Force For Good

Beyond Accounting – A Miracle on Wall Street AND Main Street

January 6, 2009

Tomorrow's Company and the Institute of Chartered Accounting and Wales today ‘soft launch’ Beyond Accounting, a programme of dialogue and discussion looking at best practice in ensuring that the ‘non-financial’ impacts of business are fully taken into account in business decision making. Over time, we want to widen this this programme to include detailed research and inquiry, building on the excellent paper by Graham Hubbard of Adelaide University which does such a good job in mapping out the agenda for discussion.

In so doing we are exploring in greater depth the conclusions of our inquiry - Tomorrow’s Global Company: challenges and choices - that business leaders and others need to redefine success, because, in a world in which there are increasingly no externalities, performance metrics need to take into account the wider impact of business decisions.

The importance of this initiative was underlined by attending the recent Accounting for Sustainability Forum, hosted by HRH the Prince of Wales, in December 2008. In his opening remarks, the Prince commented that “There are a number of parallels that can be drawn between the current financial crisis and the looming, and even more alarming, environmental crisis."

It is genuinely remarkable and extraordinarily prescient that the Prince of Wales has for so long been exhorting us to face up to the consequences and contradictions of our single-minded pursuit of material wealth and growth.

As a result he is perhaps uniquely well placed to ask that we consider the underlying causes of the credit crunch and, as he dubbed it, the ‘climate crunch’, and to recognise the way in which the causes of both are inter-linked and mutually reinforcing: over-consumption and indebtedness, over-confidence in market and regulatory systems and short-termism - also lie at the heart of a much more fundamental and alarming crisis, that of the "climate crunch".

As the Prince concluded – and this initiative very much seeks to address:

“A vital building block in this process is better information, and better and more comprehensive approaches to measurement. (my emphasis)

We have no shortage of information about the financial dimension. We can see, for example, the prices of financial assets and the quantum of lending in a clear and measured way. However, the consequences of climate change and of over-consumption of finite natural resources are not as visible and quantified; and to add to this our current systems of reporting and accounting are too focused on measuring short-term financial impacts with values rarely given to the ecosystem services which sustain us. In other words, we lack the tools and systems to assess and report information about broader and longer term issues which, in the great scheme of things, are so much more important for us, and for our children and grandchildren, than any earnings per share or debt to equity ratio.”

Our programme will consider financial and non-financial measures alike; as well as the need to recognise short and long-term impacts; and economic, social and environmental impacts. It is important to consider each aspect separately distinctly, if we are to solve the puzzle that this 2 x 2 x 3 ‘rubik’s cube’ presents us with.

All too often we conflate the non-financial with the social and environmental – because we live in a world where both our mindset and our tools frame and reinforce our view that it is only the economic that can be financially measured.

This logic is of course now being called into question as we begin to price carbon and see new methodologies being developed to better assess the economic cost of our destruction of nature – which has so powerfully been set out by Pavan Sukhdev through the EU TEEB programme, looking at ‘The Economics of Ecosystems and Biodiversity.’

We do of course live in ‘a material world’ – for the time being at least it is true that financial measures are far more comprehensively developed in relation to economic performance, but given the collapse of financial values that we are witnessing all around us the deeper and more disturbing truth is that all of our measures of value, wealth and success are flawed and inherently limited. Any, on their own, is unable to provide a reliable measure of sustainable value.

So join with us, as we reflect on what has been accomplished already, what we can learn from those achievements, and what is yet to be done to develop metrics of and for sustainable value.

In thinking about this blog over the holiday break I was struck by the uncanny relevance of that old Christmas weepy and classic, Miracle on 34^th Street – in it there is the following exchange between the immortally named central characters Fred and Doris:

Fred: “Faith is believing in things when common sense tells you not to ... don’t you see its not just Kris that’s on trial, its everything he stands for – its kindness and joy and love and all the other intangibles

Doris: Oh Fred, you’re talking like a child, you’re living in a realistic world, and those lovely intangibles of yours are attractive but not worth very much. You don’t get ahead that way.

Fred: That all depends on what you call getting ahead. Evidently you and I have different definitions.”

For this is a programme which is about seeking common measures for shared definitions, recognising the full impact of the decisions, now and in the future – the Rubik’s Cube for the 21^st Century, which to paraphrase Obama, can create the Miracle on Wall Street and Main Street alike.

The accounting profession and its role in the financial crisis

January 6, 2009

The accounting profession and its role in the financial crisis

(The Causes of the crisis – 2)

Is fair value accounting to blame for the current crisis?

That was the subject for debate among 150 Professors of Accounting and Economics at a “practitioner Forum” within the Contemporary Accounting Research/ Journal of Accounting and Economics conference to which I had been invited to speak in Hong Kong.

Professor Katherine Schipper of Duke University and Professor Ross Watts of MIT represented the academics. Keith Pogson – Ernst & Young’s Managing Partner in the Far East and Tommy Fung of AICPA and Ernst & Young, represented the practitioners, with Professor Eli Bartov of Stern School NY in the chair.

I learned a lot, and not what I expected to learn. My conclusion: the problem is not just “fair Value” and the uncritical subjection to current market prices at the expense of future values, but a wider failure in which accountants are becoming technicians where once they were professionals.

The current crisis revealed itself to most senior accountants and people “in the know” by the autumn when the second quarter of 2007 results were released by banks like UBS and Merrill Lynch and huge losses were revealed as the asset-based securities linked to subprime loans started to find their proper level.

The path to disaster is well known. People sold subprime mortgages – the debt converted into “securities” which consolidated various different grades into packages which were then “insured” giving high ratings by credit agencies and “protected” by Credit Default Swaps and sold on in large numbers by people who had no idea where the debt had originated from and what was the true likelihood of repayment.

This debate particularly concerned the role of the accounting doctrine of “fair value”. This is the idea that you value assets at the price at which they can be sold in other words you mark them, as far as possible to market.

The problem was with assets for which there is no public and transparent market. The US accounting rules then take you a logic of getting a valuation from other, parallel markets that have similar instruments and finally, if that fails, basing the valuation on formulae that have been constructed by industry insiders “marking to model”.

At every stage in the process, accountants were conscientiously doing their job. They were trying to follow the accounting rules and conventions.

But cumulatively, at least, that was not good enough. Several speakers said quite candidly that they could see that the whole subprime think stank. Yet in their professional capacity as accountants, none of them could find a way of getting the authorities to notice. This has interesting echoes of the blog so recently posted on this site by Bill Sharon (Risk Management is Dead, Long Live Risk Management 4 January 09).

Equally most speakers agreed that by the time they were reduced to the “mark to model” valuation option, they were groping in areas they did not understand and neither did the purveyors of these strange asset backed securities, nor did the rating agencies that evaluate the risk.

It would seem that banking regulators who were approached by accountants at this time may have been more concerned with “not rocking the boat” than seeing the true valuations revealed.

So here we have a systemic failure, in which the leading accounting experts in the area knew there was a serious problem, but felt themselves quite unable to blow the whistle in any effective way. They were, in the more abstruse cases, using a valuation model which they knew to be complex and opaque – not so much “Mark to market as “Mark to Myth”.

They didn’t blow the whistle about the problem overall. They didn’t put a health warning on the robustness of the opaque valuation methods. And there appears to have been no systematic attempt to “kick the tyres” – to understand the true origins of the debt and talk to some of the people whose fragile creditworthiness was ultimately holding up the whole flimsy edifice.

To listen to most seasoned accounting professionals, this is not a problem of accounting. Their job was to follow the accounting rules.

The panel talked like technicians, not professionals.

To me accounting is a profession, not a mere exercise in compliance and interpretation of rules. How could it be that intelligent professionals knew that subprime was a house built on sand, yet were complicit in its continuance for nearly a year after they were aware of the problem.

So the lessons from the crisis for accountants, to me, look like this:

1) How do we reconnect our work with the real human impacts that underpin the financial outcomes that we end up assessing? How, in future, do we get back to kicking the tyres, so that we refuse to rely on the formulae of risk rating agencies and act in future on our own awareness of impacts

2) When we spot an anomaly that is systemic – s many individual accountants did from Q3 07 onwards – how do we fulfil our professional responsibilities by blowing the whistle? At present the fear of many is that if they say anything they may either lose business from companies with a vested interest in continuance of the mis-valuation. How do we find a whistle blowing channel that can ride over these more narrow interests? And how do we get the regulators to listen?

3) Why do accountants see their responsibilities stopping at the boundaries of accounting practice? How can we reconnect them with the real world of wealth creation and societal impact on which all risk and opportunity ultimately depends?

4) How can we separate out the legitimate need to obtain a hypothetical market value at period-end – for accounting purposes - from the behavioural impact that by focusing us on the realisation value, drives people to think of economic activity in casino rather than real and continuing value creation.

There are some tentative answers offered in the debate jointly organised by Management Today and Tomorrow’s company that appears in the January edition of Management Today.

The business of Culture as the culture of Business!

January 5, 2009

“A culture is an organization’s collective mind-set - its beliefs, intentions, and memories”, said Mark Youngblood in his 1997 book, Life at the Edge of Chaos: Creating the Quantum Organization. “Organizations that will survive and prosper in the twenty-first century will be fast, flexible, responsive, resilient, creative, balanced, and full of vitality. He calls them [these companies] Quantum Organizations. Quantum Organizations, in direct contrast with the machine-like design of industrial era companies, operate using the principles of living systems. They are organic webs of life: dynamic, interconnected networks of relationships that are constantly learning, adapting, and evolving.”

Quantum or not, an organizational model based on his prophetic understanding of the new millennium business world is urgently needed today. A key ingredient for building the firm of the future is the setting up of a culture that can evolve, sustain and grow. Relationships, learning, adapting, evolving – simple to use words – not so simple to understand or, for that matter, apply in a particular context. For one, the mechanistic worldview [what became the order in the Industrial era] suggests the need for rigid structures. Today’s realities are quite different. Relationships are being formed without any physical contact: very deep relationships are being founded on areas of common interest.

In my opinion, the Internet has promoted globalisation as a natural way of doing business in today's world. It has also made "individualised" infrastructure ubiquitously available. Which means that ways of working have changed from mono to network. As a natural outcome, all monolithic organisations are morphing into networked enterprises; all solo endeavours are seeking interdependence.

I wonder if this could point towards building a business culture, especially valuable from my point of view, for small entrepreneurial ventures. Building a culture consciously, methodically and based on a value system that reflects India’s ethos, history and diversity. I come from a generation that has taken pride in the American ‘twang’ and has been celebrating capitalism, without quite understanding that it won’t work in its yankee avatar in India. Do we understand our own contexts? It’s high time we did.

In my view, India has much more to offer besides low costs if we could do two things. First, get rid of the disposition leading to ‘ji huzoori’ and second, gain self respect by being able to ‘show’ the world the richness of India’s intellectual heritage. At the risk of sounding too critical, I think the answer lies in the work culture we've come to accept. It lies somewhere in our endemic obsession with technology and our fascination for tools. We have learnt to accept that our only responsibility is to get ourselves specialised to a level. Somehow, this narrows our potential to becoming a headcount number for the US businessman. A commodity that he can monetise in his organisation's annual report.

In my company, Ideafarms, we consciously built a culture based on the values I have espoused. Admittedly we took it for granted that people who came on board along the way would automatically imbibe the founding values of our company culture. My big learning has been that one has to grab every opportunity to talk about these values while, at the same time, living them.

So my point here is to show the culture within a culture – my business culture within my country’s culture. For centuries, India has helped shape world thinking. Concepts like “shunya” (Zero), “satyagraha” (Non-cooperative non-violence), “karma” (Motivation sans motive), and individuals such as Gautama Buddha, Swami Vivekananda, Mahatma Gandhi, Pandit Ravishankar, Zubin Mehta have stamped enduring impressions on the world’s cultures. The alluring, hand-woven carpets of Kashmir, the exquisite pottery of Khurja and the scintillating silk sari of Kanchipuram, all demonstrate a prolific unity in India’s art, craft, technique and ability.

I am continually spurred-on by the possibilities that emerge if we combine these portions of our native ethnic character with new global technologies. And naturally, for me, our biggest contribution to ourselves would be to retain our Indian-ness. In thought, word and deed. And to build a work culture that the world would try to emulate as a tribute to the richest civilization in the world!

On that high note I wish you, dear readers, a very Happy New Year! 2009 is our year!

Risk Management is Dead, Long Live Risk Mangement

January 4, 2009

http://sorms.blogspot.com/2009/01/risk-management-is-dead-long-live-risk.html

Lessons from the Crisis - read Robert Kuttner

January 3, 2009

Lessons from the financial crisis

Happy (Western) New Year

I am writing this from Hong Kong, where I am attending the Special joint Symposium organised by Contemporary Accounting Research and Journal of Contemporary Accounting and Economics.

My immediate task is to contribute to a session tomorrow on corporate governance which asks the question: The Global Financial Tsunami – a problem of corporate governance?

How do we explain the financial tsunami that hit us in 2008? And what do we do about it in 2009?

I need to check the exact reference, but I read somewhere that Dick Fuld, formerly CEO of Lehmann Brothers said that whenever he saw a hedge fund manager he wanted to hang him upside down and watch him die slowly. That, he is alleged to have said, would give him real satisfaction.

.The blame game is the easiest level at which to operate. In the UK and elsewhere there have been successful – and enthralling TV shows where hedge funds, bankers, regulators, and governments were all put on trial to see who is responsible. Others in the firing line have been consumers, and the directors of banks, the risk assessment agencies. Questions here have included

We were warned about the orgy of debt and told this could not last. Why did governments, central bankers and individuals not do more about it?
Why were investment banks and other intermediaries allowed to sell products which they knew were complex and which indeed were designed to be incomprehensible?
Why did the US Federal Reserve not act to prevent the exploitation of sub-prime when this was identified as a risk in its 1994 legislation? For 13 years the Fed refused to use the authority that Congress gave it to police sub-prime lending

Then there are the macro-economic explanations and the search for equilibrium.Many have gone back to John Maynard Keynes. Keynes wrote about the powerful effect of uncertainty in an economy, and the way market psychology could defeat attempts to find equilibrium by lowering the cost of borrowing.

This is turn leads into explanations that lean more heavily on economic history and geo-political evolution. Money has always been a fragile thing. It depends so much about trust and having arrangements that allow for steady and not cataclysmic adjustment. At different times, different commodities or currencies have been entrusted with the leadership to be the reserve currency of choice. This crisis and what follows can be seen as the working through to end of the era of the dollar.

Or you can play the mirror image of the blame game. This is the (somewhat fatalistic) “no-blame “ game. It is human nature. There are always going to be bubbles. Human beings will always have sheep ( or should that be lemming?) – like tendencies

This in turn leads to a debate about the ethical underpinnings to risk management. The no-blamers take the view that since human beings will inevitably behave in herd-like ways, we should protect ourselves from the consequences of our nature by appropriate regulation. The free-marketeers object that this will kill innovation. The Tomorrow’s Company view has always been that there is interdependence between market freedom and market participants’ commitment to operate by strong values. If you want freedom, earn it by proving yourself trustworthy.

It is rare in the investigation of any disaster for all the responsibility to be pinned in one place. Take the Columbia space shuttle disaster, where the investigative report was released recently. It wasn’t down to human error. It was partly down to design, and partly down to a number of operating procedures. Training would have made some differences…and so on.

I am interested in how we learn and how we do things better in the future. For anyone who is seriously taking this practical perspective, it is essential to helicopter abut the one dimensional explanations, and to take a system view of the crisis.

What is it about the way we design our system, and the way we operate it, that made such a crash more likely? What would the design of a better system look like? And how do we get from a to b?

To me the, the financial tsunami of 2008 is symptomatic of a number of deep systemic failings, made worse by the weakness of, in order of their contribution

1)investment bankers and intermediaries who created the opaque products and

2) other bankers who willingly provided leverage

3) regulators

4) all those supposedly involved - through their ownership responsibilities - as stewards of companies and who failed to manage their investors and society’s risk (See our Tomorrow’s Owners report on this)

Together with Tony Manwaring, Arthur Probert, Clem Broumley Young and other colleagues, I am now trying to help piece together a diagnosis that will lead us our own policy recommendations.

I would like to repeat Tony’s invitation to all those with thoughts on this to contribute to the debate.

In the meantime I commend to your attention the US commentator and policy expert Robert Kuttner , in his evidence to Congress,

http://www.nakedcapitalism.com/2007/10/robert-kuttner-congressional-testimony.html

Kuttner combines all the above perspectives, especially uing his historical knowledge to make parallels with previous crashes and a clear diagnosis in which he blames the regulators for being seduced by the “self-correcting” nature of the free market.

And Kuttner begins to get close to the kind of systemic analysis that I think is necessary.

Indeed he closely parallels previous work by Tomorrow’s Company in the UK by identifying a lack of transparency and conflicts of interest as two of the key market problems. He adds a third, which is leverage.

He also makes the key point that regulation is not only about investor or customer protection. It is also about protecting society and the system generally from systemic risk – from the aggregate of self-interested behaviours that threaten the stability of the system.

Thanks Robert - I intend to build on your analysis.

"The Birth of Sustainability 2.0"

December 31, 2008

As I was idly scouring the internet this chilly New Year's Eve, I found some news to warm the cockles of my heart. And it seemed such a good way to end the year that I thought I would share it with you.

It seems that earlier this month a whole load of companies participated in the "Sustainable Brands 2008 Conference". Companies including Procter & Gamble, Coca-Cola, Johnson & Johnson flew their staff (carbon-offset, no doubt) to Miami Beach in order to "share ideas about how to create new business value in today's rapidly changing landscape".

But it seems this was no ordinary corporate jamboree.

For Peter Salmon, writing on the 'leading source of CSR and sustainability news' CSRwire,"the conference was one of those definable change moments, the birth of sustainability 2.0".

"The sustainability debate", he says, "has been positioned all wrong -- as an environmental problem, as something business needs to account for, a risk to be managed or a tax to be paid. And now, in a volatile global economy and competitive environment, sustainability is being pushed aside as a luxury."

"But it's not an and/or situation. The answer is and/and. Sustainability 1.0 - compliance, CSR, reduction, limits, is over. Sustainability 2.0 is here. Sustainability 2.0 is an outcome-focused all encompassing approach. It's a process that builds prosperous businesses creating innovative products and services; businesses founded on good financial results, responsible use of resources, and community well-being."

Of course Tomorrow's Company has been saying all this for years. And its members have been listening.

But it is good, I think, to end the year realising that in the midst of all the doom and gloom, some more people are beginning to get it.

Here's to a great 2009 !

The madness of Madoff’s Ponzi scheme fooled the unwary and the greedy

December 17, 2008

The scale of the fraud, amounting to some $50 billion, committed by the former head of the Nasdaq market Bernard Madoff beggars belief. His so-called Ponzi scheme—first investors paid with money from subsequent investors without any real growth in investment returns—was madness indeed. The 10 per cent return on investments that he was offering was simply unachievable let alone unsustainable.

How did such a scandal come about? It appears that the Securities and Exchange Commission hadn’t examined his books since September 2006 when he first set up the investment scheme. There was simply no regulation. And investors trusted his reputation.

It has left me reflecting on the nature of trust, and who we should or should not trust. Should investors have been more wary of a rate of return that seemed too good to be true? Were investors themselves to some extent to blame, for being too trusting, indeed too dazzled by the high returns? In other words, plain greedy. Were they too gullible? Could they have been more questioning, more cautious? When something appears to be “too good to be true”, then we can be sure that is.

It is all too easy to believe that some individuals can do no wrong. After all, wasn’t Madoff the head of Nasdaq? He had already built a sound reputation, or so it seemed. We tend to idolize people. We put them on pedestals. In the old saying, we treat some people as gods and others as dogs. We can’t quite believe that trusted banks and financial investors have put millions of dollars into artificial pyramid or Ponzi schemes. We so trusted their judgement that when they are exposed as fraudsters we can’t quite believe their audacity, their crookedness—and our naivety.

Yet their hubris catches them out and we are left aghast. We realise that we have subconsciously, and without questioning, treated them in John Lennon’s youthful brag as “more famous than Jesus”.

The appalling and sad thing is that when those whom we have idolized turn out to have feet of clay then trust is also destroyed. We become exceedingly wary—and probably rightly so. For, human nature being what it is, nobody should be taken wholly for granted, or put on a pedestal. It was the same situation with the rogue trader Nick Leeson, who brought down Barings Bank in 1995 due to his ever more desperate bets on market movements without any supervision of how he was using the vast assets allocated to him by the bank. It was the biggest banking scandal of the 20^th century. Have we learnt nothing since then?

Lord Skidelsky, writing for the Project Syndicate association of newspapers (19 November) in an article headlined ‘Morals and the Meltdown’, laments that in the current secular climate “the West’s worship of false gods is a proposition that cannot be discussed, much less acknowledged”. He fears that “theological language that might have decried the credit crunch as the ‘wages of sin’, a come-uppance for prodigious profligacy, has become unusable.”

So by all means let us build statues on pedestals to the great and good once they have departed this life and can withstand the judgement of history. It is indeed right to preserve their memories for all time—just as it has been right to tear down the statues of false and murderous gods such as Saddam Hussein.

But in the meantime let us be exceedingly wary. Let us have the regulation of proper scrutiny—and let no one be blinded by the false gods of easy money and naked greed.

Michael Smith is the author of Trust and Integrity in the Global Economy and a co-ordinator in Britain of Caux Initiatives for Business.

The Piezoelectric Dance Floor

December 17, 2008

Pulsing beats, thumping bass, flashing lights, dancing, and piezoelectricity? Yes, piezoelectricity. Piezoelectricity, the source of energy found commonly within the innards of a quartz watch has club-goers raving for this green source of energy—literally. Recently, piezoelectricity technology has moved from the wristwatch to the dance floor—the actual floor—to harvest the kinetic energy of dancers.

At the Surya night club in London, the dance floor is equipped with a “bouncing floor” composed of springs and power generating blocks which, when compressed by the weight of a dancing clubber, produces a small electrical current via piezoelectricity providing a significant part of the nightclub’s electrical needs. This technology, along with wind turbines and solar panels installed at Surya, is poised to create an (almost) completely sustainable nightclub—the first in the world!

The application of the piezoelectric flooring certainly has more uses than high energy nightclubs. Perhaps, the technology could be rolled out on sidewalks, at busy bus terminals, train stations, airports, or even shopping malls where green energy could be harvested at a large scale. Call it “crowd-sourcing” of energy, if you will!

I find it fascinating that a technology once reserved for little pieces of machinery such as wrist watches can be extrapolated and magnified to produce enough power for an entire building.

Where else do you see this technology applied? Do you feel comfortable knowing you’re clubbing on an energy-producing, piezoelectric dance floor?

I know I am. Time to get my dancing shoes out (then again, how about shoes with piezoelectric soles?)

Marketing Matters - Is frugal the new cool?

December 15, 2008

What role will marketing play in Tomorrow's Green Economy? We started the year looking at 'green marketing' and I was brought full circle by John Grant's latest blog, A Big Year When Not Much Happened?, which is well worth a read:-

John reinforces his argument for the increasing importance in authenticity in what is produced and how it is sold and goes onto argues that the creativity and 'knack for catching human desire' of marketing must play a vital role 'to help people reimagine the the world ... and clients to re-imagine their markets'.

For me the interplay between what is and can be, and is seen as being both profitable and sustainable to produce, is one of the central dynamics that needs to take shape as we enter the 'age of sustainability'.

One thing that I think has happened this year, with which we are only starting to come to terms, is that sustainable forms of creating value may well now be fast becoming the new mainstream - given that long-standing forms of value creation have quite literally lost so much of their financial value in recent weeks: what is lacking is the narrative, the stories and the language, which catches up with this new reality, and helps us all to come to terms with this profound role reversal and what this means for the future.

Creating the (force for good) 'learning zones' within which we can firstly think about the future shape and patterns of production and consumption in Tomorrow's Green Economy, and secondly, create the compelling stories which mean we can all take in and learn from what is going on, are going to essential - a major part of the Tomorrow's Company agenda for 2009.

To highlight some key arguments made by John with apologies to him for my editing ...

2008 will I suspect go down as a turning point year in sustainability. On the surface it seems like much less happened – there was less ‘news’ and less hype. But look beyond that and you can start to see this as the year when things started to turn in a new direction.

Even after the financial markets meltdown, in October a global survey found that nearly half (43%) of people around the world wanted governments to make climate change a higher priority than the economy.

In consumer markets we are finally seeing a new restraint as Andy Bond the CEO of Walmart subsidiary ASDA put it: “We are moving into an area of the frivolous being unacceptable and the frugal being cool. A whole new consumer generation will come out of this.”

So far we have seen green marketing as something relevant to perhaps the most sustainable 5-10% of what people buy; the green brands, but also the hero products (Prius) and major corporate reforms (M&S Plan A). Now we need to focus on the other 90%.

My own thoughts are increasingly focused on what role marketing can play in the building of a better world overall. Both a positive role in accepting its opportunities but also a self-disciplined role in accepting its responsibilities (My emphasis)

Why marketing? We need the creativity, the knack for catching human desire, the humanity and imagination to help people re-imagine the world, to help clients to re-imagine their markets.

It is ... about ‘how’ – finding whole strategic platforms to transform markets at the same time as being seen to lead. By transforming people's buying criteria - for instance from ticket price to lifetime cost, sustainable new markets can be built.

In these future markets:

- people will value the factors which are truly sustainable, not the ones which are ‘cute’ or ‘charity like’ but those which really do promote low energy, low carbon emissions, low waste, workers welfare, health and so on

- people will continue to reclaim brand meanings; brands will be more authentic and green villains will increasingly have their right to advertise and promote their brands curbed.

- faced with this companies will have to decide whether to go with their product lines or their brands. Range Rover might make an excellent brand of walking shoe, mountain bike, outdoor clothing, walking tour, slow travel holiday and so on…. And it could still make great (low energy) farm and wilderness worker vehicles. It just isn’t tenable for it to remain a gas guzzling fantasy car at the same time.

The question for every marketing client is very simple. Do I want to be part of the new world, which will in large part be a sustainable world? I’m not pretending it is an easy question. It will require a difficult transition.

Bystanders and Victims

December 14, 2008

As someone who has been in the risk management business for fifteen years and who has repeatedly come up against the wall of mathematical certainty their argument is both appealing and validating. The sense of being right in the end however is somewhat tempered by the suffering that we are all experiencing and likely to experience for some time to come. Nevertheless, it’s nice to read thought pieces by experts of the reputation of Taleb and Triana that repudiate the single-minded reliance on mathematical models and their false underlying assumptions.

But there is something troubling about their use of one of New York’s most infamous murders as an analogy. They suggest that the bystanders, in this case the risk managers and regulators suffered from apathy. I would suggest that apathy is not a state of just not caring; it is actually active decision making that just feels like not caring because it is devoid of human compassion. We seem to have convinced ourselves that our financial world is somehow disconnected from our ethical responsibilities. We are learning that nothing could be farther from the truth.

Risk and the Social Contract

December 11, 2008

There are many definitions of the social contract. Socrates spoke about it when contemplating his decision to accept imprisonment and death rather than exile. Locke wrote about the compromise of natural laws in the service of a civil society and the right of rebellion when a government no longer acted in the general interest. Rousseau rejected representative democracy and advocated “direct democracy” but also included the idea of a “general will” that was greater than the individual ego. These ideas and many others have influenced the establishment of social policies in democracies and were most recently considered with the establishment of the European Union.

There are various models of the social contract within the EU that range from a near welfare state in the Nordic countries to an Anglo Saxon approach that limits itself to activities associated with restricting the effects of poverty. Regardless of the definition it is reasonable to assert that the US concept of the social contract is the most limited version in use in the industrialized western nations. While Europe leans towards Rousseau’s ideas, the US is more in line with Thomas Hobbes’ thinking. Hobbes believed that people ceded their rights to the state in return for security. People in his world operated out of self-interest.

We find that thinking in how we address the issue of employment. Without the benefit of a legal contract that states otherwise, we are all employed “at will” (sometimes referred to as the Horace Gray Woods rule); meaning that we can be terminated at any time for any reason or no reason at all. This idea has always been part of American business, but in practice many Americans did not experience the extent of its impact until the beginning of the outsourcing process that began in the 1980’s and accelerated in the 90’s and the new millennium.

The argument for employment at will from an economic perspective is that it makes companies more nimble. With the ability to reduce headcount quickly an organization can streamline operations, strip itself of non-core activities and shrink and grow in a more responsive manner depending on market conditions. Looking at the numbers on a sheet of paper it seems to make a lot of sense. But there is another side to this coin of expediency. Employees have become hip to the system.

Once the idea sinks in that the company you work for will act in what it perceives to be its own self interest and does not owe you any loyalty, people begin to behave in the same manner. Jobs are not careers in a particular organization; they are opportunities to develop skill sets that will make the employee more marketable, either within or outside of the company. There are some benefits; this has the effect of providing companies with highly motivated people who operate at the top of their profession. From a different viewpoint it also populates a company with individuals operating out of self-interest whose actions may or may not conform to the vision and mission of the organization.

IT people want to build new systems. HR people want to develop training programs and compensation programs. Facilities people want to build-out space. The context to evaluate whether any of these efforts is useful is often lacking. Most people in these operational disciplines are not consulted during the development of a corporate strategy; a strategy that is often not communicated once it has been established.

Risk from the perspective of the balance sheet is calculated by the ability to manage expenses. The cost of personnel is often one of the top two categories in the expense column, only exceeded in some companies by the cost of real estate. What people think, the depth of their skills and the context for their motivation and decision making don’t enter into the assessment of risk to the company. Our social contract with the people in our economic system is addressed through abstract financial calculations.

The rate at which people loose their jobs over the next year will accelerate. The benefits of employment at will have the appearance of allowing US companies to deal with the economic crisis but in fact they are creating a risk that will come back to haunt them. The greater the gap between the self-interest of a company and the self-interest of their employees, the greater the risk that strategy will not be widely communicated or, more likely, ignored. We have traveled this road for the past thirty years, outsourcing our work in the service of the bottom line. The loyalty that we have tossed away is not just a feeling to be mourned but a fundamental aspect of managing risk. It becomes impossible to align human resources with a corporate vision if the corporation doesn’t value the human resources. We may not want to think about this right now, but we will have to deal with it when we begin to rebuild our economy.

Yesterday's company's history - the sad plight of the Chicago Tribune

December 10, 2008

There was an undiscovered gem of a TV programme called Journeyman - in which a fictional hero, Dan Vasser, was a journalist for the San Franciso Register: cue swirling clouds over the Golden Gate Bridge and the credits rolled. The programme centred on Dan the Journeyman suddenly being sucked back in time, drawing on his finely honed powers of investigative journalism, to fix little things that were going to go wrong: people who were going to be killed, and the like.

Leaving aside that the normal rules of time travel sci-fi were therefore suspended - I mean this guy got back close to the gal he was going to shack up with, in order to save the wife he got married to in the future - I was reminded of this TV gem when being told by my dear friend Steve McCauley of the sheer corporate barbarism of events unfolding at the Chicago Tribune: not least given that Journeyman is not only pretty cool sci-fi, but is also an ode to the power of old fashioned 'smell the print' newspapers, and their commitment to investigative journalism, as a key component of a free society.

I feel I probably need to add 'allegedly' and 'apparently' and 'as I understand it' to what will follow, because it is scarcely credible to believe what is playing out - so please take it as read that those words preface what follows. It reads a bit like a rather fantastic made for TV movie, for Christmas. A modern take on Scrooge. Except it isn't, it's real. It will hurt many good people, badly, possibly for the rest of their lives. And by any measure it is wrong.

Andrew Ross Sorkin of the New York Times summarises what is going on:

When Samuel Zell bought the Tribune Company, he literally mortgaged the future of Tribune’s employees, Andrew Ross Sorkin writes in his latest DealBook column. The real estate baron financed much of his deal’s $13 billion of debt by borrowing against part of the future of his employees’ pension plan and taking a huge tax advantage. Meanwhile, Mr. Sorkin says, the people who mismanaged the company before the buyout managed to get out with a tidy sum for their efforts. Now, with the media company in bankruptcy, it is the employees who will pay

The article goes on:

There is a lot of blame to go around, and much of it will be directed at Mr. Zell, the real estate baron whose knack for buying when everyone else is selling earned him a fit sobriquet for the news business these days: The Grave Dancer. Advertising is in a free fall, and every newspaper is suffering. But Mr. Zell literally mortgaged the future of Tribune’s employees to pursue what one analyst, Jack Newman, at the time called “a childhood fantasy.”

Mr. Zell financed much of his deal’s $13 billion of debt by borrowing against part of the future of his employees’ pension plan and taking a huge tax advantage. Tribune employees ended up with equity, and now they will probably be left with very little. (The good news: any pension money put aside before the deal remains for the employees.) As Mr. Newman, an analyst at CreditSights, explained at the time: “If there is a problem with the company, most of the risk is on the employees, as Zell will not own Tribune shares.” He continued: “The cash will come from the sweat equity of the employees of Tribune.”

My colleague Arthur Probert, who values rigour in such matters, informs me that technically the employee's interest is via an employee stock option program - indeed, CEO FitzSimons lauded the flexibility a privately-held Tribune would offer when the deal was struck. "As a private company, Tribune will have greater flexibility to transform our publishing/interactive and broadcasting businesses with an eye toward long-term growth," FitzSimons said in a release. He went on to say: "Importantly, our employees will have a significant stake in the company's future."

So in terms of risk management, take a business using a business model within the end of its current life cycle; and finance taking it over by borrowing against the pension fund built up by the company's staff: tell me if I have got this wrong, but it seems as crazy as that!

As the rather interesting 'Pheonix Principle' - 'Reinventing Business for the C21st Century - argues, in challenging the complacency of the business model on which this all rested:

The Tribune Company Success Formula was firmly stuck in the 1990s. From sales people to editors, denial about shifting reader needs was everywhere … Each newspaper and station was Locked-in to pushing the news through its format, ignoring the enormous audience opportunity they had in their local markets by using cross-media approaches, including the web … What Tribune Company needed was not only scenario planning that identified the range of opportunities for ad sales - but a sincerely intense analysis of on-line competitors

And of course we can wonder at the actions of 'the Grave Dancer' - but surely he was not the only guy involved in putting together this deal? There must have been a whole series of highly paid professionals who got a big fat fee for signing off on this, doing due diligence at the micro-level, to very high professional standards within the frame of reference of the work they were carrying out, no doubt. But who in so doing acted as agents to put together a deal which puts the system on which they themselves depend, at risk.

For some time now we at Tomorrow’s Company have argued that those involved in financial services should commit to a kind of 'Hippocratic oath' - in which they would recognise the imperative and commit to 'do no harm'. What difference might this have made, if every key actor who was part of the value chain of this deal, had made such a commitment.

Arthur goes onto there are ponder the parallels with Robert Maxwell in the early 1990s, borrowing from the pension fund to support unsustainable business activities. Maxwell's activities led to UK legislation that limit the proportion of a pension fund that it can put in the assets of the sponsoring company'

It's not only the employees who are at risk, in relation to their jobs, pensions and stock options - spare a thought too for the bond holders. (and therefore for other people's pension funds!) As a result of the deal a whopping $8.4bn in new debt was created.

More generally, as Steve wondered, how many other such highly leveraged deals are waiting to implode, set up in this way, under the pressure of the credit crunch?

And as I mentioned in an early blog, if it feels 'squirwly' and it looks 'squirwly' it probably is 'squirwly' - and there is at the very least a moral duty on those involved to say so and act accrodingly. And as we debate the future reform of corporate governance, risk management and corporate law, this should not just be a moral and professional duty: it should be a legal requirement as well.

This is not 20/20 hindsight - back in April 2007 commentators were saying the following:-

The Employee Stock Ownership Plan is the main part of Zell's financing strategy, but one can't help but wonder whether Tribune's printers and journalists have quite the same risk appetite as Sam Zell. I guess they don't have much choice. www.felixsalmon.com

In one transaction two of the largest daily newspapers in the U.S. now have their viability threatened. By loading up with debt both the LATimes and Chicago Tribune will find it impossible to address the fundamental Challenges facing newspapers today. All money will go to debt, and more cost cuts (after 5 years of chronic cost cuts) are in order to generate cash for paying this monster debt load. What a shame for two great institutions - the leadership has sold out its future in a transaction with Mr. Zell. For more info see my blog www.ThePhoenixPrinciple.com

Our thoughts - and prayers - are with the employees of the Chicago Tribune and also the Los Angeles Times.

PS: With thanks to Arthur and Steve for their support and insights ...

Never underestimate the power of thank you!

December 9, 2008

Consumers directly control 60% of the UK’s carbon emissions. I got to hear this on a seminar last week put together by Energy Saving Trust and RSA. A very good event, by the way, represented companies included giants such as Barclays, Sainsbury’s and BT. It was an inspiring way of starting the day and the compact format of the event (two hours) ensured that you could start working on the ideas gained as soon as you had landed back in your office.

Individual consumers who have such a great power to reduce the UK’s carbon emissions are also employees and that’s what the event was about. How do you engage with your employees? How do you initiate and enable behaviour change? The message was two-fold: behaviour change towards improved sustainability is about enlightened self-interest. It became clear that companies try to reach their employees through “what’s in it for me” approach. The style of communication (non-corporate language, let’s have a bit of fun), multiple channels (events, competitions, online resources, exhibitions) and frequency of communication are all embedded in the sustainability strategies.

But sustainability is not only about enlightened self-interest and potential prizes. It is also about meaningfulness of one’s own existence. Organisations need to convince their employees that they want to stay with a company because of its values and how it is living up those values. And, it is not only recent graduates that are raising questions about their employer’s sustainability credentials; also older generations are waking up to the same call. It matters who you work for.

If this is the case, it means that organisations are becoming more like political actors. In a good way, that is. What I mean is that sustainability agendas create dynamics through which organisations want to engage with their employees. This means they need to listen to their employees. Thus, organisations create opportunities for two-way communication and employees become more empowered. It sounds very much like civic engagement to me. Companies become like micro-size civil societies where participation becomes the norm. In Habermasian terms organisations could become 21^st century coffee houses: places where people get together around a common concern to talk about ‘matters of importance’, thus expressing their views and through collective power becoming involved in their companies’ decision making processes.

Too idealistic? Not necessarily, as the examples from BT reveal. Their starting point for the sustainability agenda was to go and talk to employees and ask how they would like to be engaged. Now BT has staff Carbon Clubs, each of which focusing on a specific area of interest. BT has also created more general social networking tools à la Facebook. Both of these initiatives enabling two-way communication, increasing voluntary participation and, as a result, strengthening the feeling of belonging and creating trust. You could expand on the subject by writing extensively about trust and how it forms an important basis for a successful society.

All this is actually very straightforward psychology: people feel their work is valued and that they are respected. The power of thank you shouldn’t be underestimated.

Although highly inspired by the event I still have two questions in my mind: working in the Higher Education sector myself, where do universities position themselves in this debate? How do we engage with our students and staff and can we say that we are at the frontline when it comes to changing behaviours? I hope the answer is yes, but to me it seems that at the moment companies are light years ahead of us.

Last, if changing behaviours is a long project - approximately 6-7 years according to one panellist – why does that work start only at the work place? To what extent should we be teaching sustainability at primary schools?

Mahalo - Welcome, Tomorrow's Green Economy!

December 5, 2008

This week I was lucky enough to hear Bill Becker and Pavan Sukhdev speak at our event at the East India Club - followed by John Harle of Sospiro deconstructing Barack Obama's victory speech informed by an understanding of the structure of music and the principles of performance, and then fabulous music from John, Steve Lodder on keyboards, and vocals from the glorious Sarah Jane Morris. The word 'eclectic' may well have been invented for moments like these!

If there was one central argument that ran through the core of what Bill and Pavan were saying it was I think this: that creating this green economy is not something that can be put off until after the recession, but is the way to get out of the recession - because we can only create sustainable wealth and value if we know what kind of business and society we want for the future.

This is demonstrated most dramatically by the big three US auto manufacturers pleading for the money set aside by Congress for sorting out mortgages and the credit crunch, so that they can keep trading - whilst Japanese manufacturers have led on hybrids and next generation cars. It feels like a re-run of UK industrial policy of the 1970s and 80s, and the debates we used to have about special funding for sectors such as shipbuilding.

The scale of the recession does demand and justify extraordinary responses. However given GM's focus on delivering returns rather than investing in innovation - Totota has sold 600,000 Prius hybrids since 2000, GM's first 'Volt' plug in hybrids come to market in 2010 - it is hard to believe that part of the reported $14bn package being agreed to keep the big 3 trading until the New Year will be more than a stop-gap measure: a defining moment for the President Elect looms, one of many.

Talking with Bill later, he shared the news that Hawaii has just committed to transform its infrastructure to support electric cars being widely available by 2012.

This follows on from California announcing that it wants San Francisco Bay to be the electric car capital of the world.

Indeed, some Americans are now transforming their cars to run on electricity - an auto equivalent of skunkworks!

Pavan shared news of a similar development - a revolution in the train locomotive engine, which will first go into operation in 2010, thanks to General Electric's 'ecoimagination campaign'. This hybrid locomotive cuts emissions by 50% - and cuts fuel consumption by 15%.

(What they have done is add lead free rechargeable batteries to a fuel-efficient 4,400 horsepower locomotive - when the engine brakes the dynamic energy, which would otherwise be wasted, is transferred into the batteries, adding an extra 2,000 horsepower for when needed)

Bill's slide presentation is available here - and Pavan's is also available, here.

Pavan of course emphasised that we will not have a sustainable vision of business and society which does not also include a clear understanding of the relationship of both to nature.

This was dramatically evidenced with the argument that 1billion people rely on fish protein, provided by nature - free. But half of fish stocks are fully exploited with a quarter already over exploited.

He went onto argue that the much of money is already there to make the transition to the new green economy - but it is going into the wrong places. For example, $240 - 310bn a year subsidises current energy production.

Finally, I was lucky enough to record the following video interview with Bill - to be posted shortly. In it Bill delightfully gives us a vision of America leading the way in becoming Tomorrow's Green Economy by drawing on his own experience of small town rural America, embracing solar technology and also moving the whole town rather than trying to find a techno/building fix to the dangers of flooding - combining adaptation and mitigation.

Taking a 'big picture' view Becker shared that:

the total green market could be worth $20 trillion by 2020, say UNEP;
2m jobs could be created in 2 years by investing $100bn according to one estimate, and 5m jobs over 10 years by investing $500bn according to another;
Obama argued that 5m jobs could be created over 10 years by investing $150bn.

So thank you Hawaii, California and America for starting to show us the way - or as they say in Hawaii, Mahalo!

For more on Tomorrow's Green Economy, click here This is the sixth in my series of blogs on creating value through sustainability.

Getting ‘Generation Y’ to perform: Do we need tighter control, or more freedom?

December 5, 2008

Last night I was acting as the stand-up after-dinner act for a group of British CEOs from a retail-focused industry. They wanted to know about Generation Y and how to engage them – something that’s crucial in the current climate. I focused first on technology, since that is one undeniable generational difference, and since we now have hard facts from the first global Digital Generation Survey (www.theDgeneration.com).

Most of them agreed that technology has enabled a revolution in the style and pace of communication. But then I threw in a grenade: “Many employers – perhaps half in the UK - have even banned Facebook” I said. “Imagine that! It’s like saying ‘come and join us, and by the way we’re going to switch off oxygen after you join.’”

Sometimes we researchers forget that our statistics may actually be true. At this point, as I should have predicted, almost exactly half of the room erupted: “We had to ban it! How could we let them do all that personal stuff in work time?” “I don’t pay people to socialise, I pay people to work!”; “There is time set aside for breaks”.

The other half responded: “My staff choose to come in at 7.30 in the morning; how can I tell them how to use their time during the day?” “If they don’t use company systems, they’ll do it on their mobiles”. “Facebook can have work-related benefits too – our company has a Facebook group (so I’m told)”.

It was a great debate, and for me it was not primarily about technology, it was about ideas, talent, passion and discretionary effort. How can we get those things from people if we always seek to control, not to enable? Could we not manage outputs rather than time? Which do we pay people for: Their time or their ideas? Of course it’s not a simple argument: In many types of work we pay them for both.

But some things are simple, in my view. We cannot control discretionary effort. And we know there are huge quantities of wasted talent (as Philip Sadler from Tomorrow's Company points out, ‘latent’ is an anagram of talent). Therefore, we must find ways to make work more engaging, and to empower people to create value. It may not be through Facebook, but it will certainly be through relationships – with customers, colleagues, suppliers and with each other. It will be based on face-to-face relationships (Gen Y want offices, says recent Vodafone research) combined seamlessly with new tools.

That’s what excites me most about these new technologies: At last we have tools that reflect the relationship-driven way in which the world really works. And with social media, this can result in lower costs (user-generated content rather than paid writers), greater collaboration (as companies like BT adopt social networking tools internally) and – over time – greater transparency about people’s performance so that the very best rewards can more closely follow those who generate the best results.

Jonathan Winter is Founder of The Career Innovation Company (Ci), a workplace innovation 'lab' for some of the world’s best-known companies, helping them increase business agility and gain recognition as inspiring places to work. Ci is a partner in the Tomorrow's Global Talent programme.

Lessons to learn for our Ecological Credit Crunch

December 4, 2008

As the grip of the global credit crunch tightens, we should step back and learn from our mistakes in the financial markets to develop a better understanding of how to approach the gathering ecological “crunch”.

Our current global financial crisis is the result of our access to cheap debt over the past decade. This debt-fuelled binge has led to bubbles in housing, financial markets and commodities. Bubbles will inevitably be burst, forcing us to remember the key lesson that we rarely acknowledge until it is too late - all debt must be repaid, and with interest.

The size of this current economic problem is expected to be enormous. Figures in the tillions of dollars are mentioned with significant implications for the efficient functioning of our global economy.

How far will it go? When will it end? That we cannot determine, yet one thing is certain – it will be painful, and will continue for some time.

However, this economic episode should be embraced as a way for us to learn from experience the issues associated with the accumulation of significant levels of cheap debt. It should be a warning to us that in future we must be extra vigilant about the creation and repayment of debt that is beyond our current and future means.

Hence, with the experience of the credit crisis still fresh in our minds and the development of a wider understanding of the ramifications of cheap, excessive debt it is almost inconceivable that we would not respond to the issue of climate change - the issue for us to deal with in the coming years, which is based upon cheap, excessive carbon debt.

We have been borrowing the Earth’s resources for almost two centuries, and the consequences of this burgeoning carbon debt are starting to show as our Earth’s dynamic system responds.

The Earth has been (and is) our ecological banker. We have been extracting the earth’s capital in the form of oil, coal, gas and deforestation since c. 1750 to fuel our economic growth. However, the strains are showing on the natural balance sheet. This cannot continue without the Earth raising the interest to be repaid and starting to ask for some of the capital to be returned. Given the amount of time that has passed since this process of extraction began, we have some serious interest to repay. We are heavily in debt to the Earth.

The debt is quite simple to understand. Given the number of people on our planet, the Earth only has the natural capability to absorb and extract less than 1 tonne of carbon dioxide per person per year from the atmosphere and our oceans. Yet the global average is 4 tonnes, implying that our current carbon debt is over 3 tonnes per person per year – having accumulated to enormous proportions over the past two and a half centuries. It is also worth noting that this carbon debt profile is not evenly distributed. America and Britain are responsible for between 10 and 20 tonnes of carbon dioxide per person per year, whilst in some parts of the world such as Bangladesh and sub-Saharan Africa, the per capita emissions are closer to zero.

Our carbon debt has interest, and unlike monetary debt, we cannot just write it off. We must live with the consequences. Our carbon debt is a far more permanent and wide-ranging form of debt than its monetary counterpart. The current interest on this carbon debt is our commitment to a 2 deg Celsius increase in our global average surface temperature causing glacial melt and the resultant issues of fresh water shortages, river flooding; rising sea levels and coastal flooding; species extinction and much more.

To repay our debt, we need to reduce our use of the Earth’s carbon resources to below at least 1 tonne per person per year, to both abate the worst natural effects of our carbon debt binge, and to minimise the economic consequences.

Sir Nicholas Stern warned in 2006 that early action to repay this debt by reducing our dependency upon carbon intensive fossil fuels and their resultant emissions would only cost approximately 1% of GDP per year. This equates to almost $600bn a year – a cost equivalent to the size of our current global credit crunch every year!

This may sound large, but the cost of inaction could be far greater – between $3trn and $12trn a year. These figures make our current credit crisis a walk in the park, and Sir Nicholas Stern recently said that he felt he had underestimated the risks.

So, what are we to do? Will we learn from our current debt-fuelled credit crisis and understand that we need to create a system now to define the repayment of our carbon debt over the coming years, so as to minimise the future effects? Or, will we replay the same script as our current credit crisis, and ignore the warnings that we are living beyond our means and keep going until our natural bank, the Earth, says “Sorry, no more! I have nothing more to give and I’m going to have to change the rules of the game significantly to account for our past dealings – get hotter and make it difficult for humans to continue living as you live.”

For me the answer is clear. We need to be diligent. We need to understand our carbon debt and start mapping out now how to repay the natural capital and interest that will avert the dangers we are being warned about.

Do we really want to burden our children with the excesses of our carbon debt-fuelled lives?

It’s our responsibility to enable our future generations to live free of carbon debt.

________________________________________________________________________________

Fraser Durham works for CarbonSense (www.carbonsense.com) co-ordinating client strategies involving a high technical input. He has recently made the transition from finance, where he spent ten years advising global investment funds on derivative and alternative asset transactions.

4^th of December