The financial crisis has likely shaken the foundations of your company. The way forward may seem unclear. But to paraphrase Einstein, “You can’t solve a problem with the same thinking that caused it.”
The concepts of sustainability offer a new model for understanding the timeless wisdom of long-term thinking. There are several sides to sustainability including economic, social, financial, environmental and cultural. Investment in these and you will get long-term positive results.
Unfortunately, the stock market punishes companies that do not consistently provide positive quarterly results. Many companies view sustainability as a cost and not as an opportunity. This is a direct result of the short-term, quarterly focused planning cycle. In fact many companies even sacrifice long term financial sustainability, in order achieve short term results.
Our recent North American economic downturn is a direct result of this short-term focus. Here in Calgary, where our head office is located, the main industry is oil and gas. In the last few months even the largest most “stable” companies have lost up to half of their shareholder value. Everyone had been gripped in the oil boom of the last few years and borrowed massively to invest in the legendary “oil sands” of northern Alberta. As recently as a few months ago analysts were predicting $200 oil by the end of the year. Now it’s dipped below $40 on occasion. This turns all the business models on their heads. Shareholders have had their investments wiped out.
If I were the CEO of one of these companies, how could I have avoided this? The obvious solution is to not invest so much money in development, speculating that the oil price would keep rising.
But it’s not that easy.
If all the other companies around me are investing and their stock prices are inflating on the frenzied expectations of the market, the market will punish me for not doing so myself. I’m practically forced to do so. This, of course, assumes that I am aware of the reality of the situation and not caught up in the frenzy myself. It is incredibly difficult to remain objective when everyone around you is going crazy.
The decisions that lead to this type of result (and in fact almost all corporate decisions) are made by an executive committee. This is a group of people steeped in the culture of the corporation and the culture of the business segment. They tend to get caught in “group think” because they are all from similar backgrounds, with similar life views and similar experiences. Innovation has a hard time getting in through the cracks.
They gather all their information including projections, facts and figures, risk analyses and more and stir it all together into a pot, discuss it, and make a decision. It all sounds logical, scientific, and rational but in reality it is massively affected by their own experiences, viewpoints, biases, emotional needs and personal pressures. Information which contradicts their worldview is ignored. This is not an indictment of executives. This is common to all humans. Two of the factors at play here are:
Perceptual blindness: The tendency, once we are focused on a task, to ignore other information, even if it is obvious. Check out the link at the end to see a video that illustrates this concept. You’ll be amazed by your own perceptual blindness!
Cognitive bias: Our tendency to try to slot new information into the categories and patterns that we are already familiar with.
Both of these are great adaptations because if we were always paying attention to everything and always re-analyzing and questioning every new piece of information we would never get anything done. Generally, past patterns provide fairly reliable predictions of the future. The problem occurs when there are discontinuities and chaotic disturbances to “business as usual”. Our tendency is to cling onto past patterns and beliefs, hunker down, dig in and attempt to think our way out of it using the same thinking that got us into it. How decisions are made has been the focus of much research and introspection. One of the basic conclusions has been that having an impartial, professionally trained outside facilitator on hand to facilitate decision-making process is one of the best ways to break through the patterns, emotions and blindness that can create poor decisions. It is the classic situation of a small child pointing out that the emperor has no clothes.
Thinking about sustainability requires this new kind of thinking. Businesses are naturally motivated to pay great attention to financial sustainability but have varying degrees of interest in the other forms of sustainability. But even in the realm of financial sustainability, which is core to its existence, business has created an unsustainable situation which has led to the current financial calamity.
The answer lies in a new way of thinking… a new business culture. Holistic Business Vitality. This incorporates sustainability in all of its forms as a core part of the business, thereby giving a corporation a solid foundation that will allow it to weather any storm. You may argue that the connection is tenuous, but it is not. In fact, true long term financial sustainability is impossible without the other forms of sustainability. Here are some of the benefits that each of the forms of sustainability provide:
While focused on their own quarterly results, many executives will make decisions that bump the quarterly results at the expense of the business environment in which they are operating. Decisions that have a negative effect on the economy as a whole. Things such as using questionable tax loopholes to squirrel money away overseas or cooking the books so that its makes the company look more valuable. The first one degrades the revenue the government and thereby degrades the level of services and infrastructure that the government can provide to keep the wheels of the economy greased. The second one, once it is exposed, decreases investor confidence and forces governments to increase regulation thereby putting a brake on the economy. (Think Sarbanes-Oxley). Over the long term these things degrade the economy, having a negative effect on my business, even though I had the short-term quarterly gain from my previous decision. But now I can hide my company’s poor performance in the general state of the economy and not be singled out by my shareholders. If all businesses were to make their decisions with an eye towards the health of the economy, they would all benefit from their mutual support of the economy.
The current boom in Western Canada has fueled a massive influx of new residents. Builders have strained to keep up with the demand and prices have skyrocketed. Those directly involved in making money from the boom have experienced a spike in income but this has been counterbalanced by a spike in costs. Those left on the margins have found themselves homeless or struggling to make ends meet. The cost has been increased crime, gang warfare and other social problems. Because of the demand, corporations have found themselves paying much more for labor than previously which has thrown off their cost projections. And, of course, now corporations will need to consider massive layoffs leaving all these new residents without jobs. Society’s suspicion and animosity towards business will increase, making it even more difficult to operate. Another aspect of social sustainability is the well-being of the employees themselves. To the extent that a company can provide its employees with meaningful, challenging and highly rewarding work while mitigating the effects of internal politics, capricious managers and the vagaries of the marketplace, the company will have a stable, committed workforce that will pull out all the stops on behalf of the company during times of difficulty. The benefits of this type of dedication are immeasurable. But we tend not to hear about these kinds of companies because they do not make good news copy. They quietly and steadily post good results for their shareholders while the companies that explode onto the marketplace and quickly burn out get all the press.
This one may seem logically obvious, but historically our human population was small enough so that every time we messed up our environment we could move on to greener pastures. The next field, the next valley, the next country, the next continent, the next…planet?? Now we’re stuck at the last stop on the tram, but our human, and, by extension, our corporate thinking has not yet caught up with the current reality. Emotion and momentum trumps logic. A classic case of cognitive bias.
An illustrative case of this is the Weyerhaeuser Corporation, a multinational lumber company. They started in the Appalachian Mountains of eastern United States. By the late 1800′s they had depleted the forest resource and the once mighty stands had been reduced to stump fields. They were just doing what everyone was doing. They sought out the next greenfield and found it in the Pacific Northwest of the United States. That ran out too.
Old growth forests form a bank account that has taken hundreds of years develop but can be liquidated in a shockingly short time. Shareholder demands force you to draw down this bank account rather than actually grow trees or other forms of fiber. Of course the company, still based in Alabama, has been forced to continue to look further afield for inexpensive timber.
Now they operate in Asia, Australia, Brazil, Canada, Europe and Uruguay, having left behind unemployment, ghost towns, clear cuts and shuttered mills. Their shareholders probably don’t live there. Obviously, at some point, there will be no more green fields left. They may have already reached that point.
Had they adopted a slower growth model for the last 150 years instead of, at the behest of their shareholders, liquidating their resource for maximum yearly profit, they would still be harvesting massive old-growth trees that would now be providing unbelievable profitability and would continue to do so into the future. Over the long term, practicing environmental sustainability would have placed them in an enviable situation and given them a superb bottom line. I would not want to be in the position of any CEO who is forced to obey the marketplace against his conscience and better judgment.
Now, under societal pressures, corporations are working to appear sustainable. A quick perusal of Weyerhaeuser’s website shows that they are speaking the language of sustainability. Whether this is a response to public scrutiny or a true grasp of the benefits, financial and otherwise, of sustainability is unclear. As it is, it is truly heartening that sustainability is on the agendas of most corporations and that shareholders themselves are demanding the change.
The concept that a strong, vibrant culture that people are proud of contributes to the well-being of the people and all forms of enterprise that take place within the boundaries of that culture’s influence. Cultures evolve over thousands of years and form their own complex, intricately woven nets of checks, balances, punishments, rewards, stories, histories, legends and beliefs. Unbalancing this by injecting cash, development, technology and other forms of entrepreneurial incursions can cause profound consequences. Short-term thinking says that we can walk in, invest, and shower an area with economic benefits and expect people to step up and adopt our model.
But it’s much more complex than this. This level of change causes profound rips in the cultural web, leaving gaping holes through which all manner of problems can enter. Animosities form between those benefiting from the enterprise and those left in the margins. Ancient rules of authority and distribution of power and loyalty are thrown asunder. People find themselves adrift in a place where ancient tried-and-true rules no longer apply. Mutual support breaks down. A culture crumbles. Now the enterprise that is attempting to work in the area finds itself bearing the costs of social ills that beset its workforce and its regional stakeholders. Alcoholism, absenteeism, sabotage, criminality and a listless workforce all drag on the enterprise’s profitability.
A very small example of this cultural degradation that we are all familiar with is the hollowing out of the downtown cores of medium-sized towns across North America as Wal-Mart and other big box stores settle in the outskirts of town. The downtown core has traditionally been a key part of small-town culture. It takes a population with an extremely strong sense of cultural identity and pride to force the town council to say no to the developers.
Corporations also have internal cultures, but many are not sustainable. In recent years most corporations have broken the “corporate compact” with their employees which basically said that “if you’re loyal to us we’ll be loyal to you”. Today’s employees, especially Gen X and Gen Y, harbor very little loyalty to their employers. They tend to consider themselves to be “Me Inc.” and, even when in the full-time employment of a corporation, see themselves as free agents. This causes untold and often unaccounted for costs for corporations as hard-won expertise walks out the door to the competition and those that are left only do what is necessary to produce what is required. A hallmark of a culture that is not sustainable is an inconsistency between responses when employees are asked “what does the corporation stand for”. A corporation with a strong, sustainable culture with which employees identify will have everyone singing off the same song sheet in response to this question. The benefits of having this are as enormous as the risks of not having this. Remember the lone trader in Asia who brought down a major international bank because of his maverick trades? The corporate culture was not strong enough to keep him operating within its bounds. On the positive side a strong culture elicits dedication, enthusiasm, and brings out the best in those that embrace it while forcing out those that don’t fit so that they can find an organization that better matches their values.
But We CAN Change
Sustainability is predicated on a long-term view of success. The rewards are enormous and are realized through the stepwise implementation of internal cultural change. Starting with the lowest hanging fruit and demonstrating small wins along the way builds the momentum and causes the next ring of people to become involved until finally even the most diehard skeptics are convinced and become the most enthusiastic supporters. (have you noticed, ex-smokers are the most strident anti-smokers). This is not simply a policy change, it is a cultural change. And cultural change is not easy. Many organizations are seeing that “Business as Usual” is no longer an option and are beginning to make the change. Governments are considering regulation that will make the stock markets more focussed on long term returns. People are demanding that corporations operate in a sustainable manner. Times are changing and the corporations that lead the change will collect the greatest returns.