A friend sent me an article the other day about how us CEOs were recently lamenting the fact that investors don't seem to be interested in corporate efforts to do social good and philanthropy. (Click on the title above to see the article) The context for these comments was a conference by an organization called: The Committee Encouraging Corporate Philanthropy (CECP). For those of you who have read my writings before you might initially surmise that I'd opine on why investors are missing the point regarding how doing social good is good for business. But in fact, based on the way these ideas are being presented by CECP and many of these executives I'd agree with the sentiment they're experiencing from investors. Investors are in the business of making money. Most of them are also interested in living in a just and functioning society. And I'll bet that some of them are even proponents of Philanthropy. But philanthropy and business that creates social good are two entirely different things. One is about doing good for the sake of doing good. The other is about creating a business that respects its place in society as a social entity and operates in a fashion such that its entire ecosystem is sustained. That ecosystem must include investors and you must show those investors that you will provide them returns consistent with the money they have at risk in addition to honoring your place in and effect on society.
Oddly enough some of the executives at the meeting were indeed focused how efforts to do social good must become a profitable part of their core businesses. But as one of my partners often says; Language matters! In this case the language of an outdated paradigm, one that suggests you can either do well or do good, persists in the lexicon of even those executives who understand that we have shifted to an environment where you must do good in order to do well. If executives continue to use outdated concepts and phrases to describe what's happening in the world, the idea that companies can be instruments of good to society while also creating outsized returns will not gain traction because it will be mired in the old paradigms of environmentalism and "giving back". If you operate your business based on the notion that you are an instrument of service to society, even as you make money, you're not likely to have "taken" something in the first place. No reason to "give back" if you've been adding multiple levels of value (not just financial) all along.
It's amazing to me that after reading Porter's article on Creating Shared Value, we still have executives talking about philanthropy in terms of strategic and competitive advantage. Yes you can give money away in ways that might support your strategy, but those opportunities are minuscule compared to the good you can do and returns you can get by operating your core business in a way that honors the humanity of your stakeholders. 5 or 6 years ago in a "debate" put forth by Reason Magazine (I think that's where it was) the topic was posed as a contrast between Ed Freeman (Academic Director, Business Roundtable Institute for Corporate Ethics at The University of Virgina) who advocates managing for stakeholders and Milton Friedman who famously quoted about making a profit being the only social responsibility of business in the 70's. Ed addressed this then and the same is true now: CSR becomes an outdated and useless term (and therefore much less prone to attack by shareholders and other opposition) if we frame the idea as managing for stakeholders (long-term) vs. managing for shareholders, which has been co-opted to justify a short-term, "quarterly earnings above all" mindset. Yes, when the article says: "Corporate philanthropy is no longer just writing a check for charity - more executives are making efforts to do social good part a profitable part of their core business." its apparent that some CEOs understand what I'm saying here but they have such an outdated mindset that its impossible for them to get even their enlightened message across. If "Social good" is a profitable part of their core business can it or should it still be called philanthropy? Or should we just do away with the whole CSR infrastructure and operate our businesses so that we constantly honor the humanity of employees, customers, suppliers, partners and our local communities where we do business? This is not to say we should eliminate philanthropy. We will always care about things that bring us joy, beauty, and areas where we have no business interest but feel compelled to help. That's fine and its the right thing to do. That work though should be separated from operating your business as a tool for the betterment of society. That's not philanthropy. It's humanity and simply the way business ought to be approached. The Sustainability index idea (which was posed by some executives at the conference) is an idea that has come and gone if it is focused on the traditional definition of sustainability. We've not been able to prove that investment returns or corporate performance can be enhanced through the environmentally based definition of sustainable. If however they mean investing in businesses that sustain themselves, their employees and their employees families, their communities, their suppliers, their partners, their governments and their shareholders, well then that is an index that can and will be built and will indeed generate alpha. Investors are educated only when you can show them that your approach is good for you AND good for them. Some of the CEOs there wondered about the metrics for creating such an index. I contend that once you understand the right question to ask, defining the metrics is not difficult at all. Reporting standards for corporate philanthropy are useless in that they don't give investors any insight into risk or potential returns. What would give investors insight is if they new what types of cultural organization they were investing in; this would tell them about the potential for financial shenanigans, how engaged employees were and thus the likelihood that they would give discretionary effort, insight into the strength of the customer asset for these companies (emotionally engaged customers are loyal and more profitable), how they deal with human rights issues in their supply chain and how they work to sustain their local communities. Peter Drucker addressed this long ago when he separated social responsibilities into "social impacts," or what business does to society and social problems, or what business can do for society. My basic claim is that those impacts need to be eliminated to the greatest extent possible and the problems need to be addressed humanely, and companies that operate from a stakeholder mindset are more likely to find ways to execute in this manner. I recently read an example in an Insead article of how this works that describes my feelings pretty well: "Fast food companies certainly appear to have a responsibility to act to eliminate the negative social impacts evident in their contributions to obesity in children. In contrast, the pharmaceutical companies dealing with requests to give away life-saving drugs to all that need them are responding to what Drucker would term social problems rather than social impacts. They are not responsible for the limited healthcare budgets of developing countries that preclude purchase of drugs at developed country prices, but they might choose to act on the issue of access to essential medicines nonetheless."
The main take away: Identify and address, if not eliminate undesirable social impacts of business activities and if they cannot be turned into profitable business opportunities, seek a regulatory solution (industry self-regulation or government regulation) that creates an optimal trade-off for all parties. Social problems can also be sources of opportunities as described in "The Fortune at the Bottom of the Pyramid" by the late C.K. Prahalad. But not all of them. And that's where philanthropy comes in.
If CEOs want to contribute to this discussion they should simply be more transparent about their ability to, and history of, making these types of decisions in this manner.
Thursday, March 1, 2012
Wednesday, February 8, 2012
Wednesday, February 1, 2012
Workplace design and Employee Engagement
I responded to a message board on LinkedIn this week, the topic of which is how big of a factor is workplace design in terms of employee engagement. Thought some of you might be interested in my thoughts. (there are a few references to other comments made in the discussion string so they may seem a little out of context. You'll get the point):
JC
we shape our buildings and afterwards our buildings shape us": Winston Churchill speaking to the House of Lords after the House of Commons was destroyed in 1943.
My firm consults to companies in an attempt to create performance by crafting environments that inspire behavior. There are two main issues I see time and time again when executives try addressing this issue: The first is how little a lot of people know about the effect the workplace has on performance and the 2nd is the simple fact that you can't address engagement by isolating any one component thereof. Engagement is built by the authenticity (Tara and Anne) and effectiveness of your culture in terms of inspiring people to do the things necessary for your business to be a success. The "environment" is the manifestation of your culture. When we talk about environment at my firm we are expanding the definition of the word to include everything that an employee encounters that represents the culture, helps or hinders her from doing her job and in the end drives engagement. not only is the physical space an outward demonstration of how a company feels about its employees, it is also a primary tool for getting work done. If you want your employees to be team players, we can create a physical space for you which is highly destined to make team work more apparent in your organization. Everything from the placement of printers and conference rooms, to the shape of circulation spaces and even how you use color and noise effects the brain (look at the work of the Academy of Neuroscience for Architecture). We can manipulate these components to trigger certain responses in employees and to make task associated with the behaviors required for strategic success more likely to happen. But for me the more interesting and appropriate part of the study that prompted this discussion came from the notion that integration of workplace solutions are what will drive value. This is the key to the 2nd point of departure we see when dealing with executives. If you are looking to engage employees, and by doing so elicit discretionary efforts towards corporate goals that are appropriate towards achieving those goals (take teamwork again as an example) you must create an ecosystem within your organization that inspires these feelings and these behaviors. That means creating physical environments that inspire and enable teamwork, it also means simultaneously creating a technology infrastructure that does the same, a process regime that does the same, training managers that these behaviors and ideas are important, paying people if they are good at teamwork, celebrating teamwork successes, telling stories about teamwork and yes firing people who don't follow your values even if they are creating financial success, (doesn't need to be done publicly to humiliate, employees are smart enough to see the message). These things must be integrated into a coherent whole, managed by a single executive who has a seat at the strategic table of the organization and given credence by the actions of the CEO. The fact that Michael Bloomberg sits in a cubicle along with everyone else at city hall is not meant to be just a gimmick. Although it could turn into one if the rest of the "environmental" components aren't telling the same story. Its meant as a part of a well thought out manifestation of the culture he wants to build there.
Get this right, show that your are authentic about your culture based on the reality of your entire environmental ecosystem and hiring becomes extremely easy because like minded individuals seek you out. Those that don't fit start to opt out.
If you tell potential employees that you are a progressive, innovative, fun-loving but hard working technology savvy organization, and you then show them around an office space that says anything but this, trust me, they'll understand quickly that the words are not the parent of the reality. Nothing could be less authentic.
JC
we shape our buildings and afterwards our buildings shape us": Winston Churchill speaking to the House of Lords after the House of Commons was destroyed in 1943.
My firm consults to companies in an attempt to create performance by crafting environments that inspire behavior. There are two main issues I see time and time again when executives try addressing this issue: The first is how little a lot of people know about the effect the workplace has on performance and the 2nd is the simple fact that you can't address engagement by isolating any one component thereof. Engagement is built by the authenticity (Tara and Anne) and effectiveness of your culture in terms of inspiring people to do the things necessary for your business to be a success. The "environment" is the manifestation of your culture. When we talk about environment at my firm we are expanding the definition of the word to include everything that an employee encounters that represents the culture, helps or hinders her from doing her job and in the end drives engagement. not only is the physical space an outward demonstration of how a company feels about its employees, it is also a primary tool for getting work done. If you want your employees to be team players, we can create a physical space for you which is highly destined to make team work more apparent in your organization. Everything from the placement of printers and conference rooms, to the shape of circulation spaces and even how you use color and noise effects the brain (look at the work of the Academy of Neuroscience for Architecture). We can manipulate these components to trigger certain responses in employees and to make task associated with the behaviors required for strategic success more likely to happen. But for me the more interesting and appropriate part of the study that prompted this discussion came from the notion that integration of workplace solutions are what will drive value. This is the key to the 2nd point of departure we see when dealing with executives. If you are looking to engage employees, and by doing so elicit discretionary efforts towards corporate goals that are appropriate towards achieving those goals (take teamwork again as an example) you must create an ecosystem within your organization that inspires these feelings and these behaviors. That means creating physical environments that inspire and enable teamwork, it also means simultaneously creating a technology infrastructure that does the same, a process regime that does the same, training managers that these behaviors and ideas are important, paying people if they are good at teamwork, celebrating teamwork successes, telling stories about teamwork and yes firing people who don't follow your values even if they are creating financial success, (doesn't need to be done publicly to humiliate, employees are smart enough to see the message). These things must be integrated into a coherent whole, managed by a single executive who has a seat at the strategic table of the organization and given credence by the actions of the CEO. The fact that Michael Bloomberg sits in a cubicle along with everyone else at city hall is not meant to be just a gimmick. Although it could turn into one if the rest of the "environmental" components aren't telling the same story. Its meant as a part of a well thought out manifestation of the culture he wants to build there.
Get this right, show that your are authentic about your culture based on the reality of your entire environmental ecosystem and hiring becomes extremely easy because like minded individuals seek you out. Those that don't fit start to opt out.
If you tell potential employees that you are a progressive, innovative, fun-loving but hard working technology savvy organization, and you then show them around an office space that says anything but this, trust me, they'll understand quickly that the words are not the parent of the reality. Nothing could be less authentic.
Saturday, January 14, 2012
A Short Riff on the Bain Capital Issue:
“The idea of making a short term profit actually doesn’t exist in business…”
Mitt Romney on the campaign trail this week.
In 2006 a study entitled: Value Destruction and Financial Reporting Decisions, John Graham and Campbell Harvey of Duke University – Fuqua School of Business and Shiva Rajgopal of The Goizeta Business School at Emory University in Atlanta reported that an astounding 78% of the executives surveyed for their report would legally destroy economic and shareholder value (by doing such things as eliminating value building projects if those projects were a risk to short term profits) in exchange for smooth and predictable quarterly earnings.
Which of these two points of view do you think is most accurate?
The Riff:
OK, I haven’t looked at Bain Capital’s record. I know that they have invested in some companies that are now alive and well and going strong. But here’s the truth, not all private equity companies are created equal. Some actually do destroy companies, perhaps not intentionally, but with a view towards making their money first, despite what happens to the company or its employees. They buy a company; leverage that company to the hilt so that they can pay themselves management fees. During the “turn around” period they force the company to buy raw materials from other companies owned by the firm or their partners at above market rates (According to an banker I know on the street with knowledge of this situation, this is one of the things that put the maker of my beloved Twinkies into bankruptcy), then, once they’ve taken their pound of flesh, they flip the company to another PE firm who egotistically think they can “turn around” this dog or they simply put it into bankruptcy. It happens all the time and to presuppose anyone who would ask a question about whether Bain did this sort of thing or not is “assaulting” the free markets shows either a purely political point of view or an ignorance of what happens in the free markets that is typical of politicians, pundits and anyone else who is not in the trenches of real capitalism.
Now it took me no time in terms of research to find out that Bain did do a dividend recapitalization of KB toys in 2003, which is just a fancy way of saying they issued debt in order to get their money out when they decided they couldn’t compete in the toy market. Sure, that might be a smart way to pay back their investors without actually turning the company around, and yes its business as usual. The question then is; is it fair to ask if this is the type of capitalism we want practiced in this country today? As a capitalist who cares as much about creating something of social value (like jobs) as I care about making money, I’d say this is a fair question. Not an indictment of the entire capitalist system.
Joe Scarborough said this yesterday morning on Morning Joe: “… it’s one thing if you go and you take a company that is going down hill and you invest, you try to turn it around, sometimes you succeed and sometimes you fail, when you fail, people loss their jobs…” This is true, the issue that many people have with some (not all) private equity shops is that often when the PE firm fails to turn the company around, they still find ways to make their money. Jobs, employees, neighborhoods and families be damned.
Friday, October 14, 2011
Occupy Wall Street: A "Wall Streeters" take on the occupancy...
Charles Krauthammer wrote a piece today (see below) about the occupy Wall Street movement that I think totally misses the point. Some are asking incredulously how can the occupy Wall Streeters rail against corporate greed and at the same time weep for the passing of Steve Jobs, a billionaire 8 times over? For me the answer is really quite simple: Firms of Endearment. People protesting income inequality or more accurately I might say, opportunity inequality, (not corporate greed) don't begrudge Jobs his billions, because they believe he ran an organization that cared as much about them as it does about making a profit. And I'd say that if more corporations acted or even made people believe they were acting this way, many (not all mind you but many) of the "occupiers" wouldn't be feeling as they do now. The pundits talk about "class warfare", attacking capitalism or making Wall Street a "scapegoat". My problem with this is the seeming lack of real critical thinking about the message of Occupy Wall Street. Do you think these people hate Capitalism? Of course not, in fact they are begging for a seat at the table of capitalism. They all would rather not be a part of the 99%. They all want to better their financial station in life. They want capitalism to thrive and flourish, only in a way that truly lifts all boats and not just the yachts of wall street. That's not to say that wall streeters don't deserve their yachts, they do and they should be trying to make enough money to buy more. But in the process they should also be looking for ways to give others the opportunity to buy a nice Boston Whaler or two. Not by sharing the money they've made with those sitting in a park, but by operating their businesses in a way that looks to create wealth building opportunities for as many citizens as they can...not just shareholders. (Creating shared value not sharing created value: per Porter HBR January 2011...look it up!)
The people in the park about 2 blocks from my apartment here on Wall Street aren't occupying Green Mountain Coffee Roasters; they aren't occupying Whole Foods; they aren't occupying Lulu Lemon, Under Armour or Southwest Airlines; and they aren't occupying Apple. They aren't occupying Warby Parker or Patagonia or Method Cleaning Products, Toms shoes, or Zappos. Be it perception or reality, people believe that companies like those I name above care, emotionally, really care, as much about their customers, employees, communities and suppliers as they do about making money for their shareholders. By running their businesses with this "Stakeholder" mindset first and foremost, they create a more conscious form of capitalism that creates greater opportunities for wealth creation for the greatest number of people, while amazingly creating more wealth for themselves. In fact it is my belief that organizations that truly understand and embrace the message I posit here, those that understand that income inequality is a bad thing for us all and then set out to actually do something about it, will not only reap the benefits of good press and good will. They will reap the wealth creating benefits of highly engaged employees and loyal customers willing to spend more and more on their products. Understanding this and taping into it will be the competitive advantage of the next 50 years and beyond.
An excerpt from Krauthammer's piece:
The people in the park about 2 blocks from my apartment here on Wall Street aren't occupying Green Mountain Coffee Roasters; they aren't occupying Whole Foods; they aren't occupying Lulu Lemon, Under Armour or Southwest Airlines; and they aren't occupying Apple. They aren't occupying Warby Parker or Patagonia or Method Cleaning Products, Toms shoes, or Zappos. Be it perception or reality, people believe that companies like those I name above care, emotionally, really care, as much about their customers, employees, communities and suppliers as they do about making money for their shareholders. By running their businesses with this "Stakeholder" mindset first and foremost, they create a more conscious form of capitalism that creates greater opportunities for wealth creation for the greatest number of people, while amazingly creating more wealth for themselves. In fact it is my belief that organizations that truly understand and embrace the message I posit here, those that understand that income inequality is a bad thing for us all and then set out to actually do something about it, will not only reap the benefits of good press and good will. They will reap the wealth creating benefits of highly engaged employees and loyal customers willing to spend more and more on their products. Understanding this and taping into it will be the competitive advantage of the next 50 years and beyond.
An excerpt from Krauthammer's piece:
Exhibit C. To the villainy-of-the-rich theme emanating from Washington, a child is born: Occupy Wall Street. Starbucks-sipping, Levi’s-clad, iPhone-clutching protesters denounce corporate America even as they weep for Steve Jobs, corporate titan, billionaire eight times over.
These indignant indolents saddled with their $50,000 student loans and English degrees have decided that their lack of gainful employment is rooted in the malice of the millionaires on whose homes they are now marching — to the applause of Democrats suffering acute Tea Party envy and now salivating at the energy these big-government anarchists will presumably give their cause.
Thursday, September 8, 2011
Free at Last
As many of you know...(many, like there's thousands following this)...I've been in the throws of creating a new business for some time now. It's been an incredibly challenging endeavor and for the last three years my partners and I had been stuck inside and organization where we were unable to speak freely about our hopes and dreams and ideas for this new business. Well at long last we've been liberated! As such I thought I'd just post a piece I wrote at the beginning of this journey to give anyone who's interested a view into what we hope is to come. Enjoy!
Investing in Companies with Soul:
” Soul is
when you have the ability to make other people feel better about being alive,
regardless of their condition”
Wynton
Marsalis:
In his
book, The Executive's Compass: Business and the Good Society, James O’Toole of the Aspen Institute posits a concept of
“The good society.” It is a place where the citizenry feels at Liberty to pursue their own goals, where there is guaranteed Equality of opportunity, where efficient markets drive wealth creation and constantly increasing
standards of living and where we care for our natural resources and engage in
human interconnectedness so that Communities can flourish and create an ever improving quality of life.
In other words, O'Toole's concept of the good society requires a state of
"concinnity" among Liberty, Equality, Efficiency, and Community.
Concinnity is an ancient English noun, rarely used today, that means "a
skillful blending of the parts achieving an elegant harmony."
We
firmly believe that capitalism has the greatest potential to breathe life into
O’Toole’s concept of the good society. Capitalism is the engine of wealth
creation and personal opportunity. It provides us with the resources to pursue
our own goals, and affords us the ability and time to devote to community. Absent
capitalism, the good society is unattainable. However traditional capitalism
has historically levied what were seen as unavoidable ills on society as
well. Pollution and the depletion
of resources, exploitation of workers and an ever increasing gap between the
very wealthy and the poor even in countries with the most efficient private
market economies has been seen as inevitable and justifiable for the sake of
shareholder wealth creation. For capitalism to take root, basic conditions such
as the rule of law, property rights, financial infrastructure, economic freedom
and political freedom must exist. Admittedly, our ability to convince or
influence countries to adopt these basic conditions is very limited. (Though we
will strive to support individual organizations with a stated mission to do
so.) However, what we can influence is
the way capitalism is practiced within environments where the right conditions
exist. We believe a new form of Conscious Capitalism, one that smooths
the rough edges of traditional capitalism, is required for capitalism to
flourish, spread and create the good society.
We
believe strongly that in the era of Conscious Capitalism, great companies will be those that strive to create value
for all stakeholders by operating in a state of concinnity in which
stakeholders (customers, employees, communities, suppliers, investors) are sustained
by the sublime experience of interacting with each other in elegant harmony. In
their book, Firms of Endearment, authors
Raj Sisodia, David Wolfe and Jag Seth, offer stark evidence that operating from
this more holistic perspective can do more to increase shareholder value than
operating from a more self-focused (i.e., shareholder dominant) operating
model. These companies have accepted responsibility for becoming “instruments
of service to society” in addition to their obligation to make returns for
their owners. We believe this view of capitalism will be more readily and
globally embraced and thus increase the likelihood of achieving the good
society for more and more citizens of the world.
Peter Drucker surmised that
profit is not the goal of a business enterprise, merely a measure of the
validity of its business model. Profits are a lagging indicator of what is in
the hearts and minds of customers. We believe the hearts and minds of customers
are yearning for companies that understand doing good and doing well are equal
partners in capitalism. We believe in a model of evolutionary capitalism which
aims to be an engine of value creation and service by tending to the
interdependent needs of all stakeholders as a means of achieving the good
society.
Monday, March 14, 2011
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.
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.
Subscribe to:
Posts (Atom)