Disruptive Sustainability - The New Leadership Framework

At the GreenBIz Forum 2013 in New York in February, there was an informative and energetic panel discussion “The Power of Wall Street in Promoting Sustainability”, with Erika Karp, Head of UBS Global Research and Matt Arnold, Head of Environmental Affairs at JP Morgan Chase, moderated by Marc Gunther. 

In trying to forge the link between sustainability and business drivers like revenue and ROI,  Karp said “It’s not easy to prove this case … but they [Julie Hudson of UBS London and her team of ESG analysts] have figured out how to use traditional business analysis, Michael Porter of Harvard ‘Five Forces’ analysis, to talk about what [are] the most material issues, risks and opportunities, facing an industry and even facing a company … and when you have a framework, this is how you make things systematic.” 

Using traditional business analysis to elucidate the bottom-line benefits of sustainability seems logical.  After all, to show the relevance and applicability of sustainability to business metrics you need to speak the traditional language of business, and the keepers of that language are found in places like Harvard Business School (HBS) and personified by people like Michael Porter.  But as logical as that seems, is traditional business analysis really the correct approach?  As CSR and ESG professionals plead their case for relevance using the language of business strategy, the chief architect of that language, Michael Porter, is changing the vocabulary, and even more broadly, is building an entirely new framework. 

Creating Shared Value

When Michael Porter speaks today, he is unlikely to emphasize his famous Five Forces of competitive strategy (1. Bargaining power of suppliers, 2. Bargaining power of customers, 3. Threat of new entrants, 4. Threat of substitute products, and 5. Competitive rivalry within an industry).  Instead of the Five Forces, he is more likely to point out six ways the capital markets are undermining value creation.  In a presentation Porter made at a UBS conference in New York City in the fall of 2011, he listed these six value destroyers as:

1)      Search for short-term “surprises” in earnings or revenue

2)      Use of industry-wide metrics that are misaligned with true economic value

and drive strategic convergence

3)      Encourage companies to emulate currently “successful” peers

4)      Strong pressure to grow faster than the industry

5)      Bias in favor of “doing deals” (M&A)

6)      A narrow view of economic value creation that overlooks shared value

Porter is attacking management’s short-term orientation, its blind use of metrics, its worship of growth, its group think and its narrow perspective.  This is not the typical message coming out of B-schools, and sounds a lot closer to ESG and CSR than HBS.  His criticism of the capital markets is part of larger framework for thinking about business strategy that Porter calls “Creating Shared Value” – a crunchy name itself.  It is hard to imagine that this is Michael Porter of Harvard Business School, once called the father of competitive strategy, and sought after by the world’s biggest corporations and institutions for his insights into fierce global competition.  He’s now talking about, of all things, sharing?  What changed?

Sustainability Happens

A lot changed: the collapse of the credit markets in 2008, the poor record of job creation and middle-class income growth in the last decade, the expanding concentration of wealth, the lack of U.S. leadership on global issues like climate change and in new sectors like clean energy.  And the never ending federal budget morass.  Just this month a poll by HBS of nearly 7,000 alumni business leaders found those foreseeing a decline in U.S. competitiveness outnumbered by more than two to one those predicting an improvement.

In formulating the Creating Shared Value framework, Porter may have come to realize that the current state of U.S.competitiveness is due in part to the failure of business education over the last 30 years that encouraged the next generation of business leaders to take actions that solely benefited their own firms even while they collectively weakened America's business environment.  Porter goes so far as to say that the benefits of the capitalist system are not being seen by greater society.  It’s not that profit is inconsistent with society’s needs, but rather it is seen as coming at the expense of society rather than to its benefit.  If the 20^th century model for capitalism was ‘what’s good for business is good for society’, Porter sees the 21^st century model as the converse: ‘what’s good for society is good for business.’  

Again, this sound a bit too much like CSR- and ESG-speak, with the argument for doing good evolving into doing well by doing good.  Yet sustainability is moving on from doing good and doing well to a third phase, doing differently, and while UBS’s ESG team may want to talk about doing well using the traditional language of business, it is strategists and gurus like Porter who are recalibrating their theories and ideas for doing differently.  And Porter is not alone. 

Another Harvard professor, Clayton Christensen, is also pushing back against the business-as-usual mindset of “measure what you manage and manage what you measure” which has also infiltrated the CSR and ESG vernacular.  Christensen has said “[T]he way they designed the world, data is only about the past.  And when we teach people that they should be data driven and fact-based and analytical as they look into the future, in many ways we condemn them to take action when the game is over.”  Christensen is the author of The Innovator’s Dilemma, a book that became an innovation bible in Silicon Valley in the late 1990’s and influenced many business leaders, including Apple’s Steve Jobs and Intel’s Andy Grove, helping them handle disruption within their industries.  [One might ask why it is that when HBS talks about disruption it makes the cover of Forbes magazine, but when sustainability professionals talk about resilience (the ying to disruption’s yang) it’s lucky to make it into the corporate CSR report.]

There are other leading business thinkers past and present , including Peter Senge, H. Thomas Johnson, Francis Gouillard, W. Edwards Deming, and many others who in their own way have shown the power of sustainability as an organizing principle for business.  Sustainability is strongly influencing the analysis in a number of business sectors – many leading food and beverage and consumer products companies are working closely with NGO’s like WWF, EDF, RA and others who bring a deep understanding of sustainability with decades of experience.  These engagements require a new way of thinking for business – measuring what you manage and managing what you measure frankly is not enough.  Extrapolation ought not be confused with prediction.  To address the problems facing business in the 21^st century will require new thinking.  

And fortunately new thinking is still a transformational force in business.  As Matt Arnold, the other speaker on that Wall Street panel at the GreenBiz Forum, pointed out, some companies as they think about sustainability are looking beyond responsibility and opportunity and seeing disruption.  This disruptive threat is pushing them forward and yielding transformational change.  He gave the example of the Novelis Aluminum company looking for ways to make aluminum cans without mining bauxite.   CEO Phil Martens has pledged that by 2020 the cans Novelis sells will be manufactured with 80% of the aluminum coming from recycled cans.  They call it the EverCan.   “[T]hey are disrupting not just their company, but their entire industry,” Arnold said.  “And their sustainability strategy … is their business strategy.”

The new mantra of sustainability is becoming “disrupt or be disrupted”, and there are many examples of  disruptive sustainability emerging in today’s economy.  When a house can be heated and cooled to the same level of comfort using only 5% of the energy of a conventional home of comparable size – that’s disruptive sustainability.  When a high performance zero-emissions automobile can be driven from New York to Boston, with a half hour pit stop for refueling – and the fuel is free – that’s disruptive sustainability.  When the relationship between a utility and its customers is fundamentally redefined by changing roles – customer as generator and seller of clean energy and utility as buyer and distributor – that’s disruptive sustainability.  When a company that uses garbage as the source for making 300 million pounds a year of high grade plastics that satisfy the most exacting customer requirements – that’s disruptive sustainability.  When a small home cleaning supplies start-up can capture ever-growing market share from industry giants because their products don’t leave a thin film of toxins on kitchen and bathroom surfaces and actually clean them better – that’s disruptive sustainability.  When new financing models take the capital and operating expenses out of the cost of clean energy and provide electricity at competitive rates that are fixed for 10 years – that’s disruptive sustainability.  When a 100% recyclable industrial carpet, designed using a rainforest floor as inspiration, becomes the best-selling product in the company’s history and redefines an industry – that’s disruptive sustainability.  When a major real estate developer announces the construction of the largest net-zero energy commercial building in the U.S., and finds it fully leased two years before it even opens[1]  – that’s disruptive sustainability.  When a five year-old hospitality company that helps property owners increase their asset utilization through sharing and renting among peers, and brings in hundreds of millions of dollars in annual revenues without building, owning, leasing or managing a single property – that’s disruptive sustainability.  And when Michael Porter replaces his Five Forces framework with Creating Shared Value – maybe that too is disruptive sustainability. 

In the final analysis, management is prediction.  Data can inform, but it alone cannot predict.  As Clayton Christensen once observed, ”The only way you can look into the future – there’s no data – so you have to have a good theory.  We don’t think about it but every time we take an action it is predicated upon a theory.  And so by teaching managers to look through the lens of the theory into the future, you can actually see the future very clearly.  I think that’s what the theory of disruption has done.” 

So my advice to CSR or ESG professionals: don’t look to a 30-year-old framework from Harvard Business School to prove your relevance; formulate a good theory – a compelling, credible, disruptive theory - and make your case based on that.

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[1] http://www.utsandieg–o.com/news/2012/dec/26/hines-aims-net-zero-energy-building/

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Jeremy Grantham Should Have Gone to Jail

Jeremy Grantham is the chairman of Boston-based GMO LLC, a global investment firm with over $100 Billion under management. He is not only a hugely successful investor, but also a person of the highest integrity and ethics. He is widely admired and well respected. But he should have gone to jail.

Why?  A little background: On Wednesday, February 13, 2013, Grantham was with his daughter, Isabel, in front of the White House protesting to stop the Keystone XL pipeline. Isabel was one of the 48 protesters who were arrested for handcuffing themselves to the White House fence. Grantham avoided arrest. And that’s unfortunate. Imagine if he had been taken into custody. The headline “Jeremy Grantham Goes to Jail” certainly would have grabbed attention. Perhaps those unfamiliar might have thought that some financial big-wig was finally getting his comeuppance. Yet the real narrative would have been even more shocking – a leading institutional investor behind bars for protesting against climate change, in particular against a pipeline that will tap the Alberta Tar Sands and accelerate the warming of our planet, endangering everyone’s future. 

New York Times pundit Joe Nocera said that approval of Keystone was a “no-brainer” for President Obama and called activists like Bill McKibben and NASA’s Jim Hansen “utterly boneheaded” and their efforts a misguided crusade for making Keystone a focus. The financial press has been even more clued out – they barely covered the story. But if Jeremy Grantham had gone to jail the financial media would have been forced to look, and this time the person at the center would have been someone very different - not an environmental organizer like Bill McKibben, and not a climate scientist like James Hansen, but rather an active and highly successful institutional investor. 

In a 2011 newsletter, Grantham wrote to his investors that if industrial development continued with business-as-usual, “the planet's goose is cooked." Over the next twenty years, it is estimated that two to three billion more people will be joining the one billion who already enjoy higher living standards. That’s great news and tremendously important. And it will create an ever growing demand for energy. Yet exploiting resources like the Alberta Tar Sands to meet that demand means a very serious risk of climate catastrophe. It is not that the Alberta Tar Sands are so much dirtier – although they are. The real problem with oil from tar sands is the sheer size of the global fossil fuel reserve. Once the spigot is turned on it will be hard to turn off. 

According to the Stanford Research Institute (SRI), reserves of easy to get oil represent about 35 times the current annual usage – we could burn all that oil before mid-century and if we’re smart still avoid a runaway climate catastrophe. Reserves of oil from shale may be as much as 300 times the current annual global usage of oil – if shale oil becomes easier to use it represents decades if not centuries of potential reserves which clearly means game over on keeping carbon emissions at safe levels. If we are to avoid dangerous climate change, the great majority of oil from shale and tar sands needs to be left underground. Canada's dirty tar sands seems like a good place to start. 

Yet the media – and the financial press in particular – are not very good at discussing the larger issue. The focus is on the short-term, and in the case of Keystone, on three issues in particular: (1) job creation, (2) cheap and stable energy, and (3) good relations with Canada. Clearly these make for convincing arguments in the business media and in editorials. But the arrest of Jeremy Grantham might have forced many pundits to drill down further: (4) what is the potential for a climate catastrophe from tar sands, (5) what is the value of the stranded asset risk of fossil fuels, and (6) what are the implications for job creation and wealth expansion in a sustainable global economy. Perhaps Jeremy Grantham’s arrest would have helped bring the investment community’s focus to where it needs to be – on the future. 


So, as much as I hate to see an innocent person behind bars, I wish Jeremy Grantham had gone to jail … if only for one night.

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U.S. Competiveness Project - The Need for Systems Thinking

The current state of U.S. competitiveness is in a sense not the problem. It is a symptom of a larger systemic problem. In their January 2012 report “Prosperity at Risk” detailing findings from the recent HBS Survey on U.S. Competiveness, Michael Porter and Jan Rivkin describe how the threats to U.S. competitiveness are multi-faceted, interrelated, and long term and how the strategies to address them must be multidimensional, holistic, and sustained. As they press business leaders to stop actions that simply benefit their own firms while collectively weakening America’s business environment, Porter and Rivkin are describing the real problem. Fixing U.S. competitiveness will require a broader systems perspective – much broader and more holistic than American management has practiced in the last 40 years.

For decades U.S. management has had very little appreciation for seeing businesses from a systems perspective. Hugely popular management approaches like MBO (management by objective) created “the whole is equal to the sum of the parts” and “manage what you measure and measure what you manage” mind-sets. Consequently there was little attention paid to the interconnections and interdependencies within a business operation or between businesses – these weren’t seen as important in building great enterprises or fostering strong economies. Harvard’s U.S. Competitiveness Project needs to change that thinking and hopefully will.

Yet, if we are to really address U.S. competitiveness we must stop looking at issues, businesses and markets as isolated, and instead understand that the future of U.S. competitiveness lies in how well we address the systems issues facing the global economy and the planet over the next 20-40 years.

The risks are clear. Huge increases in global demand for raw materials, industrial and agricultural commodities, energy and water, will put greater claims on resources, stress supply chains, apply enormous pressure to profit margins and deepen the planet’s most serious environmental challenges. Yet, these same risks point to tremendous opportunities. An estimated three billion new additions to the world’s middle-class before mid-century will improve more people’s lives than ever in history and triple the size of the global economy. For companies to turn these risks into opportunities they must take advantage of growth while mitigating resource disruptions and global environmental degradation. Clearly, business as usual will not get the job done. The fate of U.S. competiveness in the years and decades ahead will be determined by how effectively we mitigate the most urgent risks and develop the greatest opportunities that will drive the global economy and the planet. Sustainability must be the organizing principle of U.S. competitiveness if we are to lead in the 21st century.

Many ask about the meaning of the term sustainability. Here sustainability refers to a process and a way of thinking which begins with an appreciation for businesses as systems, embedded in larger systems such as markets, and all part of even larger systems of economies. Ultimately, the earth itself is a system made up of highly interconnected and interdependent groupings of natural and man-made systems, one of the most powerful being the global economy. In a well organized system, every subsystem supports and aligns with the aim, operations and workings of the overall system. Lack of alignment leads to sub-optimization, decay and the potential destruction of the system. Simply put, sustainability is about getting the alignment right between how the global economy works and how the planet works. To the extent business operations support that alignment, business is sustainable and will prosper; to the extent business operations are out of alignment, business is unsustainable and will deteriorate. The key to U.S. competiveness lies in how well we plan and organize for that alignment.

Next month in New York City there will be a major gathering of C-level business leaders, entrepreneurs, NGO activists, and at least two former Heads-of-State (Costa Rica’s Jose Maria Figueres and U.S. President Bill Clinton) to discuss U.S. competitiveness in the context of the risks and opportunities of the 21st century. The event – The Sustainable Operations Summit – is not unique – it takes place the very same week as Fortune Brainstorm Green, a CEO-level event in San Diego focused on the newest ideas shaping the future of business. Both events and others like them signal an important trend in the business community – putting sustainability at the center of the discussion around risk, opportunity and U.S. competitiveness in the coming years.

At The Sustainable Operations Summit, I will be moderating a panel that was originally entitled “Environmental Strategy and Business Strategy.” I spoke with the conference organizer about changing the name – replacing “and” with “as” – and he agreed. The “Environmental Strategy as Business Strategy” panel will discuss how new business strategies for American competitiveness in the 21st century must not make environmental strategy vestigial, or incorporate it because it is noble or even socially responsible. Instead environmental strategy must be seen as the key to global competitiveness. Understanding natural systems is much more than simply showing us what we’re doing wrong to the planet – it can provide unique insights into how to build efficient and resilient businesses systems. As detailed in the book Profit Beyond Measure by H. Thomas Johnson and Andres Bröms, natural system characteristics such as self-organization, interdependence and diversity have been used to build some of the most efficient and robust manufacturing systems of the 20th century. In the 21st century only by understanding these principles will companies be able to address the daunting challenges and unprecedented opportunities that are unfolding.

One of the panelists on “Environmental Strategy as Business Strategy” will be Col. Mark Mykleby (U.S.M.C. Ret.). After serving in combat in Iraq and developing strategy for U.S. Special Ops Command, Colonel Mykleby served as special assistant to the chairman of the Joint Chiefs of Staff, where he developed a new National Strategic Narrative for the United States in the 21st Century. The U.S. has been without a national strategy since the end of the Cold War when the strategy of “containment” of global communism became obsolete. Col. Mykleby’s narrative replaces “containment” with “sustainment”, making sustainability a core principle for America’s next 50 years. The narrative is not just about green energy and resource efficiency, although these are important components. It is about something larger – a view of America’s challenges and opportunities from a systems perspective. There are powerful and influential people both inside and outside Washington who are quietly working to see this strategy transformed into policy in the next administration, which would go far to mainstream the idea that U.S. competitiveness in this century as a matter of national policy must and will be driven by sustainability and systems thinking.

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Think Like a Technology Company

Why has the Chevron Corporation recently launched an ad campaign showing its commitment to the idea that it should think like a technology company?

The answer may lie in the fact that the growth and deployment of information technology over the last 40 years has had a transformational effect on the global economy. And transformational change is something oil companies - indeed all companies - will have to understand and embrace if they are to lead a global economy that will triple in size by 2050.

Chevron's ad alludes to this very important thread yet unfortunately it misses the mark. The fine print shows Chevron mistaking use of the latest technology for "thinking like a technology company." And these are not the same.

Any well run company makes use of the best tools available. But business-as-usual practices and simply deploying the latest technology is not enough. 2011 is the year when mining for new business models begins - and the tech sector provides the mother-lode of raw material about how to transform a global economy in four decades or less.

In the march towards a sustainable global economy, the most important lessons may come from the tech sector. The emergence of an information economy can be a powerful guide to transformation - and this is one economic transformation that is not optional.

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Is Moore's Law "Sustainable" ?

On August 30, 2010 a New York Times article revealed that researchers have been able to “overcome a fundamental barrier to the continued rapid miniaturization of computer memory that has been the basis for the consumer electronics revolution.” In short, Moore’s Law continues. Moore’s Law created the expectation of miniaturization around which the entire semiconductor industry organized itself. This drove investment into the burgeoning sector, resulting in the innovation that created what we now call The Information Economy.

Today we are at the dawn of a new age, requiring a new kind of economy, powered by clean, renewable energy. Getting this next industrial revolution right has huge risks but also enormous opportunities. While different from those of the information age, these opportunities are driven by the same fundamental principle – Expectation drives Investment which Leads to Innovation.

On Tuesday September 21st in New York City the conference BusinessClimate 2010 will bring together the world’s top business innovators and builders of a sustainable 21st century economy as we search for Moore’s Law for sustainability.

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The Climate Change Executive Coach - What Every CEO Should Know

In its Fall, 2009 issue, the MIT Sloan Management Review reported on a wide-ranging study in which 1500 business leaders were surveyed to ascertain their views on the new skills managers will need to address climate change and build sustainable enterprises in the 21st century. Results of interviews with experts in the field indicated that there were five management responsibilities that needed improvement: (1) the ability to act on a system-wide basis; (2) collaboration across conventional internal and external boundaries; (3) a business culture that rewards and encourages long-term thinking; (4) new capabilities in activity measurement, process redesign, financial modeling/reporting; and (5) new skills for engaging and communicating with external stakeholders. The survey results indicated that what is lacking in many sustainability initiatives is an overall plan. Efforts are often defensive and tactical rather than strategic; multiple initiatives are disconnected with one focusing on products, another on facilities, and perhaps others addressing employees, customers, or the general public. And sustainability initiatives as a whole reflect incremental rather than transformational change.

W. Edwards Deming – a giant of 20th century management thinking – spoke about transformational change. And even though he rarely used the term sustainability, Deming would have recognized his ideas reflected in each of the five areas that the Sloan Review cited: Deming taught (1) an appreciation for business as a system, (2) the importance of cooperation and collaboration as well as competition, (3) the need for managing for the long-term to foster a robust and durable enterprise, (4) new ways of looking at and understanding data and variation and the implications this has for management, and (5) an understanding of business in the broader context of community and society. The kinds of management approaches that sustainability experts today see as critical were being discussed – indeed urged – by Deming decades ago.
Today the issues facing top management are more daunting than ever. The economic well being of the business enterprise, and indeed the future of the entire planet are currently at risk from unsustainable practices such as the burning of fossil fuels leading to potentially catastrophic climate change. Executive leadership needs new ideas and approaches to the practices of management, the kind suggested by Deming years ago, in order to address this urgent challenge.

Appreciation for a System

When CEO’s first think about climate change, they often view it as a problem. Yet if studied at length, it becomes clear that climate change is not a problem, but a symptom – an indicator of a lack of alignment between two highly complex and adaptive systems - the planet earth and the global economy embedded within it. From this perspective, addressing climate change requires an understanding of systems.

A system can be defined as a grouping of interrelated and interdependent components in the service of an aim. Lack of alignment of components to overall aim can lead to sub-optimization, decay, and the ultimate destruction of the system. As a system, a business is made up of many interrelated and interdependent parts each of which must ultimately be aligned with the aim of the system – i.e. the mission of the enterprise. On a larger scale this is true of businesses within the global economy; each business is an interconnected and interdependent part of the global economy. The global economy in turn is a part of an even larger system: the earth and its biosphere.

Climate change has revealed that humanity has misunderstood the systems relationship between the global economy and the earth. Since the dawn of civilization, mankind has seen the earth as a vast resource to be put in service of the human economy. This is akin to the tail wagging the dog – and now the dog is beginning to get annoyed. A new systems model sees things the other way around, the human economy in service of the earth - that is, the economy as a subsystem of the earth, requiring alignment with the aim and workings of the earth and its biosphere. Successful CEOs today are those who are beginning to understand that sustainability is simply another word for seeing business as a system in alignment with the global economy which in turn is in alignment with the biosphere. The implications of this systems model will be the driving force behind 21st century commerce, including renewable energy, resource efficiency, information intensity, and closed loop production.
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Knowledge about Variation

Since CEO’s are surrounded by variation, how do they make sense of the numbers that come their way? What do the fluctuations in the numbers mean? Do they ascribe too much meaning or too little to the fluctuations? Can executives use the numbers to predict with a high degree of belief what the future holds? What kinds of actions should business leaders take to change the future? These kinds of questions have great importance to leaders of business and some understanding of variation can be helpful to answer those questions.

Variation that shows a clear pattern can sometimes be modeled and theories can be constructed about the causes of the pattern. Variations in the level of atmospheric concentrations of CO2 show clear patterns. Recent changes in the variation are causing scientists to predict that unless human industry radically changes course from business-as-usual, the concentration of CO2 in the earth’s atmosphere will be higher by mid-century than it has been in over fifty million years – a time when the earth’s climate was very different and much hotter.

Business leaders today have an immense influence on society. The meaning CEO’s ascribe today to the variation in atmospheric CO2, the predictions they make, and how they choose to address them may well determine the fate of our planet for centuries to come.


Theory of Knowledge

Executive leaders know that above all else, management is prediction. But rational prediction requires theory. And by comparing prediction based in theory with observation, new knowledge can be created. (A great practical form of this is the Plan-Do-Study-Act Cycle that Deming developed from the work of Walter Shewhart.) When there are competing predictions, as there are in the case of global warming, the soundness of the work that has gone into development of each prediction must be evaluated so that degree of belief in different predictions may be assessed.

Today, some CEOs and others who continue to question the validity or urgency of human-induced climate change often dismiss it as “just a theory.” Yet, human civilization has been built on theory. The greatest achievements of Newton, Darwin and Einstein were their theories – and those theories reshaped mankind and our planet. Climate change theory is already shaping the future and changing the ways humans interact with our surroundings – and for CEOs it is opening the door to new knowledge.

Psychology

Addressing climate change will take transformation. Deming knew that transformation could not take place without driving fear out of the organization - fear that saps people of energy, takes their focus away from the organizational aim, damages cooperation and constancy of purpose, and leaves people thinking about their own self-preservation. Driving out fear and building trust can unlock the creative potential that will lead to innovation and sustainability.

As climate change transforms the human systems that are corporations, psychology will play a key role in determining whether and how these corporations succeed. Given the mountains of scientific evidence, the decades of peer-reviewed vetting, and the magnitude of the threat posed, one may question why American society has not acted sooner and more swiftly. The answer is, in part, bound up in human psychology. CEOs that understand the psychology of individuals and groups can put that understanding to work to improve the lives of people and the effectiveness of organizations. On a larger scale, in understanding of psychology, corporate leadership can help to design approaches that will help society at large become more knowledgeable of the effects of climate change and the human population’s role in acting to prevent further damage to the biosphere.

Conclusion
Two decades ago, W. Edwards Deming called for new ways of management to address America’s competitive decline. He knew that tweaking business-as-usual practices would be ineffective and indeed counterproductive. Transformation was needed, and it had to be informed by knowledge. Today’s CEOs are living in a new era, where the term ‘business-as-usual’ refers to the continued practice of burning fossil fuels. Some business leaders are advocating sticking to business-as-usual or perhaps tweaking it around the edges. But such action will be ineffective and indeed counterproductive. A great transformation is required to avoid the worst consequences of a warming world – a transformation that aligns the global economy with the workings of the earth’s biosphere. It will require skillful management informed by new knowledge – using many of the very same ideas Deming introduced to transform management years ago

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Is America Failing the Marshmallow Test?

At the dawn of the 21st century America is facing a most urgent decision – what to do about climate change. We have before us two basic choices – (1) continuing with business-as-usual or (2) transforming our economy for the future. The fundamental priorities that guide this decision remind me of something called the Marshmallow Test.

The Marshmallow Test is an unusual exercise for testing children that has become regarded as a strong predictor of a child’s future success in school and in life. Originally conducted by Stanford psychology professor Walter Mischel in the late 1960’s, the Marshmallow Test presents a 4 year-old with a choice: he can have one marshmallow now, or two marshmallows in a short while. Mischel was interested in learning what enabled some young children and not others to forego immediate gratification in favor of a larger desired but delayed reward. What is most interesting was the follow-up years later. According to a study in 1990, the marshmallow test was more predictive than IQ of future SAT score.


Discipline and Trust

Researchers believe that the marshmallow test is an indicator of two important characteristics for future success: discipline and trust - the discipline to defer gratification in the present and the trust that a pledge of greater reward in the future will be fulfilled.

In the face of the daunting problem of climate change, is America reacting in a business-as-usual manner, satisfying our immediate needs, and grabbing the marshmallow before us? Or are we showing discipline by carefully considering the implications our current decisions have on the future, and trusting that we can influence that future to our greater benefit?

Discipline

Addressing climate change requires discipline - the discipline to maintain constancy of purpose, to invest in the future, and to understand the true nature of our problems. Maintaining constancy of purpose means having a sustained focus on our long-term problems even as their short-term symptoms rise and abate. That means we need an energy strategy not based on the spot price of oil, which sees us running to fuel efficient cars and mass transit only when oil spikes, and then abandoning them after it falls. The discipline to invest in the future means not only taking advantage of win-win investments with short-term returns like energy efficiency, but choosing investments that align our actions to our overall aims and that take into account long-term consequences even if the payback may be farther out than five years. Understanding the true nature of our problems means taking a systems view and seeing those problems not in isolation, but as interconnected and interdependent with other issues. Seemingly disparate events such as rising CO2 levels, China’s emergence as a renewable energy superpower, and increasing threats from climate-stressed failed states are all interlinked with American economic, social and environmental security. Understanding this and figuring out what to do takes measured and thoughtful discipline.

Trust

If America is to pass the Marshmallow Test we have to restore trust in our institutions – in government, in business, and in the sciences. U.S. government gridlock on climate change is exacerbated by the lack of trust between the two parties which feeds into a public confusion about the urgency of the problem. Lack of trust in the leaders of global finance is hurting the prospect for a carbon market in the U.S. Even if the economics make sense, the vision of Wall Street enriching itself from the climate crisis is almost too much for Main Street to bear. And sowing lack of trust in the underlying science is perhaps the best way to diminish the sense of urgency needed to address a public hazard whether it be climate change or cigarette smoking. Today’s whipped-up email “scandals” over climate science serve the same intention as found in a Brown and Williamson Tobacco Company memo from the 1960’s. It stated, “Doubt is our product.”

Does America Want to Pass the Marshmallow Test?

Imagine America as that 4-year-old child facing a choice: a sure, reliable and comforting marshmallow right now, or the potential for even greater marshmallow opportunity if we adjust our behavior. Which are we going to chose?

The one-marshmallow-right-now means business-as-usual i.e. continuing to base our economy on fossil fuels echoed by the mantra “drill-baby-drill.” It means avoiding expensive incentives for new forms of energy generation. It means continuing to borrow from China, in order to pay the Middle East so we can drive to work. It means putting no price on carbon so that energy in the short-term remains the cheapest in the industrialized world. And it means ignoring the science and continuing to put CO2 into the earth’s atmosphere, which frankly will not present serious problems for most of us in the next few years. Like that 4-year-old scarfing down that single marshmallow, we will be just fine - in the short-term.

But if we listen to those who have dedicated their lives to the study of these issues - if we trust the most informed of us – there is a significant probability that the future will be either much better than the present or disastrously worse depending on the choices we make now. Other countries are setting examples. Spain is making huge investments in renewable energy and high speed rail. Japan continues to make great progress with energy efficiency. Denmark has repowered entire communities with renewable energy. Germany and China are becoming world leaders in the solar and wind technology. And Abu Dhabi is building the world’s first completely self-sustaining zero-carbon city called Masdar. These countries are displaying the discipline to adjust current practices with the trust that there will be a long-term benefit. Like the 4-year-old who defers eating the single marshmallow for a more beneficial result in the future, these countries are all adjusting current practices to build economies that will bring more opportunity for even more people. They realize that building a sustainable economy today is key to leading the global economy of tomorrow.

The Marshmallow Test is telling us we need to be disciplined in our decision-making and we need to trust in each other. But what it is really saying is “Think about the future.” When following up on 4-year-olds many years later, those who waited for the second marshmallow were found to have scored 210 points higher on SATs than those who grabbed the first; they were also in general more successful and better adjusted to the challenges of life. The decisions made by this generation in this new decade will shape the future in ways more profound than perhaps any before us. America must pass the Marshmallow Test, because if we are not about the future, what are we about?

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