September, 2009

Cover & Feature Stories

Unsustainable Sustainability

Sustainability, done right, is difficult to argue against. Unlike environmentalism or social activism or the profit motive, the existence of a tripartite system in which the interests of all three concerns must be considered prevents extremism and provides a natural tension to avoid over-investment in a particular area.

The strongest argument against sustainability is the argument for specialization. Rather than having individual companies or institutions struggle to find a balance between the environmental, social and economic responsibilities, society might be better off having specialized institutions devoted to each of these concerns.

No less a luminary than Dr. Milton Friedman, the famous Nobel Prize winning economist, wrote a seminal piece arguing precisely this point in an essay published in The New York Times Magazine in 1970, titled “The Social Responsibility of Business Is to Increase Its Profits”:

What does it mean to say that the corporate executive has a “social responsibility” in his capacity as businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers. For example, that he is to refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation, even though a price increase would be in the best interests of the corporation. Or that he is to make expenditures on reducing pollution beyond the amount that is in the best interests of the corporation or that is required by law in order to contribute to the social objective of improving the environment. Or that, at the expense of corporate profits, he is to hire “hardcore” unemployed instead of better qualified available workmen to contribute to the social objective of reducing poverty.

In each of these cases, the corporate executive would be spending someone else’s money for a general social interest. Insofar as his actions in accord with his “social responsibility” reduce returns to stockholders, he is spending their money. Insofar as his actions raise the price to customers, he is spending the customers’ money. Insofar as his actions lower the wages of some employees, he is spending their money.

The stockholders or the customers or the employees could separately spend their own money on the particular action if they wished to do so. The executive is exercising a distinct “social responsibility,” rather than serving as an agent of the stockholders or the customers or the employees, only if he spends the money in a different way than they would have spent it.

Dr. Friedman sums up the article by quoting his book, Capitalism and Freedom: “...there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

When Dr. Friedman was writing, the issue was whether individual corporations should be expected to conduct themselves in a matter influenced by social responsibilities beyond the profit motive.

The issue was hotly contested then and remains so today. Indeed, perhaps the strongest argument for adopting sustainability as a corporate mantra is that the rules have changed and it is not profitable to not be sustainable. In The Triple Bottom Line, authors Andrew W. Savitz and Karl Weber introduce the book by telling, at length, the story of how the board of the Milton Hershey School Trust was thwarted in its attempt to sell The Hershey Company. Although legally it had not only the right to do so but was, perhaps, required to do so in order to avoid excess concentration of its portfolio, which would have placed the trustees in the breech of legal requirements to act prudently.

The comeuppance of the story was that political power could be exercised by many who had no specific contractual relationship with Hershey and to whom the foundation owed no obligation. In today’s world, with the power of the media and non-governmental organizations and the ubiquitous role of government, it borders on foolishness to not reach out and consider the concerns of those who might oppose your project.

Of course, even back in 1970, Dr. Friedman knew green-washing when he saw it, even if he had never heard the term, and he said that much that would be done under the banner of social responsibility would actually be done for prudent business reasons: “Of course, in practice the doctrine of social responsibility is frequently a cloak for actions that are justified on other grounds rather than a reason for those actions.”

“To illustrate, it may well be in the long run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government....”

“In each of these... cases, there is a strong temptation to rationalize these actions as an exercise of ‘social responsibility.’ In the present climate of opinion, with its widespread aversion to ‘capitalism,’ ‘profits,’ the ‘soulless corporation’ and so on, this is one way for a corporation to generate goodwill as a by-product of expenditures that are entirely justified in its own self-interest.”

“It would be inconsistent of me to call on corporate executives to refrain from this hypocritical window-dressing because it harms the foundations of a free society. That would be to call on them to exercise a ‘social responsibility!’ If our institutions and the attitudes of the public make it in their self-interest to cloak their actions in this way, I cannot summon much indignation to denounce them.”

So it goes today. When Tesco decided to open stores in the United States and it introduced itself to Americans with a declaration that it would install America’s largest rooftop solar panel array on top of its new U.S. facility, it was making a judgment about how it wanted to position itself in America. Same thing when it announced that it would give away money to local charities as it opened each store. Although these actions may have been explained as solely altruistic activities, in reality, these efforts were almost certainly analyzed not only from the perspective of what did the most public good, but also from the perspective of what would ultimately pay off for Tesco’s shareholders.

There is, of course, nothing wrong with thinking about one’s shareholders, and Tesco’s management is well trained to evaluate the multifaceted impact of these types of actions. Doing so is complex, as one is weighing the value of a positive reputation against the cost of capital expended. In the case of the solar panels, there is an offsetting savings on electric that has to somehow get factored in as well.

It is the very complexity of weighing these various considerations that instantly illuminates the enormous problem that occurs when buyers attempt to mandate sustainability throughout their supply chain.

Going From Discussion To Dictation

There is certainly plenty of low hanging fruit, and so there is no harm in a big buyer sitting down with vendors and looking for opportunities. Perhaps by working together, empty back-hauls can be avoided in some areas — thus saving fuel, reducing carbon emissions and wear-and-tear on trucks — or perhaps more efficient packaging can be identified to reduce wasted space within the trailer and optimize transport, refrigeration and shelf-life.

This is all sustainability as a kind of higher consciousness, in which companies work to avoid inadvertent waste or damage to the environment. It is, for the most part, completely unobjectionable and, in fact, a great idea.

Once companies get beyond the discussion-and-discovery phase and into mandates, very bad things start to happen.

The problem is that all the weighing of different factors that an individual company can do in judging, whether it wishes to make a charitable donation or build a solar array on the roof, get lost in the necessity for uniformity.

No buyer has the capacity to visit every facility of every supplier and make judgments about the trade-offs that company should make. There is simply no way to know or bring into consideration the fact that company X is not investing in reducing its carbon footprint because it is spending its money hiring the handicapped and providing special accommodation for their challenges.

Knowing this type of information is not trivial. It is the essence of sustainability to consider all parts of the three responsibilities: environmental, social and economic.

Yet, for simplicity’s sake, the world will wind up getting what Wal-Mart has recently proposed: An index that is little more than an arbitrary weighting of highly limited criteria.

Some would say that even with all its imperfections, the very idea of giving out sustainability scores and using the scores to rank suppliers and promote such scores to consumers will help move the world further along the path to sustainability.

The answer, though, is that such sustainability will be unsustainable. The proposed Index not only will fail to provide any useful information to consumers or to trade buyers, it is highly likely to do real damage: Damage to companies, industries, indeed to the world economy with all the implications of that for future employment, investment in research and development and future prosperity.

Problems With Buyer- Dictated Sustainability

The first problem with such dictates is they prevent the most prudent use of resources. It is notable that the governmental efforts both in Europe and, now, the United States to reduce carbon emissions have coalesced around a cap-and-trade program. Why not just a cap on emissions? Why cap and trade? The answer is reducing carbon emissions costs different amounts for different industries, different companies and different locales. The societal goal is not merely to reduce emissions; it is to do so most efficiently.

What cap-and-trade does is that it leads those for whom reducing emissions is very expensive to pay those for whom reducing emission is very inexpensive to do so. The comeuppance of it all is that the societal goal is achieved at the lowest cost to society.

Yet when a big buyer dictates reductions in emissions, water use or any other criteria, it only has leverage over its specific supply chain. The truth is that it may not pay for a produce farm to reduce carbon emissions — perhaps an auto manufacturer can do so for a fraction of the price — but by being concerned only with its own supply chain, the buyer is actively making society poorer than it need be. It is actively requiring that money be wasted.

The second big problem with buyer-dictated sustainability is that, virtually without exception, such plans ignore the economic sphere of sustainability. Buyers who are demanding extensive “life-cycle analysis” of each product and letting vendors know that they won’t be doing business together unless these suppliers obtain either a certain percentage reduction in carbon output or hit a set level decreed appropriate for that item are actively encouraging companies to waste money.

In other words, they are adding into the mix an external factor — the ability to sell to a big buyer, such as Wal-Mart. Now, when a vendor calculates whether it makes sense to install solar panels, Wal-Mart will have its thumb on the scale, saying yes, do so, otherwise you won’t meet the criteria to sell to us.

This, however, actively leads to the wasting of capital — perhaps the scarcest of resources.

Doing this is inherently unsustainable because in a low margin business such as fresh produce, few companies indeed will survive if they have to devote any appreciable resources to things that won’t earn a legitimate return.

The irony here is that big buyers have an excellent opportunity to really practice sustainability not by dictating to vendors about what the vendors should do but by doing themselves what is well in their power to do: Encourage the strength of the supplier base by making sure payment is adequate to fund the initiatives that the buyer values. Initiatives on food safety, traceability and sustainability are expensive and buyers committed to sustainability have to be committed to maintaining a vibrant supply base.

Perhaps such a concerned attitude is too much to ask, but at the very least we can see retail sustainability efforts as focused on what retailers themselves do, not mostly a matter of claiming credit for what buyers force the supplier base to do.

There is nothing wrong with looking to do business with suppliers who share a buyer’s values, but the detailed implementation of dictated specifications is, by its nature, too amorphous, too distant and too complicated to bring about useful progress.

Doing It Right

Sustainability involves many judgments about the relative importance of different things. These decisions are best made by executives at individual companies, living in individual communities, working with their own employees.

Recently, Gills Onions, based in Oxnard, CA, provided a perfect example of sustainability done right. It developed a system to convert onion waste into electricity. Significantly, no buyer told them to build such a plant. It grew out of a search for solutions to the problems Gills faced in dealing with excessive onion waste. Put another way, the team at Gills saw this as a compelling opportunity and it was that uplifting enthusiasm that carried the project to fruition.

Dictating standards just because those standards are easily measurable is a mistake and can lead to many Punintended consequences. It may be a retailer that expressed a prudent sense of wariness best. Back in May of this year, Produce Business magazine presented its First Annual Retail Sustainability Award to Publix Super Markets, in Lakeland, FL. As part of that event, Produce Business interviewed Maria Brous, director of media and community relations, and Michael Hewitt, manager of environmental services. Maria talked about how Publix viewed Fair Trade initiatives: “We don’t like anybody coming into our house telling us how to do business. We don’t go into other people’s and do that, but we do establish the relationships for the long term.”

Well said. If the relationship is long term, then, like members of a family, one would expect each other’s values to influence one another and, eventually come into sync. Then it starts to make sense to invest money in pursuit of shared goals.

If sustainability means corporate dictates to vendors who, each day, need to prove their value in an auction, then true sustainability, which requires long-term investment, becomes impossible.

Wal-Mart Must Include Adequate Return On Capital In Its Sustainability ‘Index’ Or It Will Do More Harm Than Good

Excerpted from Jim Prevor’s Perishable Pundit, August 5, 2009

Wal-Mart announced a major new sustainability initiative by holding a “Sustainability Milestone Meeting” and issuing a statement from Wal-Mart CEO Mike Duke, which is excerpted here:

Today, we’re announcing we will lead the creation of a Sustainability Index. The Index will bring about a more transparent supply chain, drive product innovation and, ultimately, provide consumers the information they need to assess the sustainability of products.

If we work together, we can create a new retail standard for the 21st century.

We will roll out the Index in three main steps. Some of the work will start right away. We expect the rest to happen over the next five years.

As Step One, Wal-Mart will ask all of its suppliers to answer 15 simple, but powerful questions on the sustainable practices of their companies. In the United States, we will ask our top-tier suppliers to answer quickly. And internationally, each country will work with its suppliers on developing timelines.

Like our customers, we now expect more of ourselves and our more than 100,000 suppliers around the world.

Wal-Mart also issued a press release, a fact sheet and a copy of the 15-question survey it is sending to vendors around the world.

The gist of Wal-Mart’s proposal is to do three things: First, ask 15 questions of suppliers; second, work to establish a consortium of universities that will establish a database of the lifecycle impact of products; and third, make this information available and meaningful to consumers.

We’ve heard that Mike Duke is a man of integrity, so we accept at face value that Wal-Mart means good for the world by promulgating this initiative.

It is, however, a train wreck waiting to happen and will probably do real harm to the world.

Partly the problem is with the initiative itself: First, sustainability — dealing with three separate spheres of responsibility, the social, environmental and economic — is inherently complex and value-driven. Despite many attempts to posit an analogy between sustainability efforts and accounting balance sheets, there is no “triple bottom-line” that can reasonably be said to represent sustainability efforts.

This means any attempt to create an index meaningful to consumers at large will be inherently deceptive. One product may emit more carbon, but the company producing the product may not treat its employees well and may engage in tax-evasion... and there is no number or rank that can make those things add up.

Second, the data Wal-Mart hopes to collect literally changes all the time. Harvesting during different times of the day may impact carbon output; this week the vessel carrying the product is a passenger jet, next week it’s a freighter. This week orders were low, so the shipment was an LTL that took a circuitous route; next week the orders were better, so they filled a trailer and went direct.

Third, the focus on the product is itself deceptive. Very often the environmental impact of a product depends on the consumers. Do they drive in an empty car to pick up the item? What about the cooking and storage procedures in the house? It is very common for these things to account for 25 percent or more of the impact of the product on the environment.

Fourth, the initiative is biased against the economic sphere of sustainability, and this will make the world a poorer place. Take a look at the initial 15 questions being posed to Wal-Mart suppliers in the box at left. Note that there is not one single question devoted to the supplier’s prosperity. No concern that capital might be wasted. Yet capital is always the scarcest of resources.

This is a crucial component of sustainability and one often neglected.

When we went to Oxnard to see the Gills Onions Advanced Energy Recovery System, we were thrilled but, not insignificantly, we were thrilled because Gills could convert this onion waste to energy and earn a 20 percent-plus return on doing so.

Before they encourage suppliers to waste money to score better on some metrics and thus impoverish the world, we hope that the executives at Wal-Mart would remember this: If Gills Onions had built the EXACT SAME system but it cost ten times as much, it would not be an example of sustainability. It would be a horrible waste of resources that could be used for many beneficial purposes.

Yet there is nothing in the way Wal-Mart proposes to go about this to make us think it would score against a company actively wasting money to get a better “mark” on this index.

In other words, the index, if it ever happens, will not represent some kind of “natural” level of sustainability but, instead, the result of decisions to spend money to achieve a higher ranking. In many cases, however, this higher ranking will be achieved at the horrible, humanity- impoverishing cost of wasted capital.

If Wal-Mart doesn’t change this, it will actively make the world poorer as capital is wasted to improve one’s grade on the test.

There should be a 16th question on that survey to suppliers. It is the most important question Wal-Mart could ask: “Are you earning a high enough return on capital that you can justify raising new capital to expand your business?” This also is the question with which Wal-Mart could most directly help its vendors.

Many opinion leaders somehow look at people and only see mouths to feed, when people also have hands with which to build and brains with which to discover. Natural resources are not really natural at all. Oil was a worthless inconvenience until people figured out how to use it. Onion waste was just an inconvenience, too, until some smart folks figured out how to make it into electricity.

We wish Duke had taken a different tack; instead of bemoaning limits we supposedly are living under, he could’ve directed the initiative toward cultivating the natural resource of intelligence in children wherever Wal-Mart operates.

For the future will be sustainable not because we tread lightly on the earth, but because geniuses yet unborn will find ways to overcome obstacles. We will find ways to make what now looks like useless sea or barren planets a cornucopia of resources for mankind.

Wal-Mart’s gift to the world has been to make living easier for many people close to the waterline. We wish it would run a kind of talent search throughout that customer base, not to find the best singers, but to find children with the highest IQs, who could most benefit from a fantastic education paid for by Wal-Mart and who, if given the chance, will build a great, and sustainable, future for us all.  pb