Posted by Earlier this year I visited Patagonia, the American outerwear manufacturer, headquartered just north of Los Angeles.
Patagonia has a perverse dislike of selling more products. When at a recent strategy meeting, his executives asked founder Yvon Chouinard what he thought about their plans, he responded – according to his lieutenant Rick Ridgeway – “I’m kinda worried that you’re training all those consumers out there to buy a bunch of shit they don’t need.”
At the other extreme is Jack Welch, ex-CEO of General Electric, whose tenure was marked by GE’s uncanny ability to hit year-on-year growth targets. GE’s mantra was shareholder value: to keep investors happy, it did everything possible to meet their expectations for consistent growth.
Then, in 2009, less than two years into the credit crunch and the worst financial crisis for generations, Welch recanted. He told the Financial Times: “On the face of it, shareholder value is the dumbest idea in the world.”
Chouinard and Welch could not be more different – one, a laid-back hippyish adventurer and the other, a turbo-charged golfing super-executive.
Their companies look pretty different, too. Patagonia has just become a “benefit corporation”. This is a new corporate form, available in California and a growing number of other US states, that obliges companies to take account of non-financial interests, such as social, environmental or community objectives, as well as shareholder demands. GE was and is a stock market bellwether.
Yet I don’t believe Patagonia and GE’s objectives – or the challenges they face – are as far apart as they look.
Yvon Chouinard even had his own revelation – like Welch – at a critical point in the company’s early history when a consultant pointed out to him that his best course of action would be to sell the company for $100m and spend the proceeds on environmental causes. Instead he decided “the best thing I could do was to get profitable again, live a more examined corporate life and influence other companies to do the same”.
I think both companies recognise they need to ensure – out of self-interest, in the interests of others, or through a mixture of both – that they continue to grow and that their growth should be “good” – or at least as good as it can be.
Two conditions are essential for good corporate growth: it should be for the long term, and its benefits should be shared. Even quite large companies are subscribing to these objectives.
Jack Welch’s reversal represented a partial and belated recognition that the pursuit of short-term financial targets had helped contribute to the financial crisis.
Most chief executives I talk to want to get off this treadmill. Cynics may say that they simply want to avoid the scrutiny of owners, who have a habit of sacking chief executives who underperform, and continue taking away big pay awards. After all, telling the shareholders that you only want to be measured by what happens over a three-year period, rather than a three-month one, gives you an extra two years and nine months before you’re found out.
But I think there is a growing realisation that “sustainability” is far more than a box into which companies put their environmental and social responsibility initiatives and then forget about them so they can get on with boosting profits. “Sustainable growth” is really the only way that companies can ensure their survival.
This concept is being taken far beyond the company itself. Large corporations are realising that by expanding their responsibility beyond that of their own narrowly defined self-interest they can actually create fertile conditions for their own future prosperity – and that of their customers and shareholders.
Michael Porter, the Harvard business academic, and his business partner Mark Kramer called this “CSV” – “creating shared value” – to distinguish it from allegedly old-fashioned CSR, or corporate social responsibility. They have even written that this approach constitutes a “higher form of capitalism”. But how the concept is marketed is less interesting than what it consists of, from Hindustan Unilever’s “Shakti” network of poor female entrepreneur-distributors to Vodafone’s mobile banking service in Kenya.
Do companies boast about these projects for PR effect? They do. Will all of these initiatives endure? They will not. Like all markets, these new ones could eventually become subject to diminishing returns. Investors may choose the higher return available elsewhere – pursuing “bad growth” and “lower forms” of capitalism.
While Unilever is reaping the plaudits of Harvard professors, it has not yet answered adequately the question of what will happen if and when its underlying profit starts to falter, its share price slips, and investors start to demand whether such projects aren’t simply too costly.
I’m under no illusions that it will be hard to harness growth to goodness – even for companies with the best intentions.
Later during my California trip, notwithstanding Yvon Chouinard’s warnings about not buying unnecessary items, I went shopping at Patagonia’s Santa Monica branch. Having duly agonised over whether we really needed the item in question, I paid and handed over my contact details, including an email address. Every week since then I’ve received at least one, sometimes two, messages from Patagonia urging me to buy more from their online store.
But it seems to me churlish to attack efforts to grow “well” just because they come from corporate entities. Growth increases average incomes but that average increase can conceal vast inequities and widening income gaps. These companies have recognised not only that growth is good – that’s a treadmill no chief executive wants to step off – but that “good” growth benefits the community and the corporation and contributes to the long-term sustainability of both. That has to be worth encouraging.
AUTHOR:
Andrew Hill is an associate editor and the management editor of the FT. He is a former City editor, financial editor and comment and analysis editor. He joined the FT in 1988 and has also worked as New York bureau chief, foreign news editor and correspondent in Brussels and Milan. Andrew was named Commentator of the Year at the 2009 Business Journalist of the Year Awards, where he also received a Decade of Excellence award. This blogpost is adapted from his speech to the seventh William Pitt Seminar – “What’s so good about growth?” – organised by Pembroke College, Cambridge.
After all we have seen of the fragility of corporate initiatives and the PR versus the reality, Andrew Hill’s skepticism is well-warranted. I reread Porter and Kramer’s HBR piece on Creating Shared Value. As I read it I thought; “What is this magical process called ‘thinking'”? We are never told about the process. In the article thinking, like strategy, is always defined by its results. The assumption is that we always think our way into better ways of action rather than (as many entrepreneurs can attest) the other way around.
Thus we are told that “The solution lies in the principle of shared value…” “The purpose of the corporation must be redefined…” “The starting point for creating…shared value is to identify all of the societal needs…” “(Government must) set clear and measurable goals…” Most of the verbs are what Gilbert Ryle called “achievement verbs” – they sound like action but they are really achievements – desirable outcomes. It is the reasonableness of these outcomes that blinds the reader to the absence of any theory of cause-and-effect. It’s all about “what” we need to achieve and the only answer to “How?” is by “thinking”. We end up going in a giant circle!
Hayek accused socialism of not understanding that societies have evolved and were not planned – he called it a “fatal conceit”. Doesn’t that same conceit – that we can ‘think’ our way through our problems – lurk in the concept of “shared value”?
Suppose commoditization, little innovation and slow organic growth are not the result of an “old, narrow view of capitalism” i.e. bad thinking, as Porter and Kramer suggest, but were features of a mature stage of an ecological process. Perhaps Patagonia and GE are at (almost) the opposite ends of the process. After Yvon Chouinard leaves the scene what is there to prevent Patagonia from becoming just like Welch’s GE in the pursuit of profit?
An ecological rather than a logical perspective on human nature and organizations changes all the questions. Or rather it adds another dimension. What are the processes whereby people and organizations are renewed? What are the contexts? What experiences and disciplines are important? In short – How do we act our ways into better ways of thinking?
Thanks for your penetrating thoughts, David. In answer to your question about what’s to stop Patagonia reverting to a Welch-like pursuit of profit at all costs, the answer is actually the “benefit corporation” structure itself. One of the reasons Chouinard chose it was to secure his legacy – if you follow the hyperlink from “benefit corporation” in the blog, you’ll find my FT article on the pros and cons of that structure (should be available free, but registration may be required).