Why Conscious Capitalism Matters:

(I know this is way out of date…I wrote this last August. But I still thought it would be interesting to post….)

There was an article in last Sunday’s Washington Post about how BP “investors” are trying to factor in the costs of this horrific event and decide what to do next. Is BP a “buy”?

I put investors in quotes because as in most cases, the beneficial investors aren’t the ones making these decisions. It’s actually the Wall Street money managers, analysts and large institutional investment officers who get to decide. And with that in mind it should come as no surprise to most of us that 10 of the 14 leading investment analysts that cover BP now have a “buy” rating on the stock. As those of you who know me may imagine…I’ve got a different take on the situation.

Much of the focus on whether BP is now a “buy” centers on pure balance sheet analysis: which of the costs of containment and remediation will need to be internalized (or paid for directly by BP); do they have enough cash to pay that amount; how much will they have left and how much will the damage to their reputation effect their ability to continue profitable operations in the future and possibly effect their stock price? When you do the math, based on BP’s cash position, relative lack of debt and strategic and tactical relationships, many analysts simply can’t see a reason why investors would not get into BP stock at this point. And I suppose if money were all that mattered this all would make perfect sense.

If it has not yet become evident to Wall Street that there are other issues that matter just as much (not more, simply just as much) as money, I wonder if it ever will. If money is all that matters to you, if you don’t care about the lives of the people of the Southeast, if destroying the oceans and coastal waters doesn’t concern you, if you’re not concerned with the price or availability of some of the best seafood in the world, if the notion of killing an entire species of animals is secondary to how any particular investment you might make could fare in the next 12 months, then by all means, you should consider an investment in BP. If however these things are equally as important to you as making money (not more important mind you, only equally important), than an investment in BP or any company that views the world like BP does is strikingly counterproductive.

As many of you know, I’ve been preaching to anyone who would listen for the last 4 years that we need not continue to make the false choice between attending to the common good and creating economic value. In fact I believe that the majority of Americans (and most citizens in the developed world) are simply fed up with the notion that businesses, and the people who run them, are somehow exempt from the moral and ethical standards by which we abide in private life, just as long as they tend to the wealth of their investors and just as long as the don’t do anything illegal. At this point it’s unclear whether BP did anything illegal, and it will take some time to get to the bottom of the cause of this disaster. But it seems relatively clear that, in like most engineering disasters, many small seemingly unconnected decisions and mistakes led to a catastrophe, and that many of those decisions were justified in the name cost cutting and thus in the name of tending to “shareholder value”.


R. Edward Freeman, Professor of Business Administration at The University of Virginia and Academic Director of the Business Roundtable Institute for Corporate Ethics has stated: “The alternative to capitalism as we know it is not socialism, but a better form of Capitalism – one that recognizes the existence of the commons and acts to prevent the single minded individualism capable of destroying it.”

If managers (Not leaders mind…managers), take a dogmatic and myopic view of the purpose of the corporation being to provide for shareholder value, society and shareholders alike eventually suffer. It is just that simple: If on the other hand, managers (and leaders) operate from a Stakeholder mindset, it becomes, if not impossible, certainly exceedingly difficult for them to take decisions like BP did that were so clearly borderline in regards to ethics and morality.

BP, the 10th largest company in the world (according to 2010 Forbes Global 2000 list), pursued profits with that “single minded individualism” that now threatens to destroy much of the Gulf of Mexico and large portions of the Southeastern U.S. coastline.

Instead of operating from a mindset of a long-term exchange of value between stakeholders and the company, we now have a disaster created by the company, which will undoubtedly foment scores of CSR and / or philanthropic “initiatives” meant to atone for this disaster. It’s simply incredible to me that reasonable human beings can’t see the value of avoiding these types of disasters in the first place. If BP had operated from a stakeholder mindset as opposed to a shareholder mindset, it would have been simply unthinkable for them to put employee lives at risk in order to satisfy investor’s needs for quarterly profits. And the most ironic and heartbreaking part of this story is that focusing on stakeholders would have saved shareholders billions of dollars in cash, market cap and legal fees.

Those who cling to the notion that corporations exist solely for the benefit of stockholders need only examine this current crisis to see how BP has not only effected society far beyond it’s stockholders, but is even now looking to congress…and the American taxpayers, to limit it’s liability for the damage it has done and thereby transfer that liability to the broader society. I’m sorry but the “corporatists” can’t have it both ways. They can’t claim the company be run for the sole and primary benefit of shareholders and then require other stakeholders to pick up the tab when something goes array.

The argument goes that raising the cap on liability would increase the cost of oil exploration in the Gulf by 25%, thereby allowing only the largest companies to explore, reducing competition, eliminating jobs and reducing tax revenues. I’m assuming this is all because big oil companies would insure against this higher cap and that money spent on premiums wouldn’t be available for other things, like innovation etc. Additionally there’s the argument that smaller companies would be pushed out of the business of deepwater exploration (Congress…looking out for the little guy). Which of course is a silly argument; if a company is too small to manage the real risks of doing a certain type of work, they don’t get to do that work! That’s why Joe’s Construction Company doesn’t get to compete with Parsons to build skyscrapers in Dubai! But, that aside, isn’t it funny how these big companies, and the politicians who support them, want to worship at the altar of free market capitalism…except when it might cost them something to do so? Then they are all for government “interference”. For an industry that has fought regulation at every turn, they now want the government to impose a statutory remedy to their risk!

Now of course for every action there are sets of unintended consequences. But lets suppose for a minute that instead of just buying more insurance (against an event we were told would never happen…), the oil companies managed their risks by actually understanding how to prevent this type of thing, investing as much money in safety science as they have in drilling science moving forward? Which would actually create jobs for a whole new generation of engineers and scientists who are equally as concerned with sustaining the planet as they are in extracting the oil.

Conscious Capitalists look at the world through a different lens. They realize that profit is not a strategy, merely a measure of the efficacy of your business model. They realize that the most effective business models are those that put customers, employees, and society at the center of their world




The Dividend Discussion:


I feel for the pensioners in the UK who are going to suffer from the possible implosion of this company. But this should be a clarion call for the pension fund trustees who pick the fund managers who buy stock in these types of companies. Companies that chase earnings at all costs are eventually bound to make decisions that harm society. Those people who made the decisions to put their values aside because of their “fiduciary responsibility” to their pensioners need to re-evaluate what they do and how they do it. The AFL-CIO Office of Investment website defines Capital Stewardship thusly:

Capital stewardship means investing based on the principle that the long-term, sustainable value of any investment requires mutually beneficial cooperation among all those involved, including workers, managers, investors, customers and members of the community. When investors are choosing among comparable investments, workers and their benefit funds may choose those that support working families and their communities and are aligned with their view of value.

This doesn’t define the nature of a company like BP. The people responsible for the funds of these UK pensioners were not acting as “stewards”. The idea of fiduciary responsibility has been co-opted to mean profit and increasing portfolio value at all times at all costs. What if we start to think about fiduciary responsibility in terms of investing responsibly such that you try to preserve capital and grow it over the long-term? This is what Capital Stewardship is about. Not chasing quarterly earnings.

If you invest in companies that want to look like a good companies, through earnings management and advertising, instead of doing the real hard work it takes to actually be a good company: focusing first and foremost on customer needs, creating a highly engaged workforce, treating suppliers as equal partners in your business and not like indentured servants, and putting the common good of society at the center of their purpose for existence: the possibility of bad things happening to that company, and your pension, are simply amplified to an unacceptable level.

I was at a talk given by Malcolm Gladwell this week. I think Malcolm is a genius and I have always studied his insights. He’s developed a new theory about how complexity and the access to ever increasing information are changing the skills needed to now solve complex problems (what he calls mysteries) as opposed to how linear and “puzzle-like” (his idea) our complex problems used to be in society. I won’t get into the details of his arguments but I think they are cogent and worth exploring. In the process of this however someone asked him what he thinks about the spill. His explanation of what happened, I think, is right on the money. He said the accident is what we call a “Normal Accident”. Put simply, it happened because a series of small problems occurred simultaneously in a complex and highly connected series of sub-systems. Any one or any number of them individually would not have caused even a minor problem. But when a critical mass of these small, seemingly unconnected problems occur simultaneously or in a certain sequence, we get a major engineering disaster. Gladwell then went on to make the mistake that many people make; because these systems are so complex…accidents simply happen, its nobodies fault and all we can do is work to fix them. This line of thinking allows BP to abdicate its responsibility here and I’m here to tell you it’s just not that simple. Yes complexity creates situations that we can’t anticipate. Mistakes happen and sometimes a series of those mistakes end up causing catastrophes. But something else is often required for a “normal accidents” to occur: A sub-optimal organizational structure that in turn is subject to production pressures and managerial maneuvering (from the LearningLab website)…

What does this mean? Normal accidents happen; they are more prone to happen in an organization like BP whose culture has long been morally and ethically bankrupt. For years they’ve put the safety of employees aside in search of profit. I truly don’t think BP did anything criminal here and frankly I think the criminal investigation is a waste of time and money. An even bigger waste of money is an investment in a company that doesn’t care.