The Green Gap

In the Cold War, we feared a Missile Gap was a strategic weakness. Nowadays, we must awaken to the fact that the Green Gap is true strategic weakness: the nations whose economies will thrive in the coming years will not be those with the biggest factories, but those with the most sustainable, efficient, and ecological markets. What we require is a Strategic "Green Reserve" of ecological design to weather the coming changes that both climate and resource scarcity will force on the international economy.

Sunday, 1 May 2011

More on Capitalism and Profit

I've just gotten to the end of Capitalism at the Crossroads and I wanted to share a couple quotes:

" is precisely the incumbents that most often stand in the way of fundamental change."
(paraphrased from Saving Capitalism from the Capitalists) I've heard this somewhere before.

"It's been said that capitalism is like a knife: It [sic] can be used to cut off your brother's arm, or it can be used to butter bread and feed the hungry - the same knife."
While I think that the simple line "capitalism is a double-edged sword" would have been fine here... we get the idea anyhow. We're back to my contention that capitalism is a force, not an idea or a method or a practice... it's just a fact. Funny how people just don't come out and say that. Capitalism just is. Any business practice that does not incorporate capitalism in its raw form is just an incorrect assumption regarding a potent force of nature, and is therefore dangerous. You should not look at a tornado and call it cupcakes. That's both wrong and potentially harmful to you and any easily manipulated cupcake lovers nearby.

Hart continues: "The problem with capitalism is thus not the profit motive; the problem is how the profit motive is conceptualized. ...there is a persistent myth that the ultimate purpose of business is to maximise profit for the investors. However, the maximization of profit is not a purpose; instead, it is an outcome. The best way to maximize profits over the long term is not to make them the primary goal."
In this statement it is like he is tantalisingly close to a breakthrough in understanding that profit and share value are two separate and distinct animals that don't often have much to do with one another. If Hart could see that the system has incorrect feedbacks at the level of the organisation of the corporation, he might be closer to understanding why certain BoP pilots he used to formulate his BoP Protocol failed. Briefly, the reason why they failed is simple: the quarterly report.

Why? From a systems standpoint consider the following:

1) Sustainability requires the ability to see long-term advantages.
2) The quarterly report comes out every three months.
3) A day trader clears his portfolio every night. How many investors buy big in one company and go long?

Stock price movement and the long-term success of a BoP approach are, simply through their incongruous rhythm, thoroughly disconnected. Every quarter for a long period, the only thing an investor is going to see of the BoP initiative is an unnecessary expenditure. Certainly, there are astute investors who think five years into the future, but they aren't thinking about your company five years into the future - they are thinking of their own future. They may not even hold stock in your company by then. They are thinking about the trades they are going to make in order to put an addition on their house. Your company's long-term viability does not matter to an investor unless it's somehow personal. Individuals will have traded in and out of your company twenty times before a sustainable initiative makes real money. Mutual funds hold huge baskets of shares - they don't care about your company's long-term viability, they care that you outperform S&P for a few years before they shift to a different company. Share price is not profit, and the CEO is beholden to shareholders, not to their company's profit motive. As I have and will keep on saying - profit motive is capitalism; share price is a bastardization of capitalism.

So, why did the initiatives fail? Because the minimum number of times a CEO will have to go to bat to defend that expenditure for a five-year project is twenty: the number of quarterly reports. The average lifecycle of CEOs is about 6-7 years. Chances are high that in the middle of a BoP project, your champion moves to another job. The kind of short-term thinking that ruins companies also makes BoP initiatives hard to protect.

How to solve this? Finance it differently! Shares are stupid for this purpose, and Hart contends that the corporate arms that do BoP work must not, on any account, be spun off from the company. I contend he may be wrong. His worry is that the initiative will be consigned to the charitable arm of the company when it doesn't perform fast enough. My worry is that share price motive will invariably sewer distant time-horizon initiatives anyway. The way to deal with this is to make a wholly independent startup with seed capital from the mother corporation. The seed capital can be in the form of a loan instead of shares. That way, the subsidiary has to make a profit to cover costs and repay the loan, but isn't saddled with constant interference from meddling board-members. It has the latitude it needs and the mobility it craves to do things right. That is perhaps why the example of TWI (a startup) did far better than the other corporate case studies. They were on their own from the start - so when an established corporation wants to do the same, they need a way to be like Cortez and burn their ships.

Just a few thoughts.

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