Finance and Investment

Apocalypse Nau? No, Just Business Reality

Wednesday, May 14, 2008 / KW

It seems as if there's a bit of angst among believers in sustainable business over the demise of Nau, an apparel company based in Portland, Oregon, that aimed to make and sell outdoor clothes and sportswear made from recycled materials using environmentally friendly business methods. "Is this a bad omen for sustainable startups?" wonders at least one blogger.

For what it's worth, my answer is No. The failure of Nau reflects less the inherent weakness of the sustainable business concept and more a series of miscalculations made by the company's management, most of which had nothing to do with environmentalism or social consciousness but rather with plain old business sense.

As this article details, Nau committed some of the same management blunders that have doomed thousands of other startups. They counted on a website to generate 50 percent of their sales, then dawdled over repairing the site when it proved to be awkward and difficult to use. They chose not to make their products available through traditional retailers, thereby eliminating a potential source of vitally-needed early revenue. They decided to "mute" the appearance of their logo on their garments, eschewing a powerful tool for building brand awareness and loyalty.

And most dangerously, they overspent, especially on personnel: "Among the 60 employees at [Nau's] Pearl District headquarters, about 10 held the title of vice president or higher . . . Most hailed from large companies such as Nike." In other words, they hired pricey talent accustomed to big-company perks and working conditions — always a risky choice for a brand-new company.

Given these mistakes — all of which, I hasten to add, are easier to spot in retrospect than they would have been at the time — it's not hard to see why Nau ran out of funds and couldn't find a venture capitalist willing to provide another infusion of money.

The lesson of Nau's collapse? A would-be sustainable company needs to be run at least as well as a traditional firm — because having great environmental and social goals doesn't exempt you from the laws of business physics.

Hershey Still Groping For A Sustainable Future

Wednesday, April 16, 2008 / KW

Following other signs of turbulence, including the resignation of the CEO, here's the latest in the saga of troubled Hershey Foods (makers of the iconic chocolate bar) and its largest single shareholder, the Hershey Trust:

In another high-level departure in Hershey, the chief executive of the Hershey Trust Co., Robert C. Vowler, said he would retire from the company that has overseen investing decisions for one of the world's largest educational endowments.

The Hershey Trust manages $8 billion in assets owned by the Milton S. Hershey School for underprivileged children. Among the school's assets is stock that controls the Hershey Co., the chocolate-bar-maker and major Pennsylvania employer, and the Hershey amusement park.

As president of the trust in 2002, Vowler played a central role in negotiating to sell the Hershey Co. to diversify the multibillion-dollar school endowment. But the deal encountered fierce community opposition and fell apart. Company and trust officials revived deal talks in 2007, again without success.

The Hershey Trust administers the estate of founder Milton Hershey on behalf of the school he created and the community he built. In our book The Triple Bottom Line, we told the story of the 2002 battle over corporate control among the company, the trust, and the town — a revealing parable of how the community where your company operates can exercise a virtual veto power over your business strategies in this day of intense mutual interconnections. Evidently the aftershocks from that struggle still aren't finished.

Some New Evidence On The Link Between Doing Good And Doing Well

Saturday, April 05, 2008 / KW

Via Ted Samson's column at InfoWorld, here are the latest findings on the perennial question as to whether sustainable business practices help, hurt, or have no impact on the financial bottom line. According to a new report from the Economist Intelligence Unit, a focus on social and economic sustainability is associated with positive stock market performance among the companies surveyed. Key graf:

The survey does not claim that the adoption of sustainable practices causes companies' share prices to rise. It could be that companies with a strong financial performance simply have more resources to devote to sustainability. What the findings do show, however, is that it is possible to take a proactive position on social and environmental issues while still delivering robust financial growth. Indeed, companies in the survey that saw their share price rise by at least 50 percent in the last three years (share price climbers) place a greater importance on social and environmental goals than companies with share prices that have declined by more than 10 percent (share price losers). Social and environmental goals include improving environmental and human rights in supply chains, where 40 percent of share price climbers rank this as an important priority versus 18 percent of share price losers; reducing greenhouse gases (38 percent to 24 percent); and developing products which address social and environmental problems (49 percent to 35 percent). Share price climbers also put a greater emphasis on social and environmental considerations at board level.

Worth noting if you're among the many business people who find themselves occasionally having to defend an interest in sustainable business practices among skeptical or even hostile colleagues.

A New Study of CSR: Reading Beyond the Headline

Saturday, December 22, 2007 / KW

Just opened my latest issue of Harvard Business Review (Jan 2008) and there on page 19 is a brief article headed, "Social Responsibility: Do Well by Doing Good? Don't Count on It" (no link because not yet online). The article, by Joshua D. Margolis of Harvard and Hillary Anger Elfenbein of Berkeley, describes a "meta-study" they did which analyzed 167 studies that attempted to measure a possible link between corporate social responsibility and profitability. This is, of course, a link that CSR advocates (including Andy and I) have been positing for years.

The headline of the HBR piece is, I think, a bit misleading in that it puts a negative spin on the author's findings — as if their research had debunked the notion that CSR and profitability go together. That, of course, would be welcome news to doctrinaire supporters of pure laissez-faire economics, who believe that companies have no reason to consider social impacts when making business decisions. But the article itself suggests conclusions that are rather different from what the headline implies.

First of all, the authors say they found no conflict between doing business responsibly and achieving strong financial results. "Doing good," they say, "is unlikely to cost shareholders." Although the story downplays this finding, it is actually significant news. The assumption of most CSR skeptics is that there is an unavoidable conflict between profit maximization and social responsibility.

If Margolis and Elfenbein are right, the fact that no such conflict exists immediately eliminates most or all of the cited rationale behind resisting calls for social responsibility. It shifts the burden of proof from CSR advocates to their opponents: After all, if CSR is (in effect) cost-free, why not make an effort to do the right thing? What is the upside to behaving ruthlessly if it is not even rewarded in the marketplace?

Second, the authors recognize at least a modest connection between responsible business practices and strong financial performance. They note, "we found only a very small correlation between corporate behavior and good financial results." The fact that Margolis and Elfenbein do confirm such a correlation is, of course, welcome to CSR advocates. And without having access to the original study (which doesn't yet appear to be available online), it's impossible to know whether specific factors might explain why the correlation is only a small one.

For example, time may be a factor, since some of the positive effects of CSR, such as the enhancement of a company's reputation in the marketplace, would be slow to take hold. Maybe the favorable impact of CSR on profitability can only be fully observed over a period of five years or more — a factor that may or may not have been taken into account in the many studies the professors analyzed.

Third, the authors have chosen to deliberately exclude one significant element of CSR from the effects they studied. After saying that the correlation between social responsibility and profitability appears small, the authors add the following caveat: "(the exception being public misdeeds, which had a discernible negative impact)."

It's not clear to me why the authors chose to treat this as an irrelevant "exception." Isn't avoiding "public misdeeds" a major goal of CSR? If so, why shouldn't CSR "get some of the credit" for the business benefits enjoyed by companies that avoid such misdeeds, rather than having those benefits deliberately eliminated from consideration?

The authors might argue that no one, including CSR skeptics, is actually in favor of "public misdeeds," which means that the CSR movement shouldn't be credited for any positive impact from avoiding them. I'd challenge that logic. If companies that espouse CSR do a better job of avoiding scandalous behavior, that's not a mere coincidence. It's a natural outgrowth of the CSR mentality. It reflects the difference between an organization where it is understood that close ethical calls should be resolved in favor of the company and where aggressive close-to-the-line behavior is countenanced or even rewarded, and an organization where the culture dictates that close calls should be resolved in favor of customers and other stakeholders, and where actions that blur the lines between right and wrong are frowned upon or punished.

For this reason, I think the avoidance of "public misdeeds" is really part and parcel of the CSR philosophy, and should be factored into the results tallied by Margolis and Elfenbein. If this were done, it would increase the measured correlation between social responsibility and profitability, and demand a very different headline in HBR — perhaps something like, "Do Well by Doing Good? Yes, You Can."

Sociologists Discover There Is Such A Thing As Bad Publicity

Friday, November 09, 2007 / KW

Here's a noteworthy item from a source most of our readers probably don't track — the online edition of the Columbia Journalism Review. Seems a couple of sociologists have published a study showing that coverage of protests against specific corporations in The New York Times has an adverse effect on stock prices:

Co-authors Brayden G. King, of Brigham Young University, and Sarah A. Soule, of Cornell University, observed that stories on protests caused a stock price to fall between 0.4 and 1.0 percent, on average. Longer stories resulted in greater declines. Most of the drop happened the day of the protest and the day after it.

The size of the protest appeared not to matter. Neither did the use of boycotts. "What really matters," King said in a telephone interview, "is that you're able to gain media coverage."

On one level, this might seem like a dog-bites-man story: Isn't it obvious that bad publicity hurts stock valuation? But actually that isn't obvious at all:

According to classic stock-market theory, prices change only upon the introduction of new information. Sounds reasonable. But, says King, a question arises: activists tend to mount protests based on already-released information, so why would their actions change a share price?

King and Soule argue that the new information is the news that someone cares about the previously disclosed problem. Investors may already have known that a company was polluting a river (our example), but now they know that someone cares enough to protest it. The study suggests that the market believes that activists' dissatisfaction could be costly in and of itself.

There is, then, a measurable economic cost, levied by the marketplace, on companies that disdain "sustainable" business practices — to the extent that "sustainability" can be correlated with positive, protest-free relationships with stakeholders. Conversely, companies that consciously pursue friendly stakeholder relationships may be able to avoid the "protest penalty" and thereby gain at least a small edge on their competitors.

One last point: The professors' study is based on data compiled from 1962 to 1990. If the effect they discovered existed throughout the period, it suggests that the influence of mass media on financial markets is nothing new and predates the Internet, Bloomberg, MSNBC, and CNN.

It may be that organizations like Greenpeace and PETA are using protests and the threat of protests as anti-corporate weapons more deliberately today than was done in the past, but the weapons themselves have been making an impact for a long time.

Insurance Companies Putting A Dollar Value On The Risks Of Climate Change

Thursday, November 08, 2007 / KW

Ceres has issued a noteworthy report about how the insurance industry is responding to the risk of climate change. Follow the link for plenty of detail, as well as another link that lets you download the entire document, but here is the elevator-talk version of the report from the Ceres website:

Hundreds of new insurance initiatives, including 'green' building credits, drought-protection in developing countries and incentives for investing in renewable energy and carbon emissions trading are being offered to tackle climate change and rising weather-related losses in the U.S. and globally, according to a major new report announced today at the annual conference of the International Association of Insurance Supervisors.

The report, commissioned by the nonprofit group Ceres, outlines more than 400 climate-related activities in the US and abroad — double the number of products and services identified in a similar report done just 14 months ago.

Intriguingly enough, blogger Joel Makower (whose work we've often had occasion to cite) was forecasting just this trend almost two years ago. Noting a couple of early insurance-industry moves that have proven to be a harbinger of more sweeping changes, Makower commented:

If government policies won't lead to aggressive action on climate change, maybe the insurance industry will. . . . The message is implicit, if not explicit: "If you don't care enough about the risks to your company resulting from severe climate change, we just might not insure you."

Insurance companies occupy an interesting place in our free-enterprise system. As middlemen of risk, they consolidate the financial risks to which thousands of companies (as well as millions of individuals) are exposed. By undertaking risks that would otherwise ruin a random sampling of firms and spreading the costs over a much broader base, they make it possible for injured companies to remain in business, supported (in effect) by contributions from thousands of other firms. One might almost call it a kind of "free-market socialism," created not by government but by private companies for their own economic benefit.

And because of this quasi-social role, insurance companies also play a quasi-regulatory role, developing and enforcing standards of behavior that constrain organizations almost as powerfully as laws might do. In some areas, we take this for granted — for instance, with the product-safety standards established by Underwriters Laboratories, which were founded in 1894 by an insurance company executive. Now this role is being extended into the climate-change arena. A few examples, offered by Ceres, related to auto use:

Pay-as-you-drive (PAYD) insurance products are now being offered by 19 insurers worldwide, who recognize that reduced driving means reduced accident risk, as well as reduced energy use. Tests have shown that PAYD products can reduce overall miles driven by 10-15 percent or more. About 20 percent of new customers of the French insurer AGF have elected the PAYD option, with 250,000 such policies in force. Progressive and GMAC offer PAYD policies in parts of the U.S. Japan's Sompo Insurance has given premium discounts to 3.25 million policyholders that drive low-emitting cars, and Tokio Marine and Nichido have signed up 6.23 million policyholders, 48 percent of its total auto policy customer base, who are receiving discounts for driving low-mileage or low-emitting vehicles.

It's extremely difficult to change human behavior through mere exhortation. And getting laws passed that constrain individual activities without a clear and immediate payoff can be almost as difficult, as stagnating CAFE standards in the US suggest.

But insurance companies may now be stepping into the breach. By pooling and monetizing "externalities" like the environmental risks associated with driving, and then giving insurance customers clear and easy ways of reducing their own share of those risks, they are beginning to reshape human behavior more subtly and painlessly than any government edict.

And making a profit doing it. Ah, the genius of capitalism!

Sustainable BT Is Pursuing Its Own Self-Interest — And That's a Good Thing

Monday, November 05, 2007 / KW

Over at Techworld, a U.K.-based business website, blogger Chris Mellor posts an interesting comment about the sustainability initiatives of BT (formerly known as British Telecom). Mellor notes, "BT's urging of sustainable business practices on to business in general is closely aligned to its own self-interest," and asks, "How real is BT's commitment to sustainability?"

He then shows that many of the eco-friendly practices, such as teleconferencing, that BT is promoting in the name of sustainability are also revenue sources for BT. And this leads Mellor to question — albeit gently — the genuineness of the company's commitment to the cause:

Here we have a hugely-prominent British company enthusiastically evangelising the sustainability (read 'green' mostly) agenda, practising what it preaches, which is a solidly good thing, and using the green agenda to sell its kit and services.

This could be interpreted as having an element of jumping on the green bandwagon to pursue its own self-interest. When BT says sustainability makes commercial sense it certainly does for BT because other businesses may well use BT products and services to pursue their own sustainability goals. . . .

For BT it's almost a case, one might suggest, of self-interest driving its sustainability agenda rather than being a byproduct of it. I don't know if this is true and am not pointing an accusatory finger at BT. But the co-incidence of self-interest and the sustainability agenda evangelising at BT is surely worthy of note.

One instinctively believes more in the commitment of priests who take a vow of poverty than in the religious faith of television evangelists living in million-dollar homes.

We all share Mellor's cynicism about televangelists who live high on the hog. But that's because living in luxury contradicts the spiritual message most televangelists promote, which is about humility, self-sacrifice, and service to others. However, there's no contradiction between running a profitable, growing business and the "green gospel" of sustainability, so Mellor's comparison seems off the mark.

If anything, we'd make the opposite point: The more profitable BT's eco-friendly offerings are for the company, the deeper and more sincere BT's commitment to sustainability is likely to be. Anyone who has worked in a corporation will confirm that there is nothing more heartfelt than the desire of executives to report healthy profits every quarter! And this sincere love of profit is shared by board members, shareholders, and all the other key decision-makers at most companies.

So the extent to which BT is able to align its profitability goals with genuinely sustainable practices is not a measure of the company's insincerity, but just the opposite. Such alignment is exactly what believers in sustainable business need to pursue. Without it, green initiatives lose money and therefore become philanthropic efforts rather than profit sources — which makes them inherently less sustainable in the long run.

This is not to say that teleconferencing and the other business practices being promoted by BT are genuinely green — that's a matter for experts to evaluate by objective criteria. But the fact that promoting these practices serves BT's self-interest isn't a bug — it's a feature.

SRI Leader Krumsiek Peers Into Her Crystal Ball

Tuesday, August 21, 2007 / KW

Check out this article by Barbara Krumsiek, CEO of the Calvert Group, writing about the future of socially responsible investing. Titled "In the Year 2022" (wasn't that the name of a chart-topping tune by the one-hit wonders Zager and Evans? Oh, not exactly...), Krumsiek's article takes an interesting generational perspective. By 2022, she notes, the average Baby Boomer will be 70 years old. (Hard to believe, since most of us still think we are around nineteen.) That means that the torch of business leadership will have been passed to a new set of managers with a fresh perspective:

In 2022 leadership of what used to be called SRI firms will have fully transitioned to the generation of professionals raised on Net Impact, social networking and Internet communications. People in my generation learned SRI on the job. Now, people are coming out of college with joint degrees in business and environmental studies. They went through business school when Net Impact made a difference and they learned from each other and social networking groups focused on social and environmental subjects.

As a result, Krumsiek says, "The next 15 years will be all about outcomes." The rising generation will take as its mandate the task of completing the work the Boomers have started but which is less than half finished. Emerging markets, she says, will "have emerged" — and hopefully will be making a dent in global poverty, climate change, and the other seemingly intractable problems the current leadership generation has been wrestling with.

Here's hoping that Krumsiek is right, and that we'll all be around to see her optimistic forecast come true.

Joe Keefe Points the Way from SRI to Sustainable Investing

Tuesday, August 07, 2007 / KW

Check out this must-read article by Joe Keefe, president and CEO of Pax World, one of the best-known firms in the world of socially responsible investing. Keefe's theme is the coming transition from socially responsible investing to sustainable investing. The difference, as he explains, is more than just semantic. In comparison to SRI, sustainable investing:

Is defined positively and proactively rather than negatively and defensively;
Pursues strong financial results through the managerial benefits of sustainability, rather than merely asserting "you don't have to sacrifice performance";
Focuses on identifying the best-run companies in the world, rather than on weeding out "bad" companies (such as tobacco marketers or arms dealers); and
Takes an unabashedly progressive political and social stance, rather than trying to maintain a values-neutral posture.

Most important, Keefe believes the new sustainability orientation has the potential to appeal to a far broader market base than SRI has reached. Therefore he forecasts a remarkable growth spurt for the business in years to come. Agree or not, it's a well-thought-out article by an important industry leader, one that's likely to fuel much discussion in the weeks and months ahead.

Middle Eastern Businesses Working to Define Sustainability in Islamic Terms

Sunday, June 24, 2007 / KW

With a major CSR Summit opening this weekend in Dubai, it's a good time to glance at the fascinating and complex issues surrounding sustainability in the Muslim world, particularly in the Middle East.

Over a year ago, Dow Jones and Sam Group — the people who brought you the Dow Jones Sustainability Indexes — launched the Dow Jones Islamic Market Sustainability Index, a new index that tracks the performance of 105 companies whose operating methods meet both the requirements of Islamic Sharia law and the principles of sustainability. The index excludes producers of alcohol and pork-related products, providers of conventional (i.e., non-Islamic) financial services, tobacco manufacturers, weapons suppliers, and providers of entertainment services (hotels, casinos/gambling, movies, music, and so on). Stocks are also subjected to a series of financial-ratio screens to remove companies characterized by high debt and interest income levels.

As this list of screens suggests, the DJIMSI illustrates how the values implicit in the concept of sustainability are shaped by cultural considerations. Many in the socially responsible investment communities in the United States and Europe would join the DJIMSI in shying away from cigarette makers and arms dealers, but relatively few would consider bacon or pork sausages problematic products (except, perhaps, to the extent that they contribute to obesity — as my wife likes to remind me).

On the other hand, much in Sharia law resonates with concerns embraced by sustainability advocates the world over. Here's how a special report on financial sector responsibility sponsored by Pricewaterhouse Coopers and published in Ethical Corporation magazine put it last November (link via the World Council for Sustainable Business Development):

The Islamic faith creates an entire social order. While private property is defended, individual rights are subject to the rights of others in the community to benefit from environmental resources such as water, forests, air and sunlight. These are held in common by all members of society. If you degrade a resource, you are accountable for its use and liable for its repair.

There is even a process in Islam akin to the assessment of impacts on stakeholders and the resolution of conflicts between them so as to maximise the overall public interest, known as maslahah mursalah. Special care is taken to prioritise the interests of the weak and vulnerable.

Islamic finance is expected to follow suit. More than one commentator has suggested that Islamic banking could establish a model by which modern banking could be re-imbued with ethical norms.

These are elements of Islamic business that everyone from Greenpeace to child labor protestors could admire. Yet at the same time, it's clear that there are major challenges facing Middle Eastern businesses that are eager to embrace sustainability — starting with the fact that the economy of the region is mainly based on the production and marketing of fossil fuels that are deeply implicated in what appears to be the greatest environmental threat in the history of our planet.

By contrast with the problem of global climate change, even the deeply troubling moral, political, and social challenges posed by the ongoing Palestinian-Israeli conflict may one day appear minor.

As forces ranging from Islamic fundamentalism to U.S. military might battle for influence throughout the region, we can hope that the movement toward sustainable economic development will play an increasing role in encouraging modernization, transparency, environmental responsibility, and social liberalization on the part of both governments and businesses in the Middle East. The fact that more and more Muslim-run companies are signing on to the sustainability movement is an encouraging trend.

Meanwhile, the complexity of the issues involved in sustainability Islamic-style means that managers of firms elsewhere in the world that are involved in business in the Middle East need to think long and hard about how they define corporate responsibility so as to ensure that their values are truly in synch with those of their partners in the region.

Verizon Shareholder Forum: Frontier in Investor Activism

Sunday, June 17, 2007 / KW

Almost three months ago, SEC chairman Christopher Cox gave a little-noticed speech about the evolving state of play in the world of shareholder rights. Among other topics, Cox discussed how the SEC is urging public companies to use electronic technology to accelerate and broaden public disclosure of crucial company data:

From the forms issuers file to the accounting standards they use, the SEC is waging an all-out war on complexity. And in this effort we're tapping the power of technology to bring higher-quality information to investors more quickly and more easily than ever before. Our new e-proxy rules will soon make it possible for investors to realize the full potential of interactive data. And in a related area, our ongoing conceptual work to update the proxy rules could pave the way for an Electronic Shareholder Forum in which investors could securely and anonymously share information about their company. That cutting-edge thinking is already spurring private firms to invest in creative new ways for shareholders to use the Internet to communicate with one another.

But of course the world of the Internet is one in which power is decentralized and the ability to drive the agenda can be centered anywhere — not just in a federal agency in Washington or even in a corporate office. As the New York Times reports, independent groups are already driving the creation of online shareholder forums, where the focus will be determined not by corporate executives but by institutional investors, shareholder activists, and outside watchdogs:

Examining insider stock transactions has always helped investors gauge managers’ confidence in their own company’s prospects. Shareholders who hear an executive boast of a grand strategic plan while dumping piles of his own stock have a right to be dubious. Actions speak louder than words, after all.

Now, a group of investors is arguing that an analysis of a company’s pay practices can provide similar insights into managerial confidence, and they have established a shareholder forum to demonstrate how such an assessment might be made. The forum, set up last week, will use Verizon Communications as a test case. . . .

"No analyst or investor is going to understand the market conditions associated with achieving objectives as well as a manager does," said Gary Lutin, an investment banker at Lutin & Company, who is chairman of the shareholder forum. "So the key is to find out whether the manager is betting his pay on reaching those objectives."

Perhaps understandably, Verizon is hedging its bets as to whether and how it will participate in the online forum:

Robert A. Varettoni, a Verizon spokesman, said that the company was evaluating the invitation to communicate with shareholders in the forum, but that it would wait until the Securities and Exchange Commission has issued guidance about online exchanges before it partakes.

"The S.E.C. has explored many aspects of shareholder communications, including online discussions," Mr. Varettoni said. "The S.E.C. has indicated that it will issue proposed rules on this topic in the coming months, addressing some of the questions raised, including selective disclosure of nonpublic information and a company’s liability for content posted in a forum by third parties."

But Mr. Lutin said that forum programs he had run in the past had no unusual online aspects and had simply followed old-fashioned meeting processes for which S.E.C. rules are well established.

Executives at public companies will want to follow this unfolding story closely. With the old model of top-down corporate communications crumbling, companies' ability to control the conversation about shareholder rights is a thing of the past. They'll need to move quickly and flexibly if they expect to remain a credible part of the discussion in the months and years to come.