This blog will cover some news items related to Sustainability: Corporate Social Responsibility, Stewardship, Environmental management, etc.


Searching for drugs in a tropical country: Who should benefit from patents based on poor-world biodiversity is a ticklish political problem

The scum of the Earth
Apr 7th 2005 | PANAMA
From The Economist print edition

Searching for drugs in a tropical country
FOR William Gerwick, nature's bounty is to be found in a pot of pond scum.
Organisms that cannot run away from their predators (plants and coral, for
example, as well as the micro-organisms that make up scum) experience a
strong evolutionary pressure to become poisonous. But one creature's
poison is another's drug. And the more species there are in a place (in
other words, the higher its biodiversity), the better the chance is of
finding something pharmacologically useful there. So for Dr Gerwick, a
pharmacologist from Oregon State University who works in Panama (one of
the most biodiverse places on the planet) the local scum is a particularly
promising raw material.
Dr Gerwick is a member of an organisation called the International
Co-operative Biodiversity Groups (ICBG), which seeks applications for
knowledge about biodiversity. Thanks to his collaboration with another
ICBG member, Eduardo Ortega, a parasitologist at Panama's Institute for
Advanced Scientific Investigations, he has discovered that the scum (or,
rather, the cyanobacteria of which it is composed) does indeed contain
potential drugs. Dr Ortega's contribution has been to come up with a
clever way of testing whether the organisms Dr Gerwick and others find on
their expeditions are plausible candidates for the treatment of disease.
When the ICBG project started seven years ago, it focused on treating
tropical infections such as malaria. Unfortunately, the equipment needed
to test its discoveries for antiparasitic activity was difficult to
import. In particular, the standard assay for malaria involved the use of
radioactive materials, which western governments were reluctant to see end
up in a poor country with a chequered political history. Dr Ortega,
therefore, invented a new assay that did not involve radioactivity.
The new method works by tagging a parasite's DNA with a fluorescent stain.
The parasites are then incubated in an appropriate medium (in the case of
malaria, red blood cells) and extract-of-scum, or coral, or whatever, is
added. In the absence of the extract, the parasites grow and the sample
becomes more fluorescent. But if the extract stops the parasites
reproducing or—better still—kills them, that does not happen. The
researchers then know they have found something of interest.
At the moment, they are using this method to test their finds for activity
against leishmaniasis, malaria and, most recently, dengue fever. So far, a
number of promising leads have been discovered, including a cyanobacterium
with a very high activity against malaria. And although no drugs are in
development as yet, if the researchers do find one, there is already a
plan for how to divide the spoils.
Who should benefit from patents based on poor-world biodiversity is a
ticklish political problem. On the one hand, that biodiversity is surely
the patrimony of the country in question (no one would be arguing the
point if the resource were, say, a mineral reserve). On the other, the
hard work of turning a raw biological discovery into a marketable product
is usually done in a rich country, and patent law prefers to protect the
person who reduces an idea to workable practice. In this case, though, the
answer is simpler than usual, as both biodiversity and research are
located in the same country. Dr Ortega says that at least 50% of any
profits the team receives will go into environmental trust funds, while
the rest goes to the institutions that have supported the project,
including the University of Panama.
The two researchers also believe that even though no drugs have yet been
developed, the project has been a success. The fluorescence test is now
used in other developing countries, including Bolivia and Madagascar, and
will be included in a drug-discovery kit being created by America's
National Cancer Institute. In addition, the project is a training ground
for Panamanian scientists.
It may even have conservation benefits. According to Todd Capson, the
ICBG's co-ordinator in Panama, the island of Coiba off the country's
Pacific coast has been saved from developers thanks to the ICBG's finding
that a newly discovered coral species which lives there has powerful
antimalarial properties. The island is now to become a nature reserve, in
order to protect the species. In this case, coral turns out to be more
valuable than hotels and golf courses.

Blowing a big opportunity? A Danish firm leads the wind-turbine world. Yet it lost money last year

Blowing a big opportunity?
Apr 7th 2005
From The Economist print edition

A Danish firm leads the wind-turbine world. Yet it lost money last year
YOU would think it hard to be the world leader in an industry roaring
ahead with government backing and subsidised customers—and still to lose
money. Yet Vestas Wind Systems, a Danish wind-turbine maker, did that last
year. It is a cautionary tale—and not just for Vestas.
Pushed by fears of global warming and by rising energy prices, wind power
is on a roll: worldwide, installed capacity rose by some 8,000MW last
year, to nearly 48,000MW, one-third of that in Germany. Of that new
8,000MW, Vestas, with 26 years in wind turbines and over 26,000 of them
installed, put in 35%. It has 9,500 employees, and a turnover, aided last
year by the takeover of its closest Danish rival, of €2.6 billion ($3.2
billion then), double the figure in 2001. Yet from €390m pre-tax profit
in that year it slid into two years of tiny profits and then, in 2004,
into a €50m loss.
Not everyone did badly. Gamesa, the Spanish world number two, with wind
turnover of €1.45 billion and 18% of the market, raised its profits.
Bonus, another Danish turbine maker, was bought by Siemens as the German
electrical-engineering giant's first step into wind power. LM Glasfiber,
also from Denmark, with only €300m of turnover but world leadership in
turbine rotor-blades, did the opposite of Vestas, moving from heavy loss
into profit.
Vestas itself should do better this year. The takeover of rival NEG-Micon
cost it €115m but brought with it blade technology, already proving its
worth as rotor and turbine sizes grow to shrink costs. Until now, a
three-bladed rotor of 80 metres diameter (260 feet) driving a 2MW turbine
has been typical. This year Vestas hopes to deliver 100-metre, 3MW
machines, and 120-metre, 4.5MW ones by 2007. It has also won solid orders,
not least its first from China, potentially a huge market if the Chinese
government really means what it says about renewable energy.
Still, things did go wrong. Why? One reason lies at Vestas's own door. The
machines it set up in 2002 at Horns Reef, a stormy site off Denmark's west
coast, could not stand the conditions, and had to be removed last year for
repair. This did not help sales, though some recent big orders suggest the
glitch has been overcome. So, in time, will be the fall of the dollar and
related currencies, which hit European exports: Vestas is to start
production in America and China. But there was another trouble that goes
far beyond Vestas.
If you must subsidise wind power, as many governments believe, the worst
way is by short-term, on-off measures whose future no one can foretell.
That is what Congress has done in America, another potentially huge
market—though still in its infancy, with only 6,750MW of capacity.
America offers “wind farming” a federal tax credit, now 1.8 cents per
kilowatt-hour. Born in 1992, this was switched off in mid-1999; revived in
December 1999 until end-2001; revived again in early 2002 until end-2003;
and only revived again (with back-dating for 2004) last October, until
end-2005. The uncertainty of this subsidy yo-yo has meant that the
building of new capacity also has yo-yoed wildly—2005 will be a record
year (and may be so also in Canada, whose smaller but better managed
federal subsidy is to be extended from the original 1,000MW of new
capacity to 4,000MW). The wind arm of GE Energy, the only big
American-owned turbine maker, and leader in its home market, expects to
double sales this year to over $2 billion. But, looking ahead, customers
are still uneasy: the nearer wind power gets to being genuinely
competitive, the more risk that Congress will not renew Uncle Sam's
handout next time around. If oil and gas prices stay high, Congress might
well be right. But meanwhile a sizeable industry—and subsidy—have both
been handled with absurd inefficiency.

Activists Push Kyoto Protocol Company by Company

Activists Push Kyoto Protocol Company by Company
The New York Sun, 4 April 2005 - It's shareholder resolution season and
global warming is again a hot issue. Environmental activists and their
partners in the investment community are turning up the heat on corporate
managements to implement the activists' agenda. Some managers are
resisting, but a disturbing number of others appear to be hoping
appeasement works. Worst of all, most investors seem oblivious to the
struggle and its significance.
In mid-March, six energy companies - Chevron-Texaco, Anadarko, Apache,
Unocal, Marathon, and Tesoro - surrendered to activist demands to "take
action" on global warming, including disclosure of greenhouse gas
emissions, the setting of emission goals, and integrating global warming
into core business strategies.
In exchange for these concessions, the activists withdrew their
shareholder resolutions on these issues - resolutions which, even if they
receive a majority of shareholder votes, are nonbinding on management.
Ford Motor Company announced this week it would appease activists by
agreeing to study how global-warming policy options might affect the
company's business.
"We have long identified climate change as a serious environmental issue,
and shareholders are increasingly asking about the risks as well as the
opportunities associated with it," said Ford CEO Bill Ford "It's time for
a broader, more inclusive public dialogue on the complex and important
challenge of climate change."
Mr. Ford apparently missed the very extensive public dialogue that started
in the 1980s, and which resulted in the Senate rejecting the Kyoto
Protocol by a vote of 95-0 in 1997 and President Bush pulling America out
of the treaty altogether in 2001.
One of the early corporate capitulators on global warming, energy producer
Cinergy, issued its annual report this week featuring a section titled,
"Global Warming: Connecting the Dots to Find Common Ground" - it's
disheartening evidence of how global warming hysteria has influenced
corporate managers.
Global warming "must be dealt with holistically," says Cinergy in New
Agespeak more appropriate for a spa brochure. "We must act now," warns
Cinergy, even though "we may never know for sure [whether we will
accomplish anything]. Cinergy quoted a retired college professor who
echoed the company's abandonment of science. "Humility is central to good
science," says the professor.
But science is about data, not humility - and the scientific debate
continues to rage over whether humans are adversely affecting global
climate. Just a few weeks ago, the Wall Street Journal reported that a key
computer model relied on by global warming believers is seriously flawed.
To the extent that there is any resistance to the activists, ExxonMobil
leads the way, taking a stance that forced the Securities and Exchange
Commission to overrule the company's objections to allowing shareholders
to vote on two global warming resolutions.
One activist investment manager recently told the Boston Globe that, "We
now see a significant trend among a range of companies to address climate
change. If we're not at the tipping point, we're coming close to it."
The main roadblocks for the activists are large shareholders like Fidelity
Investments who aren't interested in shareholder activism. If they don't
like how a company operates, they look elsewhere to invest. "It's not our
job to become involved in the management of a company," a Fidelity
spokesman told the Globe.
But this is a short-sighted strategy.
If radical social-activist investors continue to successfully pressure
companies on global warming and other aspects of their agendas, those
investment alternatives that Fidelity and others look for will eventually
disappear. Investors will have to invest in businesses hamstrung by the
Green agenda.
Through our public political process, we've already rejected the economic
disaster known as the Kyoto Protocol, a treaty whose provisions would
impose $100 trillion in societal costs for a hypothetical reduction in
average global temperature of 1 degree Centigrade.
Not accepting the verdict of the political process, the activists are
moving to implement the Kyoto Protocol on a corporation-by-corporation
basis, thus circumventing our democratic process.
It may not be Fidelity's job to be involved with corporate management, but
then this struggle is about more than the financial performance of
individual companies, it's about businesses being free to operate within
the bounds of the law.
Copyright 2005 The New York Sun, One SL, LLC


The poor wish to engage in the market, as buyers and sellers, says Antony Burgmans. With help from business, they can do so

Doing business with the poor
Antony Burgmans

The poor wish to engage in the market, as buyers and sellers, says Antony
Burgmans. With help from business, they can do so

Unilever, which I chair, is a company that touches people’s lives. This
may sound a little disingenuous from a businessman, but let me explain why
our long-term business success is intimately connected with the vitality
of the communities and the environment in which we operate.

Unilever makes food, home and personal care products. Our brands include
Dove, Sunsilk, Lipton, Knorr and ice-creams such as Magnum. Every day 150
million people in more than 150 countries choose our products. They do so
because they want to feel good daily, achieve more, look better, live
longer and healthier, and want to give their children a good start in
life. We have translated this daily quest for vitality in our new mission:
“Unilever’s mission is to add vitality to life. We meet everyday needs for
nutrition, hygiene and personal care with brands that help people feel
good, look good and get more out of life.” This mission gives us a clear
direction for the future. It focuses on new consumer opportunities to grow
our brands and our business. But how does this mission help our company to
address the needs of the poor in developing and emerging countries?

A wider mission
Unilever’s operations help to create wealth and generate employment for
local people. They bring the strength of an international business to
local economies. Unilever is deeply rooted in the communities where it
does business. Around the world we contribute to charities and work in
partnership with non-profit organizations, focusing on meeting local needs
and aiming to use our skills to make a real difference. In 2003, we
committed €66 million (then about $75 million) to community schemes,
equivalent to 1.5% of pre-tax profits. Some 42,000 of our employees –
nearly one in five – were involved in community activities with company
support and encouragement.

Companies are not just about making profits for shareholders, they are
also about contributing to society at large. Companies that do both are
more likely to win people’s trust – and they are in turn more likely to
choose the brands of a company that contributes to social wellbeing.
Consumers are increasingly bringing their opinions as citizens into their
buying decisions, demanding more from the companies behind the brands.
They want companies and brands they can trust. Unilever embraces these new
expectations. Our heritage of good governance, product quality and long
experience of working with communities gives us a strong base as we strive
to be both a successful business and a responsible corporate citizen.

We operate at a pivotal point in the supply chain between suppliers, on
whom we depend for our raw materials, and consumers whose everyday needs
and aspirations we seek to meet. The environment provides us with our raw
materials and the ingredients we need to make our products. Thriving
communities provide us with a healthy, growing consumer base.

People all over the world aspire to improve the quality of their lives and
gain access to basic consumer goods. Consumers in Europe or America can
easily buy our products. They can afford to purchase a big bottle of
shampoo that will be sufficient for a month or more. However, it is
different for a consumer in rural India, Africa or Latin America. There,
the price of such a bottle can be the equivalent of a week’s salary. But
people like using high-quality innovative products on special occasions –
when feeling good and looking good are important – a wedding, for example.
For these consumers we have developed small sachets at affordable prices.
They contain the same high-quality branded product but in smaller
quantities. This approach has put our products within reach of the poorest

Unilever believes that one of the best and most sustainable ways it can
help to address global social and environmental concerns is by doing
business in a socially aware and responsible manner. Much can be achieved
by industry through company efforts, but substantial progress on the
global challenges that face us will only be made if business, government
and stakeholders work together. We are committed to dialogue and
partnerships as we know we do not always get it right and that, often, a
multi-stakeholder approach is needed to solve a problem.

Salt of the earth
Iodine deficiency is the most common cause of preventable mental
retardation in young children. There are still 48 countries where less
than half of the population uses iodized salt and 41 million babies in the
developing world are being born every year unprotected from iodine
deficiency and its lifelong consequences.

Working closely with UNICEF (the UN body that seeks to improve the lives
of the world’s children), Unilever in Ghana has launched a brand of salt
fortified with iodine called Annapurna. The salt is made available in 200g
sachets to make it affordable for the country’s poorest families.
Following its success in Ghana, we introduced it in Nigeria, Africa’s
largest salt market, in 2003.

In India our subsidiary, Hindustan Lever, is taking part in an innovative
scheme to train villagers in business skills and, at the same time,
creating a new sales mechanism for its products.

In recent years non-governmental organizations (NGOs) and government
bodies have been working together to establish self-help groups for women
in Indian villages. These can have a huge impact on alleviating rural
poverty, with the help of microcredit, by enabling women to become
entrepreneurs and bringing much-needed income to villagers. This has a
knock-on effect for children by allowing families to keep more children in
schooling for longer.

Success for the groups, however, depends not only on access to this
small-scale funding, but on finding viable and sustainable business
opportunities. These are few and far between in many parts of rural India.

Helping the poor to help themselves
Project Shakti (“strength”) connects self-help groups with business
opportunities. Hindustan Lever offers the groups the chance to become
local, small-scale sellers of the company’s products. The groups,
typically of 15 to 20 people, buy a small stock of items such as Lifebuoy
soap, Wheel detergent or Clinic shampoo, which are then sold directly to
consumers in their homes.

Working in conjunction with the local district authorities, Project Shakti
was piloted in 2002 in 50 villages in the state of Andhra Pradesh, and has
since been extended to other states, creating more than 9,000
entrepreneurs. Hindustan Lever provides free training on the basics of
business management to the groups, whether they choose to become Hindustan
Lever distributors or to set up other types of small enterprise. The
company also offers continuing “on the job” training once the business is

Many of the women have little or no education and no experience of running
a business, so such support is an essential component in enabling the
business to succeed. Most of the women who have chosen to become rural
sellers of Hindustan Lever products have managed to create a sustainable
micro-enterprise for themselves. They are generating a steady monthly
income of approximately Re1,000 (about $22), almost doubling their
household incomes. This helps to improve family health, hygiene and living
standards, including education for their children.

Project Shakti works in partnership with NGOs and local schoolteachers to
provide educational resources for children through libraries and computer
kiosks. There will be 3,500 kiosks installed across rural south India by
2005, making information accessible to 14 million people.

I believe that companies, doing business in a responsible and sustainable
way, can help raise the quality of life and standards of living in some of
the poorest parts of the world. I hope that if we take pride in our
aspirations and achievements, society around us will recognize our
contribution and deem our pride to be justified.

Antony Burgmans
Antony Burgmans is chairman of Unilever NV.

Poor Idea
The New Republic, 7 March 2005 - In 1996, I stumbled across a curious
experiment in global capitalism in the jungles of Borneo. On the Malaysian
side of the island, in a beautiful river city called Kuching, a U.S.
company was building Borneo's second electronics factory. I remember
standing uneasily in the mud and muck of a construction site that had been
carved out of a rain forest near Kuching's small airport. In the heat of
the day, wearing a hard hat, a perspiring executive from Middle America
named Bob Snyder began excitedly telling me about his "experiment."
Snyder worried that Kuching, with only about 300,000 people, was too small
to supply him with all the workers he would ultimately need. Relying only
on city folks, he feared that he would soon exhaust the local labor supply
and that wages would rise. His solution was to devise a test: Take a man
out of the jungle and turn him into a reliable worker. If he succeeded,
Snyder wagered, he would never face a shortage of labor.
Snyder then revealed that he had recently hired such a man, a subsistence
tree-cutter and rice planter who hailed from a village a few hours away.
The man's name was Donald Jagau. He was 28 years old, a husband, a father,
and a member of a Dayak tribe native to Borneo's dense forests. His
village lacked electricity and could be reached only by riverboat. With a
reasonable command of English and a sharp mind, Jagau was proving a worthy
pupil--so worthy that Snyder had sent him to California to train (for
nearly a year) in Silicon Valley. Jagau would soon return to Kuching to be
among the first workers in Snyder's new factory.
Once back in Kuching, Jagau thrived. Over time, he rose from simply
tending a machine to training other new arrivals from the jungle. His
salary grew to nearly $500 per month, which gave him and his family a
higher income than 50 percent of Malaysian households. The company sent
him to Scotland for further training on the latest machinery. Jagau even
had health insurance and enough disposable income to purchase a
Documenting Jagau's transformation from impoverished forest dweller to
upwardly mobile high-tech worker became a side project for me. Over the
next few years, during trips to Southeast Asia, I visited him several
times, writing about him in The Wall Street Journal, for which I was a
foreign correspondent, and also in a book I wrote about globalization. As
I charted Jagau's ascent, I marveled at the "invisible hand" of
capitalism. In the pursuit of his selfish interests, an American executive
had transformed the material circumstances of Jagau's life. Deep in the
jungle, a would-be Colonel Kurtz was disciplined by market forces. Charity
was alien to Snyder's mentality, and he could be accused of exploiting
Jagau, who, in time, came to resent the relentless monotony of the factory
and his absence from the tranquil forests he so enjoyed. Yet Snyder had
done more for Jagau than any philanthropist could. Just ask Jagau's
brother, Jonathon, who remained an impoverished tree-cutter. Despite his
misgivings about being rushed into modern life, Donald Jagau would never
choose his brother's life, with its grinding insecurity and deprivation.
And it is easy to understand why. The last time I saw Jonathon, he was
firing a .22-caliber rifle at the faint outlines of a small animal.
Hungry, he hunted not for sport. And that night he missed.
The tale of Donald Jagau would surely warm the heart of C.K. Prahalad, a
business consultant and management expert. Born and raised in India,
Prahalad, who teaches business at the University of Michigan, is a leading
thinker in a movement of wealthy, successful capitalists who now suffer
from guilty consciences. About the time Jagau was chopping down a tree and
hearing an ad on his portable radio for a job in a high-tech factory,
Prahalad was asking himself, "What are we doing about the poorest people
around the world?"
Helping the world's poor is not standard fare for business, but Prahalad
wants to change that. He wants to bring serious discussions of poverty out
of the Ford Foundation and the World Bank and into the corporate
boardroom. He offers an immodest proposal: not to alleviate poverty, or
reduce it, which is the goal of development experts. Nope. That's too low
a bar for Prahalad, who has the over-the-top confidence that comes from
selling his ideas to senior management. (He is, according to BusinessWeek
Online, "one of Corporate America's top management gurus.") Instead,
Prahalad talks unabashedly of "eradicating" poverty, as if the global poor
were a neglected market to be reevaluated, readdressed, and, ultimately,
conquered with a re-branded product.
How? Sweeping aside decades of experience and a mountain of literature
with a few caricatures, Prahalad presents his own, very simple, solution
to poverty: Give the poor decent products at affordable prices. In short,
treat the poor as consumers. Companies who do, he argues, will find "the
fortune at the bottom of the pyramid." The phrase, which is the title of
Prahalad's latest book, refers to the world's wealth pyramid. Out of six
billion people, one third are relatively wealthy and one third are
absolutely poor, living on a $1 per day or less. Prahalad says these
people, plus two billion more who live on between $1 and $2 per day, make
up the "bottom of the pyramid," or BOP for short.
Prahalad argues that multinational corporations should pursue the poor
because they are "a growth opportunity." In treating the poor as a new
market, Prahalad contrasts his own BOP approach with that of the older and
better-known corporate social-responsibility (CSR) movement. CSR argues
that companies have a moral obligation to do good. But, in Prahalad's
view, CSR is ultimately about handouts, while BOP is about building
profitable businesses that happen to serve the poor. He insists, "If we
stop thinking of the poor as victims or as a burden and start recognizing
them as resilient and creative entrepreneurs and value-conscious
consumers, a whole new world of opportunity will open up." By catering to
the poor, Prahalad sees the chance for multinational corporations--ever
seeking fresh customers--to build profitable businesses in unlikely
If you haven't heard of Prahalad or his ideas, you haven't been hanging
out with the folks who attend the World Economic Forum in Davos,
Switzerland, or hobnobbing with Bill Gates or Ted Turner, billionaires who
are trying to save the world, or at least a bit of it. For multinational
corporations that have tried just about every scheme to put a human face
on markets, Prahalad's belief that doing well and doing good go hand in
hand is a welcome tonic. The New Yorker's James Surowiecki and Fortune's
David Kirkpatrick warmly recommend his ideas, and The Economist predicts
that Prahalad's book "seems destined to be read not just in boardrooms but
also in government offices." Former Secretary of State Madeleine Albright
says of Prahalad, "If you are looking for fresh thinking about emerging
markets, your search is ended." Gates praises Prahalad for providing "a
blueprint for fighting poverty." Prahalad has the ear of Kofi Annan and
served recently on a U.N. Development Program (undp) commission on "the
private sector and development." And, in mid-December, Prahalad convened a
meeting in San Francisco of his fellow travelers in the BOP movement,
including the CEOs of Hewlett-Packard, Visa, and Vodaphone. He was joined
by emissaries from such global poverty-fighters as the World Bank, the
U.S. Agency for International Development, and the undp. And Prahalad's
"eradicating poverty" confab was funded by, among others, Shell,
Microsoft, ChevronTexaco, Dupont, the Inter-American Development Bank, and
investment bank ABN Amro.
Prahalad's theory that doing well jibes with doing good may seem like
pabulum, but its popularity among corporate leaders and luminaries of
globalism is worth pondering. In the past, the world's largest
corporations have often acted as if profit-seeking and ethics are in
conflict. So, in one respect, Prahalad deserves credit for exhorting the
biggest businesses to try harder to square moral and financial imperatives
and to begin by crafting new strategies and tactics to liberate the poor
from what he calls the "poverty penalty." Traditionally, businesses that
specialized in the poor also specialized in gouging them, extorting
extra-high profits as a "reward" for going through the trouble of dealing
with them in the first place. In the United States, we have laws to
counteract the practice. In many poor countries, however, gouging the poor
is the norm, so even basic goods (bags of rice, matches, a container of
cooking oil) are sold at inflated prices. Smartly, Prahalad argues that
multinational corporations have abetted this sorry state of affairs by
limiting themselves to the pursuit of wealthier customers in poor
countries on the theory that consumers with more money to spend are
likelier to buy their products. Instead, he says, big business should
design products for the poor from scratch so that reasonable profits can
be earned even on lower prices.
But why would multinational corporations go to the trouble of, say,
catering to the hygiene or communication needs of the poor in Cambodia, if
not to burnish their moral images? Profits and growth is Prahalad's
answer. Taken collectively, the "purchasing power" of even the poorest
segments of poor countries is substantial. There is money to be made from
the poor, he argues, and someday, the poor may be richer and they will
move upmarket (to more expensive goods and services) with the brands they
Prahalad's argument sounds convincing until you realize that providing
goods and services to the poor, fairly and effectively, is difficult for
private corporations. He insists that "large-scale and widespread
entrepreneurship is at the heart of the solution to poverty," yet he
offers few examples, and his favorites are presented over and over again:
in India, a prosthetic foot manufacturer, an eye clinic, and a
single-package shampoo from the Indian arm of Unilever, the global
consumer products company. He is high on a Brazilian department store,
Casas Bahia, which sells in Rio's favelas mainly to self-employed service
workers. He applauds the Mexican cement giant Cemex for helping the poor
build homes through careful purchases of cement. He sings the praises of
microfinance, invoking the well-worn example of Bangladesh's Grameen Bank
and its thousands of spin-offs. He favors new technologies, citing the
rapid growth of mobile phones in poor countries, and extols the virtues of
telecenters, which, in many parts of the world, have given the poor
cutting-edge communications tools for the first time in history.
But there are two sets of problems with Prahalad's examples. First, so
long as the poor spend what little money they have, they will remain poor,
even if they now benefit from higher-quality goods. Prahalad glides over
this critical point. In fact, the poor can still be poor even if they pay
less for certain essential goods. How? To start with, they can be
persuaded (by those aggressive corporations suddenly paying attention to
them in pursuit of profit) to purchase things they did not formerly need.
Prahalad, for instance, repeatedly celebrates the success of Avon in
selling cosmetics in the heart of the Amazon without asking who benefits,
really, from those purchases.
Prahalad's blase attitude toward the effects of marketing on poor people
is willful blindness. He ought to know better. Members of the middle class
are not alone in trying to live beyond their means. Poor people try, too.
And they can be ensnared even by well-intended marketing campaigns. I am
reminded of a Frito-Lay push I witnessed in the mid-'90s in Bangkok.
Potato chips were alien to the Thai diet, dominated by fruit- and
rice-based snacks. Unhappy with locally grown potatoes, Frito-Lay trained
Thai farmers to grow better quality ones. Assured of this supply, the
company blitzed the snack market, even trumpeting the "nutritional" value
of its chips on its packaging. The nutritional labeling gave a healthy
impression and was successfully used by Frito-Lay to cut into the sales of
countless roadside snack peddlers. But even the best-packaged snack foods
are a poor substitute for plentiful local fruits and rice dishes, usually
available at a fraction of the price. In short, a taste for packaged
potato chips are making Thai people fatter and less healthy--and cannot
possibly help the budget of any poor person buying them. Such a clear
contradiction--how better services to the poor can nevertheless ravage
their daily budget--seems lost on Prahalad.
Then there is the problem that Prahalad's favorite examples--say, the
low-cost prosthetic foot and the bargain eye surgery--are priced too high
for the genuinely poor to afford. What's more, multinational corporations,
despite Prahalad's exhortations, aren't well-positioned to serve the poor.
In India, for instance, domestic companies, not multinationals, are most
attuned to impoverished consumers. Consider the push by Tata, one of
India's largest domestic carmakers, to build an auto for the masses. The
company's goal: a new car priced at $2,200 that will appeal to the five
million Indians who own motorbikes but can't afford a standard car. Tata
plans to sell both ready-to-drive and kit versions of the car. The kit
version, the company thinks, could spawn a cottage industry of small auto
assemblers around the country. No multinational carmaker has a business
model that can be easily adapted to match Tata's bold goal of a people's
car. The same is true in such diverse fields as pharmaceuticals, where
India's leading companies are far ahead in making drugs for the poor, and
in water pumps, where the most reliable and least costly devices are
Indian-designed and -made. That India's leading companies concentrate on
the poor shows the benefits of restraining, not unleashing,
multinationals. It was India's protectionist trade rules, maligned for
decades, that gave its domestic companies the living space out of which
today's innovations flow.
The most serious shortcoming of Prahalad's feel-good message is that it
ignores the experience of the poorest part of the world: subSaharan
Africa. China and India, where Prahalad is most excited about the promise
of a BOP strategy, have seen dramatic reductions in poverty over the past
20 years. What's more, these achievements were not the result of the
private sector pursuing profits from the poor. In fact, multinational
corporations have spent billions pursuing Chinese consumers over the past
decade, and almost none of them have any profits to show for it. Instead,
with the help of big government, China has exported its way out of
poverty, becoming the workshop for the world. India has grown in a more
complex fashion, through a sharper focus on its domestic market. But
Africa is poorer today than in 1990. This striking trend sets the
continent apart from the rest of the world. In the '90s, the percentage of
people living on $1 per day in East Asia fall by half, from about 30 to 15
percent. South Asia (chiefly India, Pakistan, and Bangladesh) saw rates
fall from the low forties to the low thirties. Only in sub-Saharan Africa,
where poverty rates were already the highest in the world, have they grown
higher still, now approaching 50 percent.
Africa arguably needs a BOP strategy more than anywhere else in the world,
yet Prahalad has virtually nothing to say about the region. He offers no
formal case studies--or even extended examples--of BOP successes in
Africa. (The index to his book, The Fortune at the Bottom of the Pyramid,
contains no entries on Africa, or even individual African countries; a
single entry, for an obscure food enterprise in Nigeria, is the lone
reference.) Prahalad's neglect of Africa betrays the big lie at the heart
of his argument: that business, pursuing profits, can provide the
essentials of a good life to the poorest members of society; that the
goods and services we hope even the poor can possess--things like clean
water, decent schools, basic electricity, public safety--can be delivered
at a profit, and by a private business.
Prahalad says the BOP model can vastly improve public services for the
poor, and one consequence of his ideas is to underscore the importance of
privatizing failing public enterprises. Indeed, the capacity of private
corporations to deliver services once viewed as the sole purview of
government is central to the BOP movement. To be sure, public services for
profit work in some places--and they would work in Africa, too, if there
were profits to be made. But there are not. Privatization is a bust in
Africa, and not always because Africans have made it difficult for private
actors. Consider a brief example of a best-case scenario: the capital city
of Accra, Ghana, where, for the past few years, an honest government in a
peaceful country has tried to attract foreign capitalists to invest in its
creaky water system. The plan, which received the blessing of the World
Bank, was well-conceived. To entice investors, the government raised water
rates in advance of improvements in the water system--in the hope that
higher revenue would entice a foreign savior to plunk down cash to pay for
much-needed improvements in service. (Most of Ghana's poor city-dwellers
have no piped water, and even those who do are subject to frequent
outages.) Of course, this all sounds like a great bottom-of-the-pyramid
opportunity, except for one problem: No foreigners, or even locals,
offered to invest in water delivery. Not one of the world's three major
water companies was interested in putting money into Ghana. No local
entrepreneurs wanted to either. And they didn't for a good reason. There's
no profit in it. The truth is that extracting money from poor Africans in
exchange for water isn't a business at all. It's a public service.
The best solution to poverty is, of course, the creation of good jobs--of
the sort that changed the life of my Malaysian friend Donald Jagau. And,
to be sure, good jobs are of little value if no markets exist to serve
these newly enriched consumers. But Prahalad turns this traditional
model--first jobs and then markets--on its head. Instead, he argues for
elevating the weakest consumers--insisting that the most powerful
capitalists ought to take them as seriously as the wealthiest people of
the world. In doing so, he presents a seductive alternative reading of the
multinational corporation--as an agent of transformation and empowerment,
not a force for exploitation and the concentration of wealth. It's no
wonder he has inspired the allegiance of the world's CEOs.
But can selling to the poor help alleviate poverty? And can multinational
corporations really profit from the impoverished while at same time
delivering goods and services the poor value? In a Harvard Business Review
article two years ago, which was the seed for his new book, Prahalad
conceded that "big companies are not going to solve the economic ills of
developing countries by themselves.... But it's clear to us that
prosperity can come to the poorest regions only through the direct and
sustained involvement of multinational companies." But Prahalad's
confidence in big corporations is not justified by their performance thus
far. His curious experiment, still in its infancy, may yet prove his faith
in the "fortune at the bottom of the pyramid." But, more likely, it will
show that he traded in false hopes.
Copyright 2005 The New Republic, LLC

The demographic deficit: How aging will reduce global wealth

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7 April 2005| IBM Edition
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Feature Article
The demographic deficit: How aging will reduce global wealth
To fill the coming gap in global savings and financial wealth, households
and governments will need to increase their savings rates and earn higher
returns on the assets they already have.
Diana Farrell, Sacha Ghai, and Tim Shavers
The McKinsey Quarterly, Web exclusive, March 2005

The world's population is aging, and as it gets even grayer, bank balances
will stop growing and living standards, which have improved steadily since
the industrial revolution, could stagnate. The reason is that the
populations of Japan, the United States, and Western Europe, where the
vast majority of the world's wealth is created and held, are aging rapidly
(Exhibit 1). During the next two decades, the median age in Italy will
rise to 51, from 42, and in Japan to 50, from 43. Since people save less
after they retire and younger generations in their prime earning years are
less frugal than their elders were, savings rates are set to fall

In just 20 years, household financial wealth in the world's major
economies will be roughly $31 trillion1 less than it would have been if
historical trends had persisted, according to new research by the McKinsey
Global Institute (Exhibit 2).2 If left unchecked, the slowdown in
global-savings rates will reduce the amount of capital available for
investment and impede economic growth.

No country will be immune. For the United States—with its relatively young
population, higher birthrates, and steady influx of immigrants—the aging
trend will be relatively less severe. Still, its savings rate is already
dismally low, even before the baby boomers have started to retire. To
finance its massive current-account deficit, the United States relies on
capital flows from Europe and Japan, but they too face rapidly aging
populations. Even fast-growing developing countries such as China will not
be able to generate enough savings to make up the difference.
Finding solutions won't be easy. Raising the retirement age, easing
restrictions on immigration, or encouraging families to have more children
will have little impact. Boosting economic growth alone is not a solution,
nor is the next productivity revolution or technological breakthrough. To
fill the coming gap in global savings and financial wealth, households and
governments will need to increase their savings rates and to earn higher
returns on the assets they already have. These changes involve hard
choices but can offer a brighter future.
Growing older, saving less
In just two decades, the proportion of people aged 80 and above will be
more than 2.5 times higher than it is today, because women are having
fewer children and people are living longer. In about a third of the
world's countries, and in the vast majority of developed nations, the
fertility rate is at, or below, the level needed to maintain the
population. Women in Italy now average just 1.2 children. In the United
Kingdom, the figure is 1.6; in Germany, 1.4; and in Japan, 1.3. Meanwhile,
thanks to improvements in health care and living conditions,3 average life
expectancy has increased from 46 years in 1950 to 66 years today.
As the elderly come to make up a larger share of the population, the total
amount of savings available for investment and wealth accumulation will
dwindle. The prime earning years for the average worker are roughly from
age 30 to 50; thereafter, the savings rate falls. With the onset of
retirement, households save even less and, in some cases, begin to spend
accumulated assets.
The result is a decline in the prime savers ratio—the number of households
in their prime saving years divided by the number of elderly households.
This ratio has been falling in Japan and Italy for many years. In Japan,
it dropped below one in the mid-1980s, meaning that elderly households now
outnumber those in their highest earning and saving years. Japan is often
thought to be a frugal nation of supersavers, but its savings rate
actually has already fallen from nearly 25 percent in 1975 to less than 5
percent today. That figure is projected to hit 0.2 percent in 2024. In
2000, the prime savers ratios of Germany, the United Kingdom, and the
United States either joined the declining trend or stabilized at very low
levels. This unprecedented confluence of demographic patterns will have
significant ramifications for global savings and wealth accumulation.
How the decline in prime savers will affect total savings depends on how
these people's savings behavior changes over the course of a household's
life. Germany, Japan, and the United States have traditional hump-shaped
life cycle savings patterns (Exhibit 3). In these countries, aging
populations will cause a dramatic slowdown in household savings and
wealth. In contrast, Italy has a flatter savings curve, resulting in part
from historical borrowing constraints that forced households led by people
in their 20s and 30s to save more. Thus an increase in the share of
elderly households will have less impact on the country's financial

In some countries, the relatively lower savings rates of younger
generations in their peak earning years will exacerbate the slowdown in
savings and wealth. In the United States and Japan, where we analyzed
generation-specific savings data, several factors contribute to this
pattern: a tendency to rely more on inheritance than past generations did,
the good fortune to avoid the economic hardships that prompted earlier
generations to be more frugal, and the availability of consumer credit and
mortgages (which, in the case of Japan, have become more socially
The coming shortfall in household wealth
Most of the public discussion on aging populations has focused on the
rapidly escalating cost of pensions and health care. Little attention has
been paid to the potentially far more damaging effect that this
demographic phenomenon will have on savings, wealth, and economic well
being. As more households retire, the decline in savings will slow the
growth in household financial wealth in the five countries we studied by
more than two-thirds—to 1.3 percent, from the historical level of 4.5
percent. By 2024, total household financial wealth will be 36 percent
lower—a drop of $31 trillion—than it would have been if the higher
historical growth rates had persisted.
Of course, changes in savings behavior by households and governments or
increases in the average rate of return earned on those savings could
alter this outcome. Without such changes, however, our analysis indicates
that the aging populations in the world's richest nations will exert
severe downward pressure on global savings and financial wealth during the
next two decades. The United States will experience the largest shortfall
in household financial wealth in absolute terms—$19 trillion by
2024—because of the size of its economy. The growth rate of the country's
household financial wealth will decline to 1.6 percent, from 3.8 percent.
Since the aging trend is less severe in the United States, reduced savings
rates among younger generations are responsible for a large part of the
In Japan, the situation is much more serious. Household financial wealth
will actually start declining during the next 20 years: by 2024 it will be
$9 trillion—47 percent lower than it would have been if historical growth
rates had persisted. Japan's demographic trends are severe: the median age
will increase to 50, from 43 (for the US population, it will rise to 38,
from 37), and the savings of elderly households fall off at a faster rate
in Japan than in the United States. Even more important, household
financial wealth in Japan is almost exclusively the result of new savings
from income rather than of asset appreciation; therefore, the falloff in
savings causes a bigger decline in wealth.
The outlook for Europe varies by country. Italy will experience a large
decline in the growth rate of its financial wealth—to just 0.9 percent,
from 3.4 percent—because of the rapid aging of its population. Its
relatively flat life cycle savings curve will mitigate the impact,
however, resulting in an absolute shortfall of about $1 trillion, or 39
percent. The projected decline in the growth rate of financial wealth in
other countries will be less dramatic: to 2.4 percent, from 3.8 percent,
in Germany (because of its higher savings rates) and to a still-healthy
3.2 percent, from 5.1 percent, in the United Kingdom (because of its
stronger demographics).
Global ripple effects
This slowdown in household savings will have major implications for all
countries. In recent years the United States has absorbed more than half
of the world's capital flows while running a current-account deficit
approaching 6 percent of GDP. Japan has historically enjoyed a huge
current-account surplus, which has allowed it to be a major exporter of
capital to other countries, notably the United States. The expected drop
in Japan's household savings will make this arrangement increasingly
In all likelihood, the United States also won't be able to rely on
European nations, with their aging populations, to increase capital flows.
Nor can it expect rapidly industrializing nations, such as China, to fill
the gap. Even if China's economy continued to grow at its current
breakneck pace, it would need approximately 15 years to reach Japan's
current GDP. In any case, if China is to sustain this growth, the United
States must continue consuming at its current level—something it cannot do
if capital flows from abroad decrease. Even if China did have savings to
export, it would have to confront the obstacles posed by its current
exchange rate and capital controls regime.
Although an increase in global interest rates and the cost of capital may
seem inevitable, it is not. On the one hand, as global savings fall
markets can adjust through changes in asset prices and demand; which of
these will predominate is unclear. Some economists forecast less demand
for capital: fewer households will be taking out mortgages and borrowing
for college, governments will invest less in infrastructure to keep pace
with population growth, and businesses won't have to add as much capital
equipment to accommodate a labor force that will no longer be growing. On
the other hand, the demand for capital is likely to remain strong if
emerging markets and rich countries seek to boost their GDP and
productivity growth by increasing the amount of capital per worker.
Likewise, while a drop in global savings could drive up asset prices,
opposing forces will also be at work, as retirees begin selling their
financial assets.4
One thing is certain: as household savings rates decline and the pool of
available capital dwindles, persistent government budget deficits will
likely push interest rates higher and crowd out private investment. The
rising cost of caring for an aging population in the years to come will
force national governments to exercise better fiscal discipline.
No easy solutions
Many policy changes suggested today, such as increasing immigration,
raising the retirement age, encouraging households to have more children,
and boosting economic growth, will do little to mitigate the coming
shortfall in global financial wealth (Exhibit 4).

Our analysis shows that an aggressive effort to increase immigration won't
solve the problem, simply because new arrivals represent only a tiny
proportion of any country's population. In Germany, for instance, a 50
percent increase in net immigration (to 100,000 people a year) would raise
total financial assets just 0.7 percent by 2024. In Japan, doubling
official projections of net immigration would have almost no impact on the
number of households or on the country's aggregate savings. The same is
true even in the United States, which had the highest historical levels of
immigration in our sample.
Since households don't reach their prime saving years until middle age,
promoting higher birthrates through policies such as child tax credits,
generous maternity-leave policies, and child care subsidies will also have
only a negligible effect by 2024. This approach could actually make the
situation worse by adding child dependents to a workforce already
supporting a larger number of elderly.
Similarly, raising the retirement age won't be particularly effective in
most countries. In Japan, efforts to expand the peak earning and saving
period by five years (a proxy for raising the retirement age) would close
25 percent of the projected wealth shortfall in that country. In Italy,
however, this approach would have little impact because households do not
greatly reduce their savings in retirement.
After the IT revolution and the jump in US productivity growth during the
late 1990s, it may be tempting to think that countries might grow
themselves out of the problem. Without changes in the relationship between
income and spending, however, an increase in economic growth won't
generate enough new savings to close the gap. The simple reason is that as
incomes and standards of living rise, so does consumption. For instance,
raising average income growth in the United States by one percentage
point—a huge increase—would narrow the projected wealth shortfall by only
10 percent.
Navigating the demographic transition
The only meaningful way to counteract the impending demographic pressure
on global financial wealth is for governments and households to increase
their savings rates and for economics to allocate capital more
efficiently, thereby boosting returns.
Boosting asset appreciation
The underlying performance of domestic capital markets varies widely
across countries, resulting in significantly different rates of return.5
Since 1975, the average rate of financial-asset appreciation in the United
Kingdom and the United States has been nearly 1 percent a year, after
adjusting for inflation. In contrast, financial assets in Japan have
depreciated by a real 1.8 percent annually over the same period (although
the ten-year moving average is now near zero). Real rates of asset
appreciation have been negative in Germany and Italy as well.
UK and US households compensate for their low savings rates by building
wealth through high rates of asset appreciation. Their counterparts in
Continental Europe and Japan save at much higher rates but ultimately
accumulate less wealth, since these savings generate low or negative
returns. From 1975 to 2003, unrealized capital gains increased the value
of the financial assets of US households by almost 30 percent. But in
Japan the value of such assets declined. European countries fell somewhere
in between.
Raising the rates of return on the $56 trillion of household savings in
the five countries we studied could avert much of the impending wealth
shortfall. In Germany, increasing the appreciation of financial assets to
0 percent, from the historical average of -1.1 percent, would completely
eliminate the projected wealth shortfall. The opportunity is also large
for Italy, since its real rate of asset appreciation has averaged -1.6
percent since 1992; raising returns to the levels in the United Kingdom
and the United States would fully close the gap. For the latter two
countries, the challenge could be more difficult because their rates of
asset appreciation are already high.
Achieving the required rates of return will call for improved financial
intermediation so that savings are funneled to the most productive
investments. To achieve this goal, policy makers must increase competition
and encourage innovation in the financial sector and in the economy as a
whole,6 enhance legal protections for investors and creditors, and end
preferential lending by banks to companies with political ties or
shareholder relationships.
For some countries, such as Japan, where households keep more than half of
their financial assets in cash equivalents, diversifying the range of
assets that individuals hold is an important means of increasing the
efficiency of capital allocation.7 To promote a better allocation of
assets, policy makers should remove investment restrictions for
households, improve investor education, and create tax incentives for
well-diversified portfolios. New research in behavioral economics has
shown that offering a balanced, prudent allocation as the default option
for investors can improve returns because they overwhelmingly stick with
this option.8
Increasing savings rates
In many countries, today's younger generations earn more and save less
than their elders do. This discrepancy is an important driver of the
wealth shortfall in the United States and, more surprisingly, in Japan. If
younger generations saved as much as their parents did while continuing to
earn higher incomes, one-quarter of Japan's wealth shortfall and nearly a
third of the US gap would be closed by 2024.
Persuading young people to save more is difficult, however, and tax
incentives aimed at increasing household savings have yielded mixed
results.9 Contrary to conventional wisdom, too much borrowing is not the
culprit in most countries. Although household liabilities have grown
significantly faster than assets have across our sample since 1982,
keeping consumer borrowing in line with asset growth would close $2.3
trillion, or just 7.5 percent, of the projected wealth shortfall.
The key to boosting household savings is overcoming inertia. When
companies automatically enroll their employees in voluntary savings plans
(letting them opt out if they choose) rather than requiring people to sign
up actively, participation rates rise dramatically.10 A study at one US
Fortune 500 company that instituted such a program found that enrollment
in its 401(k) retirement plan jumped to 80 percent, from 36 percent; the
increase among low-income workers was even greater.11 In addition, a
substantial fraction of the participants in the automatic-enrollment
program accepted the default for both the contribution rate and the
investment allocation—a combination chosen by few employees outside the
Of course, governments can also increase the savings rates of their
countries through the one mechanism directly under their control—reducing
fiscal budget deficits. Maintaining fiscal discipline now is vital if
governments are to cope with the escalating pension and health care costs
that aging populations will accrue.
If policy makers take no action, the coming slowdown in global savings and
the projected decline in financial wealth could depress investment,
economic growth, and living standards in the world's largest and
wealthiest countries. The future development of poor nations could also be
in jeopardy. A concerted, sustained effort to increase the efficiency of
capital allocation, boost savings rates, and close government budget
deficits can avert this outcome.
About the Authors
Diana Farrell is director of the McKinsey Global Institute, where Tim
Shavers is a consultant; Sacha Ghai is a consultant in McKinsey's Toronto
The authors wish to thank Ezra Greenberg, Piotr Kulczakowicz, Susan Lund,
Carlos Ocampo, and Yoav Zeif for their contributions to this article.
1All figures given in this article are valued in 2000 US dollars, and all
growth rates indicate real terms.
2This study examined the impact of demographic trends on household savings
and wealth in Germany, Italy, Japan, the United Kingdom, and the United
States. The full report, The Coming Demographic Deficit: How Aging
Populations Will Reduce Global Saving, is available for free online.
3The State of World Population, 1999 and 2004, United Nations Population
4Empirical analyses on the impact of demographic changes on
financial-asset prices and returns are inconclusive. See Barry P.
Bosworth, Ralph C. Bryant, and Gary Burtless, The Impact of Aging on
Financial Markets and the Economy: A Survey, Brookings Institution, July
2004; and James Poterba, "The impact of population aging on financial
markets," National Bureau of Economic Research working paper W10851,
October 2004.
5In this article, the terms "financial-asset appreciation" and "returns"
refer to the unrealized capital gains on financial assets, not to interest
and dividends paid. By convention, interest and dividends are treated as
household income, a portion of which may be saved.
6For a good synthesis of MGI's research, see William W. Lewis, The Power
of Productivity, Chicago: University of Chicago Press, 2004.
7Moving households closer to the efficient frontier of risk and returns
serves to make asset pricing more precise and forces companies to practice
greater capital market discipline.
8Brigitte C. Madrian and Dennis F. Shea, "The power of suggestion: Inertia
in 401(k) participation and savings behavior," Quarterly Journal of
Economics, November 2001, Volume 116, Number 4, pp. 1149–87.
9B. Douglas Bernheim, "Taxation and saving," Handbook of Public Economics,
Volume 3, Alan J. Auerbach and Martin Feldstein (eds.), New York: Elsevier
North-Holland, 2002.
10James J. Choi, David Laibson, Brigitte C. Madrian, and Andrew Metrick,
"Defined contribution pensions: Plan rules, participant decisions, and the
path of least resistance," National Bureau of Economic Research working
paper W8655, December 2001.
11Brigitte C. Madrian and Dennis F. Shea, "The power of suggestion:
Inertia in 401(k) participation and savings behavior," Quarterly Journal
of Economics, November 2001, Volume 116, Number 4, pp. 1149–87.
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Spotlight turned on environmental research and ratings firms

Spotlight turned on environmental research and ratings firms
Poulomi Mrinal Saha
5 Apr 05
In an effort to end user confusion, a new Environment Agency report
reviews the various types of outputs produced by the growing number of
corporate environmental research providers
Last week, the UK’s Environment Agency published a report reviewing the
work undertaken by various ratings, rankings and indexing agencies in the
field of corporate environmental performance.

Global engineering and environmental consultancy, URS Corporation Ltd
produced the report for the Environment Agency.

It is the third in a trilogy of corporate environmental research studies
published by the agency.

Last year, corporate ethical research providers, Trucost and Innovest
produced reports on corporate environmental disclosure in annual reports
and links between corporate environmental governance and financial
performance respectively.

This latest report by consultancy URS, reviews 13 organisations that
assess the ‘greenness’ of listed companies and convert the accumulated
data into ratings, rankings and indices.

The data assessed by the researchers is usually linked to companies’
environmental impacts, risks, management and performance.

Research providers such as Innovest and Trucost aim their findings towards
business, SRI fund managers, investment analysts and the media.

Much ado about a lot

But the plethora of information available in the public domain coupled
with the differing methodologies used to reach that information confuses
the targeted users, says the Environment Agency.

“This has recently led to a reduction in confidence in the results and
some products being the focus of criticism from various parties, rather
than being seen and used as a tool to help companies improve their
environmental and financial performance,” says the EA report.

According to its findings, only 30% of research organisations obtained
their information voluntarily from companies such as questionnaires
compared to 46% that relied on public documents.

To add to this, the sources of initial input used by research providers
for assessment are varied. They usually include public databases,
self-assessment questionnaires, company engagement and regulatory body

The Environment Agency recommends that research organisations should use
as many of these sources as possible in order to avoid any bias.

“It is essential to understand the relative reliability and the value of
the sources of information used in an assessment. The input data will have
a direct bearing of the outputs.”

The agency further encourages the use of quantitative environmental data
instead of qualitative data in order to ensure objectivity of research.

It adds that research providers should also use external verifiers to add
credibility to their work and assure quality. Most of them just use
internal peer reviews and external advisory panels.

One of the other issues the report discusses is the differing aspects of a
company’s environmental performance that research groups assess. They
could be related to risk, impact, management or performance. Hence the
outputs may appear “contradictory” to those unfamiliar with the differing
approaches adopted.

“Company environmental performance can often be more complex and
multi-layered than is allowed for in a straightforward ‘good practice/bad
practice’ assessment,” says the Environment Agency.

More on methods please

The agency suggests that research organisations should be more open and
transparent about the methods used by them in assessing company
environmental data.

It reiterates a call from users for some consistency and standardisation
in the inputs used and outputs produced.

“Greater collaboration over the sources of input data could be
advantageous to everybody and could help to improve the consistency and
quality of the outputs. This is turn would increase their value for the
companies being assessed and the financial investment world who are key
users of the data,” says Howard Pearce, head of environmental finance and
pension fund management at the Environment Agency.

But director of investor responsibility at Insight Investment, Rory
Sullivan, says from an investor’s point of view, he is wary of efforts by
third parties to prescribe what companies should report.

In relation to companies' own reports, he says the environmental
information that individual companies provide should be relevant to their
line of business and to their key environmental impacts.

"One-size-fits-all reporting is unlikely to deliver meaningful disclosures
from companies. However, there would certainly be value in having all
companies reporting against some set of core indicators such as those
provided by the Global Reporting Initiative - perhaps with some de minimis
exemptions or thresholds" he notes.

With reference to SRI research providers, Sullivan adds that any research
output that does not add value to the information already available
through company documents risks being useless to investors.

He says that SRI research providers, such as those assessed by the
Environment Agency, are likely to face increased competition from brokers
who appear to have a better understanding of what information investors
are looking for.

"There is a significant difference between environmental significance and
financial materiality".

But Sullivan adds that while broker research has traditionally been
reasonably good at assessing short-term impacts on company financials,
"...the meaningful and robust assessment of the impacts of environmental
issues on long-term financial performance and extra-financial aspects such
as reputation remains a challenge for brokers".

Studies show CEO pay continues upward spiral, often amid poor performance

Studies show CEO pay continues upward spiral, often amid poor performance
Lisa Roner
5 Apr 05
Two recent studies show that despite tough corporate reforms and pressure
from shareholder groups, compensation for chief executives is rising, even
among companies whose revenues are not
Recent analysis by USA TODAY of the largest public companies filing fiscal
2004 proxy statements with the Securities and Exchange Commission finds
median compensation for chief executives was about $14 million in 2004, up
25% from 2003.

A similar study by compensation consultants Pearl Meyer & Partners finds
chief executives from 179 large companies filing proxies by late March
were paid an average of $9.84 million, up 12% from 2003.

The USA TODAY analysis reports “extensive use” of retention bonuses,
supplemental retirement pay and “perks ranging from tax reimbursements to
personal use of corporate jets”.

Top dollar, poor performance

But analysts say many of the chief executives garnering the “healthiest”
pay packages head companies delivering less than stellar performance and
returns to shareholders.

Case in point: struggling movie rental giant Blockbuster, which lost $1.25
billion last year and saw its stock drop 47%, increased chairman John
Antioco’s salary by 17% to just more than $2 million, plus a $5 million
bonus and nearly $153,000 in other compensation.

A company spokeswoman says the compensation package, which was constructed
using advice from two outside consulting firms, is designed to keep
Antioco “with the company” and “focused on the company” for the next five

And while some analysts say the scope of the challenges faced by
Blockbuster warrant the tab for its chief executive, others argue leaders
of troubled corporations should not profit while their companies fail and
stockholders take the hit.

Pharmaceutical maker Eli Lilly, some say, is a good example. Profits fell
29% and return to shareholders dropped 17% the past year, while chief
executive Sidney Taurel reaped a 41% increase in pay to $12.5 million.

The disconnect between pay and performance

“The disconnect between pay and performance keeps getting worse,” a senior
investment officer at Calpers, the California pension fund, recently told
the New York Times.

Many cite the recent departure of Carly Fiorina from HP as a prime example
of “pay for failure”. Fiorina was dismissed from HP with a severance
package that included $14 million in pay, a $7.38 million bonus and $21.1
million in additional compensation from restricted stock holdings and
pension payments.

Last month, SEC chairman William Donaldson cautioned directors to “examine
their dependence on management and compensation consultants” who “do not
owe a duty” to shareholders.

Boards, Donaldson says, often accept the “conventional wisdom” that
executives should be paid in the top quarter of companies in their sector.

“But, as I have said before, we don’t live in Lake Wobegon, where as
Garrison Keillor says, ‘All the women are strong, all the men are good
looking and all the children are above average,’” he says.

Donaldson say the SEC is looking at ways to modernise disclosure rules for
executive pay, but that boards “must show greater discipline and
judgement” and should base pay on performance rather than an artificial
standard set by consultants.

Imperial pay

A study on the relationship between executive pay and executive skill
co-authored by Robert Daines, Pritzker Professor of Law and Business at
Stanford University, suggests many corporate leaders are overpaid in light
of their performance.

Disney’s Michael Eisner, the study finds, was paid $38 million above the
entertainment industry’s average chief executive and yet for three out of
six years Disney’s performance declined compared to other firms in the

Daines says current concerns over chief executive pay are legitimate.

He and his colleagues report average pay for chief executives of S&P 500
companies increased from $2.7 million in 1992 to $14 million by 2000, a
gain of more than 400%. And they say chief executives, who were paid 82
times as much their blue-collar counterparts in 1992, were pulling down
more 400 times as much as the average worker by 2004.

Pat McGurn, from proxy adviser Institutional Shareholder Services, calls
the compensation trend an “executive entitlement system”.

“What you don’t see enough of is where, if the performance is down, the
pay is down,” he says.

Compensation tops shareholder agenda

Shareholders are seeking changes in compensation for chief executives and
have filed more than 100 proposals this proxy season to curb pay, set
stringent performance guidelines and limit severance packages.

But many analysts say near record-high turnover in January and February in
the executive suites of US companies has bred stiff competition for top
chief executives, ensuring ongoing pay inflation for the foreseeable

Some analysts are more optimistic, however, and say they see signs that a
growing number of companies are working to link pay packages to corporate

This year’s proxies, they say, show that many companies are insisting
executives and directors hold about five times their pay in stock, to
promote long-term thinking over short-term gains.

And there is a departure, they say, from granting restricted shares that
automatically vest after three to five years in favour of shares that vest
only if the company hits preset goals set by the board for success.

Mercer Human Resources Consulting says it is seeing a “move toward the
median” among its clients.

Ethics enters the equation

Many corporate observers say there is also a marked trend toward expecting
more ethical behaviour from America’s executive suites. By customising
performance-based pay packages, they say, moral character can be instilled
at the top of the nation’s corporations.

A 2004 survey by a New England-based executive pay consultancy finds at 26
mid- and large-sized companies in the region, 30% to 40% of
performance-based bonuses had a link to non-financial factors such as
customer satisfaction or personal goals.

Compensation experts say companies concerned with ethics are “getting
creative” when it comes to how tightly they can link executive behaviour
to pay.

A Mercer spokeswoman predicts that within 18 months, companies that are
not tying equity awards to company performance will stand out as market

“It’s going to become the norm, and the companies that are not responding
in some way to this are going to have to be explaining [why] to their
shareholders,” she says.

Write to Lisa Roner at,
or write to the Editor at

Do you have a system for that?

Do you have a system for that?
Mallen Baker
29 Mar 05
Companies need to spend a lot more time understanding the diverse
environments, with their different perspectives, in the areas where they
operate, says Mallen Baker
Any company needs to manage its overall impact on society. Having policies
and systems with key performance indicators and year-on-year improvement
is all part of the process. But if it were so simple, then the most
responsible companies would always be those with the best systems. This is
no more likely than the companies with the best processes being the most
profitable. Mixed in there somewhere is some human element that is not so
easy to define.

In spite of what the campaigners would have you believe, the major
multi-national companies have historically shared one characteristic. Not
their ability to dominate the world, telling us how to live, dictating to
governments and everyone else. Rather they have generally risen high and
fallen hard. They have fallen because of their inability truly to
understand, or cope with, the real diversity of people and environments
within which they worked.

This was true for the original founders of empires, companies such as the
East India Company, as much as it is for some modern day equivalents.
Companies will do what they can to control their environment to improve
their success. They generally fail – even if for a while they may appear
to thrive. In the case of the East India Company, the failure was pretty
dramatic, sparking the 1857 mutiny.

Cultural variations

Diversity gurus, such as Fons Trompenaars, give some clues to the size of
the challenge. Trompenaars showed, through surveys of different
nationalities to see how they would respond to classic dilemmas, just how
marked the difference in perceptions between different cultures can be.

For instance, he posed the following scenario: your friend is driving a
car and hits a pedestrian. You were the only witness to the fact that your
friend was exceeding the speed limit. Does your friend have the right to
expect you to lie in order to stave off serious legal consequences?

One sort of culture believes in rules, codes and contracts and sees that
an agreement is an agreement that must be honoured. Another believes in
relationships, and sees that in a relationship of trust both sides respect
evolving and changing needs. The former would see that the friend has no
right to expect help. The latter the reverse.

What does this mean for corporate responsibility? For Trompenaars, the
shift can be summarised: managers deal with issues; global leaders
reconcile dilemmas.

Many of the issues actually arise out of the fact that business
environments are radically different across the world. Sweatshop labour in
one context is highly valued opportunity and development in another.

Policies to achieve improved labour standards in one context are a cynical
attempt to enforce barriers to trade in another. Campaigners move from
issue to issue following the agenda that seems to them to be most relevant
and urgent. People on the ground complain that the issue of the moment is
not good enough to deal with what is, for them, a long-term process.

A matter of perspective

Companies need to spend a lot more time understanding the diverse
environments, with their different perspectives, in the areas where they
operate. This is not a process you can do through the application of a
management system. It is about informed judgment.

Otherwise, you are operating your business within an environment of
misunderstanding, which is dangerous ignorance. The comments of some of
the participants of Trompenaars’ study give as good an example as any.
Americans taking part said: “See, you can’t trust the Koreans – they would
lie to help their friends.” The Koreans, on the other hand, said: “See,
you can’t trust the Americans. They won’t even help their friends.”

How often do the horror stories of multinational corporations being caught
out and suffering the consequences come down to the fact that these clumsy
giants just fail to understand their environment? And how much better
would a company’s corporate responsibility be if, instead of focusing
solely on key performance indicators and codes of conduct, it focused on
the process of resolving dilemmas?

Measuring long-term performance: Earnings per share and share prices aren’t the whole story—particularly in the medium and long term.

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7 April 2005| IBM Edition
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Book Excerpt
Measuring long-term performance
Earnings per share and share prices aren’t the whole story—particularly in
the medium and long term.
Richard Dobbs and Timothy Koller
The McKinsey Quarterly, 2005 Special Edition: Value and performance

It's natural for companies and their investors to be happy, even
complacent, when their earnings per share (EPS) and share prices rise. A
falling share price may not be a sign of poor performance, however: The
Home Depot's fell from 1999 to 2003, yet the company created more value
than every North American retailer except Wal-Mart Stores by continuing to
grow and improve its return on capital.
After the extreme ups and downs of financial markets during the past
decade, boards of directors, senior managers, and investors are rethinking
the way they define and assess corporate performance. There's nothing
wrong with good accounting results and rising share prices, but they don't
necessarily indicate whether a company is fundamentally healthy, in the
sense of being able to sustain its current performance and to build
profitable businesses in the future.
Nonetheless, a company can construct a comprehensive performance
assessment that measures the value it has created and estimates its
ability to create more. As a way of judging how well a company is doing,
such an assessment is far superior to any single performance metric. It
can also help management to balance the short- and long-term creation of
value and board members and investors to determine whether management's
policies and the company's share price are on target.
Testing for fitness
Since only a company's historical growth and returns on capital—not its
future performance—can be measured directly, the potential for future
growth and returns must be inferred. To do so, it is necessary to devise
metrics that gauge the longer-term health of companies and that complement
the metrics for their short-term performance. A patient visiting a doctor
may feel fine, for example, but high cholesterol could make it necessary
to act now to prevent heart disease. Similarly, a company may show strong
growth and returns on capital, but health metrics are needed to determine
if that performance is sustainable.
A company's cash flow and, ultimately, its market value stem from its
long-term growth in revenues and profits and from its returns on invested
capital (ROIC) relative to its cost of capital. A discounted-cash-flow
(DCF) analysis, based on projected performance, can be linked to key
performance and health indicators in order to demonstrate the links
between shareholder value, as measured by stock markets, and the drivers
of value (Exhibit 1).

With these links in mind, it is possible to organize performance
measurement according to three different perspectives. The economic value
that a company has created historically can be explored through its
financial statements. This set of metrics gauges what we call a company's
performance. Metrics can also gauge a company's ability to create economic
value in the future and the risks that might prevent it from doing so.
These metrics assess what we call the company's health.
The third set of metrics assesses the capital market performance of the
company, including the expectations factored into its share price and the
way they have changed, as well as a comparison between a company's market
valuation and its valuation on the basis of its business plans. An
understanding of its performance and health provides the context for
developing this accurate assessment of its share price performance.
In using all these metrics, it is important to understand the impact of
factors outside management's control: consider, for example, the case of
an oil company whose improving profitability comes from rising oil prices
rather than better exploration techniques or of a bank whose stock price
rises because of changing rates, not increased efficiencies. To use any
metric that assesses how a company is doing, you must strip out the impact
of such factors.
Performance: Value delivered
Assessing a company's historical financial performance would appear to be
straightforward, but even these metrics are subjective. Accountants and
managers decide when to record revenues and costs, and personal motives
can color this judgment—a boss may want the current quarter to look good,
for example.
Some ways of measuring a company's financial performance are better than
others. Metrics, such as ROIC, economic profit,1 and growth, that can be
linked directly to value creation are more meaningful than traditional
accounting metrics like EPS. Although growing companies that earn an ROIC
greater than their cost of capital generate attractive EPS growth, the
inverse isn't true: EPS growth can come from heavy investment or changes
in financial structure that don't create value. In fact, companies can
easily manipulate EPS—by repurchasing shares or undertaking acquisitions,
for example (see "Merger valuation: Time to jettison EPS").
The true drivers of value—growth and ROIC—are a better place to start
measuring the performance of a company. Specifically, how does its ROIC
compare with its cost of capital and with the ROIC of its peers? Has its
ROIC been increasing or decreasing? How fast has the company grown,
absolutely and relative to its peers? Is its growth accelerating or
Home Depot's average ROIC from 1999 to 2003 was 15.6 percent—higher than
its 9.2 percent cost of capital during that period and the highest among
large US retailers. From 1999 to 2003, its revenue rose by an average of
16.5 percent annually, at the high end of the range for such companies.
This performance was exceptional for what was already one of the largest
US retailers.
One disadvantage of ROIC and growth, however, is that neither incorporates
the magnitude of the value created, so a small company or business unit
with a 30 percent ROIC seems more successful than an enormous company with
a 20 percent return. We use economic profit to convert ROIC into a dollar
metric so that we can incorporate the size of the value created into
comparisons with other companies.
By adjusting for size, economic profit provides a better assessment of
value creation than do metrics based on ROIC and growth. Exhibit 2 shows
the economic profit of large retailers. Home Depot—second only to
Wal-Mart—generated $7.1 billion in economic profit over the five years
through 2003. Viewed from this angle, it and Wal-Mart constitute a class
of their own. Although other highfliers, such as Best Buy, also have
superior ROIC and growth, they are much smaller.

Health: Scope to create additional value
Health metrics supplement those for historical performance by providing a
glimpse into the future. It's important, for instance, to know whether a
company has the products, the people, and the processes to continue
creating value. Assessing the risks a company faces and the procedures in
place to mitigate them is an important dimension of all efforts to measure
To identify a company's key health metrics, we start with a value creation
tree illustrating the connections between a company's intrinsic value and
the generic categories of health metrics: the short-, medium-, and
long-term factors that determine a company's long-term growth and ROIC
(Exhibit 3). This approach shares some elements with the "balanced
scorecard"—popularized in a 1992 Harvard Business Review article2 by
Robert Kaplan and David Norton—whose premise was that financial
performance is only one aspect of total performance. Kaplan and Norton
pointed to three equally important perspectives: customer satisfaction,
internal business processes, and learning and growth.
Our concept of health metrics resembles Kaplan and Norton's "nonfinancial
measures," but we differ in believing that companies should develop their
own metrics tailored to their particular industries and strategies. These
metrics should be based on rigorous analytics and linked, as explicitly as
possible, to the creation of intrinsic value: product innovation is
important in some industries, for instance, while in others government
relations, tight cost controls, and customer service matter more.
Every company will have its own health metrics, but the eight generic
categories in Exhibit 3 can ensure that it systematically explores all the
important ones.

Short-term metrics
Short-term metrics explore the factors that underlie historical
performance and help indicate whether growth and ROIC can be sustained at
a given level or will probably rise or fall. These metrics might include
costs per unit (for a manufacturing company) or same-store sales growth
(for a retailer). They fall into three categories:
Sales productivity metrics explore the factors underlying recent sales
growth. For retailers, these metrics include market share, a retailer's
ability to charge higher prices than its peers, the pace of store
openings, and same-store sales increases.
Operating-cost productivity metrics explore the factors underlying unit
costs, such as the cost of building a car or delivering a package. UPS,
for example, is well known for charting out the optimal delivery paths of
its drivers to enhance their productivity and for developing well-defined
standards on how to deliver packages.
Capital productivity metrics show how well a company uses its working
capital (inventories, receivables, and payables) and its property, plant,
and equipment. Dell revolutionized the personal-computer business by
building products to order and thus minimizing inventories. Because the
company keeps them so low and has few receivables to boot, it can operate
with negative working capital.
Home Depot's short-term health was strong across a number of fronts. It
increased its store count by 13.4 percent a year from 1999 through 2003
while simultaneously increasing its same-store sales by 3.5 percent a
year. Its ROIC increased to 18.2 percent, from 14.9 percent, during the
same period thanks to improved margins, largely resulting from improved
purchasing and from the development (with manufacturers) of exclusive
product lines.
Medium-term metrics
Medium-term metrics go beyond short-term performance by looking forward to
indicate whether a company can maintain and improve its growth and ROIC
over the next one to five years (or longer for companies with extended
product cycles, as in pharmaceuticals). These metrics fall into three
Commercial-health metrics, indicating whether a company can sustain or
improve its current revenue growth, include the metrics for its product
pipeline (the talent and technology to market new products over the medium
term), brand strength (investments in brand building), regulatory risk,
and customer satisfaction. Metrics for medium-term commercial health vary
widely by industry. For a pharmaceutical company, the obvious priority is
its product pipeline and its relationship with governments—a major
customer and regulator. For an online retailer, customer satisfaction and
brand strength may be the most important considerations.
Cost structure health metrics gauge a company's ability, as compared with
that of its competitors, to manage its costs over three to five years.
These metrics might include assessments of programs like Six Sigma, which
companies such as General Electric use to reduce their costs continually
and to maintain a cost advantage relative to their competitors across most
of their businesses.
Asset health metrics show how well a company maintains and develops its
assets. For a hotel or restaurant chain, to give one example, the average
time between remodelings may be an important driver of health.
In the quest for growth during the 1990s, Home Depot temporarily lost
sight of its medium-term health, as measured by its customer service and
the quality of its stores. Recognizing the problem, in 2001 the company
began to reinvest in its existing locations, with the intention of making
them more appealing to customers, and to refocus on customer service—for
example, by raising its incentives for employees. It also offered
installation services and do-it-yourself clinics and set up sales desks
specifically for professional customers. Continued success will depend on
Home Depot's ability to go on satisfying its customers by carefully
measuring and monitoring its customer service, its customer traffic, and
the age and condition of its stores.
Long-term strategic health
Metrics of long-term strategic health show the ability of an enterprise to
sustain its current operating activities and to identify and exploit new
areas of growth. A company must periodically assess and measure the
threats—including new technologies, changes in public opinion and in the
preferences of customers, and new ways of serving them—that could make its
current business less attractive. In assessing a company's long-term
strategic health, specific metrics are sometimes hard to identify, so more
qualitative milestones, such as progress in selecting partners for mergers
or for entering a market, are needed.
While Home Depot's leading position in the home-improvement business
appears to be solid in the medium term, a longer-term threat comes from
Wal-Mart, which sells many of the same fast-moving items, such as
lightbulbs. The cost base of Wal-Mart is lower because it provides less
in-store help than does Home Depot, which must therefore ensure that store
associates focus on higher-margin areas where support is critical (such as
plumbing) rather than on products whose price doesn't incorporate
assistance to customers.
In assessing a company's long-term strategic health, specific metrics can
be hard to identify, so more qualitative milestones are needed
Besides guarding against threats, companies must continually watch for new
growth opportunities in new geographies or in related industries; many
Western companies, for example, have begun preparing to serve China's
enormous, fast-growing markets. Adding new services helped Home Depot to
squeeze more profits from its existing stores, but it has been less
successful at expanding abroad and at developing new store formats. By
2003, only 7 percent of its revenues came from outside North America, and
though it has experimented with new formats, such as its Expo Design
Center, only 4 percent of its stores used them as of 2003.
Organizational health
Metrics are also needed to determine whether a company has the people, the
skills, and the culture to sustain and improve its performance.
Diagnostics of organizational health typically measure the skills and
capabilities of a company, its ability to retain its employees and keep
them satisfied, its culture and values, and the depth of its management
talent. Again, what's important varies by industry. Pharmaceutical
companies need deep scientific-innovation capabilities but relatively few
managers. Companies expanding overseas need people who can work in new
countries and negotiate with the governments there.
Given the rapid growth and substantial size of Home Depot, one of its core
challenges continues to be attracting and retaining skilled employees at a
competitive cost. When it took on lower-cost part-time workers who often
knew much less than its traditional store associates did, customers began
to wonder what made the company special. Even holding on to its store
managers became a problem, since the drive for efficiency through
centralization had stifled its original entrepreneurial spirit. To address
the long-term challenges, the company began offering incentive programs
for managers and added more full-time staff in stores—moves that have been
credited with helping to improve same-store sales.3
Stock market performance
The final step in assessing a company's performance is examining its stock
price performance. In an ideal world, we would need only to examine a
company's stock market performance to see how well it was doing. But its
performance there is anything but easy to interpret.
The most common approach to measuring the stock market performance of a
company is to calulate its total returns to shareholders (TRS), defined as
share price appreciation plus dividend yield, over time. This approach has
severe limitations, however, because over short periods TRS embodies
changes in expectations about the future performance of a company more
than its actual underlying performance and health. Companies that
consistently meet high performance standards can thus find it hard to
deliver high TRS: the market may think that management is doing an
outstanding job, but this belief has already been factored into share
One way to understand the problem is by way of analogy with a treadmill
whose speed represents the expectations of future performance implicit in
a company's share price. If managers beat them, the market not only raises
the share price but also accelerates the treadmill. As the company's
performance improves, the expectations treadmill turns more quickly. The
better these managers perform, the more the market expects from them; they
must run ever faster just to keep up. This effect explains why
extraordinary managers may deliver ordinary short-term TRS; conversely,
managers of companies with low performance expectations might find it easy
to earn high TRS. This predicament illustrates the old saying about the
difference between a good company and a good investment: in the short
term, good companies may not be good investments, and vice versa.
One way of overcoming the limitations of TRS is to employ complementary
measures of stock market performance. One of them is market value added
(MVA): the difference between the market value of a company's debt and
equity and the amount of capital invested. A related metric, expressed as
a ratio, is the market-value-to-capital ratio—the ratio of a company's
debt and equity to the amount of capital invested.
Market-value-to-capital ratios and MVA complement TRS by measuring
different aspects of a company's performance. TRS measures it against the
financial markets' expectations and changes in them.
Market-value-to-capital ratios and MVA, by contrast, measure the financial
markets' view of the future performance of a company relative to the
capital invested in it, so they assess expectations about its absolute
level of performance.4
Let's examine Home Depot and the other large retailers in terms of their
stock market performance. The market value of Home Depot's debt and equity
(including capitalized operating leases) was $88 billion at the end of
2003, when it had invested $29 billion in operating capital (working
capital, the capitalized value of operating leases, and property in plant
and equipment). Home Depot's MVA was therefore $59 billion and its
market-value-to-capital ratio was 3.1.
The MVA of Home Depot was the industry's second highest, behind only
Wal-Mart and far ahead of the rest. Home Depot's market-value-to-capital
ratio was in the middle of the pack among large retailers, since the
company isn't expected to generate as much value per dollar of capital as
did other highfliers (such as Best Buy) but made up for that with size.
What about TRS? Over the five years ended 2003, Home Depot's—at -2.3
percent annually—was near the bottom of the group. So the company
delivered a strong economic profit, the second-highest MVA, and a strong
market-value-to-capital ratio but also had very low TRS. Evidently, Home
Depot's performance over recent years wasn't up to what the market
expected at the start of the measurement period (1999).
By reverse-engineering the current and past share prices of Home Depot, we
can develop a perspective on why its TRS was so low. An investor using a
DCF model might infer that at the end of 2003 the stock market expected
the revenue growth of Home Depot to decline gradually, to 5 percent
annually, from 12 percent, over the next decade while it maintained its
current margins and ROIC. Given the share price of Home Depot at the end
of 1998, an investor would have had to believe that it could grow by 26
percent a year for at least ten years. Such high growth expectations would
have required the company to triple its store count over that period—far
beyond the estimated saturation level for its markets. It is tempting to
conclude that Home Depot's poor TRS since 1999 resulted more from an
overly optimistic market value at the start of that year than from
ineffective management.
Measuring the historical performance of a company is difficult though
doable. But coming to grips with its historical performance isn't enough;
the assessment must also address the company's health—its ability to
sustain and improve its performance in the future—and its share price
About the Authors
Richard Dobbs is a director in McKinsey's London office, and Tim Koller is
a principal in the New York office. This article is adapted from Tim
Koller, Marc Goedhart, and David Wessels, Valuation: Measuring and
Managing the Value of Companies, fourth edition, Hoboken, New Jersey: John
Wiley & Sons, 2005.
1Economic profit = invested capital (return on invested capital – weighted
average cost of capital).
2Robert S. Kaplan and David P. Norton, "The balanced scorecard: Measures
that drive performance," Harvard Business Review, January 1992, Volume 80,
Number 1, pp. 71–9.
3Justin Lahart, "Housing just keeps going up," Fortune, June 16, 2003; and
Betty Schiffman, "Home Depot remodels its growth plans," Forbes, November
30, 2001.
4For a more detailed explanation, see Richard F. C. Dobbs and Timothy M.
Koller, "The expectations treadmill," The McKinsey Quarterly, 1998 Number
3, pp. 32–43.
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Partnerships that profit the poor

Partnerships that profit the poor
Financial Times, 31 March 2005 - Teachers in Ngarambe, a small village in
Tanzania, are celebrating. While last year just one student passed the
secondary school exam, this year 11 students succeeded. Behind the
dramatic improvement in educational achievement has been the supply of
electricity to the village. "The teacher says it is because now they can
do their homework and study at night," says Anders Nordstrom, senior
project manager at ABB, the Swiss-Swedish engineering group that is
running the rural electrification scheme in Tanzania.
The experience of Ngarambe is exactly the sort of result officials at the
United Nations Development Programme hope can be repeated throughout the
developing world. Through a scheme called Growing Sustainable Business
(GSB), the agency is brokering partnerships between companies and
non-governmental organisations or local government bodies.
In ABB's case the project partner is the World Wildlife Fund, and the UNDP
hopes that, through alliances such as this, it can reduce investment risk
sufficiently to encourage foreign and domestic companies to invest in
commercially viable businesses that will foster growth in developing
The UN's increasingly close relationship with business comes at a time
when governments and international agencies are starting to reassess
assistance to the developing world. In March, a high-profile report
presented by the UK-sponsored Commission for Africa called for a "radical
change in the way donors behave and deliver assistance" to African
countries and included proposals for promoting private sector investment.
Richard Sandbrook, special adviser to the UNDP, believes that if this
private sector energy is to be harnessed in the reduction of poverty, the
profit-making element of the GSB, or similar schemes, is crucial. "Unless
there's a rate of return, achieving the (UN) Millennium Development Goals
becomes a perpetual sink on public finance," he says. "You've got to
create income-generating schemes to meet these goals and that implies a
private sector approach."
So far, companies such as Ericsson, Unilever, Total, Tetra Pak, Shell,
Thames Water and EDF are participating with pilot schemes in Tanzania,
Madagascar, Ethiopia and Bangladesh.
Geographically, much of the focus is on projects in Africa. However, the
UNDP wants to extend the GSB initiative - which was spearheaded by the UN
Global Compact, a voluntary corporate citizenship network - to countries
in Asia, Latin America and eastern Europe.
While the business activities are commercial, not philanthropic,
participating companies are structuring their projects in a variety of
ways. For some, philanthropic funding does enter the picture, but as a
pump-priming tool through which to develop pro-poor markets.
For other companies, the model involves what Mr Sandbrook describes as
"business as usual but with a lower discount rate".
While these organisations would not run their entire business on these
lines, he explains, they are prepared to operate certain projects at a
lower rate of return in order to develop new markets. "It essentially
gives the same return as if they put that money on the overnight market,"
he says.
Tetra Pak, the carton manufacturer - which is work ing to improve the
links between milk production, processing and consumption in Tanzania -
has created a separate business unit through which to operate GSB projects
and similar activities.
"The business case for us is to grow our future markets. That's why we're
in this," says Ulla Holm, global director at Tetra Pak's Food for
Development unit. "So we've set up Food for Development as a separate
office that can work on a more long-term basis than a market-driven
Others are using a combination of the philanthropy budget and the research
and development budget. "If you take Ericsson, they're writing off (rural
telecommunications provision projects) against a charitable budget, but
they're also using an R&D budget line to develop the right equipment for
this market," says Mr Sandbrook.
"That's no different from an R&D budget to develop a new drug or a new
mobile telephone for an OECD country."
Companies involved stress that, though returns may not materialise in the
short term, the projects must ultimately be profitable. In Tanzania, for
example, Unilever is working with the World Conservation Union, the
Netherlands Development Organisation and The World Agro-forestry Centre to
encourage local communities and small businesses to cultivate the seeds
from the Allanblackia tree - commonly found in parts of west, central and
east Africa - for the manufacture of products such as soap and margarine.
The idea is to generate income for local farmers, says Harrie Hendrickx,
Unilever's project manager for the scheme. "But in the long term, it has
to be a viable business for us," he explains.
The GSB scheme is not without its difficulties. Some are technical. In
certain countries, for example, procurement rules mean that companies
participating in public-private initiatives where projects have tapped
into public funds can no longer tender for executing the project itself.
Management and communication challenges also arise when the corporate
sector meets the non-profit sector. "We come from different worlds and we
speak different languages," says Mr Nordstrom. "Or if we speak English,
the way we say things is different. Where a company says 'profit', an NGO
says 'business orientation'. So it's quite a different perspective."
And for the United Nations, striking the right balance between creating
investment incentives for companies and pursuing a development agenda is
tricky. "One of the real struggles of the UN having an interface with the
private sector is to understand where the boundaries are between helping
an individual company and helping the public good," says Mr Sandbrook.
Robert Davies, chief executive of the International Business Leaders
Forum, believes a broader problem lies in a UN culture that remains
reluctant to embrace the business world.
"It's a really great approach and from the UN system. It's a complete
breakthrough," he says. "But at the moment it's a very small progressive
front within a UN system that otherwise is still, if anything, rather
anti-business . . . we are completely supportive (of the GSB) but we'd
like to see much more of the UN system tuning into this as a way forward
rather than it just being one programme."
However, participating companies say that the brokerage role of the UN in
fostering private-public initiatives has already proved its worth. Mr
Nordstrom says that, without the partnership with WWF, which had spent
several years in Ngarambe establishing social structures, ABB's
electrification project would have been extremely difficult.
"To go out to a village and start from scratch would be impossible," he
says. "But if you go to a place where other organisations are doing things
and an NGO is already working, the risk reduces considerably when you
bring in other infrastructure," he says.
Risk reduction is perhaps the most important element of the GSB
initiative. In the case of water provision, for example, a company would
be reluctant to invest because poor communities often lack the banking
systems, credit and even house addresses needed for customers to be
billed. However, that company might be able to deliver a water pipe to the
edge of a shanty town from where smaller businesses working with an NGO
could organise local delivery and payment collection.
The UN believes that, by helping establish such partnerships, it can
reduce the risk associated with investments in poor countries.
And without widespread corporate investment in pro-poor businesses, says
Mr Sandbrook, achieving the Millennium Development Goals will be
"To meet the Millennium Development Goals you have, for example, to
connect 300,000 people every day with water - and you need a lot of
plumbers to do that," he says.
"By and large, governments don't employ plumbers and neither do NGOs, so
scaling up depends absolutely on the private sector's technology and
For articles in this series go to

Companies that address the social concerns surrounding contentious markets may well find the effort rewarding.

Controversy Incorporated
Companies that address the social concerns surrounding contentious markets
may well find the effort rewarding.
David Cogman and Jeremy M. Oppenheim
The McKinsey Quarterly, 2002 Number 4
Milton Friedman once famously said that "the business of business is
business."1 Today, however, the search for growth increasingly takes
companies into controversial areas in which the rules of the game can’t be
stated so neatly. Companies developing new high-growth opportunities in
fields from technology to education to economic development must often
navigate highly public ethical and social concerns and overcome restraints
far more subtle than those encountered in standard business practice or
law. Increasing numbers of large corporations thus find themselves caught
between two seemingly contradictory goals: satisfying the investor’s
expectations for progressive earnings growth and the consumer’s growing
demand for social responsibility.
Companies have become more socially responsible primarily because apparent
irresponsibility can carry a high price (see sidebar, "A force to be
reckoned with"). Although many companies now spend significant sums of
money to comply with their own codes of ethical conduct, most view these
expenditures only as an essential cost of doing business, not as an
investment that will provide a return. For some of these companies,
however, this spending may well be a source of growth, since many of
today’s most exciting opportunities lie in controversial areas such as
gene therapy, the private provision of pensions, and products and services
targeted at low-income consumers in poor countries. These opportunities
are large and mostly untapped, and many companies want to open them up.
But people are often suspicious of any private-sector interest in
contentious areas of this kind, and public debate rages over how they
should be developed, if at all.
Corporations have to be recognized as socially responsible simply to gain
access to these debates. To influence the outcome, however, it will be
necessary to do more than just check boxes on a corporate-responsibility
scorecard; unless companies can understand, engage with, and respond to
the interests of all parties that have an interest in a contentious
business opportunity, they are unlikely to win a society’s permission to
explore it. Without that permission, they will never convert the
opportunity into a sustainable and profitable market.
Contentious attractions
Ethical considerations might appear to clash with emerging business
opportunities primarily in four areas: the exploitation of new
technologies, the movement of activities from the public to the private
sector, entry into the world’s developing markets, and the exploration of
such legally contestable markets as gambling (exhibit).

Exploiting new technologies
In recent decades, promising new developments, notably in biotechnology
and information technology, have frequently been accompanied by debates
about ethics. Take biotechnology: R&D into human therapies based on it is
growing almost twice as quickly as R&D into conventional
pharmaceuticals—and leading to 40 percent of all new products. By the end
of this decade, biotechnology is expected to generate revenues of around
$34 billion (equivalent to 15 percent of today’s total drug market) from
health care and $25 billion from agrochemicals. And though existing
biotechnology applications can compete for only 2 percent of today’s $1.2
trillion market in industrial chemicals, this proportion is projected to
rise to almost a third by the end of the decade, when the total market
will be worth an estimated $1.6 trillion.
Yet there is concern about the moral legitimacy of the genetic research on
which biotechnology depends. Consider the case of deCODE Genetics, a
company in Iceland that has used a genealogical database of the country’s
population—one of the world’s most genetically homogeneous—to conduct
research into the inherited causes of common diseases. So far, the company
has found links between at least 40 of them and 350 genes. The legislation
that gave deCODE access to this data required Icelanders to opt out if
they didn’t want their records examined. Critics of the study claimed that
this legislation violated the human rights of the Icelanders, especially
since it didn’t require the company to tell participants exactly how the
data would be used. Ignoring such concerns may not only lead to further
argument but also limit the ability of biotech companies to carry out
valuable and much-needed research.
Moving from the public to the private sector
Governments the world over increasingly use private-sector companies to
provide public services such as education, health care, pensions, and
transport. While this approach may improve efficiency and raise standards
of service, it also generates criticism of the profits that private
providers can earn, particularly for services, such as welfare benefits
and housing, that affect the poorer segments of society.
Public education in the United States provides an example. The country
spends more than $350 billion of public funds on primary and secondary
education, which is widely thought to have fallen behind public education
in other developed countries. Privatizing the provision of education is a
possible solution. At present, only 4 percent of the spending goes to
schools run for profit by private companies, but that proportion is
expected to grow by 13 percent a year. At the end of the present decade,
around 10 percent of all primary and secondary schools will probably be
under for-profit management, suggesting a market worth almost $80 billion.
Executives attempting to enter the debate over privatized education face
suspicion and outright hostility
Nonetheless, the battle for privatized education run by companies seeking
to make a profit is far from won. Business executives attempting to enter
the debate—such as venture capitalist John Doerr and the convicted
financier-turned-philanthropist Michael Milken—have met with suspicion
and, often, outright hostility. Companies operating in this field face a
continual battle to prove to skeptical teachers, parents, and
administrators that a for-profit company can and will act in the best
interest of students. This skepticism won’t go away overnight.
Entering developing markets
Developing countries offer attractive opportunities both as markets and as
sources of raw materials and productive capacity. But interest groups
frequently criticize corporations active in these regions for failing to
meet the environmental, labor, competitive, and marketing standards
required of them at home.
Take health care in India, which illustrates both the scale of the
opportunities in the emerging world and the ethical quandaries that
accompany them. India’s population will surpass China’s in the near
future. Even now, India is a popular location for the manufacture of drugs
used in developed markets, but the country itself has health care
expenditures of only $23 a head, of which $7 goes to drugs. The United
States, the members of the European Union, and Japan spend, on average,
more than 100 times that amount on health care per capita, and 50 times
more on drugs.
The common causes of death in India—such as infection and perinatal
problems—can be treated easily and cheaply. But most people there are so
poor that it is difficult for companies to ask them to pay for medical
help without seeming exploitative. Since 1991, the World Bank has
supported projects in six Indian states to improve access to better health
care, especially for the poor, in part by helping state-run health care
providers outsource more of their services to the private sector. But this
approach has attracted criticism from local activists opposed to the idea
that local people should have to pay anything at all for health care.2
Exploring legally contestable markets
Social norms define what each society considers legal, but they can change
quickly: activities that once were against the law—such as euthanasia and
the possession of cannabis (marijuana)—are now accepted in several
European states. Black markets in illegal activities are often sizable, so
sudden changes in the law can create substantial legitimate markets
overnight. A black market in human trafficking, for example, has been
created by tough immigration restrictions in Europe, but as its need for
labor increases, they may be relaxed, thus opening up an opportunity for
legitimate organizations seeking to place human resources.
Similarly, gambling, viewed in some times and places as a source of
corruption, is increasingly seen as a legitimate form of entertainment;
indeed, in several unlikely localities, including conservative states in
the southern United States, it has proved to be an effective source of
jobs and tax revenue. As gambling has become more respectable, large
corporations, including several household names, have entered the
business. During the 1990s, the industry more than doubled in size, and it
is currently worth more than $60 billion.
Earning the right to operate profitably
Not all companies will want to commercialize contentious activities. But
those that do need, first, to persuade everyone involved that a private
company has the moral right to undertake the activity in question and,
second, to establish a profit norm acceptable to all stakeholders,
including investors. Winning both battles can be difficult, and companies
will have to adopt different tactics for each activity and geographical
market. Yet some common principles can help those companies engage
sensitively and proactively in such debates.
Take a long-term view of market design
Economic theory declares that a well-functioning market respects the
property rights of its participants, matches consumers with producers at
efficient prices, minimizes transaction costs, and ensures that contracts
are enforced. In most private-sector markets—for instance, those for
cement and crude oil—well-established laws, regulations, and practices
ensure these conditions. But in contentious markets, such as the one for
gene therapy, some or all of this infrastructure doesn’t exist, so it must
be developed by participants and regulators.3
Private companies entering these markets therefore need to decide how they
should be structured. How will value be created? How will it be shared?
How will risks be allocated? What regulatory or contractual rules must be
put in place? Companies may naturally be tempted to lobby for a
structure—opaque, with limited price discovery, high barriers to entry,
and an inefficient allocation of risk—that favors their interests over
those of other participants. Would that approach serve a company’s best
long-term interests? Probably not; over time, its inherent unfairness
would most likely prompt governments and activists to intervene. Greedy
participants may risk losing markets altogether.
Consider the contrast between the privatized markets for energy and rail
transport in the United Kingdom. In the decade following the privatization
of electricity supply, a substantial fall in the unit cost of energy
benefited both consumers and producers. In part, this achievement was the
result of a thoughtful market design, which separated supply and
distribution through a pooling system, and of a strong regulatory
framework. Together, these arrangements managed supply and demand
efficiently over the medium term.
Compare that positive experience with the fate of the United Kingdom’s
privatized rail industry, in which relationships among stakeholders were
structured poorly. The result was a public outcry over the declining
standard of service and a widespread perception in the mass media that
some of the new rail enterprises were extracting "excessive" profits.
Safety problems and cost overruns attracted a storm of negative publicity;
amid battles with regulators and politicians, the infrastructure company,
Railtrack, went into bankruptcy and was returned to government control.
Had the market structure been more carefully designed at the outset, the
cost of Railtrack’s collapse might have been avoided, and British
consumers might now be enjoying a higher standard of rail travel.
Learn to work with—not around—stakeholders
To propose an acceptable structure for any market, companies must
understand the needs of its other participants, some of whom may distrust
the private sector profoundly. In these circumstances, companies often try
to neutralize their opponents with gifts and grand gestures, which can
appear to be cynical and often backfire. The winning way may be
counterintuitive: view the opposition not as a threat but as a source of
information about the other market participants’ needs and concerns. With
that information in hand, companies can develop business models that
address them.
One example is Cargill’s initial entry into the market for sunflower seeds
in India. Starting in the early 1990s, this activity generated bitter
political opposition, and Cargill offices in that country were set on fire
twice. The company’s response was to teach Indian farmers how to improve
their crop yields. As a result, the productivity of the local farmers
increased by more than 50 percent. Once Cargill had provided them with a
palpable economic benefit, they understood that the company aspired to be
their partner rather than their exploiter.4
This collaborative strategy stands in stark contrast to Monsanto’s effort
to create markets for genetically modified seeds. The company was bitterly
opposed by farmers in developing countries who feared becoming dependent
on a single supplier of expensive seed. Instead of accommodating these
concerns, Monsanto responded with an effort to publicize scientific
evidence about the benefits of genetically modified seeds, but few of the
farmers believed that the scientists supporting the company’s claims were
truly independent. Arguably, Monsanto lost the opportunity by pressing its
claim too hard, too soon. Buffeted by a steady backlash in developing and
developed markets alike, the company lost almost half of its market
capitalization in the year to September 1999, and a few months later it
was acquired.
Understand your social assets
If large numbers of people are convinced that a company’s core operations
harm society, changing that negative perception by spending more money on
corporate-responsibility programs can be an uphill struggle. However, many
companies—even those with flawed reputations—already contribute a great
deal to society through their day-to-day activities; they just don’t get
any credit. Identifying and publicizing these inherent social assets could
help such companies build trust among stakeholders.
Take McDonald’s. Although the company makes large, well-publicized social
investments in fields as diverse as animal welfare, conservation,
education, and health care, it is still, to its critics, the archetype of
global corporate exploitation. Yet McDonald’s is also a company that
introduces many young people to new skills and gives them the first job of
their careers. It could claim that as one of the world’s largest employers
of unskilled youth, it contributes enormous social value just by doing
business as usual. If this value were more widely appreciated, it might
even help McDonald’s enter markets more controversial than fast food.
Other companies also have largely untapped social assets. Although (or
perhaps because) the oil majors are the number-one enemy of environmental
groups such as Greenpeace, these companies now have unrivaled expertise in
minimizing the ecological impact of industrial operations. This asset is
evidence of responsible commerce that can also help a company decide which
markets to enter. Opponents of moves to legalize cannabis, for example,
fear that the tobacco giants would ruthlessly exploit the opportunity to
sell it over the counter. This may be a battle the tobacco companies can
never win, however. A more likely candidate to distribute the drug, if and
when it becomes legal, could be suppliers of over-the-counter
pharmaceuticals, whose business already depends on a guaranteed commitment
to responsible health care.
Rethink leadership and governance
Forward-looking companies, sensitive to the new ground rules of
controversial business areas, are opening up to—rather than fighting—their
opponents. Corporations, such as those in oil and pharmaceuticals, that
have years of experience collaborating with governments have a head start
in training employees to work in contentious areas: these companies also
regularly expose managers to a range of critical opinion by assigning them
to work with nongovernmental organizations and by taking part in
In some cases, such companies even seek out critics to learn from them:
the leading UK environmental activist Jonathon Porritt, for instance,
speaks at and advises on training programs for BP executives. Indeed, such
relationships can even work in both directions, for BP’s chief executive
serves on the board of Conservation International, a global conservation
group. This kind of "cross-pollination" not only gives companies insights
into the concerns of the not-for-profit sector but also gives
not-for-profits accurate information about the companies they deal with.
The free exchange of information makes the two sides better able to reach
acceptable compromises on questions such as the way the oil majors might
exploit reserves in virgin territory.
Finally, to involve consumers and communities, ventures in contentious
markets usually require governance structures independent of the corporate
parents.5 Bolder companies may even experiment with new forms of
governance that try to combine the strengths of the corporation with the
social awareness of the not-for-profits—an approach that has already been
used by a growing number of community-development financial institutions
providing capital to businesses in disadvantaged areas that conventional
banks can’t or won’t serve.6 One example is Bridges Community Ventures, a
UK venture fund founded by the venture capital firms Apax and 3i and by
entrepreneur Tom Singh and financed by leading private-sector investors
and the UK government. Bridges is a for-profit entity but invests solely
in underdeveloped areas in England to stimulate growth and create jobs.
Companies willing and able to address the social concerns surrounding
contentious markets will find that, in many cases, the rewards are more
than worthwhile. Moreover, the participation of companies that know how to
tackle such issues sensitively and effectively should improve the chances
of addressing some of the world’s most intractable problems. And it is
increasingly difficult to imagine how such complex, large-scale tasks can
be taken on without the private sector’s involvement.
A force to be reckoned with
Two decades ago, the activists who demanded that companies practice a
higher standard of social responsibility were scattered throughout a
disparate collection of organizations, each focused, for the most part, on
a single issue. No longer. Today’s lobbyists are a well-coordinated and
effective force. And they have teeth. In a recent poll of about 25,000
people in 23 countries, 60 percent of the respondents said they judged a
company on its social record, 40 percent took a negative view of companies
they felt were not socially responsible, and 90 percent wanted companies
to focus on more than just profitability.1
Meanwhile, the activist lobby has learned how to form unlikely alliances
across the political spectrum—with people ranging from conservative
protectionists to Left-wing trade unionists—and to mobilize public opinion
on emotional issues through the skillful use of the mass media. Many
multinational companies have learned from experience how effective these
tactics can be. In particular, extractive industries such as petroleum
have come under relentless pressure from environmental activists: Shell
lost considerable market share in Germany in 1995 after activists
persuaded consumers that its proposed disposal of the Brent Spar oil
platform, in the North Sea, would harm the environment. Even though the UK
government and independent scientists had endorsed the company’s proposal
as the one that would cause the least damage, motorists boycotted Shell’s
service stations, and some were vandalized by activists.
These days, moreover, it isn’t just consumers who are clamoring for
change; shareholders too are making their voices heard. Prominent pension
funds have begun to question companies on social issues, and socially
responsible investing, though still a relatively small-scale phenomenon,
is growing rapidly. In the United States, the assets of what are called
ethical funds grew from $682 billion in 1995 to $2.16 trillion in 1999,
and they now make up approximately 13 percent of investments under
management in the United States, which is up from 9 percent in 1997. It is
no wonder that so many corporations are beginning to take their social
responsibilities seriously.
1From the 1999 Millennium Poll, conducted by Environics, the Prince of
Wales International Business Leaders Forum, and The Conference Board.
Return to reference
About the Authors
David Cogman is a consultant and Jeremy Oppenheim is a principal in
McKinsey’s London office.
1Milton Friedman, "The social responsibility of business is to increase
its profits," New York Times Magazine, September 13, 1970.
2See the World Wide Web sites of Global Action, Corpwatch, and the World
3For an analysis of the problems of market design, see John McMillan,
Reinventing the Bazaar: The Natural History of Markets, New York: Norton,
4For an account of these developments, see Stuart L. Hart and C. K.
Prahalad, Strategies for the Bottom of the Pyramid: Creating Sustainable
Development, July 2000 (Acrobat PDF).
5See Rajat Dhawan, Chris Dorian, Rajat Gupta, and Sasi K. Sunkara, "
Connecting the unconnected," The McKinsey Quarterly, 2001 Number 4 special
edition: Emerging markets, pp. 61–70; and Amie Batson and Matthias M.
Bekier, "Vaccines where they’re needed," The McKinsey Quarterly, 2001
Number 4 special edition: Emerging markets, pp. 103–12.
6For more details, see the UK Social Investment Forum report Community
Development Finance Institutions: A New Financial Instrument for Social,
Economic, and Physical Renewal, February 2002.

Collaboration and innovation needed to deliver positive outcomes for development and ecosystems

Collaboration and innovation needed to deliver positive outcomes for
development and ecosystems
Geneva, 5 April 2005 - Authors of an international environmental
assessment say that new ways of cooperation between government, business
and civil society are needed to ease the strains we are putting on the
natural services of the planet.
The Millennium Ecosystem Assessment (MA) Report, launched last week
reveals that two thirds of the ecosystem services assessed - such as fresh
water, fisheries, air wand water regulation and the regulation of regional
climate - are being degraded or used unsustainably.
The report points out that “protecting and improving our future well-being
requires wiser and less destructive use of natural assets. This in turn
involves major changes in the way we make and implement decisions”.
“What the report is really saying is that we can no longer afford the
luxury of addressing environmental problems in isolation, one risk at a
time,” cautions Len Good, chairman and CEO of the Global Environment
Facility, a principal sponsor of the MA study.
“It cannot continue to be business as usual,” according to Dr Robert
Watson, chief scientist at the World Bank and co-chair of the board of the
directors at the MA, adding that the private sector can play the role of
the “champion” for the environment in this case rather than be the
The WBCSD has had a long-term focus on this topic and two publications on
biodiversity management have been published jointly with IUCN.
Furthermore, the development of sector specific biodiversity strategies
form important parts of WBCSD’s mining, forestry and cement projects. In
addition, links have been strengthened with leading global NGO’s over the
past 12 months.
“Global companies can and do make a difference to conservation, and the
sustainable use of ecosystems and services”, says James Griffiths,
Director of the WBCSD’s Ecosystems project. “Our work shows that
constructive collaboration and innovative partnerships can deliver
positive outcomes for business and for nature.”
WBCSD has supported the MA process by encouraging business involvement and
linkages throughout the assessment. WBCSD will leverage its relationships
with the MA process and NGOs and support its member companies address the
ecosystem issues and challenges identified in the report.
Further information
Millennium Ecosystem Assessment website
Millennium Ecosystem Assessment (MA) Synthesis Report
Popularized Version of Synthesis Report
Living Beyond Our Means: Natural Assets and Human Well-being (Statement of
the MA Board)

Activists Push Kyoto Protocol Company by Company

Activists Push Kyoto Protocol Company by Company
The New York Sun, 4 April 2005 - It's shareholder resolution season and
global warming is again a hot issue. Environmental activists and their
partners in the investment community are turning up the heat on corporate
managements to implement the activists' agenda. Some managers are
resisting, but a disturbing number of others appear to be hoping
appeasement works. Worst of all, most investors seem oblivious to the
struggle and its significance.
In mid-March, six energy companies - Chevron-Texaco, Anadarko, Apache,
Unocal, Marathon, and Tesoro - surrendered to activist demands to "take
action" on global warming, including disclosure of greenhouse gas
emissions, the setting of emission goals, and integrating global warming
into core business strategies.
In exchange for these concessions, the activists withdrew their
shareholder resolutions on these issues - resolutions which, even if they
receive a majority of shareholder votes, are nonbinding on management.
Ford Motor Company announced this week it would appease activists by
agreeing to study how global-warming policy options might affect the
company's business.
"We have long identified climate change as a serious environmental issue,
and shareholders are increasingly asking about the risks as well as the
opportunities associated with it," said Ford CEO Bill Ford "It's time for
a broader, more inclusive public dialogue on the complex and important
challenge of climate change."
Mr. Ford apparently missed the very extensive public dialogue that started
in the 1980s, and which resulted in the Senate rejecting the Kyoto
Protocol by a vote of 95-0 in 1997 and President Bush pulling America out
of the treaty altogether in 2001.
One of the early corporate capitulators on global warming, energy producer
Cinergy, issued its annual report this week featuring a section titled,
"Global Warming: Connecting the Dots to Find Common Ground" - it's
disheartening evidence of how global warming hysteria has influenced
corporate managers.
Global warming "must be dealt with holistically," says Cinergy in New
Agespeak more appropriate for a spa brochure. "We must act now," warns
Cinergy, even though "we may never know for sure [whether we will
accomplish anything]. Cinergy quoted a retired college professor who
echoed the company's abandonment of science. "Humility is central to good
science," says the professor.
But science is about data, not humility - and the scientific debate
continues to rage over whether humans are adversely affecting global
climate. Just a few weeks ago, the Wall Street Journal reported that a key
computer model relied on by global warming believers is seriously flawed.
To the extent that there is any resistance to the activists, ExxonMobil
leads the way, taking a stance that forced the Securities and Exchange
Commission to overrule the company's objections to allowing shareholders
to vote on two global warming resolutions.
One activist investment manager recently told the Boston Globe that, "We
now see a significant trend among a range of companies to address climate
change. If we're not at the tipping point, we're coming close to it."
The main roadblocks for the activists are large shareholders like Fidelity
Investments who aren't interested in shareholder activism. If they don't
like how a company operates, they look elsewhere to invest. "It's not our
job to become involved in the management of a company," a Fidelity
spokesman told the Globe.
But this is a short-sighted strategy.
If radical social-activist investors continue to successfully pressure
companies on global warming and other aspects of their agendas, those
investment alternatives that Fidelity and others look for will eventually
disappear. Investors will have to invest in businesses hamstrung by the
Green agenda.
Through our public political process, we've already rejected the economic
disaster known as the Kyoto Protocol, a treaty whose provisions would
impose $100 trillion in societal costs for a hypothetical reduction in
average global temperature of 1 degree Centigrade.
Not accepting the verdict of the political process, the activists are
moving to implement the Kyoto Protocol on a corporation-by-corporation
basis, thus circumventing our democratic process.
It may not be Fidelity's job to be involved with corporate management, but
then this struggle is about more than the financial performance of
individual companies, it's about businesses being free to operate within
the bounds of the law.
Copyright 2005 The New York Sun, One SL, LLC