring body is essentially going to shift the monitoring role to those who are supposed to be monitored? While the Obama Administration is exploring criminal charges against BP, they are certainly weary of ticking them off to the point where they withdraw their efforts at stopping the leak. This is a pretty precarious position to be in because it symobolizes the incapacity of public bodies to heavily penalize companies when they've done something wrong. This is of course dangerous and likely one of the reasons why the auto and financial sectors were bailed out; government was too reliant on their presence in society.

With this lack of expertise, monitoring bodies not only struggle how to do the monitoring but also with when company behaviour should or shouldn’t be examined. There may also be instances where the behaviour of the private sector is so complicated that the public body couldn’t possibly foresee its detrimental effect until it is too late. This is precisely what happened with collateralized debt obligations (CDO) in the financial service industry. No monitoring body could have identified this as a problem in advance and no regulation would have prevented it from occurring until it was too late.

So what is this telling us? There is indeed a growing concern that the monitors are failing in their duties to keep companies in line. We’re also learning that free market fundamentalists likely had it wrong and that markets, left to their own devices, can wreak havoc on society. To what degree and in what way the pendulum swings back towards increased government intervention is likely going to be a hot topic in ensuing months. Is this simply a minor blip in society’s ability to keep corporations in line where we just need to make sure that we monitor the monitors or is this suggestive of a revisit of the relationship between business and government? Time will tell...