[MUSIC] This is Mike Rosenberg with strategy and sustainability. We're in session three, which is about strategic options. And this is segment five which deals with one of those strategic options which I call pay for principle. So the framework again, is environmental sensibility against the level of compliance. In this case, this is companies which really push to be leading, to go way beyond what the law requires. And to do pretty much everything they can imagine in terms of environmental sensibility, in terms of water usage, carbon footprint, whatever the issues are. Companies that really try to go as far as they can, and the environmental sensibility, of course, is quite high often because, especially in this case, you know of all these different shareholders, it's the shareholders who demand it. It's shareholders who say I believe this is important. It's my company, or I'm the major shareholder, or I'm the largest shareholder or a very large shareholder or whatever. And they say, we are going to do this, yes or yes? We are going to do this because it's the right thing to do. It's because it's what I believe is the right thing to do. Examples are Sir Richard Branson. He's a very committed environmentalist. He spends a lot of his own money on these issues. So you can understand that he says to Virgin Airlines, hey, I want you to fly efficient aircraft. Otherwise I don't get it, so it's deeply embedded. Yvon Chouinard, the founder of Patagonia. And when Yvon started Patagonia, he just really wanted to make equipment for himself and his friends and people he knew in this area. And he has deep, deep environmental convictions. So he said, I only want to build a company if I can build it this way. Yeah, so again, it comes from a very, very deep place in the heads of shareholders. Yeah, which I think is very, very important and it's fine. This is John McKay from Whole Foods. When he started Whole Foods in 1980, it was him and some colleagues, and they're starting a natural foods grocery store because they think it was the right thing to do. Later what happened to Whole Foods is an amazing story and we'll talk about that later in this course. But the original reason and the thing which takes people through it is their own deep convictions. I don't know if you're familiar with the story of Ray Anderson from Georgia, from Interfaces, this is a carpet company. In 1994, Mr. Henderson had what he called a spear-in-the-chest moment. People were asking his company, what are you doing in the environment to make carpet squares, carpet tiles? And it's a very intensive production process, basically, petroleum based and his answer was not a lot. When he read a book by Paul Hawkins, The Ecology of Commerce. And after reading The Ecology of Commerce, Anderson said, we've got to change the way we do business. And his metaphor was we have to go over the mountain of sustainability. Now unfortunately, he passed away in 2011, but his company is still on that path to become carbon neutral in 2020. And actually the Ray Anderson Foundation does a lot of good work in this area. Another example, this is John Doerr. Mr. Doerr is a partner, I think he's the senior partner of Kleiner Perkins, one of the big venture capital companies out in Mountain View, California. And at one point, he had a moment when he just changed his mind. He has a beautiful TED Talk on this. I think it was in response to his daughter asking a question at dinner. And he spent a lot of money, a lot of his money and a lot of his customers' money, investing in green tech over the last few years because of this fundamental transition, fundamental transformation that he's had himself. So the important thing about pay for principle, it might cost money. But these guys don't care because this is their commitment, this is what they're trying to do. Now Milton Friedman, the founder of the Chicago School of Economics, one of the most widely quoted economists of the last century, in a very famous, or infamous, depending upon your point of view, article in the New York Times Magazine in 1973, said corporate philanthropy, he said is more or less like theft. Because if a corporation is giving money to something, that money is either taking it out of its customers, charging more money for its products and services, paying less money to its employees, or giving less dividends to its shareholders. Now this was a highly criticized article. Some people think it's exactly right, some people think it's exactly wrong. In any case, pay for principle, the idea is if the shareholders choose to use their money to do something and it's their company, then there's nothing wrong with that. It's completely legitimate, it makes all the sense in the world. A related idea to pay for principles is the whole idea of the B Corp. The B Corp is the idea that there's a corporation which is here for more than just to make money, more than just to provide customers with your fantastic products and services. It actually has a deeper commitment to the environment. The idea comes from this idea that we're using resources so fast we will need two or three planet Earths. And since there is no planet B to go to, we should actually redesign our companies to make sure that we can actually use the resources we have. So there's actually a company called the B Corp and they'll give you the certification that your company is a B Corp. And they gave a checklist, this is the Ben and Jerry's checklist. And I think it's a good business model. But these are private companies which are trying to get people to do the right thing. Now you have to pay them to get the certification and they'll check you and see if you're doing the right thing. And again, this to me make sense when the shareholders' part's in it, when it's committed and they think it's the right thing to do. Anyway, what's critical, if you think about this and the first one I think is strategic clarity. To make sure that this is done based upon certain principles which are clearly articulated and that the board periodically checks to make sure the company's still on the same track. Financial modeling, because if you're going to spend money to do the right thing, you should know how much money you're spending. And if there are estimates of how much benefit you can get, you should know that, too. But pay for principle fundamentally means we know that it's going to cost us money to do this, we're going to do it anyway, and maybe we'll get some benefit. But the first idea is to do it anyway. Research and development, to develop new products and services, which can be greener, have less of an environmental impact, and do more for the natural environment. Interface for example, the carpet company from Ray Anderson, they spent huge amounts of energy and effort to try to figure out new ways to make their product. Because only that way will they actually break through to the other side. Communication, because this now, you have the opportunity to integrate sustainability into the very heart of the company's messaging but again these are pseudo complex. So you have to be careful not to fall into kind of a naive trap of saying we're doing one thing when in fact we're doing something else. And finally, the last issue is human resources, because to explicitly link the company's culture, the company's values to issues of environmental sensibility is a lot of work. It takes a lot of time. You need to have a holistic incorporation of this into the way a you hire people, the way you develop them over time, the way you promote them. Performance metric systems, all of it has to hang together. So this can be a very powerful strategy when the shareholders are deeply committed. Now the other thing that's happened, which we will mention from time to time in this course, is some of these companies have become wildly successful. They become wildly successful probably because they're connected to a market segment which will pay more money for products and services they perceive to be more sustainable. This is the case of Patagonia, this is the case of Whole Foods. So we have to be a little bit clear about what comes first. Is it the commitment, or it is the understanding of the customer segment? Pay for principle is about when the commitment came first, even if market success came late. [MUSIC]
