Yesterday, I attended a very interesting breakfast event organized by the Irvine Chamber of Commerce, the 2011 Business Outlook where Andrew Policano, Dean of the UCI Merage School of Business and Terry Savage, finance goddess, TV personality and successful author delivered 2 excellent presentations on the state of finance in the US at the macro-economic level, the challenges ahead and some recommendations that could part of the long term solutions to our financial woes. I found both to be refreshing and inspiring (albeit slightly doom and gloom at times) however there are 2 points that I would like to extract out of those and elaborate upon.
The first one would be what I call the conflict of the “organizational citizen”. Quarterly reports and short term ROI have become the de facto criteria to evaluate performance. So far, nothing new. Shareholder is king and all necessary steps must be taken and conditions met to please that “elusive” shareholder. Such as laying off workers, which is the quickest measure to positively impact the balance sheet and hence arbitrarily improve performance and profits. Outsourcing would be another avenue. Let’s export all manufacturing to a cheaper country, like, say, China? So Far, still nothing new. Company stock is up, shareholder is happy. Or so we thought. But if we look at the reality of the slides shown yesterday, “The New Normal” as it’s been coined, it shows the dire state of the country. Unemployment and debt through the roof, budget crisis etc... I am not saying that massive layoffs and outsourcing are responsible for all our woes. But I feel that in the process we have failed to realize the fact that a shareholder, an employee and a customer are not necessarily 3 distinct individuals, it can be one and the same person. We removed purchasing power from our employees, preventing them to remain our customers and in turn damaged our shareholder value. We ignored the Organizational Citizen.
Terry Savage said yesterday that there is a very likely chance that at this pace, the country will go bankrupt in our children lifetime. Isn’t time we started looking at things from a longer term standpoint? Hasn’t short-termism proved its shortfalls by now? I believe that we have got to take a very close look at investors’ incentive structures, accounting rules, rating agency practices that ignore long term business risks and use due diligence criteria that are purely not sustainable. Studies show that companies that implement sustainability practices and employee engagement strategies outperform those that don’t’ and are better equipped to weather economic downturn.
The second point I would like to discuss is based on a comment that Miss Savage made during the Q&As. The question was about China and she answered that China is a copier and a follower. I would say, until today, true. But not anymore. There are two areas where China is outdoing the US in terms of innovation and R&D: Cleantech and Sustainability. China quickly came to the realization that 1) the sheer size of its population would crush its natural resources and 2) they will choke to death if they don’t embrace clean technology (renewable energy versus coal for power generation, measures to address water scarcity). Also, as an “emerging” country, they have the luxury of starting from scratch instead of having to revamp aging and inadequate infrastructures. As such, China is now a leader in solar panel and clean transportation technologies, to name a few. There’s been countless articles about time running out for US Leadership in cleantech, about Secretary Chu’s “Sputnik” moment, and although not many fully appreciate it, China is well aware that it is manufacturing 95% of our toys and hence it has upped the ante when it comes to sustainability because it can’t afford any more Mattel scandals. Cardboard in pasta? Toxic dye in eggs? Lethal toothpaste? Thinner in milk, anyone? So what does it mean? It means that we are in a tectonic shift, that Asia is no longer America’s sweatshop but is becoming a customer of the US. According to Reuters: 53 percent of California clean-tech leaders said the opportunities in China outweigh the challenges of increased competition!
Energy Sustainability (curbing GHG emissions, energy security, rising energy costs, rising demand for resources, constrained supplies, water scarcity), the New Normal (restructuring of the economic order) and Globalization are fundamentally reshaping our societies. Everything is increasingly interconnected; creating unprecedented threats as well as unsurpassed opportunities. I believe that the 3-legged stool, the triple bottom line - People, Planet, Profit – and incorporating sustainability and human capital to the balance sheet is the only way to concurrently embrace those opportunities and tackle those threats.
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