Thursday, March 31, 2011

Chipotle Challenges Conventional Fast-Food

With a philosophy of “Food with Integrity”, Steve Ells, the founder and chairman of fast-food chain Chipotle Mexican Grill believes that it’s really important that people know where their food is coming from.

Ells is a certified chef trying to defy the definition of fast food for the many consumers visiting its 870 restaurants. Chipotle buys no pork from factory farms and 100% of the chicken they serve is grown on a vegetarian diet, free-ranged with no antibiotics.

Steve’s main supplier is Joel Salatin, owner of family-owned Polyface Farms, who prides himself on sustainable farming practices that fundamentally challenge the existing food system. More details are available in ABC’s coverage of the story.

The ABC journalists’ skeptical demeanor is representative of those who struggle to understand why any business person would want to run a business that defies conventional wisdom in a well-established industry. Is it not suicide, or at least an oxymoron, to combine the ideology of fast food with sustainability?

The journalist asked about the exorbitant costs expected from the operation of a restaurant like Chipotle as if to suggest that it would be impossible to compete with the likes of McDonald's. But this misses the bigger point. Chipotle’s strategy is a really good example of how sustainability can be a differentiator in the $1 billion dollar fast food industry. For the first time, consumers can align their quest for convenience and relatively low-cost food with health, well-being and environmental sustainability.

The video ends with the journalist asking Ells whether he is more excited about the business model than the consumer. An interesting question indeed. Many of the businesses I’ve had the pleasure of visiting that embed sustainability in this way recognize that the market typically isn’t there waiting for the company to provide what this product or service. Otherwise all the reactionary unsustainable companies would have changed by now. Social entrepreneurs and the visionaries need to play a role in creating, or at least redefining, the market. A huge part of this involves educating the consumer on 1) the dangers socially and ecologically of the existing fast food industry and 2) the opportunity associated with having best of both worlds.

To the question: “Do you think consumers will appreciate it more? Steve responds:

“Well I think they will appreciate it more. Again, I think this is a journey. You can’t just flip a switch and have 100% free ranging chicken and pork…this is something that is going to take time.”

Unlike traditional entrepreneurs who build businesses based on existing market demands and trends, social entrepreneurs adopting sustainability need to play an active role in building a market for their products and services - perhaps an illustration of the difference between those who follow and those who lead.

Logo graphic taken from Chipotle Mexican Grill reproduced under Creative Commons

Tuesday, March 22, 2011

The Role of Business Schools in the Financial Crisis

“Give it your best shot” says a frustrated and annoyed Dean of Columbia Business School as the interviewer in the Oscar winning documentary “Inside Job” questions him about a potential conflict of interest. The Dean, as Chairman of the Council of Economic Advisers under the Bush Administration, advised the deregulation of the derivatives market while earning hundreds of thousands of dollars as a consultant and director of financial firms that would ultimately benefit financially if the government followed his advice. But the President of the Economics Department at Harvard argues that economics and business academics Laura Tyson, Frederic Mishkin, and Larry Summers are not facing a conflict of interest despite their dual role as key public policy figures and advisers on the one hand and as consultants for hedge funds that rely heavily on derivatives, board members of financial institutions, or authors of financial market reports paid for by the Chamber of Commerce on the other.

The film does a fantastic job in laying out what led to the financial crisis, identifying those responsible, and describing its consequences. One of its broader conclusions is that the financial crisis was caused by the collusion of a small number of elite individuals looking out for their own self-interest – the same self-interest that economists continually boast to be the engine of a just and equitable society. John Cassidy, in his book “How Markets Fail: The Logic of Economic Calamities”, calls this “rational irrationality” where the rational self-interest of an individual – make money – is irrational when considering the broader negative impact on society. The revolving door syndrome is particularly pervasive whereby top executives of investment banks, public policy makers, and academics swap roles as part of an ‘incestual’ soup of elitism. According to the film, these untouchables have railroaded the world economy, have not been penalized for it, and shockingly remain in these powerful positions without any regulation to change behavior.

I was particularly intrigued by the blame placed upon the economics and business faculties of universities and colleges, the discussion of which focuses on the aforementioned conflicts of interest among professors. But the documentary falls a bit short in discussing the underlying ideology inherent in business schools and economics departments that end up as gospel in textbooks and curricula that instill a certain worldview and skill set among future executives. Many argue that the conventional business frameworks students learn in business schools are out of date and flawed in their ability to contribute to overall public welfare, making professors in those schools complicit, if not active agents, in the crisis.

Debate for a fundamental rethink of the field of finance, for instance, is practically non-existent while accounting for non-financial measures is presented anecdotally as some kind of nice to have in accounting textbooks. The marketing discipline tends to focus on execution and technological sophistication at the exclusion of social issues. But the crux of the problem, in my view, originates from my home discipline of strategic management which advises managers to increase power and influence over public opinion and public bodies, to create monopolistic environments, and to influence markets in ways that maximize benefit for the firm. Colleagues of mine, for instance, study and prescribe managerial behavior that proactively influences governmental bodies to put in place regulation that is aligned with the firm’s core competencies. Never mind public interests.

While the economics discipline can be blamed for its over emphasis on economic utilitarianism and the abolishing of government regulation in favor of the free market, the business strategy discipline can be blamed for teaching managers how to disrupt perfect markets for profit gains while at the same time limiting government intervention. Managers are taught to shape and mold their competitive environments in ways that build power over all other stakeholders (customers, suppliers, government, communities, environment, entrepreneurs, and competitors) such as the weakening of consumer protection agencies. They are taught to shape public opinion and market trends, engage in political lobbying to protect these positions, and build their organizations to be too big to fail. To this latter point, investment banks got to a size where the Securities Exchange Commission (SEC) heavily relied on their expertise when deciding whether they should raise leverage restrictions. SEC Commissioner, Roel Campos, was quoted as saying, “These are firms that do most of the derivative activity in the US. We talked with some of them about what their comfort level was”. The SEC Director then said, “The firms actually thought the number was appropriate”. The result is the creation of market imperfections that result in wealth for the firm - specifically its executives - at the expense of wealth for society.

It's important to remember that this behavior isn't a result of some mafia takeover of Wall Street or the devil himself paying a visit to the executives of these firms. These managers are simply pushing the envelope on what they learned at a fundamental level in their business school courses. The Economist nicely flagged the hypocrisy of corporate social responsibility where companies spend money on philanthropy and tout their socially responsible behavior when they work behind the scenes to build industries that make them too big to fail, command premium prices through industry concentration, and ultimately usurp the free market system. So while business schools may tout their attention to CSR and sustainability, it ultimately masks the underlying fundamental ideology of business which is, in fact, to usurp public interests if the opportunity arises.

Charging Bull photo taken from reproduced under Creative Commons

Thursday, March 17, 2011

No Nuclear? No Coal? Now What?

I had the pleasure of meeting Stanford Professor Mark Jacobson during his visit to Ivey Business School a couple of weeks ago. Mark argues that there is no reason why we can’t power all our energy needs with renewable sources. Ranked in order of most sustainable, he suggests the following:

  • Wind
  • Concentrated solar power
  • Geothermal
  • Tidal Power
  • Photovoltaic
  • Wave Power
  • Hydro
  • Nuclear – this would drop to the bottom when considering the potential for nuclear fallout which is happening right now.
  • Coal using Carbon Capture and Storage (CCS) – carbon capture does not capture the carbon used to transport the coal and extract it out of the ground – which represents a large percentage of where coal related CO2 comes from

In a debate on Mark goes up against one of the fathers of the environmental movement, Stewart Brand, who argues for nuclear energy as our solution to climate change. Although Brand puts forward some good arguments, Mark comes back with some impressive statistics that counters many of Brand’s claims. I asked Mark about the growing number of environmentalists and climatologists advocating nuclear power as the best approach to replace coal. He finds it frustrating when these scientists put forth opinions that are not based on their area of expertise. In Brand's argument he says that those who know the most about nuclear are least worried. But then he puts up James Hansen as an example of a person who is not worried about nuclear. Climatologists are not experts in energy and neither are environmentalists. James Hansen is an Earth and Environmental Scientist and Andrew Weaver is a climatologist – both of whom advocate for nuclear – perhaps until recent events in Japan. Listening to some of the experts on nuclear these last few days, I would say they're worried!

With the growing distaste towards nuclear energy, Mark’s assertions are likely to gain popularity. Mark is the first to accurately map out global wind and solar energy creating capacity. He published these findings in the Energy & Environmental Science Journal* where he reports that global wind capacity can generate up to 1700 terawatts of electricity while solar capacity can generate up to 6500 terawatts of electricity. On land, these sources of energy can generate up to 70-170 TW of electricity (excluding Antarctica) and 340 TW respectively. Today’s population demands 12.5 TW of electricity with an estimated 16.9 TW by 2030 – a small percentage next to what is possible.

So what’s the problem?

Mark tells me that wherever he goes to present his work, he receives a typical set of questions from the audience. The first is the issue of availability. How can we assure a stable supply of energy when the wind doesn’t always blow and the sun doesn’t always shine? Mark asserts that the energy solution requires a combination of energy sources that work in unison depending on what energy is available. In a pilot test in California over a two year period, Mark found that based on a stable supply of geothermal energy, available wind and solar energy, and hydro-electricity, the population in the experiment would not have to resort to natural gas sitting in reserve. His experiment ultimately trumps those who would argue that renewable energy is an unreliable source of energy. Mark calls this “load-matching” whereby the source of energy remains flexible so that energy utilities can draw on the source most available at a given point in time. Hydro-electricity is particularly useful as a backup because it allows for quick on and off if and when solar and wind are not available.

What about the ecological footprint and negative health effects of wind turbines? This is another popular question and was the source of resistance to an off-shore wind project in Ontario. In a presentation I attended here at UWO, a medical doctor from Doctors without Borders presented results of a study that showed no significant health effects originating from wind turbines. In fact, compared with coal and the potential fallout from nuclear, wind turbines are essentially benign. Mark too reamed off a number of studies suggesting no health effects. With respect to bird wildlife, he spoke of an interesting study showing that birds are in fact worse off from the indirect effect of coal than any direct effect of turbine blades. Finally, there’s the ecological footprint of the wind turbine itself. James Lovelock, another environmentalist and self-declared energy expert, is a nuclear supporter because of the impact wind turbines have on ecosystem health. But Mark says that this is a myth when you consider the fact that the base of the wind turbine is quite small and that turbines need to be a minimum distance from one another, leaving huge plots of undisturbed land. If we were to power the entire US vehicle fleet on wind energy, we would need 1-3 square kilometers of land for the bases of the turbines (larger once you consider the natural land between the turbine poles)

The final question he typically receives is related to the prohibitive costs and time of construction associated with renewable energy. He is alarmed that the Ontario government’s feed in tariff awarded individuals and organizations $0.11 for each kw of energy generated from wind and $0.41 from solar. He argues that wind should cost between $0.03 and $0.05 per kw hour whereas coal costs between $0.12 and $0.14 once you include health costs ($0.07 to $0.09 if you don’t). What about transmission of wind and solar power? This cost is included in the calculation. Wind and solar are two of the quickest in terms of construction.

Mark then goes so far as to advise what the global energy mix should be based on his findings. He says that wind should power 50% of global energy needs (6-8 TW of electricity), which means that we need 3.8 million wind turbines. Concentrated solar power should represent 20% of our power which would require 49,000 concentrated solar power plants (300 MW per plant). Photovoltaic comes in at 14% with 14,000 solar PV plants at 300 MW each. The rest is geothermal, hydro, tidal and wave power with relatively small proportions of the energy mix.

So what’s going on here? Why aren’t we moving in this direction? In asking him this very question, he says that this is where his work ends. He’s not a social scientist but knows that there are some very powerful players who would be quite upset if we moved away from coal, oil and nuclear energy. It’s estimated that existing energy companies receive 8-10 times in subsidies as renewable energy companies and spend 8-10 times more in political lobbying than their renewable counterparts**. I was saddened to hear a Professor in Anthropology in Japan talking about the attack on democracy as he describes how the interests of a few powerful actors pushed forward nuclear energy policy in the country in the past.

Although Mark’s study is the first of its kind, we’re likely going to see more of the same. This study is perhaps a starting point in refuting those who claim that renewable energy is too unreliable, costly, unproven, and not pragmatic. It may also show that resistance has more to do with protecting a group of elite interests who have a lot to lose from changing the status quo than it does with science or physics.

* Source: Jacobson (2009). Review of solutions to global warming, air pollution and energy security. Energy and Environmental Science. 2: 148-171
**Nick Parker, CEO of CleanTech. Presentation at the Ivey School of Business: Steering the Storm. March 9th, 2011.

Nuclear plant photo taken from Renewable Power News reproduced under Creative Commons
Wind turbine photo taken from Erie Shores Wind Farm Reproduced under Creative Commons

Thursday, March 10, 2011

Air Canada Plays Hockey

Yesterday, Air Canada sent letters to all 6 Canadian NHL teams expressing concern about the recent number of on-ice incidents that have made headlines in the hockey world. The letters came the day after Boston Bruins star Zdeno Chera hit a Montreal Canadiens player, leaving him with a fractured vertebrae and a severe concussion. Air Canada was quoted as saying:

“While we support countless sports, arts and community events, we are having difficulty rationalizing our sponsorship of hockey unless the NHL takes responsibility to protect both the players and the integrity of the game.”

As owner of the naming rights to Toronto’s Air Canada Center and major corporate sponsor of the 6 Canadian NHL teams, Montreal-based Air Canada is clearly exercising their power to influence the NHL.

I find this story fascinating for a number of reasons:

First, part of the explanation for Air Canada’s move could be attributed to an increasing pressure on companies to extend their responsibility beyond economic and legal obligations. As Denis Vandal, Air Canada’s director of marketing and communications said:

“From a corporate social responsibility standpoint, it is becoming increasingly difficult to associate our brand with sports events which could lead to serious and irresponsible accidents; action must be taken by the NHL before we are encountered with a fatality.”

Many companies, in an attempt to save face in the public’s eye, have exercised their power as sponsors to proactively influence their partners to change behavior.

Second, and perhaps more skeptically, we should be careful to prematurely label Air Canada as a valiant hero before thinking about some of the absurdities of this move. Notice in the first quotation that Air Canada thinks they are positioned to make judgments on what is best for the “players and integrity of the game”. Has Air Canada recently announced a diversification strategy into the world of professional sports? I’m not sure if there are many capabilities used in operating an airline that could be transferred to informing the rules of a professional sport.

Third, this is another example of a company getting involved in public affairs that have nothing to do with their core business. Like Google’s efforts to eliminate censorship in China or Visa’s attempts to weaken WikiLeaks by cutting off their funding supply, Air Canada is attempting to use its powerful position to influence NHL rules. Whether or not Air Canada is correct in their stance is irrelevant next to the fact that business’ dominating role in society is allowing them to get involved in the public domain at an unprecedented level, without any shred of expertise, and, most importantly, guided by a uni-dimensional motivation of profitability, which we know doesn’t have the best track record for aligning with society’s interests.

Fourth, I question Air Canada’s motives. While it is the responsibility of companies to manage future risk, I find it very hard to believe that Air Canada’s reputation could be damaged in a society where hockey defines its culture. Does the location of Air Canada’s headquarters - Montreal - mean anything here (home team of the victim of yesterday’s incident)? Ironically, while Air Canada is playing the CSR card in explaining their actions, the fact that they seem to be responding rashly over an incident that impacted their home team smells of conflict of interest and irresponsibility.

Finally, I’ll end with a criticism to those who would argue that Air Canada should keep its nose out of these sorts of things. In the early 1980s, the organizing committee for the Olympic Games in Los Angeles made an unprecedented move when they funded part of the 1984 Games with corporate sponsorship. 20 years later, the Sydney organizing committee solicited $1 Billion in sponsorship to fund 50% of the budget. Over these 2 decades, we’ve seen an unprecedented level of corporate funding for a range of individuals, organizations, and events both within and outside the sporting industry. Public educational institutions in the US are turning to corporations to reduce budget deficits through marketing in schools and funding of different programs.

How can we expect to benefit from this lucrative pot of money without sustaining some consequences. If we want the luxury of fat corporate funds to run these events, teams, organizations and venues, then we have to be prepared to accept their active role…experts or not. Perhaps the bigger question is not whether Air Canada has a right or should be able to influence the NHL but instead whether we made decisions that permitted corporate sponsorship in haste without thinking through how this trend would subsequently lead to increased corporate involvement in activities held sacred by public interests.

Photo taken from Disabled Travelers reproduced under Creative Commons