New Bottom Line Volume 5.7 – Shooting the Rapids: Time and the Logic of Wall Street

March 26, 1996

I recently attended a meeting with environmental managers from several leading Silicon Valley companies. By any measure, these were some of the most astute and committed environmental managers in the world, representing some of the world’s most successful and innovative companies. But even here, we weren’t far from the Alice in Wonderland world of “financial realities.”

One gentleman observed “We can’t act on many environmental improvement initiatives that we know make sense, because we can’t make any capital investment that takes longer than 15-18 months to pay back. I know it’s crazy,” he said, “since one of the things we need for sustainability is a longer planning horizon.”

But in this extreme of the fast paced corporation — where the capital hurdle rate is set not just by Wall Street but also by the phenomenal pace of change in the computer and electronics industry — this rate was somehow “rational”, though everyone knew it didn’t yield the sensible answer. How then does a company justify sound initiatives that don’t meet the hurdle rate?

“Fast drivers can see no further than slow drivers,” Robert Grudin observes in Time and the Art of Living, “but they must look further down the road to time their reactions safely.” Yet somehow the rules of the game keep our best managers focused just a little bit ahead of the front bumper as the vehicle hurtles down the highway. For most firms the time scales are set not only by the logic of the product, and the expectations of the customer, but by the invisible hand of the capital markets, and the quarterly gods of Wall Street.

The discount rates used to assess net present value of investment alternatives has the perverse effect of making the future worth less, in our economic eyes, than the present, and thus open to our exploitation. We know, as Herman Daly said, that “There is something fundamentally wrong with treating the earth as if it were a business in liquidation.” Yet we somehow still lack the economic tools to match our ethical commitments to our progeny.

One step to finding those tools is the will to have them. This is the first challenge of design (as I’ve discussed in earlier columns; see for example, “Design for the REAL World…and the REAL World”, NBL 3.2): to clearly frame both performance criteria and constraints — especially those that may seem contradictory or unreachable — and then create the solutions that most effectively satisfy them.

The emerging field of environmental accounting is attempting to do this — with measures such as full cost accounting, that accurately tallies costs and benefits (externalities as well as secondary in-firm impacts); activity based costing, that allocates costs and benefits to the units that generate them; and booking potential future costs (such as waste management and cleanup expenses, regulatory changes) as balance sheet liabilities. These measures can shift the results of the hurdle rate calculation — even if the rate itself remains maddeningly short — by ensuring that the costs and benefits considered for all alternatives (both “environmental” and “standard”) are realistic.

It’s not, however, just a matter of the mechanics of accounting, but of strategic and even moral leadership. It may not be possible to predict the future, but it is possible to choose different postures in relation to time. A friend recently recounted a meeting of an American CEO with a Japanese CEO. The American recounted, with some pride, his success in stretching his firm’s long range planning horizon from five years to 15. His Japanese counterpart observed that his own role was his company’s 500 year plan. Apochryphal? Perhaps. Instructive? Absolutely.

In a world that changes as rapidly as does ours, it’s difficult to predict the conditions we will face in ten years, much less in 100 years. For some, like our friends in the computer industry, it seems impossible. But effective planning and management is not about predicting the future — it’s about positioning your enterprise to be able to effectively navigate whatever future it encounters.

Peter Schwartz, in The Art of the Long View, presents a scenario-based process for navigating change in the world of business and policy. A diverse group of insiders and outsiders spins a set of possible futures, both likely and not so likely, and richly textures their economic, political, social, cultural and technological dimensions. The goal: to condition your companies to recognize which possible future is unfolding, and to identify strategies that will succeed in any of them.

Successful companies are like white water rafters who, knowing they have little hope of controlling their boat in raging rapids, and no hope of controlling the river, learn to position the raft going into the rapids to give it the best chance of getting through on a desired trajectory.

One key to success in the face of change — whether on the river or in business — is understanding the fundamental principles that don’t change. More on that in a future column.

(c) 1996 Gil Friend. All rights reserved.

New Bottom Line is published periodically by Natural Logic, offering decision support software and strategic consulting that help companies and communities prosper by embedding the laws of nature at the heart of enterprise.

Gil Friend, systems ecologist and business strategist, is President and CEO of Natural Logic, Inc.

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