The Brittle Spear IV: Incentives

Publicly traded companies have a fiduciary responsibility to do what is best for their shareholders. It is all well and good that management should be beholden to the beneficial owners of a firm. Management indeed should act in the best interests of those whose mandates they are supposedly carrying out.

This gives us some perverse incentives, however. In a situation where a company could spend 3% more on a product and lessen its environmental impact, but reap no other rewards beyond that, it would be unclear what the direct benefit to shareholders would be. If we spend more and chalk it up to marketing costs and hope that people will buy more of our stuff later, then this could be of benefit.

Similarly, we can spend more because it would strengthen our license to operate and would make for less criticism from the public or regulators. We could also envision a scenario where a company could spend more in an attempt to obfuscate other detrimental economic impacts that the business has (gluten-free meat products or a “green” packaging for something that is, per definition, destructive, such as palm oil.) The company may do this in order to attract more graduate students to its ranks by not being the boogeyman or by perfuming a foul odor emanating from the simple fact that its business is dead and buried through new competition.

Corporate corpses aside the reasons for spending more on an input to be, or at least appear, green are legion. In many of the above examples, the company will never really be able to completely estimate a concrete return. It’s just another few straws on the goodwill bale of hay.

So, as long as it deludes itself, the company is free to indulge in green dressing tarting up a pollution salad. The Coca-Cola Company is one of the world’s largest polluters and, yet, in following its advertising, it could be mistaken for a polar bear sanctuary. The only sanctuary that the company is building is from long-term shareholder scrutiny as to the compatibility of being an omnipresent brand with being more responsible for polar bear drownings than most other economic activity on Earth. Nowhere must the thought arise that, in being so prominent, the backlash will be extra vociferous when it comes. There is no flip-side to goodwill apparently. To that, I would counter that if a  firm other than Toyota would have had floor mats cause unintended acceleration, the resulting scandal would have been milder. We would have accepted as much from Alfa Romeo—perhaps even quietly tickled by the fact that our alfas wished to go fast even if we didn’t.

So it is not that the modern corporation is naturally opposed to a green world or that it is not compatible. We could do it if we lied to ourselves and others after all. But, it is rather that the incentives are wrong. With the C-Level benefiting from options and stock, which in turn is worth the most from continued stock market growth, but with CEO tenures becoming shorter, cost-cutting, new products, M&A, bold new roads to nowhere, general McKinsey nonsense and other quick fixes are now ways to move the needle while you still can. With CEO tenure falling from eight to seven years quick fixes that may work can be tried willy nilly, substantial reorganizations may work and new markets may pay off in that time as well. But, giant big turn arounds or paths like re-founding the company can rarely be completed in those time frames. Leadership is being disincentivized from doing things that hurt short term, but would bring firms outsized perennial gains. The only thing transformative is the Scrabble games carried on with the initiatives not the actual underlying economics. At the same time, institutional or other shareholders want to see the occasional leap but then just a nicely massaged no surprises growth.

If you’re a new quantity, an unknown flavor, then indeed your newness can create totally new economics and thinking, as we have seen through Tesla. But, investors want stodgy and safe bets from all the rest of the pack leading to lots of initiatives but little in the way of transformation. Capitalism may be compatible with green business but the incentives are currently not.

If we look at products failing quickly, being discarded, having planned obsolescence embedded in them, then short term revenue targets trump long term goodness for the planet as well. New products that are being introduced find it much easier to fabricate green credentials and paste it on a fast failing inferior thing than to make an actual thing that lasts long. I used to have a cooking timer that I had for over 15 years. Once it broke, its replacement lasted a week, the next one a month and the next one-three days. It’s not that some cooking timers used to be good, but that all of them now suck. Do you then want to be that one entrepreneur making less margin and growing slower, out of principle?

Incentives within the current capitalist system ensure that we are trapped in a low-quality, high-speed market of ever shorter production runs of crappier products. My heart sinks when I see review sites and forums under assault from fake reviewers competently raving about flash-in-the-pan products for which they’re trying to fabricate hype and brand. Word of mouth and recommendations themselves are under attack. Some regulators are actively involved in trying to make the world better with, notably, the EU. But, most don’t care.

As much as I’d like to be optimistic, these initiatives seem like chamber music drifting over the deck of a sinking Titanic. We have a log cabin in which we all live, all of us are chopping away at it and lighting fire to it continually because our house has always lasted forever. And the best we can do when something is exhausted or broken beyond repair is to quickly move to devouring something else. And the only discussion is about how long parts of our home will last, not about the lunacy of it all.

A great many of the wealthy and powerful on this earth will take no quarter or not at all reduce their acquisitive habits for nothing. Even if it’s just a number on the pages of a magazine, they wish to continue their ways. And the rest of us are locked into a glitchy Matrix without escape.

Capitalism is incompatible with life on this planet. We will eat up our home to make imaginary numbers on spreadsheets. I only have three potential solutions: a mild one, a more rigorous one, and a cataclysmic one. The mild solution is simply to do away with all rich lists and instead substitute them for lists of world’s greatest philanthropists. This may very well direct people’s attention away from accumulation towards spending it on solutions for the entire lifeboat. The more rigorous solution is the conclusion that capitalism doesn’t work well in a vacuum. When contrasted with communism or another enemy, the hard edges of capitalism are softened to blunt its excesses and make the alternative system look less appealing.

But, without a clear alternative to capitalism, our system of competition has no competition. The system is maintained, its hard edges return and capitalism does not evolve. Pretty soon the system is hijacked and like any other power system becomes decrepit and a pale frail form of its former self. In order to reclaim capitalism’s glory and ensure its victory with this earth rather than against it, it should be reestablished. A new creed and system must be created that takes out the dynamism and resilience of capitalism, but marries it with continued stewardship of this planet and everyone on it.

Should that not happen, we always have door number three, which would entail that Marx was right after all. And, in my opinion, that my friends will only be good for whoever makes tear gas and batons.

You can find part one of this series here.

Images: Kylie Jaxxon, Gui Seis, John Mason, Jeanne Menjoulet.