Here Comes Conscious Capitalism (Part III)

Do the words “sustainable” and “sustainability” make you feel as uncomfortable as they first made me? Getting comfortable with Conscious Capitalism also requires getting comfortable with the concept of sustainability in the business context. Understanding sustainability is relevant to the venture capital industry because the path to a sustainable society may provide the biggest opportunity in the history of capitalism.

Professor Nada Nasr of Bentley University suggests that at a basic level sustainability is the capacity to endure. It’s obvious that a business must be profitable over the long-term in order to endure. Reviewing the balance sheet and income statement is the standard approach to measuring a business’ capacity to endure. Unfortunately, the current method of accounting for profits does not include a business’ external costs which are the negative consequences of corporate behavior that don’t show up as liabilities on the balance sheet.

The prevailing economic model ignores the cost of externalities like pollution foisted on the commons and society in general. The belief that the earth is there for the taking of raw materials and the dumping of waste is an acceptable tenet of business. This attitude is changing as businesses like BP discover that it matters how profits are made because there are consequences to such behaviors. True sustainability is becoming about creating profitable businesses that both endure and eliminate the cost of their externalities.

Professor John Sterman of the MIT Sloan School of Management expands the definition of sustainability to include three new components. First, businesses shouldn’t use renewable resources like forests or fisheries faster than they can regenerate. Second, businesses shouldn’t emit pollution and waste faster than natural processes can render them harmless. Third, businesses shouldn’t use non-renewable resources faster than renewable substitutes can be introduced. A business that follows these new tenets will reduce and eliminate its external costs and be more likely to endure over the long-term.

Professor Sterman’s expanded definition suggests the need to replace the prevailing “cradle to grave” manufacturing paradigm of the Industrial Age that transforms raw materials in waste emitting processes into goods that are used and then discarded as trash. Sustainability invites a new circular paradigm that reduces or eliminates waste and trash by reducing, recycling and reusing the raw materials used to make goods, and by using renewable resources. William Mc Donough’s and Michael Braungart’s Cradle to Cradle: Remaking the Way We Make Things provides a compelling alternative and suggests how the new paradigm will work. The authors recently co-founded The Green Products Innovation Institute to help the state of California create the world’s first sustainable economy.

Ray Anderson’s Confessions of a Radical Industrialist: Profits, People, Purpose – Doing Business by Respecting the Earth tells the story of how this emerging paradigm has completely transformed Interface Inc.’s carpet business. Interface’s vision is to “be the first company that, by its deed, shows the entire industrial world what sustainability is in all its dimensions: people, process, product, place and profits” (see www.interfaceglobal.com). The company’s website contains a wealth of information about how a company can use a cradle-to-cradle approach on its path to sustainability.

It’s helpful to have a mental map of sustainability in order to see the big opportunity. Stuart Hart’s Capitalism at the Crossroads: Aligning Business, Earth and Humanity discusses the opportunity inherent in two trends, developing clean technology and lifting the 4 billion people who live on $1 per day out of poverty. Where these trends converge is what Mr. Hart, who is a professor at Cornell University’s Johnson School of Management, calls “The Green Leap”. Lifting those four billion people at the ‘base of the pyramid’ out of poverty provides a bigger potential market oppo8rtunity than the opening of China to capitalism. Developing base of the pyramid businesses using clean technologies amplifies the opportunity and may invite the development of new capitalist business models.

The food and retail industries are at the vanguard of sustainability. Gary Hirshberg started Stonyfield Farms, a producer of organic yogurt, in 1983 with the question: can we create an enterprise where everything wins? His book, Stirring it Up: How to Make Money and Save the World, tells the inside story of how to create a sustainable business. Gary’s epiphany in the first chapter, which led to the founding of the company, also captures how he was inspired to become a more conscious capitalist. Stonyfield has higher costs than conventional yogurt producers because it pays more for organically produced milk but its net margins are higher than its competitors because its story is so compelling that it can spend almost nothing on marketing.

Gary’s story also suggests a new model for preserving a company’s unique culture after an acquisition. When Group Danone acquired an 80% ownership interest in Stonyfield, it left Gary with majority voting control so he could continue to run the company to innovate freely and provide inspiring leadership. By preserving Stonyfield as an independent entity, Group Danone uses the company as an incubator and a model for sustainable business practices in its other operations.

It is hard enough to build a successful company without making it sustainable. There is no question that making a business sustainable takes more effort, but the results produced by some of the pioneers of sustainable business practices like Ray Anderson and Gary Hirshberg suggest that it is well worth the extra effort. Gary seems to have answered his initial question that it is possible to create a sustainable enterprise where everything wins. Professor Dipak Jain, the former Dean of the Kellogg School of Management, believes that sustainable businesses will win by creating wealth, promoting social welfare and preserving the environment to create global prosperity.

John Montgomery is a partner with Silicon Valley law firm Montgomery & Hansen. Read his prior posts here.