Thursday, November 15, 2012

Diabetes and Grocery Store Chains

November is Diabetes month.   A shocking 9 million Canadians live with diabetes or prediabetes and 371 million people globally are living with the disease (although it is estimated that an additional 187 million people have no idea that they are suffering from the condition).  Estimates predict that one-third of Canadians and 552 million people globally will have diabetes by 2030.  This number is shocking considering that diabetes was largely non-existent only decades ago.

Diabetes describes a medical condition where a person has high blood glucose (blood sugar).  90% of all cases worldwide are Type 2 diabetes where the body does not produce enough insulin or the body does not properly use the insulin it makes.  Insulin is important to help your body control the level of glucose in the blood and obesity promotes insulin resistance. 

The Globe and Mail had an entire section on diabetes in yesterday’s edition of the paper.  I found two things particularly striking.  The first was the content of the stories in the newspaper.  Some chronicled the lives of people with diabetes, others talked about the importance of medical treatment of diabetes – particularly the need to shift from acute to chronic care – while others promoted the importance of exercise and an active lifestyle.  Although there was mention here and there about eating habits, the only dedicated story I could find about the role of food and beverage companies in the diabetes epidemic was on the back page on the bottom right hand corner where there was a brief article warning consumers about the breakfast cereal they choose to purchase and consume.  I found this striking, largely because the primary cause of diabetes and obesity is not exercise or poor treatment but eating habits and the proliferation of processed foods that dominates the supermarket.  The food and beverage industry produces enough food for each person on the planet to consume 3900 calories.  The average consumption rate is 2800-3200 calories and the recommended calorie intake is 1800-2000 for females and 2200-2400 for males.  A brisk 60 minute walk would expend 280 calories, not nearly enough to offset the increased calorie intake that we’re seeing today.  So then why don’t we see a dramatic educational platform that educates consumers to move away from processed and highly fortified foods? 

The second surprising thing I noticed was a large one-page advertisement for a diabetes awareness event with a listing of the sponsors for the event.  Almost all of them were grocery store chains – Loblaw, Safeway, Metro, Zehrs, Your Independent Grocer, among others.  I was aghast from the irony to the point where the secretary at the dentist office I was waiting in thought I read a funny joke. 

Perhaps I had. 

Here we have the proliferation of one of the most widespread diseases in our society linked closely to one of the most alarming trends in our society (obesity), and the main sponsors of creating awareness are the same companies that litter 90% of their stores with the very crap that is causing the disease.   Walk into any one of these grocery stores and you’re bombarded by messages to purchase and consume unhealthy products. 

But then is it really their fault?  Isn’t the food in these grocery stores merely reflecting consumer demand?  I’m sorry to say that anyone who thinks that these grocery store chains are not complicit in the proliferation of diabetes does not understand the fundamentals of business.  The food that would sharply curb the incidences of diabetes (e.g. fruits and vegetables, cheese, and nuts) have virtually zero profit potential for business, which is why these sorts of products are relegated to the outside aisles of the grocery store, perceived as poor cousins to the very sexy and highly marketed value-add processed goods that have some tiny yet manipulated remnant of one of these raw foods.  The money lies in processed food where food companies can add value to products and grocery store chains can capture a larger percentage of the price for their own margin.  On top of this, as a grocery store you’d be more interested in selling products that have properties that would encourage consumers to buy more.  Sugar, salt and fat are addictive, so if I’m a smart business person, I know that it would be more worthwhile for me to stock my shelves with foods containing these ingredients than with foods that don’t.  As a consequence, because consumer responsibility implies choice, grocery stores play a very active role (intentionally or not) in limiting the choice available to consumers so that they purchase higher margin, addictive products. 

The irony behind grocery store sponsorship of diabetes awareness reminds me of Corporate Knight’s recent endorsement of Loblaw as the most responsible company in Canada.  In another blog posting, I put forward a rather harsh criticism of this endorsement largely because Corporate Knights completely overlooked the products in the store aisles and the impact these products have on society and the environment. 

These sorts of “slap in the face” initiatives by companies drive me absolutely nuts!  Any company representative reading this will remark on how much they’ve improved their healthy product offerings through an organic section or through more general healthier alternatives.  But what they can’t come to grips with is that their business model is fundamentally at odds with societal interests to reduce obesity and diabetes.  I sympathize with these companies.  How would you feel if a majority of your products that you sell to consumers is closely linked to a disease that is killing them?  On the other hand, it's important to consider purchasing power these grocery chains have to elicit change in the food and beverage supply chain.  Are they using it to the best of their ability?  Shouldn't they be spending their resources on making these more fundamental changes to the food and beverage value chain rather than spending it on these sorts of sponsorship activities that represent band aid solutions to a more complex problem?

Monday, October 22, 2012

Who's to Blame for Household Debt Levels?

Canadian debt levels are among the highest of developed country nations, beyond those of Americans and Britons.  Recently, we’ve been warned that these debt levels are far worse than previously thought with growing consensus among experts that Canadians aren’t immune from the downfall they witnessed among their American neighbors.  The only bright side, ironically, tends to be the eroding asset base of Canadians, which is largely dependent on a deteriorating housing market.  As Madani at Capital Economics explained: “Debt growth dynamics over the last decade look eerily similar to the U.S. experience, just before their dramatic housing bust.”

In response, the discussion in the media tends to revolve around the dilemma the Bank of Canada faces in its efforts to combat a struggling global economy on the one hand, which requires a lowering of interest rates, and rising household debt levels on the other, which paradoxically requires the raising of interest rates.  I find our reliance on the Bank of Canada amusing because nowhere in our discussion of this dilemma are we considering what I think is the elephant in the room, which I refer to as an intrinsic motivation of big banks to exploit consumers.

3 Types of Lending
To understand this, it’s worthwhile to perhaps simplistically distinguish among three types of lending practices.  The first is responsible lending where banks respond to the needs and wants of informed and educated consumers as a means to lubricate the economy to improve societal welfare, The second is called careless lending, an extreme level of lending that we saw in the US where, due to the deferral of risk, lenders provide credit to those highly susceptible to default.  The conversation in Canada often ends here as loyalists to the invisible hand argue that banks have no incentive to employ the latter practice because our regulation makes it so that consumer default results in bank losses.  In fact, recently, National Bank Financial analysis Peter Routledge explained

“That these consumer debt levels are a non issue because the average loss rates on banks’ credit cards has fallen back down to about 4 percent, a level not seen since 2008 and the average value accounts whose payments are 90 days or more delinquent is just 1 per cent of the portfolio.”  

He concludes that while Canadian debt levels are high, the default rates clearly indicate that this is a non-issue.  The fascinating thing about this absurd and completely misguided conclusion and others that say debt levels isn’t a big deal is that he’s using defaults as a proxy for debt problems rather than considering the idea that perhaps banks have just gotten better at finding ways to exploit consumers without sustaining the cost of default.  

This leads me to an overlooked third category of lending practices that I think represents a majority of the types of loans banks make called exploitative lending, a middle ground between the first two extremes where banks search for gaps in consumer knowledge to impose on them the maximum amount of credit possible without them defaulting.  It is this third type of lending that while difficult to pin down is critical because it puts into clear focus the inherent conflict between bank and societal interests, a conflict that I believe is responsible for today’s debt levels.  A recent report from an equity research firm in Toronto looking into the ease at which consumers can get mortgages found that banks are bending over backwards to make it easy to take the plunge and buy.  It noted: "At once sales centre, BMO was willing to lend half of the required 20 per cent down payment.  Apparently, BMO is qualifying the prospective borrower on the full mortgage before approving the down-payment loan".  

My Own Experience
For the last several years, I’ve been bombarded with offers from my and other banks to take advantage of credit opportunities, to increase the credit limit on my personal line of credit, my visa card, or to apply for a home secured personal line of credit.  The latter came up when I was asking for a $5000 increase in the credit limit of my existing PLC, at which time I was encouraged to apply for a home secured line of credit that would provide me with 40 times the amount I was originally asking for and 8 times what I had already.  The interesting point of the conversation was that the person on the phone forgot completely about my original request of $5000.  On top of all this, I recently received my fourth communication in a year from my bank offering a 33% increasing in my visa credit despite the fact that since first getting a visa card 17 years ago I have never come close to having a balance of more than 33% of my credit limit for more than 4 weeks.  In other words, I have never maintained a balance on my visa card. 

Now what is going on here?  Is my bank really looking out for my needs by offering credit to me that is going to improve my life?  Sadly, I don’t think banks are experts at improving the quality of life of their consumers.  They are experts at finding ways in which to capture value from their consumers.  In this case, value comes in the form of disposable income.  In my case, the bank has learned through reams of data on people sharing my demographic and psychographic characteristics that increasing my credit limit in multiple ways leads to a false sense of security that I have greater disposable income through which to meet needs I didn't know I had.  More specifically, they know that because I’m comfortable with a 33% use of my credit limit and that my income level has not increased by a similar amount, increasing that credit limit will eventually lead to payments that exceed my monthly income thereby locking me into a perpetual state of interest payments and a high debt-income ratio. To ease consumers into what it means to have a large balance on their PLC, banks require that consumers keep a minimum balance on new PLCs as a means to avoid initial registration fees.  After the 3 months of a high balance, the hope is that the consumer is accustomed to such a debt level while at the same time hasn't put money away to pay this off.  

Throughout my undergraduate university education, I worked at one of these financial institutions as a customer service representative (teller).  I was awarded cash on the spot if I signed up someone for a credit card.  We were very strongly encouraged to look at the birthdates of younger looking clients to see if they were 18 and were now eligible for a credit card.  I recall learning clever tactics to convince them to get a card such as benefits to their credit rating for future credit access and the benefits of receiving free money for up to a six-week period.  I realize today that this represents a dramatically scaled-down version of a more general culture of pushing credit on unbeknownst consumers. 

From the bankers’ perspective, think about how easy it would be to slide down the slippery slope of exploitative lending by finding ways to convince consumers to take on more credit that they don’t need.  Bankers are very bright people, and while well intentioned at best, they understand the psychology behind consumer purchase decisions.  They know that a majority of the consumer population struggles to differentiate between cash and credit and that when consumers see a high credit limit they are more willing to use that credit in lieu of cash.  If you were a bank, you would have every motivation to push credit on consumers just up to the point prior to bankruptcy.  Call it greed or good business, the point is that this is a reality that we’re not talking about.

Consumer Responsibility
One of the main reasons why this discussion hasn’t yet occurred is because the very conservative Canadian culture would argue that it’s up to Canadian consumers to spend responsibly and therefore to borrow responsibly.  Carney himself, in his message to Canadians, tends to use this approach.  What this completely overlooks however is how the power of Canadian financial institutions in influencing consumer behaviour in Canada.

Several months back I was somewhat lambasted by the Sustainability Director of one of the Canadian banks because I criticized their green initiatives as green washing, a mere disguise for the blatant disregard that they oftentimes demonstrate to society.  My main criticism, like with many other firms I comment on, is that on the one hand the bank is marketing the hell out of their commitment to renewable energy and energy efficiency in their retail branches but on the other ignores how their ongoing daily activities with business and individual consumers leaves them culpable to debt issues.  

There is no question that the banks would respond to my above claims by completely denying responsibility for any increase in debt levels because it is up to the consumer to make sound credit decisions.  This is an expected response, one that several other industries have taken when they engage in activities that indirectly lead to major social issues.  The apparel industry denied responsibility for sweatshop labour in the 1990s, the consumer electronics industry, up to a year ago, denied responsibility for the suicides in their suppliers’ factories, the food and beverage industry denied responsibility for the obesity epidemic, and of course the tobacco industry denied responsibility for consumer deaths. 

The banks got their first scare in 2008 with the financial crisis revealing that the inherent motivation of the financial industry does not necessarily align with society’s interests.  As Canadians figure out that debt levels, like cigarette addiction rates, are not necessarily caused by consumer irresponsibility but rather a blatant attempt by banks to exploit the vulnerabilities of their consumers, a major backlash will ensue…perhaps one so drastic that they end up like their tobacco company counterparts, cowering in a corner begging for mercy. 

Friday, August 17, 2012

Is LEED Certified Construction Management Worth the Investment?

Nearly every major city or province is investigating the possibilities of renewable energy, as attested in a recent post about the Bala Falls Hydro Project in Ontario. Green building projects are on the rise in North America, with many new building achieving LEED certification at some cost to builders and homeowners. While everyone can agree that we need to conserve the earth’s dwindling resources, not everyone is pleased about those upfront costs, as Noelle Hirsch writes in today’s post. Noelle writes for, an online resource about all things construction.  Check out her guest post below


By: Noelle Hirsch

There are two competing interests in construction management today: first, to overcome the slumping market and sell buildings; and second, to build with energy-saving and eco-conscious features in mind. Ideally, these two should go hand in hand, and in many cases they do. It can be tempting, though, for construction managers to seek cost-saving shortcuts for purposes of funding or expedience. Designing a building to be “green,” and seeking green certifications, is a costly and time-consuming process, which has many wondering whether the investment is worth it. In most cases, buildings built to green standards save a lot of money in energy costs over the years. The payback window can be long—20 to 30 years in some cases—but for permanent structures like houses, government offices, and schools, those savings can really add up.

Reduced energy consumption is one of the primary goals of the United States Green Building Council’s Leadership in Energy and Environmental Design (LEED) certification program. Construction teams who build structures to LEED certifications are eligible for inspection by USGBC officials, which culminates in an award corresponding to one of LEED’s five tiered levels: certified, bronze, silver, gold, or platinum. There are many different criteria for building teams to meet. Some are simple fixes, like using energy-efficient appliances or motion-sensing faucets and low-flow toilets. Others, like geothermal heating and cooling units and construction designed to maximize natural light and air flow, are more complex. All relate in some form or another to energy conservation, however, which can mean big cost savings for building owners and tenants.

Energy expenditures tend to be huge in the United States. Inefficient building is mostly to blame. Poor insulation, unnecessarily wasted water, and lights left burning strong waste significant sums each year. Ernst & Young, a financial services company, recently shaved $1 million off its annual electricity bill simply by replacing all of light bulbs in its Times Square offices with efficient models, and installing light sensors in public spaces. “The retrofit is one of the largest LED lighting retrofits yet in New York City. It will cut Ernst & Young’s lighting-related energy and maintenance costs in half,” SmartPlanet reported in 2012.

While the cost savings were substantial, the retrofit was not cheap. After rebates and grant awards were factored in, Ernst & Young spent $2 million upfront for the changes. If energy efficiency keeps up, the changes will of course pay for themselves. Many skeptics of the green program wonder if there is not too big a focus on the bottom line, however.

Henry Gifford, a New York-based energy efficiency expert, has openly criticized the LEED certification program’s focus on energy saving potential, rather than energy saving actuality. “It's impossible to go out and buy a building with a guarantee for how much energy it won't use,” Gifford told National Public Radio’s All Things Considered. “What really needs to happen is the transformation of the owners and the operators of the buildings to ensure that the building is being operated properly,” he said. “I like to say you can get the same gas mileage out of a Prius that you get from a Hummer if you drive it incorrectly.”

One thing seems clear, though: building owners who are committed to keeping their costs low can usually succeed, either with LEED or other small energy-saving measures. As was the case with Ernst & Young, a number of grants and subsidies are usually also available, which can help keep the upfront investment manageable. Many states and localities offer tax breaks for green building initiatives, for instance. Reductions or waivers for city inspection fees are available in some places, as well.

The federal government, usually through the Department of Energy, the Environmental Protection Agency, and the Department of Health and Human Services, also offers grant money to help builders and designers offset the costs of planned green improvements or additions. Applying for these grants and understanding the parameters often takes a lot of time and planning upfront. This means that construction and design teams usually need to budget not just finances, but also time for their projects.

“Going Green” is fast becoming a way of life for many in the construction industry. Seeking certification is usually about more than just earning a fancy credential—it is about long-term savings and reduction in energy consumption. This takes planning, saving, and doing, but is worth it for most in the long run.

Wednesday, August 8, 2012

Why the “Free Market” Today Resembles Soviet-Style Communism

A free market isn’t the same as “freedom.” In several blog posts, I’ve heavily criticized the conservative perspective that naively – and inaccurately – couples neoliberal economics with our broader concept of freedom.

Like economist Milton Friedman and his legion of followers, proponents of free markets argue that any governmental regulation that prevents a private enterprise from achieving its profit goals is a widespread and unlawful attack on the freedom of every man, woman, and child. On the surface, the logic of the argument is convincing. Government regulation – in the form of new environmental standards, stricter health standards or small business registration hurdles – creates costs for private companies. It inhibits people’s ability to start new businesses that create jobs and to generate profits, which presumably create more jobs.   

But the connection between free markets and freedom is more complicated than that. It originates in the two socio-economic systems that at one time characterized our way of life on this planet. Up until the 1990s, “free-market” capitalism was considered the opposite of Soviet-style communism, in which economies were centrally planned, consumer choice was non-existent, and citizens were subject to the whims of a few centralized authorities. This dichotomy between communism and capitalism was characterized in the West as “The Free World” vs. “Behind the Iron Curtain.” 

I recently came across an interesting article in that articulated the irony of our perception that free market capitalism equates to freedom in society. In particular, author Sara Robinson argues that neoliberal economics is not a counter to Soviet-style communism but in fact analogous to its attack on individual liberties.  There are at least three ways in which the free market ideology now mimics Soviet-based communism.

Central Planning and Control
First, one of the things we associate with communism is central planning and control of the economic system. The supposed free market approach was meant to completely decentralize economic development through the “invisible hand.” (The invisible hand theory argues that, driven by self-interest, individuals will use capital to address market needs, creating value for both consumers and themselves.)  

But a small number of business leaders today possess shocking levels of power over society. As Ira Jackson from the Kennedy School at Harvard explained, CEOs and executives of companies are “the new high priests, reining oligarchs of our capitalist system.” Driven primarily by the need to create shareholder wealth, these individuals secure highly prestigious positions of influence over governmental bodies. They do so through mechanisms like the US-based “super PACs” – powerful political action committees that spend millions of dollars bolstering, but not directly supporting, political candidates or specific pieces of legislation. They wield power through the “revolving door syndrome” – a practice that sees people from an industry take regulatory or legislative jobs overseeing that industry, and vice versa. And these powerful business leaders also suffer from the assumption that they are “too big to fail”.

Consider JP Morgan’s Jamie Dimon, who sits on the board of the Federal Reserve, the very same body meant to regulate his firm. Consider the many food and beverage corporations that have immense influence on food and safety regulations. Or the cozy relationship between oil giants and the Minerals Management Service – a now-defunct federal regulatory body that was responsible for managing the United States’ natural gas, oil and other mineral resources. That relationship resulted in the approval of careless oil projects and was associated with serious oil spills.

It is in business’ best interest to replace government regulation with self-regulation. And when that happens, you get CEOs and top executives - not that unlike communist totalitarians - with substantial power over the very products and services that define our way of life. 

Limited Consumer Choice
Second, communism limits consumers’ choice to those products and services determined by the state, not the market. Ironically, though, consumer choice in the West has become severely limited under free market capitalism.

My students often argue it is the consumer’s responsibility to “vote with their dollars”: the free market provides a powerful force through which to address issues of inequality and sustainability. I cringe when I hear this argument, though, because it overlooks the fundamental motivation of business: to limit consumers’ choice of products and services by erecting entry barriers to new ones or by buying out and eliminating existing ones.

For instance, North American consumers today have no choice but to purchase appliances that will break down in approximately seven years. This unavailability of longer-lasting appliances is not caused by limited technological capabilities; it is the result of an optimality equation designed to maximize repeat revenue. Companies make more money if they can sell you a new stove every seven years rather than every 30. Gone are the days, as Robinson explains, when products are as abundant as the mom and pop shops that sourced them. Product diversity is the antithesis of economies of scale and if companies have the power to limit the supply of this diversity, they will. So, the supposed freedom associated with market demand for products and services has been severely stunted by companies’ quest for market dominance and power. 

The Propaganda Machine
Third, and perhaps most sinister, is the level of cognitive influence companies hold over us. During the Cold War, the Iron Curtain earned its name because of its ability to prevent citizens living behind the curtain from knowing what was happening outside the borders of their country. This information control kept citizens in check and ensured the outside world didn’t affect people’s acceptance of the communist regime.

It’s no coincidence that one of the largest expense items on a corporation’s balance sheet today is communications, marketing and public relations. It is absolutely mind-boggling to comprehend the sheer magnitude of capital used by corporations on communications to the public. I’ve said before that it’s hard to believe this marketing hasn’t had a substantial impact on our values, our beliefs, and our way of life. As Naomi Klein explained in her book No Logo, marketing has evolved from promoting a product to promoting a lifestyle. As the largest institution in today’s society, business’ impact has gone beyond the provision of a product or service to the primary vehicle shaping society.

A very important debate I have with my students is whether citizens of the West realize how much the plethora of marketing messages dominate their lives. My students have a difficult time accepting the notion that their behaviour is influenced by decades of messaging. In their minds, every consumer has the ability to detach from this external influence and make objective decisions. But this assumption overlooks the fact that business, like any other actor, has the ability to socially construct the norms and beliefs of a given society, whether intentionally or not.

Take, as an extreme example, a marketing initiative that introduced the scent of bacon into baby blankets to establish a solid future customer base. On top of all this, there’s the very monopolistic media industry, where the dissemination of information is based on whether it generates shareholder return rather than whether it in the best interests of society.  There is no question in my mind that the West is equally trapped behind an iron curtain of commercialization, excessive consumption, and a biased media, shielded by a seemingly endless supply of messages.

Where is the freedom that a “free market” society was supposed to provide? 

Stephen Barley, one of the most prominent management academics recently called on his fellow researchers to examine more closely the influence companies have on those institutions meant to protect democracy and the public good. He did so in the backdrop of the role creditors played in changing bankruptcy reform, which made it more difficult for individuals to declare bankruptcy, and the role pharmaceutical companies’ played in persuading the US congress to amend the Food, Drug, and Cosmetics Act so that drugs are approved without going through any clinical trials.   

Yet management scholars have spent more time examining how companies can more effectively play this role rather than examining how to engage in business practices that preserve democracy and the public good.  A rather large research area in business is what is known as Corporate Political Activity where some of the leading management scholars theorize how for-profit businesses can manipulate the regulatory environment for their own benefit by, for example, pushing for government policy that will position firm level capabilities as having a competitive advantage over competitors. 

So while there is no doubt in my mind that “freedom” is a contentious term when discussed in the context of the “free market”, we as business scholars are no less complicit than the companies who directly or indirectly erode such freedoms.  

Thursday, June 28, 2012

The Sadistic Nature of the Insurance Industry

According to the National Journal’s Influence Alley, health insurers in the US secretly spent huge amounts of money to defeat health care reform while pretending to support Obamacare. The industry gave $102.4 million over 15 months to the Chamber of Commerce for advertising designed to convince the public that the legislation should be defeated.  This is completely legal because there is no law that requires groups to publicly disclose where they are sending money or who they are receiving it from.  Up until now, this expenditure was unknown to the public because the insurance industry accounted for it on their books under the heading “advocacy”. 

At first blush, insurers’ attempting to influence public sentiment to oppose the bill would seem odd because health care reform essentially creates more customers for insurance companies overnight.  But according to Neera Tanden, who served as the senior advisor for health reform at the Department of Health and Human Services and was a member of the Obama White House health reform team, the industry’s distaste for reform revolved around a provision under the Affordable Care Act that requires companies to spend at least 80 percent of customers’ premium dollars on actual health care expenditures and that failure to do so would require them to refund the money back to customers. 

These two stipulations would essentially rein in escalating premium amounts by keeping them tied to the level of claims made by customers.  In other words, insurance companies would be bound to stick to their primary value proposition, which is to protect consumers.  By working to defeat the bill, companies are aiming to use customer premium amounts for purposes other than what they were originally set out to do.  This is not that dissimilar to the financial services industry that fought hard to overturn Glass Steagal so that they could use their revenue from customers’ deposits for investment purposes – purposes other than what the customer is expecting that money to be used for. 

I find this shocking discovery to be a fantastically accurately illumination of the underlying motivation of the insurance industry.  On the one hand, they market themselves as being the protectors of their customers in the case of emergencies yet do everything in their power to renege on that promise when an emergency does in fact take place.  Is it that simple?  Do we account for the industry’s schizoid behaviour around advocacy on Obamacare to their underlying culture of hypocrisy that has all but infected this industry? 

In my view, the insurance industry is one of the largest market failures in our economic society.  The underlying purpose of their efforts to eliminate the bill is to wipe out any accountability to their customers because it would mean that they could overcharge on premiums and at the same time do their best at reneging on a promise to fulfill insurance claims.  Sadly, this is the ultimate objective of business – maximize revenues and minimize costs.

But the provision in the Affordable Care Act would put a cap on the margins that insurance companies can make because 80% of their premium revenue has to be spent on claims.  As a consequence, Obamacare is seeking to fix this market failure.  The problem though is that influencing regulation is considered another strategy to appropriate value from society (in this case customers).  Value appropriation is a fundamental pillar of business strategy where the objective is to extract economic value that exists in society and to bring it into the firm for the benefit of shareholders.  The simplest example of this would be Wal-Mart, whose size has allowed them to successfully cut the margins of their suppliers (i.e. appropriate value) for the benefit of their own shareholders.  The insurance industry recognizes that Obamacare would cripple their ability to appropriate value because any excess margin they accumulate has to be given back to customers. 

What is more disturbing for me as a business professor is that I consider myself complicit in the sadistic act of the insurance industry.  I recently read an article on Online MBA that talked about 8 ways in which business schools are building in more responsible decisions in their graduates by altering business school curricula.  Many of these changes are a direct response to the financial crisis for which business schools carry much of the blame.  But what I find interesting about these eight changes and the many other initiatives I’ve seen at business schools is that the underlying paradigm of shareholder maximization and value appropriation remains unchanged.  Offering specializations in ethics and corporate social responsibility (CSR), adding more courses in this domain, aligning their mission statements with society’s interests, and deemphasizing profits as the primary function of business are insufficient in my view and ignorant of the elephant in the room.  

Fundamentally, what we teach as our core capstone course is to do precisely what the insurance industry is doing.  We teach them to appropriate and monopolize value, value that may originate from any sector of society.  These business school CSR initiatives represent fluffy disguises analogous to putting a nice coat of paint on a termite-infected house. Until business schools, their board of advisors, academic conference delegates, and the many other institutional pillars that support the existing business school paradigm look themselves in the mirror and recognize that they provide the platform through which this sort of behaviour is considered legitimate, they should be standing by the insurance industry in their attempts to defeat Obamacare.  

Sunday, June 10, 2012

Why do we ignore climate change?

The scientific community has reached a consensus that the build-up of heat-trapping emissions from burning fossil fuels and clearing forests is changing the climate, the result of which imposes significant risk to our well-being. Yet as conclusive as these studies are, we continue as a society to accelerate our emission levels putting us on a trajectory of temperature increases well in excess of the two degree celsius target established by the international community in the 2009 Copenhagen Accord. 

This shocking ambivalence persists in the backdrop of 2011 being a “real killer” when it comes to hot temperatures and a record number of extreme weather events including droughts, catastrophic floods, and forest fires, including the worst ever in Texas.  This alongside a recent study that showed how our current trajectory will lead to an unprecedented and permanent tipping point in the Earth’s ability to provide ecosystem services.

Why then, despite unequivocal conclusions, does society drag their feet in acting?  Several studies have looked at this question and through doing so they tend to distinguish between those people who deny that climate change is a reality from those people who accept human-induced climate change as reality, yet are inactive in response.   Let's look at each in turn.

Why do people deny climate change? 

You may be surprised to learn that only a small minority of people actually all-out denies that climate change is real and/or caused by human action.  Even in the US, a country known for being skeptical of climate science, only 10-20% of the population is in denial. This denial persists despite some of the worst skeptics coming out to admit that the leading scientists are in fact correct including Richard Muller at UC Berkeley who originally set out to debunk climate change mantra but then after an objective analysis conceded in a wall Street Journal article that “GlobalWarming is Real”

Misleading Media:  The media unfortunately does a very poor job at educating the public on the facts of climate change and instead has played an important role in spreading doubt by giving the false impression that climate science is one side of an equally valid set of arguments. David Johnson at Huffington Post remarked on this pathetic reality and blasted the integrity of the journalistic profession for perpetuating this very ambiguity in their efforts to be objective.  I recently attacked Margaret Wente and Canada's Globe & Mail for spreading such doubt through outdated scientific knowledge and opinions of highly unqualified individuals. 

Related to this is the fact that the deniers, according to Dr. Leiserowitz, Director of the Yale Project on Climate Change Communication, oftentimes drown out the broader conversation about the subject, making themselves seem more numerous than they are in reality.  These individuals have borrowed from the tobacco industry’s playbook of the 1980s/1990s of dis-information where the objective is not necessarily to deny climate change but to raise enough doubt so that you can “blunt the urge for calls for political reform”.  As a consequence, the 70-80% of the public who are neither strong believers or strong skeptics are highly swayed by this megaphone. 

Political Affiliation:  The second reason has to do with political ideologies.  Of those who reject climate change outright, 76% were conservatives.  The conservative mantra tends to associate action on climate change with a breach of fundamental human liberties presumably because such action will impose unnecessary regulation that will choke the very foundations upon which freedom flourishes.  As a consequence, right wing conservatives have lumped climate change among other topics that carry “liberal views” such as pro-choice, same-sex marriage and gun-control. 

(Allow me to digress: This is a very simplistic argument because on the one hand it overlooks the fact that a lack of regulation to curb human impacts on the climate is a recipe for a loss of freedom as more and more individuals struggle to rely on the basic necessities that enable such freedoms.  On the other hand it overlooks how a lack of regulation represents a platform through which those actors most complicit in causing climate change are in fact appropriating the very freedoms that we value.)  

Culture of Denial: Australian intellectual Clive Hamilton argues that denial is not necessarily due to a deficit of information as much as it is due to culture. Hamilton demonstrates that society has a history of denial and delusion in the face of substantial threat because people have a tendency to ignore knowledge that unsettles the mind.  As Hamilton explained, “so earnestly did the British public wish for peace that they were prepared to suspend their grasp of reality in return for a comforting delusion” that a world war would never happen.  The desire to disbelieve deepens as the scale of the threat grows, until a point is reached when the facts can be resisted no longer.  Unfortunately with climate change, unlike war, this ‘point’ is largely hidden from daily view.” 

Why do we not act? 

Now what about those who concede that climate change is a reality and that humans are the primary cause yet still do very little in response?  The American PsychologicalAssociation commissioned a task force to look at the Interface BetweenPsychology and Global Climate Change to identify the factors that prevent people from taking immediate action.  Many of these same factors were identified in other sources.  I summarize a selected few here: 

Climate Change Isn’t an Evil Tyrant:  The first reason has to do with the fact that climate change doesn’t represent an easily digestible evil character to which we can all rally against.  We worry more about anthrax (with an annual death toll of virtually zero) than influenza (with an annual death toll of half-million people).  Because climate change isn’t intentional, it does not capture out attention. So it’s a shame that climate change isn’t trying to intentional kill us! 

Climate Change is beyond our Noses:  Some argue that the economic recession has pushed climate change down on the priority list in light of more urgent economic needs.  It costs money to do some of the right green things. But more importantly, like all animals, we are more prone to respond to clear and present danger.  Our brains evolved that way.   Despite the fact that our intellectual prowess has enabled us to predict dangers before they actually happen, our brains haven’t developed the natural biological instinct to do something about it.

Climate Change is Inconvenient.  Old habits die hard.  There is a massive institutionalized system of social norms and practices that make it very difficult to change behaviour. How many times have you forgotten shopping bags or your reusable coffee mug?  Our way of life for the last several decades  (past two generations) has spawned behaviour that presumed that we had unlimited resources.  Look around you – everything you purchase is slated for the landfill.  It is seemingly impossible to do something without living in a clay hut, peeing in a hole in the ground that acts as compost for your garden, or walking several kilometers to the nearest congregation of box stores.  When you go into the grocery store or a home improvement store, the procedures for domesticating our lifestyles is based on an unsustainable system albeit with small yet humorous products that help us to be less unsustainable, perhaps out of guilt. 
Climate Change is an Underestimated Risk.  Finally, we tend to underestimate the risk associated with climate change to the point where we presume that our human ingenuity will come to the rescue.  This very naive perspective is common among neo-liberal observers who claim that the market can and will resolve the problem.  When I hear this rhetoric, i can't help but think of one of Albert Einstein's favourite quotations where he says (if I may paraphrase) that one cannot resolve a problem by using the same approach that initially caused it.  
All in all, the task for social scientists is huge.  The non-social scientists have done their job just as they had done in the 1960s proving unequivocally that tobacco was a cause of cancer.  But it wasn't until the 1990s that we finally began to take action at the societal level.  Let's hope we don't take so long this time around!