TD Complicit in North Dakota Pipeline Controversy

Recently, protesters chained themselves to a TD branch to protest the bank’s funding of the controversial North Dakota oil and gas pipeline.  The pipeline is meant to transport natural gas from U.S. fracking operations.  Despite President Obama and the justice department directly intervening to block the pipeline's progress due to the lack of stakeholder engagement and consent, the media has not been covering the issue to any great extent.

Earlier this week, Schulich School of Business hosted the Senior Director of CIBC's Environmental Group.  The Schulich MBA alumnus explained how CIBC screens projects based on their environmental risk to the client.  This is what we’d call the business case for sustainability because it makes financial sense for CIBC to do this.  These sorts of initiatives are labeled as a commitment to sustainability when they are simply business practices that maximize the bottom line.  As a 12 year old article in the Economist noted, this is not CSR, this is simply good business.  But the problem is that the bank’s determination of what is an environmental risk is not the same as society’s determination of an environmental risk.  For instance, a bank may push their clients to consider the effects on their operations of devastating storms resulting from climate change but they will not consider the negative impact of those same operations on nearby waterways upon which local communities depend if there is nothing in place, such as regulation, to facilitate the potential for financial costs.  This is why CIBC often looks completely hypocritical considering that they continually boast their commitment to breast cancer research through funds raised for CIBC Run for the Cure yet will not bring their environmental risk standard to a level that would preclude funding those businesses that produce and/or use the chemicals that contribute to breast cancer.  

TD’s blunder in the North Dakota access pipeline represents a very similar example of this because the project likely passed their weak environmental risk standard, a standard they boast to be part of their commitment to sustainable development.  But what their standards did not include was the necessary social license to operate that companies should have before receiving funding from TD.  This is because TD would determine this to be low risk, even though broader society as represented by the protests there (including the US President and Justice Department), deem this high risk.  The bottom line is that the banks' standards around sustainability will only become as strict as is necessary to optimize profitability.  This is insufficient if any bank is serious about responsible business.  Let's be clear:  standards that are necessary to prevent negative social impact yet are unnecessary to prevent substantial risk - because government regulation is too laxed or behind in enforcing certain practices,  or the risk of stakeholder revolt at the time of the loan and its impact on the client's brand is negligible - would represent a drop in profit.  

So I balk at Schulich's CIBC presenter and the rest of the big banks’ bold commitments of environmental sustainability because they are simply following the buck.  It is now more attractive for banks to go in this direction because of looming regulation, serious stakeholder revolt if they fail to do so, and the negative impacts of decades of negligence in the lending practices these banks have ultimately facilitated (e.g. climate change).  To now say that this movement into environmental markets is a solid example of their commitment to sustainability is like saying that Tim Hortons' or McDonald’s introduction of healthier food options is a bold movement towards responsible business.  The reality is that they are now profiting from a growing awareness that what they were feeding society over these last several decades was garbage.  The banks have profited off of the negative externalities they were complicit in creating as the intermediary of capital and now they are profiting off of the growing market for environmental practices meant to correct what they helped to create.  That's f$%#& up!

Putting the "Public" Back into "Publication"

Let’s talk about the academic publishing industry.  Or, as I like to refer to it, knowledge hoarders!

I’m an academic.  It is my job to publish research in reputable journals to contribute to knowledge, knowledge that tells us important things like causes of cancer, whether climate change is real and human driven, whether particular foods are more or less associated with diabetes and obesity, and, this is true, that Pacific herring farts, unlike human farts, are essential in helping to build social bonds

Now there are different types of publishing.  We’re most familiar with the publishing of books and textbooks.  But I want to talk today about the publication of academic articles.  They key difference between an academic article and say a book is that the article is vetted by expert anonymous reviewers (unknown to the author) so that the reader has some assurance that what the article is saying is in fact reflective of sound science.  Academic publications filter out hearsay, myth, and fear-mongering bullshit that tends to come from a simple google search and sometimes books.  Could you imagine if we devised regulatory policy based on the seemingly airtight consensus on the internet that eating gluten is unhealthy? 

Yet, here’s the rub…although the word “public” is in the word “publication”, public access to the knowledge inside these publications couldn’t be more private.  

There are three main publishers of academic knowledge – Elsevier, Springer, and Wiley-Blackwell.  Together they own the access rights to 42% of all academic journals.  To put that differently, they own the access rights and are thus the gatekeepers to 42% of knowledge in the academic community.  Things haven’t been that bad since Immortan Joe from Mad Max Fury Road controlled the flow of water to desperate citizens of a parched world or when Donald Trump controlled what was considered real news.

But unlike Immortan Joe who likely paid the high costs associated with drilling and accessing that water, publishing companies don’t pay the salaries of the scholars nor do they cover any expenses associated with the research they conduct.  Instead, the cost of research falls on the backs of you, the taxpayer, through the salaries and expenses public colleges and universities pay its professors.  This means that even though taxpayers are paying to produce knowledge, they can’t access that knowledge unless they fork over an average $30 for a single article and $4,000 to $20,000 for a single journal subscription paid for by universities and colleges that students access through tuition fees.  It is no coincidence that there is a strikingly strong correlation between student tuition fee increases over the last two decades and journal subscription fee increases that universities and colleges have little choice but to pass on to students.

Think about that for a minute.  That’s like paying $45,000 for a car and then being prohibited to use the car until you pay the car dealer a monthly fee to use it.  Or that’s like buying a house from Rose and John and not taking ownership until you pay them a monthly fee to use it.  That’s fucked up!

Publishing companies claim that there are enormous costs associated with distributing knowledge that justify the fees.  Printing costs have become incredibly expensive…all that paper, and the cost of binding the journals, not to mention shipping journals to the many colleges and universities around the world...that’s crazy expensive.  

Except, the Internet happened!

So what costs do these companies sustain to justify these prices?  What value are they adding to knowledge creation? According to a 2012 article in Nature , they provide a wide range of services.  They edit the draft of the article, they select scholars to review the work to determine whether it is suitable for publication, they work with the author to enhance the article, they translate the author’s illustrations to journal level formatting, and they provide the platform for access along with “other enhancements”.  That sounds helpful.

But there's one problem, it’s bullshit.  By the time the article is accepted to the journal, the draft is typically well written by the authors, requiring very little editing by the publisher.  But get this, Elsevier recommends that authors hire an editor to proof edit the work.  In fact, Elsevier offers editing services at, get this, $115 a pop for a proof read.  

Wait, what?  

Taxpayers are paying the scholar to prepare their draft and then are also paying publishing companies for the editing of the manuscript, something these companies say is part of what justifies their high fees.  Back to my house purchase analogy with John and Rose.  Not only are you paying these former owners a monthly fee to use the house that you bought, you’re also paying John and Rose’s expenses to live in their new house. 

Now what about the cost of finding experts to review submitted articles, another of the many services publishing companies allegedly provide?  Every journal has an editor, typically with a team of senior editors who manage this process.  These people ultimately decide whether an article is to be published based on reviews from anonymous or blind experts.  Both the editors and the blind reviewers are not employed by the publishing company but are instead scholars, employed by you, the taxpayer.  This means that the publishing company is completely separate from the process by which an article is determined suitable for publication and therefore incurs no cost associated with this.  Let me rephrase that, they do not in any way add value to the determination of whether something should or should not be published. 

Any remaining services they provide add virtually negligible value to the knowledge creation and dissemination process.  In fact, I would argue that in their pursuit to restrict access to knowledge, their net contribution to the public good is negative.

But the real kicker that puts to shame any argument that publishers have costs that justify their exorbitant fees is that the average profit of these companies is around 40% of their revenue.  That means that for every dollar they make from universities, only 60 cents is used to cover their costs.  Apple, one of the most successful companies in the world uses an average of 77 cents to cover one dollar of revenue, over the last 10 years, while Google uses 78 cents in the last couple of years.  Exxon, one of the most hated companies in the world, peaks at around 88 cents in costs for every dollar.

Things have gotten so ridiculous that Harvard University, one of the wealthiest institutions in the world, has cut some subscriptions as a way to control costs, demonstrating that even such a giant of an institution with billions of dollars in endowments, is vulnerable to predatory publishing.  That’s like Vladimir Putin pulling out of Ukraine because, well, the price of oppressive politics has become much too crazy these days.

But more sinister is what differentiates high quality journals from low quality journals i.e. the $20,000 subscription versus the $4,000 subscription that universities and colleges pay.  Fascinatingly there is virtually no difference in cost of the publishing company between these two sets of journals.  The reason why there is such a price difference is that the quality of the research is so much higher in the $20,000 journal.  That is, there is much more demand for these journals, which drives up the price.  But as I said, publishing companies have nothing to do with that variation in quality.  Normally, when consumers pay more for product A than B, it’s because the producer of Product A is providing the consumer more value due to some additional capital investment over time. But, in this case, the publishing company’s costs are unchanged because the taxpayer is footing the bill by paying more for scholars who publish high quality work. In actual fact, the taxpayer (i.e. the public) is getting kicked in the ass not only with high research costs but with footing the bill for the $20,000 subscription fee.  That’s nuts!  Think about that for a minute!  That would be like paying for the materials in a smartphone, the labour to put it together, the shipping to get it to your hands, the labour at the retail outlet and then on top of that paying the ridiculously high retail price of $600 to purchase it.  On the one hand, you’re saving Apple from incurring these costs and on the other, you’re giving Apple an extra $600.  But unlike Apple or its competitors, publishing companies incur no marketing costs to convince you to pay the $600 because you don't have a choice!

As a business professor, the sad thing is that this is what we teach business students to do.  To business education, this is an impeccable business model, but to society this is a disaster.  How impressive is it to have your customer not only pay you a high price but to also have your customer pay for the costs to produce what you’re selling.  Let me be honest…business students who think of these sorts of business models will get an A+ in the typical strategy or entrepreneurship class even though at the end of the day the public gets a boot in the ass and society is worst off because important knowledge is restricted. 

As an academic, how my compensation is determined and how I’m promoted is based on whether I write stuff that gets locked into this private club of knowledge privilege.  I therefore contribute to an infernal machine that does nothing but screw the public and income-poor students.  What an asshole! 

So what can we do?  Tweet your support to #puttingpublicbackintopublication and as a taxpaying citizen who pays professor salaries and expenses to do research, pressure professors around the world to publish in open access locations.  Otherwise, as a society, we should collectively fire them…including me!

And don’t fall victim to those seemingly independent people who opine that open source would be a disaster in that it would erode knowledge quality because scholars would simply purchase journal space to cover shoddy research.  There is no solid empirical evidence to prove this.  In fact,  a study by Stuart Shiever (professor of computer science and faculty director of the Office of Scholarly Communication at the Harvard Library) noted an extremely high positive correlation between the quality of the journal and its APC.

Put that in your journal and smoke it!

Exploiting Consumer Irrationality

In 1974, two economists published an article that has had profound implications for our understanding of how people make decisions in their everyday lives.  Nobel Prize winners Amos Tversky and Daniel Kahneman presented strong evidence to suggest that when faced with a decision, people do not engage in what many believed to be a rational, calculated process where they collect all relevant information, evaluate that information, devise alternatives, evaluate those alternatives against criteria and then make a decision. 

Instead we use heuristics or mental shortcuts that supplant this time-consuming and arduous process.  We use these shortcuts all the time without even knowing it.  One of the most common is representative bias where we make decisions based on anecdotal information that we believe is representative of all situations.  We all have generalized a couple of instances of bad customer service by suggesting that this bad service is endemic in all situations.  Another is availability bias where we make decisions based on information that is readily available to us or easier to gather thereby ignoring potentially more accurate information.  How many of us have researched a symptom of an illness by googling the symptom which, as we know, presents completely inaccurate and alarmist information that in most cases is not grounded in any scientific research? 

Another is anchoring.  It suggests that people will rely too heavily, or anchor, on one trait or piece of information when making decisions.  For example, companies often present an often made up manufacturer’s suggested retail price above the retailer’s price.  By anchoring the consumer to the suggested price, the retailer’s price looks much more appealing.  Thus rather than conduct a calculated analysis of the retailer’s price by comparing it with other retailers, looking at how much value one is expected to get our the product, the quality level of the product - all of which is time-consuming and difficult - consumers will resort to this short cut and make the decision based on the perceived gap between the suggested price and the retailer’s price. 

The 1974 paper  was so powerful that it remains one of the top cited articles in the social sciences today with an army of researchers confirming and reconfirming that people use these shortcuts to make decisions and thus make decisions that are likely not in their best interests. 

The implications of this article are profound.  As Harvard Professor Dan Ariely concludes in the below video, “We think we wake up in the morning in control of our decisions” when in fact nothing could be further from the truth.

This is a very powerful notion, one that my students continue to struggle with, despite the reams of statistical evidence available proving them wrong.  My undergraduate students, especially, struggle to accept that their decisions are not made objectively but are in fact reflecting a particular and rather narrow construction of reality. 

Now imagine the implications for business if marketers are aware that consumers do not make calculated decisions when purchasing products or services but instead base their decisions on these aforementioned heuristics:  

The goal of business is no longer to meet the needs and wants of society but instead to exploit these decision-making biases to create and shape needs/wants in ways that better align with profitability. 

I was quite disturbed to read this article, in which the author ultimately prescribes how marketers could take advantage of the heuristics of consumers to increase sales.  In other words, rather than work to better meet the needs of consumers, the idea is to exploit the limitations consumers have in making decisions so that companies can sell products/services that have higher margins.

 

Let me be clear…it’s articles like these that dampen the hope I have for business in addressing major societal problems.  It’s not only that these articles exist, it’s that they are presented as a natural evolution of business strategy.  Understanding the real needs of consumers plays second fiddle to exploiting their cognitive limitations to manipulate and shape those needs so that they want/need those products and services that better align with financial goals.  

This is a major problem...