Stakeholders: Finance/Wall Street Archives

November 6, 2011

You Can't Impress Stock Analysts...and Shouldn't Try

ExxonMobil reported last week that its net income reached $10.3 billion...in just the third quarter. The oil giant is arguably the most profitable corporation in history. Ten billion in three months is historic, but as the New York Times reported, "analysts were not impressed."

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Is there a better distillation of the serious problem with our economic system? Not to put too fine a point on it, but the relentless pursuit to satisfy analysts, and not customers or other stakeholders, is killing our economy and our planet.

Earlier this year, I asked a CEO of Fortune 100 company how he dealt with analyst pressure. Even though he answered on stage in a public forum, I'll keep this anonymous in case it was a moment of mistaken honesty. What he said was this: "I don't know any CEO that would want to run a company the way analysts would want us to."

And yet...I keep hearing from top executives at large, profitable companies that they're under "P&L pressure." This pressure comes not from being anywhere near unprofitable; no, it stems from fear of not hitting growth targets for earnings per share. What all senior executives seem to have forgotten — in some mass delusion — is that these growth targets are arbitrary.

Who declared 7 or 10 or 15 percent growth in earnings a sacrosanct pursuit, above all other corporate goals — like the innovation that leads to novel solutions that address customer needs? If you believe the best-selling business books from the last 25 years, companies are "In Search of Excellence" or trying to go from "Good to Great." Nobody writes a paean to the search for 9 percent EPS growth.

Moreover, pure growth targets are even wackier right now. The debt and overleverage explosion artificially inflated our economies and corporate earnings. So expecting growth in earnings today, while we re-set the economy to a more "normal" growth level, is absurd.

Now imagine for a moment that a proverbial alien lands on the planet and looks at the financial statements of many of our largest companies (I know, aliens might have better things to do, but go with it). They would see massive profits, tons of free cash flow, and healthy balance sheets. Since they wouldn't know that the companies had set and missed growth targets, they'd declare them very successful. But not the analysts.

Our big, profitable companies have the resources to do everything they might consider a priority in the long run — invest in R&D, pay shareholders well, build new businesses and hire people, create a more sustainable enterprise...whatever.

The strategic decisions that would lead to these outcomes require broader thinking, not quarterly focus. But the pressure to "impress analysts" means that leaders can't pursue the long-term perspective that creates truly lasting, great, and sustainable organizations. It's a strategic and operational straight-jacket.

A few leaders — from companies such as Google and Unilever — have told Wall Street that they won't provide "guidance" anymore. In essence, they'll report their results to GAAP standards and as the SEC, FASB, and other quasi-regulatory bodies require...but they won't answer to analysts. Not coincidentally, these CEOs are also deep sustainability thinkers.

I have a sneaking suspicion that most CEOs and CFOs would enjoy this kind of freedom from analyst conversations. Wouldn't it be more personally rewarding for them — and all the layers of management beneath them — to build and lead fundamentally more profitable organizations (versus maximizing short-term profits)?

As Unilever CEO Paul Polman told the crowd at the World Economic Forum in Davos in January, "The worse thing would be to do what is probably right for the long-term benefit of society and being forced out of that because you don't get the short-term results...I want people to focus on cash flow, which is a much longer-term measure than short-term profit."

Sustainability is about the real long-term health of both the planet and enterprise. I hope we see more leaders walking away from these absurd pressures that keep them from building innovative, profitable, sustainable companies.

(This post first appeared at Harvard Business Online.)

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @GreenAdvantage)

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January 22, 2012

A Vision of Real Corporate Leadership on Sustainability

[This piece appears on Sustainable Brands' site as part of a special monthlong focus on leadership. Chris Laszlo and I are guest editing. We have laid out a framework for true sustainability leadership to help shape the discussion. We each are also offering a deeper dive on one half of the two-by-two matrix we suggested. I'm focusing on the “external” side of leadership which focuses mainly on (a) how a company responds to global sustainability pressures and (b) how it does business in a way that’s visible to the outside world…its products, processes, relationships, and so on.]

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The basics of sustainability excellence are fairly well known by now: reduce your footprint, create products and services that help customers do the same, drive employee engagement, think value chain, track data and enable transparency, and on and on. But real leaders will go further and address the scale of the sustainability challenges we face by fundamentally remaking their companies. Here’s what I envision in a few key areas:

Science-Based Goals

Footprint reduction targets are important, but if the goals are not based on what scientists tell us – i.e., we need an 80% reduction in absolute greenhouse gas emissions – they’re not good enough. Sony and a few others have targeted zero impact by 2050. This level of commitment needs to become the norm, and then a few brave souls can go beyond reducing harm (even to zero) and set goals to build restorative enterprises.

Policy

While uncommon today, the basic level of performance on policy should be to make lobbying efforts consistent with core business strategy and public messaging (for example, are you proudly launching products that use less energy, yet lobbying hard against higher efficiency standards?). Real leaders go much further and lobby for stricter standards and aggressive action on climate. CEOs can demonstrate their external leadership by promoting this agenda with corporate peers and government leaders. Some companies are on track, committing to the recent “2 Degree Challenge Communiqué” or joining groups like BICEP (led by Ceres, Nike, and others) which demand strong climate policy action.

Product and Service Innovation

Reducing the customer’s footprint will need to be the core aim of all innovation efforts and all product lines (not just a sliver of the portfolio as it is today). Sustainability innovators will open up their creativity process, inviting customers and partners to offer innovative solutions (GE’s Ecomagination Challengeis a good example). Innovators will embrace disruption and heresy (which I’ve written about before) by helping customers use less of their products. For a glimpse of the future, see Unilever’s campaigns to get customers to reduce water use and Patagonia’s Common Threads, which offers a grand bargain: “We make useful gear that lasts a long time…You don’t buy what you don’t need.”

Valuation and Investments: Financial and Operational Metrics

Leaders such as P&G and GE have set aggressive revenue targets for their greener products. A few companies put a price on carbon for internal capital allocation decisions or, like DuPont and Owens Corning, set aside a percentage of capex for eco-efficiency investments. These actions help correct the inherent flaws of ROI decision-making by valuing sustainability more explicitly. The next step is fully incorporating intangible value – employee engagement, customer loyalty, brand value, and the like – as well as measuring and including all externalized costs in investment decisions. Two trendsetters, Puma and Dow, have begun this important journey.

Investor Relations

I believe that the relentless pursuit of short-term, quarterly profit goals to please Wall Street analysts is bad for companies – great enterprises very rarely seek profit alone – and certainly isn’t good for the planet. Like Unilever’s CEO Paul Polman, the real leaders will stop providing quarterly guidance and ask managers to focus on the real measures of success: making great products, serving customer needs, creating good jobs, and driving both cash flow and long-term profitability. The most sustainable companies will become “benefit companies” or “B Corps”, with a broader charter than just pursuing shareholder value. Seek greatness and sustainability, and the money will follow.

Resources Dedicated

Most companies give their sustainability execs woefully inadequate resources to do their stated jobs, let alone transform their companies. A truly committed organization will allocate resources equal to the challenge and will give the sustainability function real power. I suggest creating a “skunk works” team run by sustainability, along with perhaps corporate strategy and R&D, to question everything and challenge the core business model (e.g., What if the product were a service? What if we used no fossil fuels?). This is how companies can systematize heretical innovation.

Employee Engagement

Educating all employees on sustainability principles and creating green teams are good first steps. Tying all executive compensation directly, and substantially, to sustainability goals is even better. But real leaders should work to convince those hostile to change throughout the organization…or eliminate them. In the words of Jim Collins in Good to Great, “get the right people on (and off) the bus.” Leaders will also help employees pursue sustainability in their own lives and communities and provide an outlet for organizing campaigns, such as the awareness-raising “climate ride” conducted by apparel company Eileen Fisher. If the workplace is appropriate for United Way drives, why not for climate action?

In short, I’m imagining a very different kind of company. The overwhelming challenges we face demand profound shifts. Of course, much more than I’ve mentioned will need to change – on the social side of the equation for sure – so please let me know what you would add to my vision of true leadership.

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @GreenAdvantage)

November 8, 2012

The Fantasy of the "Sad Green Story"

(Note: This blog is co-authored with my colleague Jigar Shah, a partner at Inerjys and a board member of the Carbon War Room, where he served as its first CEO. Jigar also founded SunEdison, helping to create the multibillion-dollar solar services industry.)

To get back to some non-election topics...A couple weeks ago, New York Times columnist David Brooks wrote an op-ed entitled "A Sad Green Story" about the (supposed) travails of the green movement over the last 10 years. The idea that the clean technology sector is failing, or that it's a bad investment, is common enough in the business world and pundit class. But it's patently false. So what is Brooks talking about and what's really true here?

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Brooks focuses in part on whether Al Gore has made money on clean tech — a total distraction that has no bearing on the reality of climate change or the growth of clean tech. What's more important is Brooks' absurd logic that an entire sector of the economy is a "sad story" because some government-supported companies struggle, go under (Solyndra), or get acquired (battery maker A123). And how can Brooks tear down the government's involvement in promoting the deployment of American green innovation while providing no tangible idea of how he would do it better?

Most of us watching or working with the clean tech sector agree that government shouldn't try to pick winners (see Jigar's take on Solyndra's failure here), but we can propose a plausible model of how the government might play a more productive role. This ranges from providing a roadmap for remaking the multitrillion-dollar energy sector, to providing leadership by example (and scale) when purchasing new technologies.

For proof of how crazy all of this criticism of clean tech is, we need look no further than a recent Times-reported story on natural gas. Natural gas is a booming industry. But as the paper of record reports, it turns out that one key part of the natural gas value chain — that is the step of actually digging it up — is struggling financially. Small, scrappy entrepreneurs like Exxon Mobil are, according to its CEO, "losing our shirts today... Were making no money. It's all in the red."

This is exactly the same economic story that Andrew described a few weeks ago about the solar industry. The manufacturing end of the chain, experiencing a glut of supply, is losing money. But downstream users of the product, solar panels in one case or natural gas in the other, are doing very well. The financial struggle for some companies in both solar and natural gas is a sign of a boom, not a bust.

So we assume David Brooks and other green skeptics will soon write about the "sad brown tale" of the (also) highly subsidized industry of fossil fuels, which, since some people are losing money, must be shut down and mocked. We'll hold our breath.

Brooks' column is also filled with fantasies and misstatements that would be easy to correct with a simple Google search. As Andrew mentioned in his previous blog post, the percentage of our electricity coming from green energy has doubled in just four years — that doesn't seem like much of a sad story. Brooks also dismisses the idea of green jobs with no data to back up his position. Of course there are green jobs — there are 100,000 people working in solar in this country today. And, not for nothing, but the fastest growing green jobs markets are in politically red states. (We'll stop there and let climate blogger Joe Romm tear apart some of the more subtle Brooks fallacies.)

From a practical perspective, green technology is succeeding in part because we have oil prices that are stuck near $100/barrel, and water challenges that are creating deep competition between agriculture and oil and gas in places like Colorado. At some point Brooks and others will also have to acknowledge what the U.S. military, particularly the Navy, has already determined: future conflicts will arise over resources like oil and water; climate change is a security threat; and pursuing a renewable energy future is a safe, logical path.

In the end, fact-free attacks on all things green need to stop. Like in all industries, some paths are profitable and some are not. But we'll only find out what works if we invest in new growth sectors and not act like the sky is falling — or that there's some devious green investing cabal secretly making money — when some companies fail. Sad business stories become happy ones through persistence and overcoming failure. Not understanding that is Brooks' greatest fantasy.

(This post first appeared at Harvard Business Online.)

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @AndrewWinston)

February 1, 2014

The Largest Risk (and Opportunity) Investors Are Ignoring

Tackling climate change — and thus keeping the world inhabitable — is an achievable goal, but it will become prohibitively expensive if we wait to act. This is the key message from a leaked United Nations study that The New York Times reported on last week. Journalist Justin Gillis wrote about the risk of “severe economic disruption” and “wildly expensive” solutions — ones that may not even exist — if we don’t leverage existing technologies to shift the global economy away from carbon over the next 15 years.

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Talk of potential risk to humanity is not new. And we’ve seen more recently the actual devastation of record weather events like Hurricane Sandy and Typhoon Haiyan. But neither the scientific warnings nor the extreme storms have prompted enough action. However, now the risk we’re talking about is financial, which, along with the enormous economic upside of taking action, may finally get the investment community moving.

The day before the stark story in the Times appeared, I attended a related conference, the Investor Summit on Climate Risk, held at the UN and run by the NGO Ceres. Hundreds of financial executives gathered, including some heavy-hitters, from state comptrollers to executives from large pension funds to former U.S. treasury secretary Robert Rubin, who declared, “climate change is an existential risk.”

The conferencewas focused on the release of Ceres’ new report, “Investing in the Clean Trillion.” Created in conjunction with Carbon Tracker, the study lays out a plan for mobilizing much more capital toward building the clean economy. The trillion-dollar number is not random: TheInternational Energy Agency (IEA) has estimated that the world needs to pour $36 trillion of investment into the clean economy between now and 2050 in order to keep the planet below the critical warming threshold of 3.6 degrees Fahrenheit (2oC). That’s $1 trillion per year.

A key target for Ceres’ work, and the main audience at the conference, is the group of institutional investors who manage tens of trillions of dollars in assets for long-term performance. The core argument to compel institutional investors to change how they influence companies and where they invest their money is simple: as the world pivots away from carbon-based energy to avoid devastating climate change, fossil fuel assets, like coal plants or off-shore oil rigs, will be “stranded” — a wonky term for “worthless.” The value of the companies owning and managing those assets, the logic goes, will plummet. As Nick Robins from the bank HSBC described to the audience, in a scenario of global peak fossil fuel use by 2020 “implies a 44% reduction in discounted cash flow value of fossil fuel companies” — or in simpler terms, a decline in share price of 40 to 60 percent.

In another Ceres meeting last fall on this topic of stranded assets, Craig Mackenzie from the Scottish Widows Investment Partnership ($200 billion in assets) spoke about the “wake-up call” investors had gotten from recent shifts in the U.S. coal market. The 20% drop in coal demand was driven mainly by the incredible increase in natural gas production due to fracking technology, not from any concern over greenhouse gases. But the rapid shift demonstrated to Mackenzie and his firm the dangers of overexposure to a class of assets. So, he says, the fund “reduced exposure to pure play coal companies to nearly zero.”

It’s easy to point out a big flaw with the stranded assets discussion: uncertainty. I spoke with executives at a few big banks who said the big question for them is when will the assets be stranded. Nobody wants to leave profitable investments too early that gets you fired. But trying to time a bubble bursting is a dangerous game. How many investors got the timing right on the implosion of mortgage-backed security assets in 2008? Nearly none, and that systemic failure of vision contributed mightily to a global financial collapse.

Given what’s at stake now — not just financial system stability, but planetary, human-supporting system stability – it’s more than prudent to avoid the game of timing the market perfectly. The investment community should be much more proactive about using its weight to a) pressure fossil fuel companies to quickly migrate their own portfolios to new forms of energy; and b) dedicate significant funds to investing directly in new technologies.

With the chilling, “it’s going to be very costly” message of Gillis’ article, and the warnings of trillions of stranded assets in the Ceres report, it’s easy to miss the very big silver lining running underneath all the dire warnings: we have the technologies today to make the shift and do it profitably.

The Clean Trillion report cites the uplifting flip side of the IEA’s calculations — the $36 trillion of investment we need will yield $100 trillion in fuel savings between now and 2050. That’s a lot of money to leave on the table, and a very good investment.

(This post first appeared on the Harvard Business Review blog network.)

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @AndrewWinston)

February 12, 2014

How Exactly Will We Move Away from Fossil Fuels?

Investors who have significant money tied up in the fossil fuel industry — every pension and market fund, essentially — are facing a massive risk. The logic, according to the International Energy Agency (IEA) and banks like HSBC, is this: as the world migrates away from carbon-based fuels, trillions of barrels of oil and billions of tons of coal — the assets sitting on the books of energy companies — will become “stranded,” or worthless.

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It’s a compelling argument, but only if we can answer a key question: How exactly will those assets become stranded? That is, what will prompt a fast enough migration from fossil fuels to cause their value to plummet? I see a few plausible paths: government regulation, straight economics (when cleaner energy crowds out fossil fuel investment because the returns are better), or a social movement that propels voluntary action. Let’s quickly look at each.

1. The Stick: Regulation

The organizations talking about stranded assets seem to assume that governments will price carbon at some point. As a recent report on the subject from the NGO Ceres said, “According to the IEA, more than two-thirds of the world’s proven reserves of fossil fuels will be unusable prior to 2050 if necessary carbon regulations are enacted [emphasis added].”

That’s a mighty big “if.” While some regions are experimenting with carbon taxes, and Clean Air Act regulations in the U.S. are making coal plants more expensive, regulation is not truly impeding global fossil fuel use.

Ultimately, the political will for fundamental change is lacking. In the State of the Union speech last Tuesday, President Obama said that climate change was a fact and touted the growth of solar energy in America. But he also bragged about increased production of natural gas and oil. Very few politicians will take on those powerful lobbies, so a price on carbon is likely a fantasy in the U.S. for now. And partly because of America’s intransigence, 19 years of global negotiations on binding limits on carbon have led nearly nowhere.

2. The Carrot: Money

On this path, we choose renewables because they’re cheaper, which is far more plausible every day. In significant swaths of the world, wind or solar power is more than competitive with fossil fuels. About half of the new energy capacity put on the grid globally is now renewables, and the picture going forward is even better. Bloomberg New Energy Finance has estimated that between now and 2030, around 70% of the power generation the world will add will be renewables.

This level of investment is happening because the economics work. But it doesn’t mean we’ll be stranding many assets any time soon – the installed base of carbon-based energy systems is really large. Renewable energy does provide 21% of electricity globally, but modern renewables (like solar and wind, not hydro), which would really displace coal and natural gas, only provide 5%. Renewables are a long way from dominating electricity enough to make fossil fuel energy a bad investment.

And when you look at mobile energy use (that is, cars), the story is even clearer. To strand oil assets, we’d need to drive mostly electric vehicles or use a lot more public transportation. And while the new electrified vehicles market is growing fast, it’ll be many years until those technologies dominate.

3. The Guilt or Enlightenment: Moral Suasion

We could, in theory, see a vast voluntary movement toward clean energy by companies and individuals — even faster than what they’re purchasing already where the economics do work. But it is tough for public companies in particular to spend money when they think it doesn’t pay back in traditional ROI terms.

That said, organizations could recognize that the additional benefits from a larger, quicker move to onsite renewables — including having a hedge on fuel prices, inspiring employees and customers, and building resilience to extreme weather and grid outages — adds up to real value, even if it’s hard to measure. Companies and consumers could also decide it’s cool to use clean power. The Toyota Prius sold millions of units not because it saved money on fuel, but because of what detractors noticed was a certain smugness or pride in driving it (I’m guilty as charged).

We could also see moral pressure to move away from fossil fuels. The growing divestment movement, led by the NGO 350.org, is an attempt to make investing in fossil fuel companies morally equivalent to investing in South Africa during the anti-apartheid movement. The next generation — the students leading the campaign now — may never work for or buy from the old energy industry.

But moral campaigns are highly unpredictable and we can’t count on this path to get us there.

Ultimately, the second path is clearly the most likely, and the clean economy will dominate over time on purely economic terms — a variable cost of basically zero for renewable energy will win out. But will it be fast enough to turn fossil fuels into stranded assets any time soon? I doubt it, since companies and countries aren’t even doing all the clean energy projects that pay back quickly, or don’t require any money down. It’s not just about economics.

That’s why we need all of these efforts to work in conjunction — movement on any one of them will give momentum and credibility to the others. The social and government pressures will accelerate investment and thus improve the economics. And in return, if companies start buying a lot more renewable energy, they will help build the market, improve the economics, and give cover to politicians to take action.

In short, all three paths are valid and tough, but together, they should do the trick. They’d better.

(This post first appeared on the Harvard Business Review blog network.)

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @AndrewWinston)