“The biggest change over the past decade has been the growing realization of sustainability and its impact on world growth into the future.”
This morning, the Wall Street Journal carried this quotation of me in the inaugural segment of a series of articles on the decade just passed. The journalist, Scott Thurm, wanted to know what I thought was a theme that defined the past 10 years. As indicated, my vote goes with the concept of sustainability as a defining attribute of the decade. Sustainability is commonly associated with our use of natural resources and our impact on the environment. Scientists tell us that such use and impact cannot be sustained indefinitely without harm to our own way of life. But the same concept could be extended to many fields:
- Real Estate. No, housing prices do not always rise. The extraordinary growth in prices from 2004 to 2007 could not be sustained.
- Corporate earnings. Rapid rates of growth in excess of the economy cannot be sustained for long. In the 1990s, Enron’s earnings per share grew at a compound rate greater than 30%–then it imploded in 2001. I have written elsewhere about the evils of corporate strategies founded on a goal of high EPS growth.
- Geopolitics of natural resources and food. This decade saw the popularization of the concept of “peak oil,” the notion that production has reached a peak. Writers are now extending the concept to metals and food–I’ve been reading Jeff Rubin’s new book, Why Your World Is About to Get a Whole Lot Smaller and suggest it as a sobering representative of the genre. Nations are not strangers to this line of thinking: recall European colonialism of the 18th and 19th Centuries, America’s relationship with the Middle East and China’s current spree of acquiring global resource reserves. Will the 21st Century see a return to mercantilism?
- Health care and other entitlements. Increases in the cost of health care have helped to motivate the massive reform legislation currently moving through Congress. Health care accounts for 16% of U.S. gross domestic product and is expected to grow at 6.7% annually for the next 10 years, a rate well in excess of the growth of the U.S. economy. We cannot sustain this. One could point to similar economics with respect to social security and other entitlement programs. It remains to be seen whether the current legislation will resolve or worsen the unsustainability of the health care entitlement.
- The fate of the dollar. Large and persistent U.S. trade deficits flood the global economy with dollars. One consequence is a depreciation of the dollar versus other currencies. Thus, the dollar declined 20% versus the euro between March and December, 2009. But as the dollar depreciates, will the countries with large trade surpluses be willing to hold their reserves in dollars? Will they be willing to buy U.S. treasury securities thereby recycling the dollars back to America? The short answer to both is “no.” Trade deficits and a strong dollar are inconsistent; this is not sustainable.
- Use of debt financing. Going into the latest financial crisis, some enterprises were levered at 25 parts debt to one part equity; a few were in the region of 40:1. Leverage that high is not sustainable through a downturn, as the spectacular bankruptcies and financial collapses have attested.
You get the picture. Sustainability is a lens through which we can view many aspects of business and economics—it embraces the environment and so much more. The “so much more” is what we have confronted so vividly in the first decade of the 21st Century. Sustainability should be one of the defining attributes of success of a strategy for a business enterprise or government—one should be able to prove that once launched, the strategy can be sustained. Enriching and disseminating this view is where business schools can and should make a difference. Already students at Darden and elsewhere gain the outlines of this broader view through aspects such as these:
- Balanced scorecard rather than a narrow focus on profits.
- Business ethics and corporate social responsibility.
- Long term rather than short term performance measurement.
- “Lean thinking” as a guide to the use of all resources going into business processes.
- Economic value added rather than a focus on cosmetic accounting results.
- A renewed interest in value investing.
- …and a focus on the use of natural resources and impact on the environment.
There is no free lunch. You cannot get something for nothing. You cannot live today by borrowing indefinitely from the future generations. My conversations with executives and investors suggest that the pendulum of attitudes may be swinging back in favor of this broad view of sustainability.