Our core deficit – the one to which all others relate – is humanity’s ecological overstep. The world’s industrial economies are using up earth’s resources more than 50% faster than they can be replenished. And that’s a conservative estimate. For more on this, see the Global Footprint Network.

Measuring the real economic impact of this ecological deficit is guesswork at best. (How do we value damaged ecosystems or the economic effects of global climate change?) However, we do have numbers on the growing deficits embedded in our financial system, which not surprisingly have been growing alongside those in the ecosphere.

During the financial collapse of 2007 – 2009, the US Federal Reserve lent or spent $29.6 trillion to bail out the banking system – an amount that’s roughly double the nation’s GDP. This astonishing information was revealed only after the Fed had been sued under the Freedom of Information Act and the Dodd-Frank Act. The actual data can be found at the levyinstitute.org.

If this sum strains credibility, consider it in the larger context of the banking world’s derivatives exposure, which at last count was $707 trillion – roughly 11 times world GDP. The actual data, published semiannually by the Bank for International Settlements (BIS), can be found at bis.org.

Derivatives are securities whose price is derived from one or more underlying assets – typically stocks, bonds, commodities, interest rates and market indices. Originally conceived to hedge market risk, they are now used as leveraged bets on fluctuations in the underlying asset(s).

As traditional bank business – taking deposits and making loans – withers in today’s compromised economic times, their trading of derivatives has exploded. The referenced BIS report reveals that over the six months from December 2010 to June 2011 the notional value of derivatives outstanding increased by $106 trillion – an annual rate of 35 percent. According to the US Comptroller of Currency, the notional value of derivatives traded by the 25 largest US banks has grown from roughly $20 trillion in 1996 to more than $250 trillion today – a 12-fold increase at a time when reported GDP approximately doubled. See Chart 1 at occ.gov.

Of particular concern, 78% of BIS reported derivatives exposure ($553 trillion) was in interest rate contracts. Banks like to say these are virtually riskless because of “offsets” whereby opposite bets cancel each other out. However, this does not take into consideration counterparty risk, where one side to a contract falls into bankruptcy and can’t honor its obligations. As we discovered during the 2008 bankruptcies of Lehman Brothers and AIG – both ubiquitous counterparties – the global banking system nearly collapsed because so many institutions were caught in the nets of these obligors.

Interest rate derivatives are supposed to protect banks from interest rate rises. Because most banks borrow short in the wholesale market and lend at fixed rates for long periods a big rise in long-term interest rates could trigger claims on these derivatives. This is a palpable risk in Europe. As lenders to Greece, Ireland, Italy, Portugal and Spain recently discovered, interest rates on sovereign debt can rise quickly when investors become concerned about a borrower’s creditworthiness.

A closer look at BIS statistics reveals that by far the largest concentration ($219 trillion) of interest rate derivatives are denominated in Euros. If just 1% of these failed the global banking system would be looking at a loss of $2.2 trillion – enough to wipe out its entire capital base. To avert such a disaster the Fed and European Central Bank (ECB) are now lending additional trillions to European banks, which recycle the low interest loans back to weak sovereign borrowers.

In sum, derivatives trading today parallel the decline in global credit quality due to excessive borrowing. Disturbingly, that leverage is now both a cause and effect of the earth’s declining biological carrying capacity and the diminution of its resource base – a self-reinforcing ecological/economic doom loop of artificially reinforced demand and collapsing raw material supply. Continuing on this track is recklessly life threatening.

We can and must do better. And, indeed, we are in some encouraging ways. A critical mass of leadership companies has emerged over the past four decades that operate on a radically different mental model than the failed one of industrial capitalism. Rather than being machine-like in their singular pursuit of profit, they model themselves on adaptive living systems. The operating leverage they employ resides in the limitless bounds of human spirit and creativity instead of increasingly scarce raw materials and aggressive debt/capital ratios.

Where our real leverage exists

As shown in my book, Profit For Life, these new leadership companies achieve higher returns on equity with less debt leverage and ecological impact by inspiring employees to work with their hearts as well as their minds. This is their real advantage over traditionally managed companies, where employees are less respected and correspondingly less productive.

The cultures of these new leadership companies reverse the priorities of traditionally managed companies by placing a higher value on living assets (people and Nature) than they do on non-living capital assets. Such values are typically reinforced with life-affirming missions and visions of an uplifting future. Profit for them is not so much an end in itself as it is the means to higher ends of service. In more advanced practitioners, there is a clear realization that profit can only arise from life, in which case profit must return to serve life.

These cultural attributes engender deep stakeholder trust and loyalty – the utilities through which information and fresh ideas flow. Employees in such cultures are more apt to bond, experiment and collaborate because they feel their ideas matter. For this reason life-mimicking companies tend to become prodigious learning academies and centers of innovation – qualities that increase the odds of reducing their ecological footprints, gaining market share and becoming profit leaders.

The way forward

There is no time to waste in changing mainstream business practices. The old model is collapsing and closing down future options at an alarming rate.

The challenge of reversing the outgoing ecological and economic tide is immense and exciting to those who join in the corporate renaissance now under way. I can imagine no more meaningful life than leading this transformation.

Al Jolson sings “Brother can you spare a dime”– the anthem of the great depression.

 

“Empirical inquiry into the relationship between companies’ social and financial performance – between their concern for humanity and their concern for the bottom line – has received ongoing attention since Bragdon and Marlin published the first empirical study in 1972.”

-Joshua Daniel Margolis (Harvard Business School) and James Patrick Walsh (Michigan Business School), People and Profits? (Lawrence Erlbaum Associates, Publishers. 2001), Page 1.

Corporate executives sometimes act as if making profits today, under tighter environmental laws, is stealing cheese from a mousetrap. Is the cheese always in a trap, or is a sound environmental policy sometimes fully compatible with company profits?

Proponents of the mousetrap position argue that corporate managers can either control pollution or maximize profits but that the former can be accomplished only at the expense of the latter. From the investor’s perspective, this in turn implies that he can either invest in a profitable company or a “good” company (which protects its environment) but that no company is likely to be both.

Since this attitude is derived from economic theory, we will first review orthodox theories which suggest that pollution control must be a drain on profits, and will then suggest alternative theories. Moving on to the evidence in the pulp and paper industry, we will conclude that at least in this industry there is a strong correlation between companies with a good record in pollution control and companies with a good profit record. We explain the relationship as a reflection of lower costs associated with better pollution control or of differences in management ability. In any case, the good pulp and paper guys (as defined by environmental virtue) win (as defined by financial reward); there is no mousetrap.

Orthodox Economic Model: More Pollution Always Means Less Private Costs

In its most elementary form, economic theory concerns itself with choices among scarce economic goods, for example, between guns and butter. A given society can produce either a certain number of guns or a certain number of pounds of butter, or some combination of quantities of the two. The usual solution determines how the society can maximize total value by some combination of guns and butter.

The solution is almost never to produce one or the other exclusively because the last unit of one will be at the expense of an enormous number of units of the other. The actual amount to be produced depends on the relative prices of each.

This formulation exhibits a great many well-recognized shortcomings, such as the fact that the obviously political issues that are involved (hawks vs. doves) are left out of the model; many more arise as we examine environmental questions and talk of the tradeoffs among goods that do not have established prices, such as producing “clean water” instead of butter. The economist is to be congratulated for forcing the realization that there are always tradeoffs, but he has not been able to provide an adequate answer to the public’s question about the impact of pollution control on business and society generally. Only a tangential response has been provided: An estimate of the investment required to meet new pollution control standards (a widely cited estimate by McGraw-Hill for 13 industries in 1971 totaled $16 billion).

As an introduction to the lessons of economics, let us consider two models relating pollution to costs. The first model is an adaptation of the basic two-factor input model, showing how a firm combines two inputs to produce the maximum amount of its output of a given product¹. We can look at “clean water” as a land input (which is used up when the water reaches a certain degree of saturation with pollutants) along with “investment in pollution control equipment” as the other (capital) input. Economic theory tells us that the tradeoff faced by the firm when pollution control taxes or standards are legislated is: Invest in pollution control equipment or reduce output.

Another model with the same kind of conclusion to this problem is one that appears in an elementary economics text. It shows the costs associated with different pollution levels. The idea is that society doesn’t suffer when pollution is low, but that the firm has to spend a great deal to keep it low. At higher levels of pollution the costs are lower, but society has to foot the bill in the form of health hazards, disposal costs, discomfort, and so forth. Private costs are continuously declining, social costs are continuously increasing. The optimum is viewed as a compromise whereby the firm and society each bear an equal cost, because this minimizes total costs. The pollution level (measured by the amount of smoke emitted) is then at B, as shown below in Figure 1. The firm would prefer to be at point A; society would prefer to be at the zero pollution point^.2

The problem with the model is that it doesn’t allow for the possibility at any point that the interests of society and the interests of the firm may be coincident, i.e., that the firm may sometimes find that its costs are increasing with pollution and that it may be profitable to reduce that pollution. In the next section we shall look at some of the a priori reasons why it might be reasonable to expect an economic model to allow for this possibility. The following sections will introduce such a model and provide some evidence from the pulp and paper industry in support of the underlying principle.

The Case For the Coincidence of Environmental Virtue and Reward

Since orthodox economic models are all cast in the form of tradeoffs between pollution control and profits, they imply that a manager going beyond (or even complying with) legislation must always be doing so at the expense of profits.

This approach ignores some of the facts of life of the production process, which allows four ways to reduce pollution, only one of which is customarily regarded as a drain on profits: (1) Increase the “conversion rate”, the efficiency with which inputs are processed during production (the lower the wastage, the higher the conversion rate); (2) Sell waste as byproducts for input into other production processes; (3) Buy or accept free the waste of others (including one’s own disposed-of products) for use as an input; and (4) Treat Waste before emitting into the air or water, or discarding to the garbage dump.

Whereas the fourth category, involving scrubbers, electrostatic precipitators and the like, has occupied the attention of economists, the first three are also enormously important and play little part in economic models relating to the environment. Better conversion rates could be achieved by internal recycling, better monitoring of the production cycle, or more efficient equipment. Selling wastes as byproducts constituted the growth stimulus of the petrochemical industry, in which one p1ant’s Waste becomes another’s mainstay. For example, sulfur removed from oil is used as an input by other industries, including pulp and paper producers. Finding more uses for waste is a tremendous contribution to environmental health, since it makes it easier to reduce the volume of such wastes discharged into the air or into rivers.³

The key significance of the environmental movement may be the impetus that it gives to the development of better conversion systems and use of byproducts (including the use of one plant’s disposable products as inputs for another plant’s recycling). Dow Chemical has said that its pollution control investments have not only paid for themselves but have actually yielded a profit.⁴ In part, Dow’s achievement is based on the fact that it is including investments made to achieve higher conversion rates as pollution control expenditures, whereas other companies may include only waste treatment; but Dow’s method of accounting is surely a fair one from the point of view of society.

There are three arguments that support the view that pollution control and profitability are compatible: (1) Pollution control reduces costs and increases revenues, which together more than offset the investment in equipment or redesign of production processes; (2) Firms with higher profits are better able, and thus more likely, to invest in cleaner plants; and (3) Good managements are likely both to earn higher profits and to be more careful in protecting the environment. Let us look at each of these in turn.

Pollution Control Increases Profits

There are four major ways that a company’s pollution control investment can reduce operating costs, and two other says that profits might be increased:

1) Lower costs of raw material inputs per unit of production, because of recovery and recycling in better designed production processes. In the paper industry, we could point to recovery of wood chips and chemicals.⁵

2) Lower labor costs, resulting from improvements in morale, performance, health, lower turnover (with consequently lower training expenses and operating requirements), and reduced health insurance premiums. The incidence of health and accident claims can be expected to be higher for the firms which have records of employees suffering from emphysema and asthma caused by particulate air pollution; unconsciousness, hallucination and amnesia caused, in the paper industry for example, by sulfuric acid mists; and other illnesses caused by consumption of polluted water. Over time, health insurance premiums must reflect these claims. It must be admitted that these potential cost savings become less important in highly industrialized areas for companies that reduce pollution unilaterally. If the company contributes only 1% of the air pollution, its own actions are not likely by themselves to have a significant impact on the working environment of its employees.

3) Lower taxes and legal costs, since companies with a good pollution control record are less likely to have long drawn-out battles with community groups and government environmental agencies, incur fines and penalties from government and private suits, and bear increased local taxes resulting from the departure of neighboring taxpayers. At the same time, companies attempting to protect their environment benefit from federal tax write-off provisions and other concessions related to the installation of pollution control equipment

4) Lower costs for plant and equipment purchase and maintenance. Companies which attempt to postpone adequate pollution controls will be more likely to have to install pollution control equipment on an emergency basis, after the plant is built. Such equipment can be as much as three times as expensive as it would be if incorporated in a plant from the beginning.⁶ Furthermore, better pollution controls may reduce plant maintenance costs: Sulfuric acid mist or sulfur dioxide, for example, have a corrosive effect on equipment. There is a great potential for explosion in plants where there are significant amounts of gas, dust and auxiliary fuel emissions in the air. Grossly unpleasant working conditions also increase the likelihood of employee vandalism, thereby raising maintenance costs. As mentioned above under labor costs, however, there may be a limit to what a company can do to improve its environment on its own.

5) Lower financing costs, as a company’s good record in the environmental area facilitates the raising of new equity and the funding of debt. There are a number of elements involved here. From the shorter term perspective, commercial banks are looking carefully, in considering loans, at whether pollution control expenditures will hurt projected cash flows (Chase Manhattan, for example, does this on a routine basis for commercial loans); they also may be more willing to commit funds for pollution control expenditures than for other uses (Chemical Bank widely advertises this fact), sometimes at special interest rates. From the longer term perspective, investors in stocks and bonds are becoming increasingly worried about the downside risk associated with companies having a poor pollution control record. This may reduce the price that investors will pay, thereby increasing the cost of capital for companies that pollute.

6) Higher revenues from the sale of byproducts which had formerly been discharged as waste, from the sale of regular products to new customers who have switched from companies that pollute, and from the sale of recycled products. In the pulp and paper industry, for example, M.I.T. Press not long ago announced that it would direct its purchases to paper suppliers who showed greater environmental concern. The director of the Press, Howard Webber, implemented this policy to the extent made possible by a report of the Council on Economic Priorities, a New York-based non­profit research organization (CEP), Paper Profits, (which the Press will publish in late 1972), and by personal visits to the plants of suppliers to the Press. A number of large companies used recycled paper for their 1971 annual report, federal and local governments are specifying recycled paper, and at least four publishers either are now using or are considering using recycled paper.⁷

Profits Permit Pollution Control

There are two kinds of arguments for saying that a company’s pollution control record is a function of its prior profitability. The first, and weaker, argument is that it takes money to buy pollution control equipment and only the richer companies can afford such a luxury. This argument is weak because higher conversion rates and sale of byproducts reduce costs and even gross costs of waste treatment systems are unlikely to exceed 10% of total investment when amortized over their lives. Furthermore, in the pulp and paper industry at least, profits were fairly high at the turn of the decade (16 of the 17 companies we shall be analyzing earned at least 4% on net assets), and they are understated because of unrealized gains in timber holdings. More important, even in situations such as the steel industry where profits are not high, we must ask the question: What were companies doing when profits were higher? Failure to modernize steel company plants and raise conversion rates resulted both in higher pollution and lower profits. In the paper industry, the two pollution control leaders (as evaluated by CEP), Weyerhaeuser and Owens-Illinois, both adopted their environmental stance in the 19403, long before they also became profit leaders. By contrast, International Paper was a profit leader for many years without cleaning up its mills. It is true that all of the 17 paper companies which we will discuss below are registered on the New York Stock Exchange, and are therefore preselected as being older and larger firms; but within this size range there does not seem to be any basis for saying that any of the companies was too poor in the 1960s to afford new pollution control equipment. That is, pollution control does not seem to have been limited by profits; it seems to have been an independent management decision.

A second, more sophisticated, argument carries more weight: Rapidly growing firms will have a greater proportion of their investment turning over. The average age of their plants is therefore likely to be lower than for stable firms, and the equipment in use is likely to be newer and better designed (i.e., with higher conversion rates) than that of older firms. Since older equipment is less efficient both because of wear and tear and because of obsolescence, one would expect less rapidly growing firms to be using less efficient, and therefore more polluting, production methods. Profits, however, provide a measure of and impetus to the growth of a firm, so that there is a possibility that better pollution control results from profits via the firm’s capital growth.⁸

Pollution Control and Profits Depend on Management

We have looked at the possibility that pollution controls affect profits, and the possibility that profits affect pollution controls. There is a third possible way of explaining a relationship between a good profit record and a good pollution control record: Both are a consequence of good management. Creativity in dealing with pollution problems is likely to follow from general management competence, understanding of the ability to influence their environment, and an ability to respond creatively to public pressures for change.

We can see these elements at work in the case of the steel industry, which failed to modernize in the postwar period and thereby chalked up a poor record in both pollution control and profitability, while Japanese and European firms were investing in new equipment with high conversion ratios (and therefore lower pollution levels), American steel companies refused to change over to the new technology. The problems of the steel industry today must be viewed as a consequence of poor management and not as a good argument for permits to continue their past levels of pollution.

A New Economic Model: The U-Shaped Private Cost Curve

In view of the three arguments relating good environmental policies to good profits, there seems to be some justification for modifying economic models to allow for the possibility that reducing pollution can, under certain conditions, be profitable.

Except in the unlikely event that society were to shift entirely to an economy based on crafts, agriculture and services, approaching zero pollution would mean a tremendous drop in employment, personal income and consumption. To a certain extent, therefore, private costs correspond to a kind of social cost, namely the cost of reducing society’s standard of living. When we speak of social cost, therefore, we must be understood as restricting ourselves primarily to health and waste disposal costs (i.e., of consumer goods or packaging). If we were to draw in a social welfare cost line, it would correspond to the private cost line, so it is enough to point out that such a cost is a real one and that to this extent what is good for business is also what is good for society.

Turning to the private cost line, we could argue that there is a point of extreme pollution at which the costs to the firm of pollution stop going down and begin to turn up: That is, when the firm’s nest is so fouled that production is impeded, employees become significantly less productive, and society takes countermeasures such as legislation or private law suits. We have already discussed at length the kinds of costs that can increase with extreme levels of pollution.

If private costs stop falling, we can identify point A where they are at a minimum. At point B, private and social costs are equal. In Stage I, up to point B, the situation is much as in the orthodox model, although the income or living standard costs are not taken into account. In Stage II, the difference is that private costs start to fall at a slower rate. In Stage III private costs start to increase. This is shown in Figure 2.

The reason for the increase in private costs in Stage III is that a company’s poor pollution record will hurt its ability to attract financing or good employees; employee productivity will be reduced; regulatory agencies and community groups will begin to take action against the company; consumers may buy elsewhere; and so forth.

Our main purpose has been achieved by the model in Figure 2. We can now explain the phenomenon of pollution control being profitable as a move from some point in Stage III toward either a minimum private cost point (A) or toward a private-social optimum (B). We can now proceed to an examination of the evidence regarding the relationship between pollution control and profitability in the pulp and paper industry.

The Case of the Pulp and Paper Industry

Let us examine the evidence against the mousetrap view, that pollution control is incompatible with profits in the pulp and paper industry. The industry was selected for two reasons: First, it is one in which do have some control over their own environment. Most paper mills are located in one-company towns away from industrial centers. Pollution by a paper company is easily identified with the company and has strong and corrigible impact on working and living conditions in the area. Other industries would find it more difficult to affect their environment unilaterally.

Second, pulp and paper is the only major industry on which good information has been made available comparing company pollution records. A study was conducted assessing the pollution control records of 131 virgin pulp mills of 24 pulp and paper companies by CEP. The CEP will also be releasing similar studies of the electric utilities and steel industries this year, but in the meantime only one well documented pollution study is available.

Data and Methodology

For our study, we excluded seven of the 24 companies covered by the CEP, thereby removing 21 mills from the total of 131. The companies were excluded on the grounds that they were too small in some cases (two companies had only one mill each; none had more than five), that they had a small proportion of their sales in the pulp and paper sector (American Can and Continental Can, for example), and that in all cases their pollution control records were considered average by the CEP.

The pollution records of the 17 Companies were compared to their profit records. Pollution control adequacy is measured by three indices derived from the CEP study. The percentage of plants with adequate water pollution controls was calculated for each company. The same was done for two measures of air pollution: Particulates, and a combined measure of gas and odor emissions. Using an average of the three percentages gives us Index A. Weighting the percentage for water pollution twice as heavily as each of the air pollution percentages gives us Index B. Index C is a number from 1 to 3 indicating good, average, or poor, signifying CEP’s evaluation of companies’ overall performance in pollution control.⁹

Profits are measured in five different ways: Earnings growth during the 1965-70 period; average earnings per share growth (estimated) between 1970 and 1971; average return on equity (ROE) 1965-70; average return on capital (ROC) 1965-70; and earnings net worth (ROE) 1970-1¹⁰ These measures of earnings each provide a slightly different view of a firm’s profitability. The three five-year averages have the advantage that they show sustained profitability. The two single­-year figures (one projected in 1971) indicate a most recent profit record and its profit potential. Earnings figures related to equity or capital (equity plus long-term debt) show the return on shareholders’ and bondholders’ investment.

The study was complicated by two considerations. First, some of the companies were heavily involved in mergers during the 1965-70 period. This is important because the pollution records of the companies that merged may have been quite dissimilar, as was the which merged into Great Northern Nekoosa, and also because the mergers. may have had a significant impact on earnings (the company may have bought “cheap” earnings, a firm with a lower P/E ratio). See Appendix I for further information on merger activities.

Second, the proportion of pulp and paper sales to the total sales of the different firms varies. Ideally, we would have liked to separate out the pulp and paper sales of the different companies, and obtain a profit figure for this division of each company.

However, the companies do not have uniform methods of reporting on their pulp and paper profits. The average proportion of pulp and paper sales to total sales, on the other hand, is over 60%, so that we can say with some confidence that the companies are by and large pulp and paper companies. Furthermore, it can be argued that the four companies with proportions less than 40% Owens-Illinois, Weyerhaeuser, Boise Cascade and Georgia Pacific have all shown consistent patterns of environmental behavior throughout their operations, so that one would expect the pollution control indices to reflect top management attitudes rather than divisional decisions. Further details on the importance of pulp and paper operations in the different companies are shown in Appendix II.

Results

Tables setting forth the results of the comparison are provided on the facing page. Table 1 shows the actual percentage growth in earnings per share, the percentage of plants which are adequately controlled, and the overall rating. Table 2 shows the relative position of the different firms compared to other firms in the industry.

First, three general comments about the two tables: Of the top five performers as measured by 1965-70 earnings growth; four had above-average pollution control records (using Index B). The one company which had a bad overall pollution record, Great Northern Nekoosa, was the result of a merger between two companies with distinctly different environmental records (Great Northern having a good record, Nekoosa Edwards not).

Of the top five performers in 1970-71 expected earnings growth, four had above-average pollution records using Index A or Index B. The exception, Boise Cascade, is again one of the companies with heavy merger involvement, and Boise’s 1970 earnings were understated because of a write-down of losses on real estate operations.¹¹

Finally, both of the firms given an overall good rating by CEP for their environmental record (Index C) were among the top five earnings performers during 1965-70. The worst-rated company, Potlatch, had the lowest earnings performance during the period except for two companies heavily involved in mergers.

The above “eyeball” comments, however, do not represent a valid statistical test. For the latter we must calculate correlations between pollution control records and measures of financial performance. Since our primary interest is in the relative performance of the different companies, we can correlate the ranks of the different companies for each measure. If pollution control were incompatible with profitability, one would expect significant negative coefficients. If it is compatible, the coefficients should be significantly positive. If there is no relationship one way or another, the coefficients will have mixed signs and will not be significant.

If we correlate the pollution control indices with the profitability indices for all 17 companies, our results are not very interesting. All of the coefficients are positive, supporting the thesis that pollution control and profitability are compatible, but Index C is the only one with coefficients significant at the 90% confidence level.

However, if We exclude the five firms which were heavily involved in mergers, for the reasons outlined earlier in this section, the results change dramatically. Two-thirds of the coefficients are now significant at the 95% confidence level, as shown in Table 3.

All of the profitability measures correlate at the 95% confidence level with Index C. All of the pollution control indices correlate at the 95% confidence level or higher With EPS Growth 1965-70 and ROE 1965-70.

Conclusions

In the paper industry, at least, the gross evidence seems to refute the mousetrap view of the incompatibility between environmental virtue and financial reward. Obviously it would be desirable to try to pinpoint the relationship more closely. To what extent does pollution control really reduce costs? One would like to relate profits on a plant basis to the capacity utilization (production/investment) of that plant, to the density of population in the area, to product mix, and age of plant as well as an overall measure of pollution control. However, information on profits is not available by company division, let alone plant.

Another direction for further study is the coverage of a larger number of firms. Without more companies, it is difficult to apply statistical tests to such questions as the simultaneous determination of pollution control by age of plant, and age of plant by growth in profits.

In the meantime, however, We hope that we have made a step in the direction of laying to rest the economic model which poses the alternative, on the level of the firm, of either increasing pollution control or increasing profits. Some degree of pollution control is likely to increase profits. The cheese of better environmental performance is there with no traps attached. Virtue in this case is not its own reward.

FOOTNOTES

*The authors would like to thank James Cunningham of Wertheim & Co. and several members of the Baruch College economics department for helpful comments, and Joseph Nampiaparampil for research assistance. The views expressed in this article are personal and unofficial. This is a version of a research study to be published in an academic journal.

1. For Example, see Richard H. Leftwich, The price System and Resource Allocation (New York: Holt, Fììnehart and Winston, 1965), Dp. ‘|17-125.
2. Fìovall Brandis, Principles of Economics (Homewood, Irwin, 1972), P. 579. Private costs be thought of as per unit operating expenses, and social costs as per person medical and garbage disposal costs. To avoid complex diagrams, marginal costs have been assumed to be equal to average costs.’ The optimum at pollution level B is based on marginal cost analysis if the costs shown were average costs, the optimum would be at a lower pollution level), while the private cost minimum at pollution level A in Figure 2 is based on average cost analysis (if the costs shown were marginal costs, the minimum would be at a higher pollution level). A complete diagram and discussion is available from the authors. See also Abba P. Lerner, “The 1971 Report of the President’s Council of Economic Advisers: Priorities and Efficiency,” American Economic Review, LXI:4 (September, 1971),
3. Some progress in this direction has been made by the pulp and paper industry. Conversion from the sulfite to the kraft process reduces waste because the latter process produces a lower volume of waste. Sulfite liquor has been used to make vanillin (a synthetic byproduct from softwoods) and a new wonder drug, L-DOPA, developed by Georgia-Pacific’s labs in Bellingham, Washington (Pulp and Paper, July, 1971, |199). Kraft liquor has been used for over 20 years to make tall oil, which is broken down into fatty and resin acid, and turpentine; more recently, a Crown Zellerhach mill has produced DMSO, a drug for skin treatment, from its kraft liquor. The most interesting development of all is, perhaps, the use of garbage as an input into paper production in the St. Regis plant in Franklin, Ohio (St. Fiegis Made Paper from Fiber Retrieved out of Haw Garbage,” Wall Street Journal, January 14, 1972), producing a high-quality paper which is 30»50% garbage.
4. “Dow Cleans Up Pollution at No Net Cost,” Business Week, January 1, 1972, DP.
5. Virtually all pulp and paper companies now recycle wood chips, in part because of an increase in their value and in part because of new state laws against past methods of burning them, An economic survey by the Northwest Pulp and Paper Association states that 75% of the raw materials for pulp and paper plants in Oregon and Washington in 1970 were in the form of wood chips or sawdust (Pulp and Paper, September, 1971, p. 17).
6. Council on Economic Priorities, Paper Profits, researched and written by Leslie Allan, Eileen Kohl Kaufman and Joanna Underwood (New York: CEP, 1970), p. 34.
7. Bank of America, Coca and Canada Dry used recycled paper in 1971 annual reports. New York City ordered $350,000 in recycled paper. The Government Printing Office, Western Electric (publisher of of phone books), Simon & Schuster, Encyclopedia Britannica and Harcourt, Brace and .louanovich were either using or considering using recycled papers in 1971. Business Week, July 17, 1971, p. 86.
8. See footnote 6 above. The full-length report was summarized in CEP, Economics Priorities Report, 1:6 (December-January 1971).
9. CEP, Economic Priorities Report, 1:6, Tables 4-6, pp.21-23 and pp. 13-24.
10. Most of the profitability information is from Forbes Magazine, Twenty-Third Annual Report: on American Industry, January, 1971.
11. Boise Cascade 1970 losses were due to the underestimation of consumer and environmentalist reaction to their real estate developments and new state and federal environmental regulations. These factors created public relations and new development costs that reduced profit margins. Since the Boise-Burnett real estate subsidiary was heavily debt-financed, the costs and delays of these circumstances forced liquidations to meet amortization costs, at unfavorabie prices. in terms of our theory that the relative pollution records of company paper and pulping divisions reflect broad company the Boise-Burnett example is interesting. The parent company shows a poor pollution control rating in terms of Indices A and B.

APPENDIX I: SIGNIFICANT MERGER AND ACQUISITION ACTIVITIES

1965-1970, EPS Effects Evaluated 1971

1. Boise Cascade merged: Minnesota and Ontario Paper C0. (1965). RC. Can Corp. (1967), Diveo Wayne Corp. (1968),and Union Lumber Co. (1969). Acquisitions include: Ebasco Industries (1969), CFHVI Corp. (1970); various real-estate and recreational land operations were acquired in 1966-58. Effects on EPS: favorable through 1969 (in 1970 the company began realizing losses on some real estate operations).

2. Diamond International acquired Heekan Can Company (1935). merged Penobscot Co, (1967), acquired Groveton and Mohawk Cos. (1968), and acquired U.S. Playing Card (1969), In particular, Groveton, Heekan and U.S. Playing Card helped 1970 results. Effects on EPS: favorable.

3. Great Northern Nekoosa was formed in 1970 by the merger of Great Northern Paper Company and Nekoosa Edwards Paper Co. The merger is expected to strengthen long term prospects, Effects on EPS: neutral to favorable.

4. Mead acquired 15 companies during 1968l69. Two major acquisitions, Woodward Corp. and Stanley Furniture, and some of the minor acquisitions have suffered setbacks since consolidation, contributing to significant earnings per share deterioration. Effects on EPS: unfavorable.

5. U.S. Plywood-Champion was formed in 1967 by the merger of U.S. Plywood Corp, and Champion Papers, Inc. Acquisitions include: Drexel Enterprises (1968), Birmingham Ornamental Iron and Trend Industries (1969), Roberts Consolidated and Path Fork Harlan Coal Co. (1970). Effects on EPS: neutral to unfavorable.

APPENDIX II: IMPORTANCE OF PAPER/PULP OPERATIONS IN COMPANIES’ SALES

Download this article as a PDF: Is Pollution Profitable? Risk Management, April 1972

This article was reprinted with permission from Risk Management Magazine. Copyright 1972 Risk and Insurance Management Society, Inc. All rights reserved.

LAMP’s larger than average loss was caused by the Index’s heavy weightings in European stocks, which sold down in reaction to the European Union’s sovereign debt crises. The domestic S&P 500 Index was stronger by comparison, which benefited indices with larger US equity exposure.

This single year result does not diminish the longer-term advantages of companies in the Global LAMP Index®, which remain at the forefront of a global corporate renaissance. As a group, these life-mimicking companies remain innovation leaders due to their inspiring cultures and prudent fiscal management. Consequently, we believe they will continue to gain market share from their more traditionally managed peers.

The ongoing renaissance is a reaction to the failures of industrial capitalism and traditional economic thinking. These themes run throughout this website, so there is no need to repeat them here. The economic turbulence caused by failing systems, of course, makes life more challenging for global LAMP companies. So too does the rise of new life-mimicking companies (such as Google), which didn’t make it into the original LAMP 60. Therefore, we can make no promises that past results for the Global LAMP Index® will be repeated in the future.

The power of now has been part of the human psyche since the earliest days of our hunter-gatherer ancestors. Yet it is only part of our story for we also have a passion for achievement that transcends present needs as expressed in great works of art, abstract thought, brilliant insight and technology breakthroughs.

Over the past six millennia, the balance between these two attributes of the human psyche has shifted in grand historic cycles: from bursts of achievement, which launch great civilizations to periods of dissolution, where rising expectations lead to empire building, over-indulgence and decline. Since the ascendency of ancient Mesopotamia in the 4th Century BC – wherefrom language, writing, art, architecture, math, astronomy, medicine, philosophy and law evolved – we have seen this cycle repeat many times.

The era of Western dominance, which began with the 16th Century Age of Discovery and ran through the now fading Industrial Age, is the latest example. Once again hubristic tendencies towards empire building and over-indulgence – serially played out in various European countries and the United States – have put our civilizations at risk.

So what have we learned through these cycles of great achievement and dissolution? The main thing that comes to mind is the benefit of thinking beyond one’s self to the greater good. Another is the advantage of learning from our mistakes. These two themes play out in multiple ways in the wealth growing attributes listed below.

Wealth Growing Attributes

• Concern for the whole
• Cooperative (living system) approach
• Focus on long-term value creation
• Grow core competencies
• Quest for stability, renewability
• Partnerships, networked flat organizations
• Servant leadership culture
• Employees as valuable assets
• Learning from adverse systemic feedback
• Open minded, integrative, adaptive
• Resource conservation, recycling
• Continuous balance sheet strength
• Thinking about “being”
• Beta-driven (What’s undervalued?)

Wealth Damaging Attributes

• Concern for self
• Competitive bottom line first approach
• Focus on immediate results
• Take what you can while you can
• Quest for domination, continual growth
• Vertical top-heavy organization
• Command-and-control culture
• Employees as costs, potential liabilities
• “Managing” adverse systemic feedback
• Belief in one-way
• Aggressive resource consumption
• Over-leveraged balance sheets
• Thinking about “having”
• Alpha-driven (What’s hot?)

The corresponding wealth damaging attributes are all features of hubristic thinking: the need to continually “have” more and to dominate as distinct from the wish to “be” in creative harmony with Nature and society into the distant future.

These damaging attributes are ubiquitous in the quest for quick returns by most corporations and investors; and they are compounded by a misplaced faith that the systemic risks they create can be “managed” through financial engineering and market timing. Within governments we see similar patterns of chasing economic growth amidst a declining resource base by debt-leveraging, bailing out too-big-to-fail corporations and managing risk by withholding potentially disruptive information from the public.

There is growing evidence that we’re entering a cycle wherein we spend more to keep the system operating than we receive in economic value. If we add up the costs of U.S. private sector bailouts and subsidies, ecological destruction and defense spending, we’re arguably near that point. And that’s not counting the annual increases in unfunded liabilities to government health and retirement programs. Legendary investor George Soros recently called this cycle “a self-reinforcing process of disintegration.”

Consider the forced disclosure on August 22, 2011 of $1.2 trillion in Federal Reserve advances to some elite Wall Street banks – a fact Bloomberg uncovered in a Freedom of Information Act battle with the Fed. This sum was in addition to: the $16.1 trillion in emergency loans disclosed by the first-ever (one-time only) GAO audit of the Fed under the Dodd-Frank Act; the $2 trillion quantitative easing program; and the $700 billion Troubled Asset Relief Program (TARP). Add it all up and we get $20.1 trillion in rescue operations – roughly 1.4 times the nation’s GDP.

The US government currently collects about $2.1 trillion in taxes. But it owes $15 trillion (not including promised Social Security and Medicare benefits). This puts the ratio of revenue to federal debt at about 1 to 7. If the carrying cost of that debt were a moderate 5 percent, it would cost $750 billion per year in interest — or about a third of tax revenues. That would leave only $1.35 trillion to cover the costs of federal spending — which is now $3.5 trillion per year.

The near insolvency of the global banking industry is another cause for concern. In too many cases the core capital of the world’s biggest banks is a fiction of accounting gimmickry. Against this, consider the $244 trillion derivatives exposure of the top 25 US banks – a sum that equates to 17 times national GDP. If just a quarter of one percent of that sum were to be lost due to miscalculation, it would wipe out what’s left of the banks’ capital, necessitating further government bailouts of unimaginable magnitude.

To anaesthetize the public from these and future risks, the US government has engaged in a continuous cycle of money printing abetted by policies of official secrecy. Examples of such concealment include: President Bush’s executive order of May 2006, which excused companies from accounting and disclosure requirements under section 13(b)(3)(A) of the Securities Exchange Act; and the Federal Reserve’s secret lending to US banks. See more on this story from Bloomberg.com

Time to Get Real

Having spent more than four decades as an investment analyst and manager, I have had a ringside seat at the drama currently unfolding. Although most in my profession continue to believe in the durability of the current system, I long ago surmised it was headed for a wreck. What keeps me going in this otherwise depressing situation is an emerging renaissance in business and economic thought, which I have broadly summarized as “Wealth Growing Attributes.” In the meantime I must guide clients through the economic dangers ahead.

If we strip away the veneer of official economic pronouncements, the new reality is simple. Very few investments offer an acceptable return. Top quality bonds today pay less interest than the rate of inflation. Leading stock market indices, such as the S&P 500 and the MSCI World, have lost money for more than a decade. The industrial age model of aggressive resource extraction, debt leverage and market domination, which once accelerated GDP growth and profit, have now thrown us into a reversal of resource exhaustion, debt overload and misplaced economic priorities.

Governments have compounded the malaise by expanding credit in the mistaken belief it will buy us time to get back on the growth track. But rather than treating the structural causes of our economic distress – summarized under “Wealth Destroying Attributes” – they offer only temporary symptomatic relief. In the meantime the patient gets worse and worse.

Best Performing Investments

The best performing investments over the past decade have been monetary metals (gold, silver) and commodities we need for food, transport, shelter, health and economic development (oil, minerals, grains, etc.). The former address our needs for stable money and a trustworthy store of economic value; the latter, our hopes for a stable, prosperous life.

Among corporations the best performers have been companies whose cultures embrace the wealth growing attributes listed above.

Both approaches mitigate risk: first by avoiding the danger of collapsing currencies and decaying bond markets; and second by investing in stable, self-financing companies with value-added cultures and important core competencies. For the past decade they have worked well because they tend to offset one another’s periods of weakness while maintaining a generally upward bias. Because of their long-term risk mitigation we refer to such strategies as “beta-driven.”

We contrast this with the more pervasive alpha-driven approach, which involves more active trading in an effort to ride shifts in market momentum. While the latter is more attractive to Wall Street because it generates more transactions and revenue, it is less so to the investor who must bear extra trading costs and the uncertainty of transient variables (price momentum, quarterly profits), most of which have scant long-term significance.

This is not to say the beta-driven approach is riskless. All bull markets have periodic corrections. But historically investors are better off buying into the big trends and staying with them so long as their underlying premises remain valid.

We are today in an exceedingly dangerous period of transition. Many good companies will get swept away by the outgoing economic tide. Only the most resilient will survive. For those of us who want to emerge from this period with the skills, hope and capital to rebuild more sustainable economies we must hear what the markets are telling us about wealth creation and destruction.

That renaissance is defined by a shift from narrowly focused linear thinking to more holistic non-linear thinking. To sovereign credit analysts it means looking beyond narrow measures of economic health, such as GDP, to more complex indicators of systemic health, which increasingly impact future GDP and debt carrying capacity.

According to the collaboration’s overview: “The project aims to assess the financial materiality of ecological risks relevant for the credit risk evaluation of government bonds, and to develop a methodology to enable credit rating agencies, investors and financial information providers to integrate ecological data in their respective models.”

The UNEP-FI collaboration continues a theme introduced in my March 2009 essay, “From Systemic Collapse to Rebirth,” concerning the acceleration of financial risk as the ecological footprint moved into overstep.

Disturbing Correlations

In 1985 the ratio of debt/GDP in the US was roughly 2.08 meaning there was roughly twice as much debt in the system as there was GDP. Derivative trading at the time was not formally measured because it was used primarily for hedging currency or commodity risk, in which case the notional value of derivatives outstanding was probably much less than GDP.

When I looked at these two financial leverage ratios against ratios of GDP/bio-capacity over successive 5-year periods it became clear that ecological overstep had a magnified impact on financial risk. In the 23 years between 1985 and 2008 while ratios of GDP/bio-capacity grew by roughly 39%, the US debt/GDP ratio grew by 74% and the derivatives/GDP ratio exploded at least 11-fold.

The same general pattern holds today. In the 25 years since 1985 the ratio of GDP/bio-capacity grew by roughly 50%, but the derivatives/GDP ratio increased more than 17-fold.² Because of the secrecy and dubious accounting of government economic bailouts, an accurate debt/GDP ratio is difficult to compute; but anecdotal evidence suggests this too has vaulted much higher.

Consider the forced August 22 disclosure of $1.2 trillion in Federal Reserve advances to some elite Wall Street banks – a fact Bloomberg uncovered in a Freedom of Information Act battle with the Fed. This sum was in addition to: the $16.1 trillion in emergency loans disclosed by the first-ever (one-time only) GAO audit of the Fed under the Dodd-Frank Act; the $2 trillion quantitative easing program; and the $700 billion Troubled Asset Relief Program (TARP). Add it all up and we get $20.1 trillion in rescue operations – roughly 1.4 times the nation’s GDP.

Based on this information is it any wonder that Standard & Poor lowered the credit rating on US government debt? Or that The US – once considered the world’s safest credit risk – has fallen to 15th place in the Euromoney Credit Risk rankings.³

The UNEP-FI focus on sovereign debt is timely because governments are increasingly called upon to bail out politically powerful corporations. Such bailouts shift the burden of private sector liabilities onto taxpayers and government bondholders without addressing the fundamental question of ecological overstep.

The Emerging Renaissance in Economic Thinking

The UNEP-FI collaboration reflects an emerging trend in economic thinking: that perpetual growth in resource consumption is impossible on a planet with finite resources. The incontrovertible fact is: world supplies of oil, water, minerals, forestland, arable soils and fisheries are limited. When these resources get pushed beyond their capacity to regenerate, we, and the ecosystems on which we depend, cannot survive.

This awakening is transforming our worldview from one of humanity in control of Nature (anthropocentric) towards one of living and working in harmony with Nature (bio-centric). The earlier command and control mindset was an extension of Newtonian physics, which led us to believe that our knowledge of science and our technological innovation made us pre-eminent. The new thinking is metaphysical in the sense that it seeks a deeper understanding and appreciation of our inherent relationships with the web of life.

The Golden Rule of doing to others as we would have them do to us is central to this metaphysical awakening. Such thinking looks to the value of whole systems as distinct from the physical objects that we can measure or control. It is concerned with the unity of all things rather than the value of isolated components at a given point in time. In these respects it resonates with the moral reasoning of all cultures and religions.

Debt as a moral system

Whether we borrow from a lender or borrow from the earth, we are morally obliged to repay in order to maintain the health and continuity of the system. The UNEP-FI group implicitly recognizes this. By relating sovereign credit risk to ecological risk, they move us in a more moral, sustainable direction and set a new standard of economic behavior.

1. For more information, see: http://ht.ly/7bgjP
2. At mid-year 2011 the top 25 US banks had a notional $249 trillion in derivative contracts outstanding – nearly 17 times national GDP of $15.0 trillion. (For derivatives exposure, see Table 1 at: www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq211.pdf)
3. Andrew Mortimer, Euromoney Country Risk September 2011: Emerging sovereigns converge with the US, UK and France,” Euromoney Magazine, September 30, 2011.

“Today humanity uses the equivalent of 1.5 planets to provide the resources we use and absorb our waste. This means it now takes the Earth one year and six months to regenerate what we use in a year.”
-The Global Footprint Network, September 2011

Long before the world began to run short of oil, water and other strategic resources, a group of pioneering companies, in partnership with the municipality of Kalundborg, Denmark began a far-sighted experiment. Rather than paying fees to dispose of their wastes into the environment, they decided to mine each other’s waste streams as a means of generating value.

This public-private symbiosis began modestly in the early 1970s in an effort to conserve fresh water supplies and reduce operating costs. It has since grown into a progressive generator of value. Today the Kalundborg eco-industrial park is fast becoming a north European “Biocon Valley,” wherein leading companies and research institutions develop new products and technologies by exchanging biological knowledge and byproducts.

The earliest tenants of the symbiosis – a Statoil refinery, DONG Energy’s Asneas power station, Novo Nordisk, Gyproc and the municipality of Kalundborg – began by recycling and re-circulating water, stack gases, biomass and fly ash. As the following conceptual map of the project illustrates, the number, scope and bio-sophistication of exchanges has grown year by year. The successes of participating companies are now such that other innovative companies want to join in order to test new technologies on a large scale.

The resource savings of the symbiosis are prodigious and growing. In 2010, it reduced CO2 emissions by about 265,000 tons per year and water consumption by an estimated 30 percent. Gyproc used scrubbed stack gases from Asneas to produce 100,000 tons of gypsum for wallboard construction. Nearby cement manufacturers used recycled fly ash to produce concrete. Local farmers got the benefit of waste yeast from Novo Nordisk’s insulin production, which converted to food for about 800,000 pigs per year; and they received approximately 150,000 tons of fertilizer from the wastewater plants of Novo Nordisk and Novozymes. Sludge from the municipality’s water treatment plant was used as an additional soil nutrient. Inbicon makes bio-ethanol from organic waste material from the farms, using the waste steam from Asneas plus enzymes and yeast from Novozymes.

Cluster Biofuels Denmark (CBD), one of the newest members of the symbiosis, is a bio-refinery research partnership between the municipality, Inbicon, DONG and the European Union. Its goal is to produce fuels and high-value products from biomass to replace oil-based chemical and pharmaceutical products. One promising new venture (REnescience) uses enzymes to treat non-sorted household waste into bio-ethanol, biogas, electricity and heat with reprocessed metals and glass as residue. Another uses microalgae to extract from wastewater bio-fuels plus high value pharmaceutically active compounds.

Replacing brute industrial force with intelligence

The brute force of traditional industry practice – abetted by its voracious appetite for virgin materials, aggressive marketing and prodigious waste – is no longer practical or acceptable. As indicated by the Global Footprint Network, the earth cannot sustain present rates of resource extraction and waste generation. Its biological carrying capacity is declining at an accelerating pace.

The simple truth is: infinite resource extraction is impossible on a planet with finite resources. Something has to give. The horrifying alternative to business as usual is accelerating ecological decline, species extinction, public health epidemics, economic disruption and social upheaval.

The Kalundborg symbiosis offers some hope of escaping this awful fate by addressing both the biological and economic challenges before us. Although not a total solution, it nevertheless stands as a practical step forward. The core idea is to leverage the abundant resources of human ingenuity while conserving the finite ones we’re currently depleting. The goal is to create an industrial metabolism that mimics a biological metabolism in the sense that little or nothing is wasted.

Companies that mimic life in the ways they organize and operate are particularly skilled at doing this. Their highly integrated open networks allow information and knowledge to spread quickly; their servant leadership cultures grow individual knowledge and team capacity; and their life-affirming missions, values and visions inspire employees to work with their hearts as well as their minds. By so leveraging human intelligence and creativity these companies are quick to learn and adapt as the world about them changes. (For more on this topic, see the text of my September 21, 2011 talk in Copenhagen.)

Bio-innovation leaders, such as Novo Nordisk and its offspring Novozymes, have been at the forefront of this revolutionary reimagining of corporate culture. Others in the symbiosis are catching on quickly

From Intelligent Solutions to Profit Leadership

All five primary corporate tenants of the symbiosis have exemplary records of performance. Beyond the cost savings they achieve by virtue of their resource frugality, they have been consistent innovation and profit leaders.

Novo Nordisk’s total investment return has been nearly 4,000% over the past two decades – far above its key competitors in the pharmaceutical industry. Novozymes, which was spun out of Novo Nordisk in 2001, tripled its profits over the past decade and remains the world leader in industrial enzymes plus a rising force in biotech. Statoil generates more than double the oil industry’s net income per employee and its return on investment has been nearly 50% higher (2006 – 2010). Gyproc is a subsidiary of Saint Gobain, the European or world leader in all its activities.

DONG Energy, which is principally owned by the Danish government, is a world leader in wind energy with a low gearing ratio (43% in 2010) and a credit rating (BBB+/A1) that is above average for the utility industry (BBB). Although it doesn’t have a base of public shareholders, its profit growth has supported a commendable growth of net equity. Inbicon, a subsidiary of DONG Energy, was voted the “Bioethanol Company of the Year” at the 2011 World Refining Association.

Denmark, which is a significant player in the Kalundborg symbiosis, has a coveted AAA/Aaa credit rating and has the world’s fourth highest risk rating by Euromoney – well ahead of the US in both categories. Risk is predominantly based on the 10-year credit default swap premium

These bona fides should deflect criticisms that the Kalundbord symbiosis is an unrealistic model for a capitalist economic system. The concept works because it is fundamentally sound.

Returning to the current global reality of ecological and economic decline, we are compelled to ask: How long can conventional business/economic thinkers continue to pretend that business as usual is the right way? Especially when a more viable model with a 40-year history of success is here for the whole world to see.

It is time we put aside outdated thinking and adopt the symbiosis model.

My message today is one of hope. It is based on the strength of the human spirit, our survival instinct and our capacity to alter mindsets when faced with imminent danger.

This is not to say I see an easy road ahead. As we look over the world economy and ecosystems today, we see a planet at grave risk. Humanity uses the equivalent of 1.5 planet earths to provide the resources we use and to absorb our waste. To the detriment of future generations, this overstep has been growing at an accelerating pace, causing life-threatening ecological degradation and economic catastrophe beyond normal comprehension. We know this. We see it every day. And we want to stop it. That’s why we’re here.

To get out of this mess, I believe, we need to know how we got into it in the first place. Although some will disagree, I submit it’s not because humanity has become more greedy or immoral, but because we are trapped in mental models of reality that have led us in the wrong direction.

If I can digress a moment: The mindsets that lured us into our present overstep were formed hundreds of years ago when natural resources seemed limitless and capital scarce. Because capital could leverage returns on land and labor, capitalists began to assume that capital took precedence over people and Nature – a dangerous thought that still carries influence today because it is so deeply rooted.

Nevertheless, to our credit as an adaptive species, starting nearly a century ago, an alternative worldview began to coalesce that today holds great promise. Its early roots were in complexity theory and ecology, which caused us to think more holistically about the world we live in and how deeply interconnected we are with the rest of life. These notions later became incorporated into systems thinking and modeling and into the ways some leadership companies are organized and managed today.

The companies leading today’s corporate renaissance operate from this holistic worldview. Rather than modeling themselves on mechanical systems – a machine-like behavior that emerged from the industrial revolution – they mimic living systems. They are acutely aware that their primary assets (people and Nature) are alive. Beyond that they know all value ultimately emanates from life. It is an integrative, harmonic way of thinking that inspires great insight and accomplishments. In this disruptively creative sense it echoes the earlier European renaissance.

To understand the gathering energy of today’s corporate renaissance, and to assess its future potential, I’d like to do three things:

1. Create a framework for understanding the underlying beliefs and force of the renaissance;
2. Summarize common attributes of companies leading this change so we, as change agents, can be more aware of their interests; and
3. Discuss what we can do to accelerate the renaissance in this time of deep economic and ecological crisis.

To historian Thomas Kuhn, what ultimately causes a system to change is the accumulation of anomalies – observations that can’t be explained by the prevailing paradigm of beliefs and mindsets.

In the next few slides I’ll try to summarize how the anomalies we’re seeing today – the ecosystem and financial distress – emerged from well-intended visions that were built on false assumptions.

Following that we’ll look at the promise of the renaissance model. And for the sake of clarity, we’ll frame these alternative systems in a metaphor familiar to us all.

To understand the dynamics of a system of human enterprise, such as our global economy, think of an iceberg. What we see at the top is only 10% of its mass. The largest part, as we see here, lies beneath the surface invisible to the naked eye.

The things we see above the surface are quantifiable results – things such as GDP, profit, ecological impacts and public health. But most important, as suggested here, are the behaviors, organizational structures, visions, values and beliefs that ultimately produce those results.

Think of it this way. Beliefs frame our concepts of how the world works. Our worldview, in turn, frames our visions of what is possible. Those visions then affect how we organize ourselves and behave in pursuit of our goals. Therefore, the deeper we go towards the beliefs, assumptions and mindsets that govern our behaviors, the greater our potential for effecting transformative change.

The traditional model of the firm is premised on beliefs we now know to be erroneous: that earth’s geological and biological resources are limitless; that perpetual consumption growth is good; that technology is universally beneficial; and that non-living capital assets are worth more than people and Nature, which I describe as living assets.

This distinction between non-living capital and living assets is worth repeating because it frames a fundamental difference between traditionally managed companies and those that mimic life. Traditionalists tend to place a higher value on capital than on people and Nature, while life-mimicking companies do the exact opposite.

In any event, as we move up through this iceberg diagram, we see how widely-shared beliefs inform visions, values, structures, behaviors and results at the tip of the iceberg. And on the next slide we’ll see how these beliefs have led us unwittingly into the unsustainable bubble we’re now trying to escape.

In the far right column of this image we see how the systemic failures we’re experiencing today emanate from systemic stress and the dehumanizing, disconnected structures producing that stress, much of which arises when we put a higher value on non-living capital than we do on life.

This is not the outcome that traditional capitalists envisioned. Their ethos, described by Jeremy Bentham, was the utilitarian ideal of “the greatest good for the greatest number.” This ideal looked to rising living standards – later defined as per capita consumption – and doing it quickly with machine-like efficiency.

The tragic flaw of this approach, as we now know, is its shortsighted dismissal of social and ecological costs that exist outside the process of commercial value creation – costs that mainstream economists call “externalities.” The sheer weight of these external costs is today crippling the world economy and devastating earth’s biological carrying capacity upon which all species depend.

This is not new news. Our most progressive companies saw the approach of this tsunami decades ago and began taking corrective action.

The emerging organic model of the firm couldn’t be more different than the industrial capitalist model. As earlier suggested, companies that mimic life reverse the practices of traditionally managed ones by placing a higher value on living assets than on capital assets. They understand at a basic level that living assets are the source of capital assets and that capital assets can’t function without living ones.

In similar fashion, the value systems of these life-mimicking companies are bio-centric rather than anthropocentric. That is to say they’re concerned with total systemic health – the possibilities of long-term ecological and economic wellbeing – rather than the quickest shortcuts to GDP growth and profit.

These distinctions are hugely important. They lead us to think more deeply about life, our innate connections to the biospheric web-of-life and our ethical urge to live in harmony with life – an urge the eminent Harvard biologist, Edward O. Wilson, calls “biophilia.”

As summarized on this slide, life-mimicking companies seek harmony with the larger web-of-life by becoming more life-like themselves. Their visions are fittingly more positive and inspiring, their structures more synergistic, their behaviors more constructive and their results more sustainably prosperous. Companies that operate this way practice what I call living asset stewardship (LAS).

About 16 years ago, I created a learning lab of these exemplary firms called the Global Living Asset Management Performance (LAMP) Index. Its constituent companies were those I believed to be best-of-breed living asset stewards in their industry/sectors.

As you will see in the next two slides, these LAMP companies became prodigious innovators and creators of value because their life-mimicking qualities inspired employees to work with their hearts as well as their minds.

The secret to success of LAMP companies resides in their spirit, which catalyzes the reinforcing cycle shown on this slide.

Here is how it works. We become inspired when corporate cultures affiliate with our biophilic (life affirming) instincts. In companies that practice living asset stewardship (LAS), we’re more likely to find meaning in what we do. This makes us more eager to learn and more likely to access our higher thinking capacities. Our eagerness for learning and deeper understanding ignites our capacities to innovate. And visionary innovation increases the odds of turning a profit. The cycle repeats as profit reinforces LAS.

It’s important to note here that Global LAMP companies approach LAS with the same professional competence they bring to other critical disciplines such as finance, marketing and product design. And they do this with carefully constructed metric and audit systems, which continually assess the strength of their relationships with employees, customers and other key stakeholders.

The strength of those relationships defines a firm’s relational equity. And this is a critical point: Relational equity is the best leading indicator of financial equity I know.

The chart you see here reflects the value of relational equity through the results of our Global LAMP Index relative to three commonly used peer indices. And it illustrates the effects of compounding consistently advantageous returns.

To grasp the importance of compounding, consider this. The average annual return of the Global LAMP Index over this 15-year period was not quite double the return of its peer indices. However, because it consistently made more in up years and lost less in down years, the compounded result of the LAMP Index was 4 to 5 times better.

Some have asked if this result was the product of frequently changing LAMP Index composition – and the answer is no. LAMP results were achieved with less than 1% one-way annual turnover since 2002, when the Index became the research source for my book, Profit For Life. (Results prior to 2002 were on the same 60 companies, which were selected with some benefit of hindsight.)

Also significant, the risk profile of the LAMP Index is comparable to peer global indices – a finding that has been validated by the global investment consultancy Northfield Information Services. So what we see here are above average returns achieved with average risk – a result that strongly suggests Global LAMP companies are better organized and managed.

To people schooled in traditional economic and investment theory, these results defy logic. Performance advantages, such as those we see here, are supposed to be quickly arbitraged away as the successes of leadership companies are copied.

While I agree that such copying will take place and that the advantages of LAMP companies will eventually be arbitraged away, I doubt that this will happen quickly for one simple reason. What needs to be copied here is not a technology or a manufacturing process, but a corporate culture … and that culture runs counter to conventional practice.

To achieve the requisite cultural shift, traditionally managed companies must dive to the bottom of the iceberg where our beliefs, mindsets and assumptions reside. This takes time – especially for companies that are accustomed to command-and-control hierarchies and linear mechanistic reasoning.

Before leaving this slide, I should note that much of the profit growth of LAMP companies is derived from rolling up market share against traditionally managed competitors. This will not go on forever because eventually LAS cultures will prevail everywhere. From that point forward, profit growth must depend upon service and intelligent value added – not on using up scarce earth resources.

So, what are we talking about here? If we could define a framework for companies that mimic life, what would it look like?

The broadly shared attributes of life-mimicking companies are easy to understand once you get inside their beliefs and mindsets. Each of the attributes I shall mention in the next slide have been extensively researched and described in books and professional journals. This, however, is likely the first time you will see them presented as a coherent whole.

And that brings me to another important point about life-mimicking companies relative to traditionally managed ones. The defining properties of life are properties of the whole whereas those of machines can be reduced to the sum of their parts. If we want companies to exceed the sum of their parts, to be highly conscious and self-sustaining, they must become more life-like.

Some of you may remember that my first description of LAMP companies’ life-mimicking attributes listed only the first five you see on this slide. Later on I added a sixth one – consciousness – believing it to be an emergent quality that stems from the original five.

The first attribute you see here concerns networking. Companies that mimic life are organized as radically decentralized networks, much like the organization of our bodies. While they maintain some degree of hierarchy for structure, they localize decision-making just as our sense of touch is localized. They also foster the development of informal collegial networks linking experts within the firm to those outside the firm, including suppliers, universities, key customers and the like. This sensing capacity greatly accelerates knowledge acquisition – a huge advantage as we transition from the industrial age into the age of knowledge.

The second attribute you see here concerns the self-organizing, self-renewing and ultimately self-making – “autopoietic” – attributes that are unique to life. To achieve these qualities LAMP companies serve the professional growth of employees by a process called servant leadership. Their goal is to increase the capacity of individuals and work teams to spontaneously adapt as market conditions change by making decisions on the front lines. In the most advanced LAMP companies, these autopoietic attributes continually refresh product offers and enable firms to reinvent themselves from within.

The third attribute is frugality. Companies that mimic life are frugal in the ways they manage energy and resources because wastefulness makes them vulnerable to predators or early death. Frugality is a survival instinct common to all species.

The fourth attribute looks to the synergies achieved when we are exposed to diverse sources of information and feedback. To optimize such synergies, life-mimicking companies openly share and exchange information within their market ecosystems. Such transparency invites diverse stakeholder feedback, which greatly increases the firm’s capacity to learn, adapt and innovate. Just as in Nature, LAMP companies derive great strength from their diversity of perspective and experience.

The fifth attribute is a symbiotic mindset. Companies that mimic life give back to the larger living systems that support them – a behavior we see in all ecosystems. This sense of higher purpose is typically expressed in their values, visions and missions and in the respect they show to their employees, host communities and Nature. It is a source of great inspiration to employees and creates bonds of trust and loyalty among customers.

Finally, companies that mimic life are highly conscious. This attribute covers a spectrum from their self-image as a living system to their awareness of the larger web-of-life. The consciousness of LAMP companies arises from their earlier noted self-organizing networks, which function much like the brain in assimilating information, and from their symbiotic sense of caring. This duality simulates the heart-brain connection that links our emotions and desire to learn, which activate our higher (quantum) thinking capacities. In the best LAMP companies this heightened awareness becomes so integral to employee thinking that it’s like a second nature.

Once we understand these attributes and how they are interconnected we begin to see companies in a different light. Reflecting back on the earlier iceberg metaphor, we now have a conceptual framework and a vocabulary to understand the renaissance now taking place in corporate management.

The three companies on this slide are interesting because they come from industry sectors with very different economic sensitivities and behaviors and because they come from parts of the world with different cultures. Nevertheless, each one affirms the core message of the Global LAMP Index: that living asset stewardship and respect for life resonate everywhere.

In the next three slides we’ll look at the qualities of life-mimicking companies in pairs in such a way that we cover all six attributes. My purpose here is to focus on important structural elements and how they relate to one another so the whole becomes more than the sum of its parts. For lack of time this can’t be a detailed discussion. But I hope it will create a context that leads to greater understanding.

In Nucor we find a model of decentralization and deep networking – a web of networks within networks – from the corporate level to individual business units and down into the informal communications among work teams at the mill level. The strength of these networks is defined by the strength of the individuals and trusting relationships that exist within them. (Trust, I might add, is the utility through which information flows.)

A close reading of the Nucor story will show how it reinvented the steel industry in three distinct ways. First, and most important in the company’s mind, it put its workers at the center of its universe rather than on the outer fringes – a Copernican revolution of industry practice Nucor put into effect more than 40 years ago. In a second point of departure, Nucor created a decentralized web of mini-mills that reprocess locally sourced recycled steel – a radical change from the mammoth integrated mills that dominated the industry for most of the past century. Its third innovation was to become an industry leader in industrial ecology with a vision of closed loop manufacturing – an idea that still eludes its primary competitors.

Nucor’s culture is one where mill workers write their own job descriptions, manage their work schedules, teach one another and freely share ideas as they work together. The impetus to excel in each facility comes from within the team and it is so strong that Nucor has become the steel industry’s innovation leader with no R&D department. In fact, the firm’s capacity to learn is such we could call it an idea mill that happens to make steel. And the extraordinary thing is: most of its mill workers have no more than a high school education.

Today Nucor is the largest steelmaker in the US and by far the most productive – a radical change from its status at the time of its cultural transformation, when it would not have made the top ten.

Canon, like Nucor, is a highly networked generator of ideas and for decades it’s been the global leader in imaging technologies. I feature it here because of its self-generating energy and symbiotic vision.

Canon’s San-ji spirit is a model of autopoietic self-making and self-organizing corporate energy and it has been a core value since the company’s founding 75 years ago. In essence, San-ji asks employees to be conscious of their roles in the larger web of social and environmental life and to take responsibility for their actions and impacts.

Together with its corporate philosophy of kyosei, which envisions living and working together for the common good, Canon appeals to the spirit of employees. They are asked to imagine a better world and to collaborate in making this happen, setting in motion the reinforcing cycle of learning, innovation and profit that energizes all LAMP companies.

Canon’s long-term vision, summarized in its recent Sustainability Report, gives further definition to its mission. It looks to a balance between social prosperity and environmental sustainability that will be a standard of excellence for the next 100 to 200 years – a rare exercise in foresight for any organization.

What we see in this culture is a call to innovate towards a transcendent life-affirming goal in ways that balance individual freedom and responsibility. It’s a powerful mixture because it engages people’s hearts as well as their minds: their longing to create a meaningful legacy for future generations.

Novo is perhaps the best example of LAS I have yet seen. Like a living eco-system, it works to conserve energy and the resources it needs to function. And it does this through an inclusive culture of high ideals and prolific idea sharing.

Last year Novo’s Danish operations became fully converted to renewable enrgy. The extra cost of this conversion was almost entirely offset by energy savings that Novo employees found in their individual workplaces.

Novo accomplished this extraordinary feat because the firm uses all its intellectual resources. With four employees represented on the board, front line knowledge and experience gets blended into strategic thinking and visioning. Employees know what the board is thinking, and vice versa. Further, through regular inclusive dialogue, Novo finds it easier to form a common sense of purpose and to implement strategy.

As a healthcare company with a holistic sense of mission, Novo derives much of its energy from giving employees big intellectual challenges. One such is its concern with bio-ethics – an issue that connects its work in human health to the biological health of the planet. Another is its goal of “positive net impact” wherein it seeks to return more value to the earth than it takes in, creating value for its customers.

Novo’s over-arching goal of systemic health is also reflected in its frugal financial management. To honor company commitments to employees, customers, suppliers, host communities and investors, Novo consistently holds more cash than debt on its balance sheet. This cash cushion enables the company to thrive and innovate through difficult times, such as the one we’re now in, while less prepared competitors must cut back in ways that compromise their stakeholder relationships.

Over the 20 years ending September 1, Nucor stock has had a total return from shares and reinvested dividends of 925 percent – more than 13 times the return of US Steel, which was formerly the largest steel company in North America.

During this same period Bethlehem Steel and Republic Steel – formerly the second and third largest steel companies in North America – entered bankruptcy in large part because of their inability to compete with Nucor.

Over the past 20 years Canon stock has risen 682% while key competitors Kodak and Xerox either lost value or were marginally profitable. Because of its productivity, Canon today is worth more than 5X Kodak and Xerox combined. This is quite a change from 30 years ago when Canon was smaller than either of these once dominant competitors.

Finally, Novo’s total return to investors over the past 20 years has been more than 3,700% – far above industry competitors Eli Lilly and Pfizer. If we were to add the value of the Novozyme and ZymoGenetics spin-offs to these results, I believe Novo Nordisk’s total return to shareholders would have been closer to 6,000%.

These companies, and others in the LAMP Index, are on the leading edge of the emerging corporate renaissance. Rather than trying to dominate and control people and Nature, they are learning how to nurture and affiliate with these living assets.

To paraphrase historian James Carse, LAMP companies are on a learning journey from the finite game of growth for its own sake towards the infinite game of life, where bio-ethics and LAS are central to the enterprise.

This journey, this existential awakening, is not an abstraction. It is real. And the results of its leading exemplars cannot be ignored.

To step back and look at the big picture unfolding before us, we now see why companies that mimic life accrue advantages over their traditionally managed peers.

By placing a higher value on life than on capital in their quest for value, they inspire deep stakeholder loyalty and trust. This feeds back into exceptional employee commitment and innovation, repeat business and referrals from happy customers, patient long-term investors and well-intended advice from other stakeholders.

The growing systems thinking capacities of life mimicking companies convey another important advantage. Because they are more adept at seeing the diverse interconnects and feedbacks in natural and social systems, and understanding the limits of those systems, they are more skilled at dealing with complexity.

The operating leverage of life-mimicking companies, then, is in their reach to human heart and spirit, which are links to our higher (quantum) thinking capacities.

Now we come to the core question of this conference. What can we do to support this emerging corporate renaissance, to create a sustainable path into the next century?

As systems thinker Dana Meadows once said, “Challenging a paradigm is not part-time work. It is not sufficient to make your point once and then blame the world for not getting it.” In fact, those in power often have a vested interest in resisting change, no matter how beneficial it may be.

So we must be strategic, knowing our leverage resides in shifting beliefs and mental models and in reawakening humanity’s biophilic instincts, which have been wired into our genes for thousands of generations.

People today are hungry for change, desperate for solutions. They are also deeply perplexed by the adverse impacts of an industrial system that once carried such great promise.

Yet, few know the story I’m telling today because it’s foreign to their belief systems and excluded from the evening news. Although some may like the sound of it, most don’t trust that respect for life will work in this hyper-competitive world of industrial capitalism.

I, however, am more optimistic because I can see the important changes taking place beneath the surface of events, at the bottom of our metaphorical iceberg. The mind shifts occurring in this important space have major implications for our future. And these, like returns on the Global LAMP Index, have a way of compounding. Success breeds success.

My principal concern is that defenders of the traditional industrial capitalist system will prevail on governments to keep bailing them out and that this will compound error upon error. That is why it is important that we become proactive in demanding change in our capacities as voters, consumers, employees, investors, educators, systems analysts and the like.

Juxtaposed against the failures of industrial capitalism, demonstrated success stories can change fundamental belief systems. Powerful leverage in those most committed to learning.

In conclusion, I believe brain rich companies have a huge role to play in our economic and ecological future. Within this realm, the most powerful leverage for transformative change resides in companies that mimic life because they are the most open and committed to learning.

We, as change agents, must know how these life-mimicking companies think and operate both in order to work with them and so we can explain to others the sources of their success.

People are attracted to success stories. Success overcomes fear and kindles hope. And in hope resides the possibilities of transformative change so beautifully captured in Canon’s kyosei philosophy, Nucor’s employee-centric culture and Novo’s desire for net positive impact. This is how success compounds.

Although much of my case this morning is built on systemic thinking and bio-mimicry, there is yet a more important catalyst to the change we seek. I believe that impetus resides in our spirit, our love of life, our biophilic instinct because these impel us to look ever deeper into the systems that impact our lives.

It is my hope that we all embrace that spirit, that love, and so become full partners in co-creating and expanding today’s renaissance.

Thank you very much.

Jay will describe the corporate renaissance as a beacon to the future. He will illuminate their extraordinary life-mimicking attributes and synergies via case studies. His talk will conclude with a strategy for accelerating renaissance best practices. Following Jay’s presentation his slides will be posted on this website.