Karl Moore: This is Karl Moore of the Desautels Faculty of Management at McGill University, talking management for The Globe and Mail. Today, I am delighted to talk to Stuart Hart, who is a Samuel Johnson professor at the Johnson Business School at Cornell University. Good morning, Stuart.
Stuart Hart: Good morning.
KM: Your latest book, Capitalism at the Crossroads: Aligning Business, Earth, and Humanity, suggests that the world is going in that direction. What are you arguing in your book?
SH: The core message in my book, if we can think what is going on in the business world… In my view, we are in a time period now much like what happened 120, 130 years ago in the 19th century, when capitalism transformed essentially from the free-labour movement - which was the small entrepreneurs, [the]sole proprietorships - into the industrial corporation. That happened in the space of 30 or 40 years after the American Civil War. The concept of a large, limited-liability, joint-stock-owned company just did not exist in the 1830s. That emerged over a period of time through the 1870s, 1890s, through the turn of the century, that became the norm and is what we thought of as capitalism and business.
I think we are going through a similar sort of transformation right now. That model is ending. It is dying because it has to, it is unsustainable. It is unsustainable environmentally and it is also unsustainable socially. The way it has turned out to be practised has benefited relatively only a few and many have not been able to participate. What we are in the midst of is the transformation to what comes next. What is the next variety? What is the 21st-century corporation and [what does]that form of capitalism look like. It's going to be some version of what we think is a sustainable business or a social business. We do not know exactly what that is going to look like.
One of the things we know for sure is that whatever form of business ends up taking root, it will be environmentally sustainable, perhaps even regenerative from a natural capital point of view and it will be more inclusive, it will include all of humanity in the dream, in "the capitalist dream." And it will figure out how to engage everyone. Now, does that mean everyone is equal? No, but what it means is that capitalism will shrink the differences and will shrink inequity rather than magnify it.
KM: What we have seen in our generation of the boomers, since [the Second World War]particularly, an enormous growth of wealth, particularly [for]those on the top, but for Americans, Canadians, Brits, Western European [countries] but it has been voracious in its use of resources. It has been a great roll, but you are saying it's ending. We have to move to a new form. Why is it ending?
SH: We have hit the wall. This is what it comes down to. I know that people have been saying the sky has been falling going back to the sixties with the Club of Rome, "we are running out of resources." I am not arguing that so much. If you are looking at it through the environmental lens, we are running out of natural capital, we are running out of nature's ability to absorb our waste. That is perhaps what is going on. If you look at what is happening with the climate crisis, it is not just the climate system, [it]is every natural system that is under assault. Agricultural soils are washing away, marine fisheries are either at maximum or overfished or crashing, coral reefs are being plundered, and natural native forests are in decline everywhere. Every natural system is under assault, and it simply cannot go on this way.
KM: It seems like India and China, understandably wanting to have our lifestyle, that that is a tipping point as well. The world can hardly sustain our lifestyle, let alone a few hundred million people more.
SH: Right. I think we are at a point where, if we look at what sustainability has meant up until recently, the nineties I think was the awakening. That was when people in business realized that something has to give and this whole issue of social environmental problems and challenges aren't something for the government and for the NGO [non-governmental organization]world to think about, but we have to think about them.
I think the approach primarily was incremental. We can reduce waste and we can become more ecoefficient and that will save us money, right, because we are driving more raw material into saleable product, and that is a good thing. The efficiency argument, the continuous-improvement way of thinking we can be more socially responsible, that is sort of the incremental way of looking at it and, as important as that is, I think what we are seeing now - with the financial crisis, with the oil price spike, with the world food crisis, with all the things that have happened over the past two or three years - I think it is coming home to a growing number of people in the world and a growing number of people in the business world that something more fundamental has to change.
So the whole argument around beyond greening, is yes, the greening revolution - which was about continuous improvement and reduction and negative impact - that was good. But the real challenge, the real opportunity and, in fact, the real requirement long term, is to take the leap to what comes next and what comes next is inherently clean and renewable technologies. Not just reducing the negative impact of unsustainable existing technologies, but leaping to what comes next: Inherently clean, inherently renewable and regenerative where possible, No. 1; and No. 2: Engaging all of humanity in the capitalist dream, not just the richest one billion. That is what comes next, that is what beyond greening is all about. I believe that the companies that figure out how to crack the code when it comes to doing that, will be the 21st-century corporations; that is what capitalism will morph into over the next 10 to 20 years.
KM: Are any firms doing this? It seems a tough thing to do. Are we at the really early days or are there firms that have actually moved along the way on this?
SH: People often ask the question: "Are there any sustainable corporations out there?" I think the answer is no, but that is a pretty high bar to think about just a single organization as being entirely sustainable embedded in an unsustainable system, that is a pretty high bar.
The way I would think about it is: Can we find examples of strategic initiatives and efforts by organizations that are on that path? There, the answer is clearly yes. We can see some large companies out there, both in the developed world and in the developing world, doing some really interesting things and increasingly they are coming from the developing world. They are [companies like ITC]in India, not only [agricultural business]e-Choupal, which is famous, but some of the really interesting work they are doing in wasteland reforestation with poor people in villages, creating forested land that can retain water out of wastelands, and then creating a form of livelihood for those villagers and at the same time generating essentially, biomaterial as a natural renewable resource that can become a feedstock for biomaterials that are produced.
Now, they are in the paper business, right, but they have also generated new ways of pulping using just natural processes, not caustic-chemical pulping processes, but rather natural pulping done on a distributed basis. We can find lots of interesting examples in companies like ITC or others that are experimenting with renewable models that engage local people on the ground, that generate livelihoods and that do so in a way that might actually regenerate underlying natural capital rather than exploiting it - that is exciting to me.
We can find companies, both subsidiaries of existing large corporations but also startups, who are incubating tomorrow's energy technologies on the ground - distributed generation of renewable energy, not just big centralized technologies. I think a lot of what we see coming out of places like the United States and Western Europe, I think of it as "green giant" technology which fits our institutional structure - that would be big wind, solar thermal, big centralized water treatment - and there is nothing wrong with that; those at least have a chance at being more renewable.
But there is a whole other emerging suite of technologies, which are small-scale, distributed point of use, which struggle to come into any commercial reality in the upmarkets at the top of the pyramid because they are disruptive. It is tough for them to compete against a stacked deck, where you have incumbents that are getting all kinds of perverse incentives to perpetuate the fossil fuel system.
But at the base of the income pyramid, it is possible for those kinds of technologies to emerge rapidly because people at the base of the pyramid typically are so badly underserved and poorly served. You think about distributed generation of solar: It doesn't compete against subsidized coal-based electricity in a fully depreciated grid at 8 cents a kilowatt hour, if solar is 30 cents. But it can compete against kerosene lanterns and dry-cell-battery torches and candles at the bottom of the pyramid. Because to light up a home that way at night, it costs you 80 cents to a dollar a kilowatt per hour. So there is this strange reverse logic where you have the "poverty penalty," where poor people basically get the worst stuff at the highest price. They pay a lot more per unit than you and I do, so the real opportunity to leapfrog is there, not at the top of the pyramid. There is a reverse logic there.
I think it is enormously exciting when we think about the "beyond greening" agenda. That is where the more sustainable way of living and tomorrow's industries will be incubated and then they will trickle up. There was a recent piece in the Harvard Business Review about GE [General Electric]and how GE is disrupting itself; they coined the term "reverse innovation" and I think that is exactly what we are talking about here. Now it is an enormous challenge for established corporations to figure out how to do that because it reverses the logic of innovation. In the past, we always thought that we would come up with the breakthrough technology in our research labs in the U.S. and then figure out how to adopt it out there in the world. Now, we think about the only way we are really going to generate the kinds of innovations we are talking about is to get out into the world, on the ground, in villages, in slums and shantytowns with our technological potential and then figure out how we are going to develop businesses and applications around that and then trickle it up. It is the exact opposite of what we are accustomed to doing.
KM: This has been Karl Moore of the Desautels Faculty of Management at McGill University, talking management for The Globe and Mail. Today, I have been speaking with Stuart Hart, a professor at the Johnson business school at Cornell University.
AFTERTHOUGHT
This week, I am continuing an experiment where I have asked two McGill MBAs to join me in reflecting on what the CEO said and giving our two cents worth. This is part of a new course, The Role of the CEO, which Dick Evans, just retired CEO of Rio Tinto Alcan, and I are teaching. This week, I would like to thank Antoine Bourgoignie and Rod Peck for their input as I prepared the following comments.
Stuart is well known in the business school world for his work on the customer at the bottom of the pyramid with C.K. Prahalad and his most recent book on the environment and capitalism. We very much appreciated his thoughts in this interview.
A decade ago, his ideas would have been seen as radical, today much less so, though still a considerable percentage at the B school would take him to task. Over the last decade, I have seen a considerable sea change, here at McGill and at other schools where I teach and research from time to time: Oxford, INSEAD, Duke and the Rotterdam School of Management.
These five schools, (including McGill) represent a fairly broad sweep of leading business schools. I am increasingly hearing faculty and students expressing views in sympathy with Stuart's. "Are we ahead of business?" is the question which I wrestle with. I vacillate between thinking we are, and at other times thinking that at least some businesses are taking on board these ideas and are ahead of us.
Two ideas particularly resonated with us. We have recognized [the concept of]environmentally unsustainable [practices]for many years, but socially it was still accepted, particularly by business people. Today's socially unacceptable attitude is evolving as more of us start to be concerned about the world we will leave to our children. We sense this as well.
We tend to agree that we are now facing a turn in the development of the capitalist model. Historically, the capitalist entrepreneurship model was developed as an answer to the necessity of supporting and controlling the massive development of industrial activities ( the industrial revolution) induced by the huge growth in the utilization of natural resources such as coal or oil in economic activities which were made possible by technological innovation. As sole-entrepreneurship structures generally only allow the development and control of a limited amount of economic activities, the tremendous increase in industrial, economic and trade activities induced by the industrial revolution required the creation of adequate management structures. To a large degree, we see that modern capitalism is a byproduct of the industrial revolution.
In the last decades, however, and particularly since the first oil crisis in the early seventies, it appeared that capitalism, as we have known it, is not sustainable in the long-term. Not only because of the inequalities it creates by an unfair wealth repartition, or by the social and environmental damages it generates (these consequences are usually manageable in a way or another by governments and companies) but it is primarily not sustainable because the natural capital (both the natural resources and the planet's natural productivity) the capitalist system has its roots in is depleting fast and must therefore be replaced by other elements, replicable and sustainable. This last issue seems to be the one that particularly is driving the need for rethinking our system.
Therefore, we tend to agree with Stuart when he says that "we are in a time period now much like what happened 120 years ago in the 19th century, when capitalism transformed." We would, however, add that if capitalism is transforming now, it is more because of a new industrial revolution induced by the necessity to replace natural resources in the various production processes than because of companies' social or environmental awareness. These last two elements being, in our opinion, not the drivers for system changes. Karl Moore