AHC Group

Risk, fiduciary responsibility and `regulatory insulation

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Courtesy of AHC Group

With 'regulatory insulation' taking hold worldwide as a powerful business strategy, the author advises forward-thinking company leaders to look at the world through an ecological lens, allowing them to identify key future issues, position their products ahead of the trend, and outflank their competitors.

INTRODUCTION

We've seen our share of scandals in recent years — Enron, WorldCom, and so many others. But there's a more serious crisis in modern capitalism. It's not the one Marx spoke of. The problem is worse in the U.S. than in the European Union and in Japan. China is still an open question.

The crisis: too many boards and executives are consistently leaving money on the table, exposing shareholders to avoidable risk, ignoring relevant trends that impact their business and its value. And, in so doing, they may be violating fiduciary responsibility to their shareholders.

Some of these failures may be actionable in court of law. Many may be actionable in shareholder meetings. All are actionable in the marketplace.

FIDUCIARY RESPONSIBILITY

Fiduciaries are those who 'hold something in trust for others' (from Latin fidere, 'to trust'). Executives and boards are most obviously holding things in trust for shareholders as protectors of economic value. Most commonly, for a myriad of reasons, the definition of the scope of the trust is narrowly drawn — focused only on what can be monetized and usually focused only on the near term.

As a result — almost inevitably — most companies, their directors, and their executives are running their companies with a rear view mirror instead of a radar system, and most are failing as fiduciaries.

The failure is widespread, despite the progress some firms have made in steering to the shapes emerging on the horizon, rather than the shades of the past. The sustainable business phenomenon has been taking deeper root, rapidly and remarkably, in sector after sector. U.S. business is making faster progress than most people think, yet the very best of corporate sustainability initiatives are nowhere near adequate to either the challenge or the opportunity we face.

PROFIT THROUGH AN ECOLOGICAL LENS

How are businesses and investors finding these opportunities? How are they discovering profit, competitive advantage — and 'regulatory insulation?' The framework for this thinking is what I call, 'looking through an ecological lens' at physical reality — the physics that underlies the chemistry, that underlies the biology, that underlies the ecology, that underlies the human economy. Though it uses environmental terms, this is a decidedly business-focused perspective. The 1997 book, Nature's Services, reported the work of several dozen scientists, engineers and economists who quantified the value that nature provides for free to the economy — cycling of air, cleaning of water, pollination of crops, biodiversity, and many more. Their first-order estimate was a 33 trillion dollar contribution; the entire global economy had an economic value, at the time the book was published, of 18 trillion dollars. Nearly double the value for everything that we measure in our economic lives is contributed free to us from nature. Even if we knew how technically to provide these services (and the Biosphere 2 failure confirms that we don't) — we could never afford to replace that massive subsidy of free goods and services.

RISK AND UNCERTAINTY

The more proactive companies were years ahead of the game, designing environmental factors into products, material choices, and production systems to ensure that they would be able to compete effectively in a prosperous, 300-million person market that seems to be continually raising the bar.

This should not come as a surprise. As we have advised numerous clients, you can see these changes coming if you watch the market through an ecological — as well as financial — lens. Since cadmium, mercury, lead, hexavalent chromium, and other materials have no place in living systems, we will at some point remove them from our products. Biologically, it is clear it will happen; the only question is 'when?' By internalizing your environmental externalities and watching the market through an ecological lens, just as you would with your daily business drivers and risks, you have a choice: wait until it's mandated, or figure out how to do it right now — profitably — before your competitors get there. We call this 'regulatory insulation.'

ERRORS IN THINKING

Change is made more difficult by deep and pervasive errors in thinking — the assumption that we can't afford it, and the belief that our economic well-being is separate and autonomous from the living systems that sustain us — and by a serious and unrecognized gap in management methodology.

The assumption that we can't afford it is held in common by business people, environmentalists, and government — people who disagree on so much, yet find common ground in this fallacy. Business people say, 'we can't afford to be environmentally responsible, because it will hurt profits.' Environmentalists say, 'You should sacrifice some profit for the good of the planet.' Government officials say, 'Let's use taxpayer dollars to persuade business to do the right thing,' assuming that they won't do it otherwise. Fortunately, these views are being replaced — out-competed by results like DuPont's — but they are still prevalent.

Green buildings offer a case in point. People call my firm, saying that they would like to build a LEED Silver building. (The LEED rating system has four levels — certified, Silver, Gold, and Platinum — in order of increasing energy efficiency and environmental performance). My first question is always, 'Why Silver?' The response is, almost always, that certified 'isn't cool enough' — and that Gold is 'too expensive.' We sit quietly on the phone and wait for them to say — as they inevitably do — 'Isn't it?' It's not, of course — or at least not necessarily.

A recent study by the State of California found no correlation between greenness and capital cost. Toyota's 690,000 square foot LEED Gold building in Southern California cost not a penny more than a 'standard' building. That's not even counting the reduction in operating costs — which will come later. The California Academy of Science's new LEED Platinum museum will cost just 1% more than a standard building; they'll be in payback on the increased capital expense in a matter of months.

THE CHALLENGE

Today's challenge is for Boards of Directors, CEOs, and CFOs — not environmentalists — to lead the sustainability revolution. It's not that environmentalists shouldn't do what they do so well. But true business leadership shouldn't wait to be pushed. The business opportunity is significant, and clear.

The message to Boards and executives: here's the agenda — do this or else. It's not that I hold a big club or threat — but the market does. You can wait for certainty, or you can lead your industry, and lead your market.

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