Value Creation 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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December 22, 2011

Top 10 Green Business Stories of 2011

Yes, it's December again somehow: time to look back on what we've learned and oversimplify into a handy list. Here's my take on the 10 big stories in sustainability and green business this year:

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1. The usual sustainability drivers got stronger
Ok, this one is cheating a bit, but on a fundamental level, the top themes in green business haven't actually changed too much (see the 2010 list). So, rather than take up valuable list real estate with these perennial favorites and big-picture drivers, I'll quickly list them in one big bucket of mega-trends:

  • The rise of the consumer around the world, related to...
  • China, China, and China. From relentless demand for resources to bamboo-like 9% growth to vicious competition for the technologies and industries of the future, China will be the big story for a long time.
  • The greening of the supply chain. Big organizations keep asking more of their suppliers.
  • Increased demand for transparency and its close partners, (a) the quest to define and develop useful sustainability metrics and (b) the growing sustainability data explosion.
  • The military continues to lead the way on energy and climate.
  • The ongoing failure of policy at a global level (with the important exceptions of some successes/workarounds such as new mileage targets for cars and trucks and a carbon tax in Australia).

These drivers underpin a number of stories from 2011, but a few new themes came out as well. Here's the rest of my top 10 stories, with callouts for companies and examples that typify the trend.

2. Malthus strikes back: Coca-Cola takes an $800 million hit on commodity costs
Coca-Cola was not alone in facing increasing costs in 2011; one of my clients, Kimberly-Clark, took an earnings hit from record pulp prices. These companies are notable victims of a new reality: resources are constrained and input prices are fundamentally rising.

For over 200 years, from Thomas Malthus to the Limits to Growth gang, many people have made the case that it won't be long before we'll run out of food, energy, materials, and on and on. It's an idea that has enthralled many, but has seemed to be wrong. But this year, something felt different as we hit 7 billion hungry, striving humans on the planet. While "running out" isn't really the right phrase, it's clear that delivering many commodities to market is getting harder and more expensive (we don't dig for oil a mile under the ocean for the heck of it). And the dangerous mix of supply crunch and rising demand is only increasing, across nearly all commodities.

In January, China "seized" its rare earth metals (meaning it wouldn't export them anymore). In June, the New York Times declared a warming world hostile to food production. The best analysis of the resource scarcity mega-trend came from asset manager Jeremy Grantham. His analysis of commodity availability on a finite planet is compelling, thorough, and absolutely fascinating. Here's the gist: after 100+ years of fundamentally declining resource prices, the data show a rising trend for nearly every input into our society. Business as usual is no more.

3. Climate Change Arrives: Texas weather triumphs over (some) ignorance
Climate change is here. The list of "once-in-a-century" storms, floods, and droughts this year is too long to list. I know, I know — no single storm or season "proves" climate change. Was a year like 2011 possible in a world without climate change? Of course. But please. Was a year like 2011 likely? Not at all. In the words of climate scientist Jim Hansen, we've loaded the dice in favor of extreme weather events.

From Thailand to Pakistan to Texas, some areas are deluged with water, while others have absolutely none. Please look at the numbers for how dry and hot Texas was this summer (I'll wait). The data speaks for itself: Texas' heat was literally off the charts this year. What was once temporary drought is looking more like permanent change. For another angle on a changing "normal," read Jeff Goodell's piece in Rolling Stone on "Climate Change and the End of Australia." Finally, if the immediacy of the "look out the window" method of gauging climate change didn't work for some, at least one major climate skeptic changed his tune based on longer-term data. Richard Muller ran the models himself and discovered that, surprise, the thousands of scientists before him had gotten it right. It's probably wishful thinking, but I believe the climate debate is actually over (and a solid majority of Americans agree).

4. High-profile "failures" shake up clean tech: Solyndra has its day in the, um, sun
What can one say about the failure of solar company Solyndra? It certainly has become a media darling for clean tech skeptics. Soon after this quasi-fiasco, a few other stories seemed to indicate that corporate America was backing off of green tech. Google stopped its high-profile pursuit of cheaper-than-fossil-fuel renewables, and California utility PG&E quietly pulled the plug on its carbon offset program. In my view, none of this is all that distressing. So one technology and company failed miserably (and perhaps the government made a bad investment choice). And some initiatives didn't work out as planned. So what. Whether it's government money, venture capital, or corporate initiatives, you gotta place lots of bets to get some winners. These were all experiments, and you always learn from what doesn't work. But the real reason I'm not too worried is that...

5. ...clean tech is rising fast: Renewable investment tops fossil fuels for first time
Markets have a remarkable way of sorting the wheat from the chaff. While the overall carbon emissions news is not good, the renewable energy market is growing very fast. The sector is larger than most people realize, with clean tech investment hovering around $200 billion globally. Total investment in new power generation is a good indication of where we're headed, and for the first time renewables beat fossil fuels globally. Right now, the U.S. and China are entering a trade battle over solar subsidies, which tells me it's a real market now. They wouldn't be arguing if the prize were not very large.

5b. Nuclear on the outs

Following the nuclear meltdown in Fukushima, Japan, the once-resurgent nuclear industry is flatlining: generation actually fell globally in 2011, with Germany alone shutting down 8 gigawatts' worth. In September, Siemens, one of the world's largest nuclear power plant suppliers, exited the business. CEO Peter Loscher declared Germany's plans to move aggressively toward renewables "the project of the century."

6. Water rising — both literally and as a serious issue for business: Honda's supply chain gets slammed, Levi's gets creative
A list of floods that devastated lives, homes, and countries this year would be tragically long. So it's no wonder that business started to wake up to the serious danger that storms and shortages present to their operations, both from direct damage to property and from massive production interruptions (i.e., "business continuity"). Think back to the January floods in Australia which covered an area larger than France and Germany combined. The extreme weather seriously disrupted coal production, one of the most important economic engines in the country. At the microeconomic level, consider what Thailand's floods have done to the market for disk drives, or to supply chains for Honda and Toyota (which are dealing with a double flood hit from the tsunami as well).

On the use side of the water issue, companies with products that depend on water in production (beverages) or in use (shampoo, apparel) are also seeing the writing on the wall and getting creative. Levi's announced a low-water jeans production method, Unilever started asking customers to shorten showers, and beverage companies are working with farmers and NGOs to drive water use down throughout the value chain (see my last blog, co-written with Andy Wales from SABMiller). In 2011, the phrase "water footprint" became a lot more common.

7. Value chain and transparency partnerships growing: The apparel industry bands together
One of my favorite new partnerships is the new Sustainable Apparel Coalition, an impressive mix of powerful retailers, apparel manufacturers, and NGOs. The group is leveraging extensive data from Nike and the Outdoor Industry Association on supplier sustainability performance (energy, water, toxicity, etc.) for "every manufacturer, component, and process in apparel production." The goal: to reduce negative environmental and social impacts of the $1.4 trillion market for clothes and shoes.

The larger trend here is the continued growth of "open" — open data and open innovation, including new value-chain business partnerships and cattle-call contests inviting in any and all ideas. The movement has been building for years, from P&G opening up its product development pipeline early in the 2000s to the launch of the GreenXchange for sharing green patents early in 2010. But the trend accelerated this year, with GE's expanded Ecomagination Challenge and other coalitions and open competitions.

8. Valuing and internalizing the externalities: Puma Calculates its Environmental P&L
A few very cutting edge companies are starting to ask some deeper questions about the value they create and destroy in the world. Puma, in a surprise leap to the front of the sustainability leadership pack, commissioned TruCost and PwC (full disclosure: I have a partnership with PwC) to assess the value of its total environmental impacts from operations and supply chain, including carbon pollution, water use, land use, and waste generated. The total: 145 million euros. In a similar vein, Dow Chemical launched a 5-year, $10 million partnership with The Nature Conservancy to "value nature" (so called "ecosystem services") as an input into their businesses. It's unclear what companies can do with these numbers since externalities are by their nature, well, external to the regular P&L. But it's the beginning of something very important — companies are starting to understand the real value and costs of their businesses, to themselves and to society. Watch this space.

9. The people speak: Keystone and OWS
Speaking of getting companies and governments to think longer term about value and costs to society: against all odds and expectation, the protests against the Keystone XL pipeline from Canada — led most prominently by uber-environmentalist Bill McKibben — were successful (for now). And what can one say about Occupy Wall Street? The movement is, in part, about this larger question of value and values. Do we value the right things (equity, fairness, justice) or just promote growth and profit above all? Currently, our businesses are driven entirely by quarterly profits. Pursuing the short-term payback can cause a firm to deviate wildly from actual, long-term, sustainable profitability. This disconnect was bound to stir some passions eventually. Whatever your politics, ignoring or dismissing this movement is a big mistake. The concerns underpinning the anger out there stem from concern about what's good for the long-term, and what's truly sustainable. None of these questions are going away.

10. A path to sustainable consumption begins to emerge: Patagonia asks us to buy only what we need
Perhaps the most heartening business story of the year came from perennial thought (and action) leader, Patagonia. Its Common Threads campaign/business model questions consumption at its core. The company announced that it would take back its clothing and refurbish, resell, reuse, re-whatever. The website proposes a grand bargain - we make clothes that last, and you don't buy what you don't need. A holiday ad got more specific and demanded we "Don't buy this jacket." Patagonia is testing new ground and it's not a gimmick — it's a sign of the future.

Looking Forward to 2012 and beyond: New business models coming
Patagonia has always been at the leading edge; it was one of first companies to buy organic cotton or to turn recycled plastic into fleece. Now it's showing the way to new business models. I've written about this kind of heresy before, but the few examples out there are generally B-to-B (Waste Management, Xerox). Patagonia's move is a warning shot over the bow that the consumer-facing consumption question is coming. The near future will hold more questions about how businesses can and should operate in a resource-constrained, hotter, drier (or wetter) world. And companies will increasingly question the wisdom of focusing on quarterly profits. It won't all come to fruition in 2012, but it's on its way.

As usual, I'm sure I'm missing many great stories in my list. I look forward to your suggestions. Happy holidays and Happy New Year!

(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)

March 20, 2012

Corporate Sustainability Efforts -- Feast or Famine?

Is corporate sustainability on the wane or growing more important to top executives? At the beginning of the year, two big-picture reports on the state of green business painted divergent pictures.

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In GreenBiz's annual review of 20 indicators of "how business is doing" on green, we learn that 6 of those indicators are on a downward trend. But in the report "Sustainability Nears a Tipping Point," MIT and BCG prove their point with a fast-rising graph of companies that recently put sustainability "on the management agenda."

While they seem at odds, both views are right — companies are no longer ignoring sustainability; most big companies now have someone focused on it, at least in part. That's why execs can honestly tell MIT that it's on their agenda. But with sustainability often siloed into just one person or department in each organization, it's hardly a surprise that, at the same time, we're seeing some loss of momentum. Sustainability has moved from being a hot, new management trend to being just one more thing for execs to keep an eye on: for many it's become a check-box exercise..

This structural gap reveals the fundamental misunderstanding about what sustainability really means for organizations. I've seen it time and again in the companies that I work with or study. For them, sustainability is a thing to tackle, a functional area; it's a what, like marketing or product development.

But sustainability needs to be viewed as much more of a how concept, like quality or innovation. It's a way of operating that creates the most value when it's embedded throughout the organization.

Of course companies have distinct quality or R&D departments and professionals, but the most committed companies drive the thinking into every aspect of the business. This is the mindset that sustainability needs to engender throughout an organization. And as with quality, this isn't just about ethical or aspirational hopes — acting with sustainable values, for example, as covered well by many, including Dov Seidman in his book How.

No, I'm talking here about the more prosaic, everyday, tactical, blocking-and-tackling of business. Sustainability pressures force changes in how we build our supply chains, how we design and manufacture products, how we deliver services, how we create and execute our business models and strategies, how we develop financial metrics to measure success, how we attract and retain 21st-century, holistic thinkers, and on and on. So sustainability pressures, if acted on, drive us to create and build better products, design more efficient services, execute better, and hire the best. Those are goals that reach throughout the entire organizational structure, and they're actually enabled by sustainable thinking.

Given the scale of these goals — and the global challenges we all face — putting just one (or a few) people against the what of sustainability is a woefully inadequate response.Resource constraints and rising input prices; increasing demands from customers, employees, and consumers; the risks of severe business continuity disruptions from water, climate, or labor problems in the supply chain...the list of big pressures grows more complicated every day. And these issues require a full-court press from all aspects of operations.

It's become a mantra in the sustainability world that green needs to be a part of everyone's job. Of course that's true, since detecting risks and innovating around them will often fall to those closest to the ground (hint, that's rarely the c-suite). But most companies are missing a big step.

To conquer a how you need more than just a mantra. You need a significant investment of resources in time, top-leader focus, people, and money. You need people to ride herd and drive the agenda — to do the cross-cutting analyses such as lifecycle assessments, to track and get a handle on the many diverse and complex issues, to present a unified front to employees and external stakeholders, to question business models and find new, heretical ways to operate and serve customers...the list goes on.

There's no "ideal" structure for sustainability efforts, just as no two companies would tackle innovation the same way. Most large companies have now appointed a lead on sustainability, but have provided limited financial support and fewer human resources. There are exceptions: a few well-known sustainability leaders, such as Starbucks, Nike, and Coca-Cola employ central teams with specialists in areas like water, climate, and packaging, as well as reps spread out around the organization.

One of my clients, Kimberly-Clark, a much quieter sustainability leader, has a centralized team of 5 to 10 sustainability-only managers (and that's only part of the 50-plus central staff covering environmental, health &safety (EHS), OSHA, and, yes, quality). More importantly, Kimberly-Clark has another couple dozen professionals in dedicated sustainability roles (again, not EHS) embedded in business lines and geographic regions.

But even the leaders with robust organizations are rarely putting much money specifically into sustainability-driven innovation or disruptive changes that might dramatically reduce the value chain footprint of the company's products. Let's be honest: It's very hard to assess how much is "enough" when you're investing in a strategic priority. But it helps if the organization first defines it as a strategic priority. And given the ever-rising costs of under-reacting to sustainability pressures (such as direct costs from rising input prices, or business discontinuity risks from extreme weather), it's clear that companies should put a lot more people and money against an agenda as large, complicated, pressing — and let's not forget profitable — as sustainability.

Only with significant investment can we move down the path to sustainability integration and real, ongoing, full value creation. A robust network of sustainability professionals within a company — whether or not they sit in one "department" — may need to obsolete themselves over time. But until then, sustainability can't drive anything — it will just remain a nice side show.

(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)