Tuesday, April 27, 2010

Greenwashing Sin #8 or an Important First Step?

Al Gore recently came under fire after his organization took money from Dow Chemical to raise “awareness about the need for clean water”. Dow is regularly criticized for buying Union Carbide, the company that owned the pesticides factory responsible for the death of 20,000 people in Bhobal, India.

For years, environmental organizations have found dangerous levels of highly toxic chemicals in rivers, lakes, and other water supplies close to other factories owned by Dow. Hundreds of thousands are still forced to drink the polluted water. Apparently for those close to Dow’s headquarters in Saginaw, Michigan, eating fish or touching the water in the Saginaw River is a no-no. But apparently, Dow sponsors a walleye fishing tournament near Saginaw on an annual basis. You can't read this without a feeling of irony.

The Al Gore event is meant to campaign for cleaning water of controversial chemicals, chemicals that Dow manufactures and uses which end up in rivers, lakes and water systems.

Is this greenwashing in the form of hypocrisy? Or is this genuine?

Greenwashing is defined as the act of misleading consumers regarding the environmental practices of a company or the environmental benefits of a product or service. There are seven popular sins:

1. The sin of the hidden trade-off
2. The sin of no proof
3. The sin of vagueness
4. The sin of worshiping false labels
5. The sin of irrelevance
6. The sin lesser of two evils
7. The sin of fibbing

None of these sins speak directly to this sort of behaviour where companies are engaging in initiatives that contradict the very nature of their core operations. The sin of the hidden trade-off and irrelevance is somewhat related but not really. Does this mean that we need an 8th sin – The sin of hypocrisy whereby companies distract or divert attention away from their unsustainable operations to isolated and philanthropic initiatives that work to clean up the mess they create? They’re technically not lying. Or is this something else?

To explore this question further, let’s think about the options managers consider when trying to be more sustainable. One option is to do nothing. With increased pressure, this is becoming a less viable option. Studies show that more than 80% of companies report something related to sustainability online. Another option is to do something that is meant to offset (perceptually or not) the negative impacts of their core business. Here they can be philanthropic by supporting a random charity or an event that is trying to clean up the mess that they’re making. They may even create a small isolated product line to offset the negative effects of their traditional product line only to disband it after creating the impression of being green – like Nike’s trash talk shoe. The objective of course is to shift the negative image consumers and stakeholders have developed of these companies. To me, this is the easy way out but a natural response because of the growing pressure to do something yet the low costs and minimal disruption to core operations. From an economic point of view, this is completely rational and likely the reason why this is such a popular strategy.

The more difficult option involves rethinking their core business. But why do something like this when you can avoid dramatic change and show that you’re at least being responsible for the mess you’re making? But as these articles indicate, more and more consumers and activists are growing critical of this approach.

A happy medium perhaps is for organizations receiving funding from these companies to put in place conditions that go beyond commitment to the event. For instance, could Al Gore’s team or Live Earth (also partnering with Dow) have required Dow to engage in subsequent partnerships with environmental organizations to reduce their toxic output a certain amount by a given year as a condition of the sponsorship? Or could companies use this event to announce an initiative that demonstrates a change to their core operations? This is beneficial to the company because it’s considered to be less like greenwashing. It also introduces them to potentially lucrative partnerships granting them ideas and resources to make this happen which, in an increasing regulatory environment, implies a potential first mover advantage over competitors. For the public organization receiving funding, they are perceived to be less of a hypocrite by accepting funding from an organization that is responsible for the negative effects that these organizations are trying to address and more of a change agent. Not only are they putting on this event/initiative but they are building long-term commitments by these organizations and instigating change.

My issue with the many articles that criticize these sorts of partnerships is that they follow the typical ‘us versus them’ perspective - the environmentalists versus the toxic company. This is an old and outdated dichotomy and arguably doesn’t get us anywhere. Rather than keeping this black or white (allowing sponsorship or not), let’s talk about some of the grey area where we’re challenging companies to collaborate for long-term change and we’re challenging environmentalists to sit at the table with the company. The companies need to admit that they need the help and ask for it from those organizations out there who want to elicit change. Dow’s denial strategy here doesn’t help. Many companies get defensive when it comes to these sorts of things. But don’t the animosities on both sides need to be overcome; a swallowing of pride, so to speak? This may be the first step. Until this happens, I think Dow may be full of shit and the environmental groups are not helping.

Tuesday, April 20, 2010

Shareholder Pressure for Social Responsibility

After a shareholder resolution submitted by Harrington Investments, Intel announced that sustainability performance and reporting is now an official fiduciary duty of its corporate board. Although Intel was initially reluctant and had in fact rejected the resolution the year previous, the shareholder was successful in getting the company to change its corporate charter by requiring the Governance and Nominating Committee to report the following:

“...matters of corporate responsibility and sustainability performance, including potential long and short term trends and impacts to our business of environmental, social and governance issues, including the company’s public reporting on these topics”

The notion that the board of directors is considering more than just shareholder value is not a new phenomenon. In the early 1990s, 30 states in the US enacted stakeholder statutes that permitted directors to consider the interests of non-shareholder constituencies (e.g. communities, employees, consumers, environment, farmers) when making corporate decisions. German law requires employee representation on second-tier boards of directors while the Companies Act of Great Britain mandates that company directors include the interests of employees in decision-making. Moreover, the well-known corporate governance models of Japan presume that corporations exist in a network of stakeholders while the 2004 Principles of Corporate Governance launched by the Organization for Economic Cooperation and Development explicitly noted the importance of cooperation with stakeholders.

But these were times when stakeholders (employees, communities, NGOs) and shareholders were at odds with one another. Increasingly, however, shareholders are showing signs of a change of face as they put pressure on firms to consider these stakeholders through corporate social responsibility. For instance, the number of investor proposals urging director attention to environmental issues nearly doubled between 2004 and 2008. Board directors of Ford Motor Company were behind a detailed climate change plan that pledged to reduce emissions from its new vehicle fleet by at least 30% by 2020 while board directors of American Electric Power docked part of the CEO’s bonus because the firm had received too many notices of possible environmental regulatory violations. Lester Hudson, chairman of American Electric Power’s governance committee explained that the earth’s sustainability “has become a much more important part of every board’s activities”.

But are these merely exceptions? Just a couple of days ago BP shareholders voted ‘no’ on oil sands transparency. The shareholder resolution was meant to require the company to commission and review reports that explain the assumptions “about future carbon prices, oil price volatility, oil demand, anticipated greenhouse gas regulation, and legal and reputational risks associated with the projects” in Alberta. The interesting thing about this is that all these requirements are directly related to the financial welfare of the firm. There is nothing in here about reporting on environmental impacts such as biodiversity loss or tailing ponds or water use. I’m perplexed by this one. Perhaps this shows that different types of shareholder perceptions and interests exist in different types of companies. Are BP shareholders a bit less conscious then Intel or Ford shareholders?

What does increased shareholder interest in the sustainability domain mean for business and for business education? Managers are already facing pressure from employees, communities, customers, government, and others to be more socially responsible. Shareholders represent another on the list hinting at a broader movement towards managerial accountability to multiple stakeholders. While there are plenty of examples where meeting the needs of employees, customers, communities and the environment aligns with shareholder value, these are perceived to be low hanging fruit or what has come to be known as the “business case” for sustainability. For example, changing light bulbs, reducing waste and energy use not only helps to protect the environment but also improves shareholder value through reduced costs.

But things get more complicated when these ends do not align and managers presume that tradeoffs are inevitable. For example, encouraging people to use less of your product because of its impact on the environment might not go well with revenue generation. Or moving away from processed food which affords companies like General Mills and Kellogg with handsome margins and access to far off markets would dramatically dissolve chunks of these firms’ market caps. Or eliminating the use of antibiotics (which are now creeping into human health systems) in factory farms of 6,000 cows or more would mean smaller cows, more disease, and less $ per kg of cow. Aligning these sorts of behaviours with sustainability requires a much more radical and fundamental shift that, up to this point, managers have been happy to avoid.

So does this mean that shareholders are willing to forego financial return because they’ve become more altruistic in their investment decisions? Likely not. It is more likely that increasing shareholder pressure means that the onus is on the CEO to revisit business models and the firm’s ‘bread and butter’ to figure out how to avoid these tradeoffs in the first place. Managers are losing their ability to fall back on their “duty to protect shareholder wealth maximization” as an excuse and will be expected to revisit these more fundamental questions of how firms maximize value for a number of stakeholders, including shareholders, concurrently and without tradeoffs. This may represent the challenge of business graduates in the 21st century. Those business schools that make the appropriate adjustments to educate future managers on how to face this very challenging task may be deemed the Harvard’s of the future.

Wednesday, April 14, 2010

Is Business School Education Sustainable?

I’ve had a few emails/comments asking me to further comment on my views related to business school education. Let me start by saying outright that, in my view, the present business school education is unsustainable and in need of a revamp. A majority of business school courses are predicated on the rather narrow worldview of maximizing shareholder value. This is so engrained in these courses that business professors tend not to think twice about it. This extends beyond the classroom to academic journals as well. For instance, a growing number of management scholars are examining how corporations can shape government policy in ways favourable to the firm. Interestingly, these scholars consider this to be a viable strategy of the firm completely ignorant of the ethical implications of a for-profit entity influencing the very institutions meant to preserve the public good. The tools and frameworks in accounting, operations, finance, strategic management, marketing, and human resources are all based on performing well on a very narrow set of measures. While there may be some intermediary measures such as employee and customer satisfaction, these measures tend to exist because they help to improve the ultimate measure of shareholder value.

Shareholder value as the ultimate barometer of success in business became solidified in the 1970s. With this as the dominant presumption guiding research in business, one can safely presume that the many frameworks and tools that make their way into business textbooks and journal articles were developed with shareholder value in mind as the dominant outcome. When you have thousands of business graduates exiting universities and colleges with this mindset, one has to wonder why we are so surprised with our current predicament. As Holland of the New York Times explained, “Instead of being viewed as long-term economic stewards, managers came to be seen as mainly the agents of the owners and responsible for maximizing shareholder wealth”. This led to board and manager accountability to one actor (shareholders), absolving them of any responsibility for anything other than financial results (my next posting will speak of Intel’s recent shift in board accountability that has gained a lot of press).

It’s likely no wonder that the “M.B.A.” initials are being satirically translated into phrases like, “Mediocre but Arrogant”, “Mighty Big Attitude”, “Me before Anyone” and “Management by Accident” and more recently “Masters of the Business Apocalypse”. Harvard Business School is taking a particular beating as journalists are regularly reminding readers that they graduated the likes of Stan O’Neal and John Thain, the last two heads of Merrill Lynch, Andy Hornby, the former CEO of HBOS (who by the way graduated at the top of his class), Jeff Skilling, the CEO of Enron, Hank Paulson, former US treasury Secretary, and Christopher Cox, former chairman of the SEC. In contrast, some of the positive revolutionaries of our time – Larry Page and Sergey Brin of Google, Bill Gates of Microsoft, Michael Dell, Richard Branson and Lak-Shmi Mittal – do not have an MBA.

The New York Times’ Kelley Holland put forth some convincing statistics suggesting a close relationship between MBA programs and those responsible for the financial crisis. For instance, Harvard Business School is perceived as the top MBA school in the world yet 40% of their graduates end up on Wall Street. Because of stats like this, many people are questioning whether the existing business education is partly to blame for this behaviour and whether a revamp is required. The Dean of Thunderbird School of Global Management was quoted as saying:

“It is so obvious that something big has failed…We can look the other way, but come on. The CEO’s of those companies, those are people we used to brag about…We cannot say, ‘well, it wasn’t our fault’ when there is such a systemic, widespread failure of leadership”. 

 A major conclusion drawn from many critics is that managers are ill-prepared to make decisions that consider the complexities associated with the financial crisis, social inequity, environmental devastation, corruption, and climate change.

When I teach my Business and Sustainability course, I tend to find three types of students. The first are those students who want my course to end as soon as possible because they feel that this topic is a waste of time and want to get on to the real crux of business which is to make money (this is not to dismiss other reasons such as my ineffectiveness in teaching). The second group includes those who are generally indifferent. They are shocked by the role of business and intrigued by how business can represent an agent of change but they are not necessarily eager to be change agents wherever they end up working, put could be encouraged. The third are those students who are somewhat aware of these issues and are in the classroom because they are excited about the idea of using business skills to address social, ethical, and ecological problems. These three groups are distributed over the typical bell curve but interestingly, the distribution is shifting to the right meaning that there are less of the first group and more of the third group. This tells me that perhaps our students are demanding a different type of business education.

So where do business school educational curricula go from here? A growing number of scholars and practitioners are questioning the disciplined based approach of business school and are advocating for a systems thinking approach where students learn how to think critically, creatively and independently, where they are able to see the bigger picture, are exposed to multidisciplinary approaches, understand the global and historical contexts and perspectives, deal effectively with complexity and ambiguity, approach problems from multiple perspectives, and focus on leadership and social responsibility.

Here’s an example. Let’s say an MBA class is doing a case on a food processing company where students are asked to devise a future growth strategy for the company (let’s say Kellogg or General Mills). In most cases, students are going to apply frameworks and tools that will assess the firm’s competitors, market trends, internal competencies with the ultimate objective to understand how to boost market share, revenue and profitability. They’ll likely crunch some numbers, come up with a few ratios to assess past performance, conduct an NPV or two and put together a couple of projected financial statements. Anything else, like how ethical the decision might be, its health effects or impact on the environment would represent a tradeoff to financial value creation unless it is in direct violation of the law or they foresee negative consumer response to their decisions.

An alternative approach would encourage the class to consider the bigger picture of the firm’s decision, considering how the industrialized food system emerged since the second world war, how the western diet emerged, how the actions of the firm impact environmental systems, health systems, etc.. They’ll also consider the decision from the perspective of small farmers, doctors, the obese population, diabetes associations, developing country farmers, environmentalists - – all of whom are directly or indirectly impacted by the decision these students make for the company. They would be challenged with reconciling these conflicts. In fact, they would be discouraged to consider these diverse perspectives as conflicts and instead recognize that this dialogue is what being a business leader is all about. They would move away from an either/or decision and learn how to think creatively for a solution not pursued before yet maximizes value for multiple stakeholders simultaneously – including shareholders. The new role of business graduates is not to manage but to lead business in a new direction where assumptions are constantly questioned, new perspectives are consistently incorporated, complexity is the norm and critical thinking encompassing collaborative solutions is the measure of success.

Sunday, April 11, 2010

Dumping Plastic Into Our Oceans

Japanese scientists have found preliminary evidence indicating that Bisphenol A (BPA) has been found along shorelines of 20 countries in staggering concentrations. The EPA officially designated BPA a ‘chemical of concern’ a couple of weeks ago. Environment Canada just a couple of years ago announced BPA as a toxic substance and considers the water pollution limit for industry to be 1.75 parts per billion (ppb). The Japanese researchers found BPA in the oceans and sand in amounts ranging from 10 ppb to 50,000 ppb. Dr. Frederick vom Saal, a biologist at the University of Missouri, said that it is “a scary finding that the levels in the ocean could already be at levels where you would not want to swim…This is shocking” (quoted from the globe and mail)

As we all know, BPA is an industrial chemical used in hard plastics and found in a range of products from canned foods, baby bottles, plastic food storage containers, and plastic reusable water bottles. BPA increases bodily concentration of estrogen from low parts per trillion to, as the research showed in oceans, 10 parts per billion. This results in lowered sperm count and fertility, high occurrence of breast cancer, prostate growth, early puberty in children, heart disease, and diabetes.

Why are we finding these concentrations in the oceans? Well, floating in a circular motion in the middle of the pacific ocean (between British Columbia and Japan) is a concentration of garbage two times the size of Texas or France. Found there are thousands of water bottles, plastic bags, soft plastic, and plastic containers floating and apparently releasing chemicals such as BPA. Remember that only 23-25% of plastic is recycled meaning that an unprecedented amount of plastic waste makes its way into the oceans. The EPA estimates that more than 450,000 kg of BPA are released into the environment annually, out of the 2.7 million kg produced.

This is one of a growing number of issues that are illustrating the connection between ecological and social sustainability; social referring to health issues. Despite warnings of the health issues associated with BPA, few companies have made the changes necessary to weed out these products from their shelves (MEC is an exception) while consumers continue to purchase these products.

A colleague of mind said that he would never drink tap water because of the amount of fluoride put into the water. Is this perspective a bit oversimplified? Shouldn’t he consider the more complex implications of purchasing bottled water on future generations having to deal with the mess this will create from both an environmental and health point of view?

Friday, April 2, 2010

Strategy and Sustainability

I’m working on a paper right now that is flagging some of the inconsistencies between business strategy and sustainability. In a nutshell, business strategy is all about differentiating firms from their competitors. We strategic management scholars develop frameworks to explain how and why companies outperform competitors in their respective industries. So how does Sony work to outperform Panasonic, Coca-Cola outperform Pepsi, Air Canada outperform WestJet, etc. There are many ways in which they do this but fundamental in the strategy discipline is an attempt, if at all possible, to create a monopoly situation. Microsoft is the model here because they’ve monopolized the operating system market (although Apple is trying to take chunks out of their market share). Google has a dominant position in the online advertising and searches while Apple is dominant in the online music and handheld music device industry and now more recently a growing dominance in the handheld smart phone industry. This is interesting to strategy scholars because it explains why companies are outperforming others.

But when we consider this strategic behaviour in the backdrop of sustainability, it starts to breakdown because if firms are working to lock-in industries so that enough inertia is created to make change impossible, we may not be able to respond to major social, ecological, and governance issues as they arrive. Consider the energy sector or better yet the oil and gas sector. These industries have been very successful because a number of companies and industries are dependent on the supply of oil. This is a model example of strategic success when we consider how dependent we all are on oil and imagine how difficult it would be to move away from our dependence on plastics, gasoline, combustible engines, fertilizers, etc. There’s no wonder that this industry is so profitable ($40B – Exxon in 2007) and why it’s difficult for competitors to take chunks out of their market share. This same story can be told in the food industry where food barons have successfully monopolized the food system to their liking making consumers and suppliers very dependent on what they do. More recently, large businesses are starting to monopolize the fair trade movement weeding out many small players – ironically the ones who created the fair trade movement.

The point I’m trying to make here is that strategy encourages the locking in of companies and products/services so that enough inertia is created that change is all but impossible. In a society where we need relatively quick and radical change to address social, ecological, and governance issues, we can’t afford to have these sorts of monopolistic positions.

I’ve spoken about Better Place before. They are working to build the necessary infrastructure to replace gasoline stations so that you can purchase an electric vehicle and, instead of filling up with gasoline, you go into a service station to replace your battery. Now this is the first and presently only company to be thinking about this so they are certainly primed for a monopolistic opportunity. But when asked whether his company is attempting to earn a monopoly position, here was the CEO Shai Agassi’s answer:

Agassi: “We asked governments wherever we go to…force all the [competitors]…to do two things. One, [to] only use international standards so that nobody can control it. The plug has to be standard and everyone will be able to use that same standard so there is no way to lock anybody out. Two, [to] force every network that is created to allow everyone else to access it so there is open access across the network. [Governments] usually ask us if we’re crazy to be the first [to market] and not ask for protection but to [instead] ask for openness. And my view is: god forbid that we would have two standards coming into the market [where] we’ll have VHS and BETAMAX and the consumer sits back and says, ‘I’ll just take my time’. …collectively we don’t have time, we ran out of time. We already did that in the last [few] decades. Now the only thing we have to do is [not] think how to make the most profit out of every single consumer but how we switch as fast as possible.”

If you want to learn more about this company, click here

Now this is business leadership and, to me, questions the very foundation of what strategic management represents and more importantly suggests that we need very different business management frameworks that build in triple bottom line thinking into managerial decision-making.