How to Read Companies’ Success Stories

As I argued before (read this blog post on the halo effect), we like simple stories that account for a company’s success or failure. These stories are almost always delusional. So, what should you keep in mind when you pick up the latest best-selling business book written by a famous CEO or management thinker? The answer: beware of biases. In a beautiful little chapter called ‘The Illusion of Understanding’ in Thinking Fast and Slow, Nobel Prize winner Daniel Kahneman gives an example of the biases involved when trying to explain Google’s tremendous business success:

The ultimate test of an explanation is whether it would have made the event predictable in advance. No story of Google’s unlikely success will meet that test, because no story can include the myriad of events that would have caused a different outcome. The human mind does not deal well with nonevents. The fact that many of the important events that did occur involve choices further tempts you to exaggerate the role of skill and underestimate the part that luck played in the outcome. Because every critical decision turned out well, the record suggests almost flawless prescience  ̶  but bad luck could have disrupted any one of the successful steps. The halo effect adds the final touches, lending an aura of invincibility to the heroes of the story.

Kahneman does not deny that there was skill involved in creating a great company like Google. But, since there are not many opportunities to practice how to build a great company, luck has a greater impact than skill in a business environment. (As opposed to for example Roger Federer’s grand slam record: there’s more skill than luck involved here.)

What you need to do, then, is be aware of a number of biases, fallacies and hidden statistical rules that could be at play when reading a business success story. The next sections will briefly explain the ones I found in Thinking Fast and Slow that relate to false explanations of business success.

The Halo Effect

Defined as the tendency to like or dislike everything about a person or a company (including things you have not observed), the halo effect can be an obvious bias in business books. In Rosenzweig’s book on the halo effect, he phrases it like this:

[The halo effect is] the tendency to look at a company’s overall performance and make attributions about its culture, leadership, values, and more. In fact, many things we commonly claim drive company performance are simply attributions based on prior performance.

In other words, we like the performance of the company and then attribute that performance to things like culture, leadership, management techniques and more. We start to like everything about the company, and, thus, are creating a halo. The actual driver of performance, the causal link, is usually not exposed: there is surprisingly little quantitative data that links performance to a leadership style or a management technique (including highly popular ones like Agile). The halo effect stands between us and judging different elements of the organization in isolation (leadership, strategy, structure, culture, etc.): it’s either all good, or all bad.

The Narrative Fallacy

A narrative fallacy is a flawed story of the past that strongly shapes our view of the world and, not unimportant, our expectations of the future. The problem is, of course, that when we construct why things happen in stories, we are often wrong, over simplistic, too concrete and this can thus not serve as a blueprint for future success. Kahneman:

Narrative fallacies arise inevitably from our continuous attempt to make sense of the world. The explanatory stories that people find compelling are simple; are concrete rather than abstract; assign a larger role to talent, stupidity, and intentions than to luck; and focus on a few striking events that happened rather than on the countless events that failed to happen. Any recent salient event is a candidate to become the kernel of a causal narrative. (..) we humans constantly fool ourselves by constructing flimsy accounts of the past and believing they are true.

This is a very powerful trap: we just like stories too much. And once there is a convincing story, we fail to ask more questions.

WYSIATI

We actually can create better stories if we have less information (exacerbating the narrative fallacy!). Less data makes it easier to create a coherent story. What you see is all there is (Kahneman uses the rather ugly abbreviation of WYSIATI):

At work here is that powerful WYSIATI rule. You cannot help dealing with the limited information you have as if it were all there is to know. You build the best possible story from the information available to you, and if it is a good story, you believe it. Paradoxically, it is easier to construct a coherent story when you know little, when there are fewer pieces to fit into the puzzle. Our comforting conviction that the world makes sense rests on a secure foundation: our almost unlimited ability to ignore our ignorance.

Instead of asking yourself ‘What would I need to know to create an informed opinion?’ your brain will go along with many stories that sound intuitively right. But, as I argued elsewhere, intuition is usually wrong when it comes to explaining complex problems or environments. Since the business environment is indeed a complex environment (maybe even a complex adaptive system with lots of positive feedback loops), judging a company on little information only feeds the narrative fallacy and, possibly, the halo effect.

Hindsight Bias

We tend to change the beliefs we previously held in line with what actually happened. It is thus really hard for us to recall what our previously held beliefs were, once they have been changed by an actual outcome. If you ask people to assign probabilities to certain scenarios beforehand; then show them the actual outcomes and ask them again what their initial probability ratings were, they will overestimate the probability they assigned in the past to the scenario that actually played out. This is a problem. Because this so-called hindsight bias feeds the narrative fallacy; in the sense that CEOs or entrepreneurs might be portrayed, in hindsight, as having assigned the right probability to the chosen scenario that caused the company to thrive. Hindsight bias makes these leaders into true visionaries. They were probably just lucky according to Kahneman:

Leaders who have been lucky are never punished for having taken too much risk. Instead, they are believed to have had the flair and foresight to anticipate success, and the sensible people who doubted them [i.e. who assigned better probabilities beforehand] are seen in hindsight as mediocre, timid, and weak. A few lucky gambles can crown a reckless leader with a halo of prescience and boldness.

Regression to The Mean

Extreme groups (including over- and under- performers in business) will regress to the mean over time. This is a statistical fact, there’s no cause. Kahneman, when discussing regression to the mean, directs his attention to some of the most lauded management books:

The basic message of Built to Last and other similar books is that good managerial practices can be identified and that good practices will be rewarded by good results. Both messages are overstated. The comparison of firms that have been more or less successful is to a significant extent a comparison between firms that have been more or less lucky. Knowing the importance of luck, you should be particularly suspicious when highly consistent patterns emerge from the comparison of successful and less successful firms. In the presence of randomness, regular patterns can only be mirages. Because luck plays a large role, the quality of leadership and management practices cannot be inferred reliably from observations of success. And even if you had perfect foreknowledge that a CEO has brilliant vision and extraordinary competence, you still would be unable to predict how the company will perform with much better accuracy than the flip of a coin.

Conclusion

What I am not suggesting is that leadership style and management techniques do not matter. Of course, they do: not implementing best business practice already puts your firm at a disadvantage. What I am suggesting, however, is that company performance is less influenced by management and leadership styles than you would like. It all boils down to two things (Kahnemann):

  • Is the environment sufficiently regular to be predictable?
  • Is there an opportunity to learn these regularities through prolonged practice?

If the answer is yes for both questions, you find yourself in an environment where you can acquire a skill. This is why you can acquire high proficiency in tennis, surgery and firefighting (and probably in some management techniques such as Agile or performance management), but not in overall business management: the business environment is not sufficiently predictable and there’s no opportunity for prolonged practice (how many chances does an entrepreneur get to build Google?). Sure, a good CEO makes a difference. And please read her latest book. But, while reading, remind yourself of the pitfalls described in this article:

  • the halo effect;
  • the narrative fallacy;
  • what you see is all there is;
  • hindsight bias;
  • regression to the mean.

To conclude, a remarkable quote from The Economist on managers in football that might back up my claims in this post:

Fans lay most of the credit or blame for their team’s results on the manager. So do executives: nearly half of clubs in top leagues changed coach in 2018. Yet this faith appears misplaced. After analyzing 15 years of league data, we found that an overachieving manager’s odds of sustaining that success in a new job are barely better than a coin flip. The likely cause of the “decline” of once-feted bosses like Mr Mourinho is not that they lost their touch, but their early wins owed more to players and luck than to their own wizardry.

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Holiday Reading List 2018 – The Rationalist Delusion

Finally, this last year, long overdue, I picked up Daniel Kahneman’s Thinking Fast and Slow (2011). And what a book it is. If you still thought you were a rational human being, deliberately making judgements, weighing pros and cons for every decision you make, consider this quote from Thinking Fast and Slow:

(..) emotion now looms much larger in our understanding of intuitive judgments and choices than it did in the past. The executive’s decision would today be described as an example of the affect heuristic [a mental shortcut], where judgments and decision are guided directly by feelings of liking and disliking, with little deliberation or reasoning.

This resonates so strongly with the work of Jonathan Haidt in The Righteous Mind, that it made me think of one of the themes of that book, the rationalist delusion:

As an intuitionist, I’d say that the worship of reason is itself an illustration of one of the most long-lived delusions in Western history: the rationalist delusion. It’s the idea that reasoning is our most noble attribute, one that makes us like the gods (for Plato) or that brings us beyond the “delusion” of believing in gods (for the New Atheists). The rationalist delusion is not just a claim about human nature. It’s also a claim that the rational caste (philosophers or scientists) should have more power, and it usually comes along with a utopian program for raising more rational children.

How’s that for some provocative ideas worth exploring this holiday?

Haidt’s The Righteous Mind is not on this year’s list because I used it in the past for a number of blogs on biases (see this one on morality bias; and this one on confirmation bias). But the ideas of that book strongly influenced the way I progressed onto the books of this year’s list. Here we go:

Thinking Fast and Slow. Daniel Kahneman. A landmark book if you want to make better decisions. Kahneman shows, that by relying mostly on system 1 (mental shortcuts based on feelings, emotions and morality) in decision-making, and not on system 2 (our rationalist selves), we make predictable errors of judgment. The intuitive system 1 is a lot more influential than your think. Kahneman:

This is the essence of intuitive heuristics [rules of thumb]: when faced with a difficult question, we often answer an easier one instead, usually without noticing the substitution.

Learn how you fool yourself and read about: the availability heuristic (or What-You-See-Is-All-There-Is heuristic), anchoring bias, the law of small numbers, availability bias, the halo effect, and many, many more.

The Economist have their own way of describing the rationalist delusion in a review of this outstanding book:

As Copernicus removed the Earth from the centre of the universe and Darwin knocked humans off their biological perch, Kahneman has shown that we are not the paragons of reason we assume ourselves to be.

The Master and His Emissary – The Divided Brain and the Making of the Western World. Iain McGilchrist. A different dichotomy than intuition and reason is discussed in this ‘fascinating book’ (Financial Times). The leading question here is: ‘Why is the brain divided?’ McGilchrist:

(..) the hierarchy of attention, for a number of reasons, implies a grounding role and an ultimately integrating role for the right hemisphere, with whatever the left hemisphere does at the detailed level needing to be founded on, and then returned to, the picture generated by the right.

This book is almost two books into one: the first part is steeped into neuroscience, tells us why the brain is divided, and which functions the left and right hemispheres perform. (If I would have to place Kahneman’s systems 1 and 2 in McGilchrist’s left and right hemispheres, system 1 would reside in the left, and system 2 in the right hemisphere.) In the second part of the book (called ‘How the Brain Has Shaped Our World’), the story unfolds in a dramatic way. McGilchrist takes us on a tour through the Ancient World (Plato, again, also see my blog on him here), the Renaissance, Enlightenment and the Industrial Revolution, to come to some daring propositions. One of the most striking ones is that the left hemisphere (the Emissary) has become so dominant that it has seized power over the right hemisphere (the Master), creating a Western culture with an obsession for structure, narrow self-interest and a mechanistic view of the world. I had to think of books on the 2016 reading list by John Gray and Matthew Crawford when I read this. True, or not, it makes for some great reading and stuff worth discussing over a good glass of wine during the Holidays.

Why Buddhism Is True. Robert Wright. No, I’m not going religious on you. And no, I’m not going Buddhist on you. Lauded by The New York Times Book Review, The Guardian, The New Yorker and Scientific American, this book is Darwinian in nature. There’s also a good deal of Kahneman and McGilchrist here:

Again, the part of the brain that controls language [system 2; left hemisphere] had generated a coherent, if false, explanation of behavior  ̶  and apparently had convinced itself of the truth of the explanation. The split-brain experiments powerfully demonstrated the capacity of the conscious self to convince itself that it’s calling the shots when it’s not. (..) In short, from natural selection’s point of view, it’s good for you to tell a coherent story about yourself, to depict yourself as a rational, self-aware actor. (..) It is possible to argue that the primary evolutionary function of the self is to be the organ of impression management [note: Haidt has a similar wording in that he talks about the press secretary].

With the help of modern evolutionary psychology, Wright explains that the mind is increasingly seen as having a modular design. Different modules were created by evolution to size up different situations and take action towards these situations. Much of this action goes on without you (the CEO) even knowing that action is being undertaken. Think about things such as fear, lust, love and many other feelings: are you calling the shots? From a very different angle than Kahneman’s, namely the angle from Buddhist mindfulness and meditation, Wright ends up at the same conclusion:

(..) our ordinary point of view, the one we’re naturally endowed with, is seriously misleading.

Wright goes on to explain why meditation can help us understand ourselves better:

Mindfulness meditation involves increased attentiveness to the things that cause our behavior  ̶  attentiveness to how perceptions influence our internal states and how certain internal states lead to other internal states and to behaviors.

This is an extraordinary book that takes mindfulness meditation out of the esoteric realm. It puts it straight into evolutionary psychology and hands us a tool to help us understand, and improve, our own decision-making.

Mindfulness for Creativity. Danny Penman. Now that I introduced mindfulness meditation above, there needed to be a book on the actual practice of meditation on this year’s list. Mindfulness meditation is still ‘weird’ enough that you have to explain to the world that you are not a tree-hugger, an anarchist or, well, a useless creature in general. Bill Gates, far from being a useless creature, put a book on meditation on his 5 best books of this year. However, even he still felt the needed to explain what the benefits of meditation for creativity are, and that it’s nothing to freak out over:

Back when I was avoiding music and TV in the hope of maintaining my focus, I knew that lots of other people were using meditation to achieve similar ends. But I wasn’t interested. I thought of meditation as a woo-woo thing tied somehow to reincarnation, and I didn’t buy into it. Lately, though, I’ve gained a much better understanding of meditation. I’m certainly not an expert, but I now meditate two or three times a week, for about 10 minutes each time. I now see that meditation is simply exercise for the mind, similar to the way we exercise our muscles when we play sports. For me, it has nothing to do with faith or mysticism. It’s about taking a few minutes out of my day, learning how to pay attention to the thoughts in my head, and gaining a little bit of distance from them.

Well, if it’s something that Bill Gates and Steve Jobs buy into (founders of two of the most valuable companies in the world), I think we should at least give it a try.

If you need more book recommendations, check out the summer reading lists of 2016, 2017 and 2018, and the holiday reading lists of 2016 and 2017.

Happy holidays, and happy reading!

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The Anthropocene – 3 Reasons Why It Matters to Your Business

 
David Pope, Scratch Media, https://www.scratch.com.au/

Introduction to the Anthropocene

In a wonderful new book, professors Simon Lewis and Mark Maslin at London University College, make a convincing case that the Earth has entered the Anthropocene (combining the Greek words for ‘human’ and ‘recent’). Humans have literally become a force of nature. Meaning that human activity changes the Earth from one state to another. To define the Anthropocene, these scholars define a framework in three parts:

  1. Is there evidence that human activity has begun to push the Earth in a new state? In short, yes. GHG emissions are delaying the next ice age and human actions are influencing evolution. Both will show in future fossil records.
  2. Is the new state marked in geological deposits? Again, the answer is yes. Changes in carbon dioxide levels are stored since the expansion of farming. Pollution of the Industrial Revolution shows in swamp sediments, and trees recorded nuclear fallout.
  3. When did the switch occur? From four candidates, the authors settle on the Columbian Exchange and the resulting Orbis spike (a lowest point in CO2) as the start of the Anthropocene:

(..)following Columbus’ 1492 arrival, approximately 50 million people in theAmericas perished and farming collapsed across a continent. (..) Vast areas ofland grew back to forest, removing billions of tonnes of carbon out of theatmosphere and into the new trees. This is seen as a dip in levels ofatmospheric carbon dioxide (..), with the lowest point being at 1610, capturedin Antarctic glacier ice [i.e. the so-called Orbis spike].

How Lewis and Maslin lead us towards these conclusions is a fascinating read. If you loved Guns, Germs and Steel, Sapiens, The Mating Mind, and The Origins of Political Order, you will love this book. (All of these books are highlighted in another post by the way, you can read that post here.) Below is a nice info-graphic that shows (some) of the topics they will run you through:

Source: UCL, https://www.ucl.ac.uk/news/2018/jun/scientists-propose-changing-rules-history-avoid-environmental-collapse

Why Should Managers Care About the Anthropocene? 3 Reasons.

I can almost hear you think: “All well enough that this is a great read, but why is this also a great read from a business perspective?”. Here are my 3 reasons:

1. The Anthropocene has found its way into mainstream vocabulary in relation to externalities of the firm. The term Anthropocene is a matter of huge debate (whether or not we should officially use the Anthropocene as a new geological time scale that follows the Holocene, that is). The debate itself is of little consequence for business. What is of consequence, however, is that it entered mainstream vocabulary. The link to externalities of the firm are easily made, and that’s why you should familiarize yourself with the term. [An externality is, as you know, a negative consequence of an economic activity experienced by unrelated third parties.] Like climate change entered the mainstream vocabulary in the nineties, the Anthropocene is popping up more and more. Leading newspapers, journals and organizations have already picked up on it, see for example: Nature, Wall Street Journal, the World Economic Forum, and the Guardian. There’s even a multi-media project consisting of a movie, a book, exhibitions and an interactive website that is getting a lot of media attention. This paves the way for systems thinking and more and more people and organizations will start asking questions how your business operations (as an integral part of the Anthropocene) affect the Earth’s systems. Do you already have an all-encompassing answer to this question? Do you have innovative sustainability strategies in place that take into account the Anthropocene is a central concept? Do you have the reporting processes in place to tackle this question?

2. The Anthropocene is central to the rise in ESG-pressures on your firm. Understanding the Anthropocene will answer the question where the ever increasing ESG-pressure on firms is coming from. Since more and more people will understand that the Earth is a closed system (see reason number 1), you can expect that every impact your business has on that system will, sooner or later, be under scrutiny. I argue that putting the era in which we live, i.e. the Anthropocene, as the all-encompassing force on Earth’s systems and, in turn, on people’s well-being, gives you a model to understand why there’s a proliferation of social movements and NGO’s pushing for changes in laws, regulations, reporting practices and business models. A possible depiction of how the Anthropocene ̶  through its pressure on physical and social systems  ̶  sets off pressures all the way down to the level of the firm to change business models, business processes and business practices, could look like this:

sleemanconsulting.com

3. The Anthropocene can be used as a super-structure for all ESG-related topics. If you, like me, have struggled how all different topics in the ESG-realm fit together, the concept of the Anthropocene can be used as a helpful tool. By plotting both social and natural/physical topics in the figure above, you have a super-structure where you can find all ESG-topics that might influence your firm’s business model, strategy and processes. This might be a useful addition to tools that you already have in place (e.g. a materiality or priority matrix) and can be used to track and make sense of topics as diverse as the Paris Agreement, Planetary Boundaries, the SDGs or radical transparency. I plotted a number of well-known concepts in the figure above to end up with the figure below:

sleemanconsulting.com

Why to read “The Human Planet – How We Created the Anthropocene”

The Anthropocene, with all that it entails (just a few of the topics, covered in the book, you should know about are: humans as a force of nature; positive feedback loops; complex systems; utilization of ever more energy; generation and processing of more information; increase in collective human agency) is a handy super-framework to connect ESG-topics that might have been considered separately without such a framework.

Even if you do not see the connection to your firm’s ESG-efforts, strategy or processes, and even if you do not see the need for defining a new geological time scale (I couldn’t care less; also see this article in Scientific American), this is a book worth reading. As the reviewer in the Guardian wrote:

‘Brilliantly written and genuinely one of the most important books I have ever read.’

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How to Structure Agile Companies. A Developing Story.

Everybody, in profit and not-for-profit organizations, will know by now how to run a scrum project or set up agile teams. The topic I try to explore here is more far-reaching: are there any good ideas out there on how to build your entire organizational structure to accommodate agile working?

I use concepts developed by Steve Denning (author of The Age of Agile) for a working definition of agile:

  1. Agile responds to the central challenge of business today: how to provide instant, frictionless, intimate value at scale.
  2. The law of the small team. Agile practitioners share a mindset that work should in principle be done in small autonomous cross-functional teams working in short cycles on relatively small tasks and getting continuous feedback from the ultimate customer or end user.
  3. The law of the customer. In truly agile organizations, everyone is passionately obsessed with delivering more value to customers. Everyone in the organization has a clear line of sight to the ultimate customer and can see how their work is adding value to that customer—or not.
  4. The law of the network. Agile practitioners view the organization as a fluid and transparent network. In the agile manifesto this is described as “individuals and interactions over processes and tools”.

Having worked as a scrum master on various agile projects myself, a question slowly developed over time: How would you draw the lines in an organization that wants to adopt agile working for the entire organization? In other words, what does an agile organizational structure look like?

A number of management thinkers have tried to answer just this question. What follows is a brief overview and some preliminary conclusions.

Bain & Company – Agile at Scale

In a recent Harvard Business Review article, consultants from Bain & Company argued that structuring for agile should at least be situational:

  • Companies often struggle to know which functions should be reorganized into multidisciplinary agile teams and which should not.
  • Not every function needs to be organized into agile teams; indeed, agile methods aren’t well suited to some activities. Even the most advanced agile enterprises – Amazon. Google, Netflix, Bosch, Saab, SAP, Salesforce, Tesla – operate with a mix of agile teams and traditional structures.
  • Changes are necessary to ensure that the functions that don’t operate as agile teams support the ones who do.
  • Routine operations such as plan maintenance, purchasing, and accounting are less fertile ground for agile. In companies that have scaled up agile, the organization charts of support functions and routine operations generally look much as they did before, though often with fewer management layers and broader spans of control as supervisors learn to trust and empower people.

Bain argues that one of the features of Agile is delayering. (Which, by the way, is another well known management concept, just as ‘situationality’ is). According to Bain a delayered organization should speed up decision making. When senior managers then also leave the decision on how to innovate to agile teams, “senior leaders get time to create and communicate long-term visions, set and sequence strategic priorities, and build the organizational capabilities to achieve those goals. Leaders remove constraints and solve problems.”

McKinsey – The five trademarks of agile organizations

In a January 2018 article on their website, McKinsey wants us to believe we are in a paradigm shift (possibly game changing as well?) from thinking about organizations as machines, to thinking about organizations as organisms. Weirdly, the writers mention Gareth Morgan when they write about organizations as machines, but not when describing organizations as organisms. Morgan did so in his 1986 (!) book Images of Organization. (He came up with a number of other useful metaphors for thinking about organizations, such as organizations as a brain, a culture, a political system, a psychic prison, a change or flux, and as an instrument of domination. It’s a classic.) To credit McKinsey though, they are first to attempt to draw an agile organizational structure. It looks like this:

The writers go on to discuss their five trademarks of agile organizations:

Reading through this list of five items; are these all really trademarks that we’ll only find in agile organizations? That’s a question you might want to answer yourself.

London Business School – Adhocracy

Julian Birkinshaw and Jonas Ridderstråle of London Business School, in their recent book Fast/Forward, also argue that in the current VUCA age (volatile, uncertain, complex and ambiguous) we need to say goodbye to old modes of structuring organizations. Their solution is the adhocracy. Not that the adhocracy is a new model, it has been around for multiple decades. The definition that springs to my mind is the one given by Mintzberg in another classic, The Structuring of Organizations:

In adhocracy, we have a fifth [after the simple structure, machine bureaucracy, professional bureaucracy and the division structure] distinct structural configuration: highly organic structure, with little formalization of behavior; high horizontal job specialization based on formal training; a tendency to group the specialists in functional units for housekeeping purposes but to deploy them in small market-based project teams to do their work; a reliance on the liaison devices to encourage mutual adjustment the key coordinating mechanism -within and between these teams; and selective decentralization to and within these teams, which are located at various places in the organization and involve various mixtures of line managers and staff and operating experts. To innovate means to break away from established patterns. So the innovative organization cannot rely on any form of standardization for coordination. In other words, it must avoid all the trappings of bureaucratic structure, notably sharp division of labor, extensive unit differentiation, highly formalized behaviors, and an emphasis on planning and control systems.

Birkinshaw (in Forbes) puts the emphasis on action:

Adhocracy is an action-based view of the organization focused on capturing opportunities, solving problems and getting results.

Ask yourself the question: is this really new, or is it an old concept that might be adopted by more and more firms now that more business environments seem to get more turbulent? I give you some more Mintzberg quotes from 1979 (emphasis added):

Contrary to the other configurations, large parts of the organization are organized into ad hoc project teams which solve specific projects.

This team grouping makes mutual adjustment the favored coordinating mechanism.

On a daily basis, the organization’s work force may be grouped into functional units, but if required by the managers, almost everybody can participate in temporary market based units. Intergroup coordination and communication with the strategic apex is done by the use of liaison devices.

Nobody in the organization monopolizes the power to innovate, and management typically does its best to ensure a setting that nurtures creativity and innovation.

An attempt to describe an agile organization structure

With all of the above in mind, here are some things to take into account when trying to build your agile organizational structure:

  • Agile is about small teams that can freely innovate to deliver value to internal and external customers. There still needs to be management direction on where to innovate, however.
  • To draw the lines in the organization, it is best to adhere to proven management methods in building organizational structures. Senior management still has to decide at least three things:
    • how to divide labor, or ‘who is doing what?’
    • how to make decisions, or ‘who decides what?’
    • how to coordinate activities, or ‘who talks with whom about which topics?’
  • You might want to consider keeping to one of the traditional structures (functional, geographic, product) for housekeeping purposes such as HRM-processes, but at the same time deploying staff to agile teams for day-to-day work.
  • Before you do anything else, ask yourself the question if your business environment warrants a highly flexible organization that structures work around every opportunity or customer whim in sight. Is your specific business environment really VUCA? We all like to be Spotify or Tesla. But in reality, we also need traditional production and logistics firms that might not operate in VUCA environments.
  • Probably it is best to deploy a few agile teams, track the results, and deploy more teams when business results improve because of agile.
  • ‘Only VUCA needs an adhocracy’, could be a useful credo.

Don’t get carried away

The first of two closing comments that buttress my attempt to describe an agile organizational structure comes from The Economist:

(..) companies need to adapt to a world that is VUCA (volatile, uncertain, complex and ambiguous) and which requires continuous innovation in order to keep up. Agile teams are the equivalent of in-house startups. It is worth remembering, however, that many startups fail to gain traction. There is a danger that, while a firm’s best talent is off pursuing new ideas, the core revenue-generating business deteriorates due to neglect. Permanent revolution may sound an enthralling idea in theory but may lead to chaos in practice.

The second closing comment is from Steve Jobs. I often have to think about this quote when agile practitioners preach about the need to listen to customer’s wishes:

“A lot of times, people don’t know what they want until you show it to them.”

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ESG-Disclosure Using The Economist as a Proxy (2)

The second installment in an effort to distill relevant ESG-topics from The Economist has notable differences from the first effort (see here). Digging through the second series of four months of articles (May to August), I found that:

  • climate change remains the number one topic;
  • green technology is in firm second place;
  • governance more or less keeps the same spot in the matrix;
  • pollution gets a lot less attention but remains important in terms of impact on a firm’s profitability;
  • environmental laws are a new category with potentially big impacts on business models (not including climate policies, which I include in the climate change category);
  • new these last months, is the coverage of ecology, conservation and environmentalism (which I grouped under ‘ecology’); although important from a stakeholder’s perspective, I opted to put ecology to the left of all other categories since the subjects at hand still need to find their way into the mainstream; on top of that, laws and regulations on these topics seem further away then the ones on, for example, climate change and governance.

The picture above follows, again, the format of a Materiality Matrix, with the number of articles per topic on the Y-axis and the – debatable – impact on a firm’s profitability if this topic is not tackled by its management, on the X-axis. If The Economist can be used as a guide, you should, in addition to the topics that were already present in last month’s Materiality Matrix (i.e. climate climate change, green technology, pollution and governance) consider disclosing information on your efforts towards a healthy ecology. As far as new environmental laws are concerned, these were of course already included in your risk management approach.

Below, some interesting snippets taken from the articles can be found, grouped per topic. (Most quotes are adopted directly from The Economist).

Climate Change

Interesting facts taken from all articles in the group ‘climate change’:

  • Businesses are overvalued because of a “carbon bubble” and could suffer if the climate threat is tackled resolutely. A study at Oxford University found that electricity producers would have to retire a fifth of capacity, and cancel all planned projects, if the Paris goals are to be met.
  • What is the single most effective way to reduce greenhouse-gas emissions? Go vegetarian? Replant the Amazon? Cycle to work? None of the above. The answer is: make air-conditioners radically better. On one calculation, replacing refrigerants that damage the atmosphere would reduce total greenhouse gases by the equivalent of 90bn tonnes of CO2 by 2050. Making the units more energy-efficient could double that. By contrast, if half the world’s population were to give up meat, it would save 66bn tonnes of CO2. Replanting two-thirds of degraded tropical forests would save 61bn tonnes. A one-third increase in global bicycle journeys would save just 2.3bn tonnes.
  • Scientists have laid out steps that Arab countries could take to adapt to climate change. Agricultural production could be shifted to heat-resilient crops. Israel uses drip irrigation, which saves water and could be copied. Cities would be modified to reduce the “urban heat-island effect”, by which heat from buildings and cars makes cities warmer than nearby rural areas. Few of these efforts have been tried by Arab governments, which are often preoccupied with other problems.
  • Virtually all simulations which chart paths toward meeting the Paris climate agreement – to keep temperature rise “well below” 2°C relative to pre-industrial levels – assume not just a sharp reduction in actual emissions but also the removal of carbon dioxide from the atmosphere on a massive scale.
  • In Canada, provinces can control emissions in their own way. British Columbia has already introduced a carbon tax (now C$35 a tonne). Alberta charges C$30 a tonne. Ontario’s cap-and-trade scheme would have qualified. If a province fails to tax or cap emissions, the federal government will impose a tax.
  • Three years after countries vowed in Paris to keep warming “well below” 2°C relative to pre-industrial levels, greenhouse-gas emissions are up again. So are investments in oil and gas. In 2017, for the first time in four years, demand for coal rose. Subsidies for renewables, such as wind and solar power, are dwindling in many places and investment has stalled; climate-friendly nuclear power is expensive and unpopular. It is tempting to think these are temporary setbacks and that mankind, with its instinct for self-preservation, will muddle through to a victory over global warming. In fact, it is losing the war.
  • Two social psychologists have found that Republican voters will back carbon taxes if they are told Republicans favour such a policy.
  • The number of Europeans who can expect to witness a temperature above the current record, wherever they happen to live, would double from 45m today to 90m if the planet warmed by another 0.5°C or so on top of the 1°C since the 1880s. If, instead of 0.5°C, it warmed by 1°C, the figure would rise to 163m.This looks even more alarming if you factor in humidity. Human beings can tolerate heat with sweat, which evaporates and cools the skin. That is why a dry 50°C can feel less stifling than a muggy 30°C. If the wet-bulb temperature (equivalent to that recorded by a thermometer wrapped in a moist towel) exceeds 35°C, even a fit, healthy youngster lounging naked in the shade next to a fan could die in six hours.
  • A report published on August 6th by Sarasin & Partners, an asset manager in London, suggests that oil firms are assuming that decarbonisation will be limited and are thus overstating their assets. Sarasin notes that eight European oil giants all used long-term oil price assumptions of $70-80 a barrel, rising by 2% a year with inflation to $127-145 by 2050, to price their assets. But that does not appear to assume any drop in demand. The International Energy Agency predicts a price of just $60 by 2060; Oil Change International, an activist think-tank, estimates one as low as $35. Oil firms could face a sticky mess of forced writedowns.
  • A new IMF working paper finds that taxes raise around twice as much revenue as today’s cap-and-trade schemes, and are roughly 50% better at cutting emissions.

Green Tech

Interesting facts taken from all articles in the group ‘green tech’:

  • Plastic production has tripled over the past 25 years, and the mess it causes has risen commensurately. Recycling is an option. Another is biology. At Stanford University, they found that bacteria in the guts of mealworms can break down polymers faster than fungi and bacteria can.
  • Six of the top ten producers of solar-panels are Chinese.
  • Though solar was the world’s biggest source of new power-generating capacity last year, it still generates a paltry 2% of global electricity.
  • Materials-science researchers are finding that plant fibres can add durability and strength to substances already used in the construction of buildings and in goods that range from toys and furniture to cars and aircraft. A big bonus is, because plants lock up carbon in their structure, using their fibres to make things should mean less carbon dioxide emitted. The production of concrete alone represents some 5% of man-made global CO2 emissions, and making 1kg of plastic from oil produces 6kg of the greenhouse gas.
  • In the bike-mad Netherlands nearly one in three newly bought bikes last year was electric.
  • Acid rain damages crops. In particular, it damages rice. I can be cleaned with water but it is not always obvious when it needs to be cleaned. A cheap method now has been found: rice plants sprayed with artificial acid rain, cut the release into the soil of three relevant bacterial food stuffs. The electric current the bacteria in the ground generate consequently drops. This is easily measurable using cheap electrodes.
  • India has plans for alternative means of generating electricity. Even before the Paris summit, Narendra Modi, the prime minister, aimed to install 175 gigawatts (GW) of renewable-energy capacity by 2022, a vast increase from today. That has now risen to 227GW. In the meantime, prices of wind and solar power have tumbled. Recent auctions have led to a 50% drop in the cost of solar power in the past two years, to about three rupees ($0.05) per kilowatt hour, about the same as wind. This can make both sources cheaper than building new coal-fired capacity. An excise tax on production and imports makes coal ever less attractive. After a massive spree of building coal-fired power plants in recent years, investment slumped last year, while that in alternatives surged.
  • A view prevails that the blockchain will guzzle too much electricity for energy applications to make sense. But this assumes that projects will use a public blockchain such as bitcoin, which anyone can access with the right software, requiring lots of computing power and time to verify each transaction and protect the blockchain. Energy firms could in fact employ blockchains in which only trusted participants can join, making the process of maintaining the blockchain faster and less energy-hungry.
  • America’s Forest Service uses a model to assess fire risk. This model feeds on data on the distribution and types of trees, bushes and other vegetable ground cover, and on construction materials used in an area. Such intelligence will be needed increasingly in the future. Predictions based on the likely effects of climate change suggest that, by the middle of the century, fires will burn twice as much acreage as they do today.

Pollution

Interesting facts taken from all articles in the group ‘pollution’:

  • Two books have been reviewed that have the Flint water pollution disaster as a subject: Had the dirty river water been treated with the right chemicals, thousands of people would not have been poisoned by lead and bacteria, including one that causes Legionnaires’ disease. But to save more cash, the city declined to add anti-corrosion agents that would have stopped the water eating away at the lining of the pipes, thus preventing lead from leaching out. That might have cost around $100 a day—peanuts compared with the hundreds of millions that the state and federal governments are now forking out to repair some of the damage. These two books both show how an austerity drive with racial undertones led to the mass poisoning of mostly poor and black residents, and how officials tried to cover it up, attempting to discredit anyone who came up with proof that the water was tainted.
  • Also on Flint: to almost everyone’s surprise, the citizens of Flint prevailed in March 2017, when the government agreed to an expensive settlement in the first type of lawsuit. The state of Michigan agreed to spend at least $87m to replace lead-contaminated water pipes in Flint within three years. The settlement also required the city to run at least two centres where residents could pick up free bottled water and tap-water filters until September 2017, and beyond that if tests continued to show that Flint’s water was contaminated. The government stopped the giveaway in April this year, saying the city’s water passed the test; Karen Weaver, the mayor of Flint, retorts that many of her constituents still do not trust it.
  • Kapuas, Indonesia’s longest river, is murky because of deforestation. Since the 1970s, logging has enriched locals while stripping away the vegetation that held the soil in place. The Centre for International Forestry Research (CIFOR) found that between 1973 and 2010 over 100,000 square kilometres of forest was lost on Kalimantan, or a third of the original coverage. A national moratorium that began in 2011 has done little to still the axes. As a result, torrential tropical rains wash lots of loose earth into the Kapuas.

Governance

Interesting facts taken from all articles in the group ‘governance’:

  • Plato argued that the richest members of society should earn no more than four times the pay of the poorest. John Pierpont Morgan, a banker, reckoned that bosses should earn at most 20 times the pay of their underlings. Investors today hold chief executives in vastly higher esteem: America’s largest publicly listed firms on average paid their CEO 130 times more than their typical workers in 2017.
  • “I fear that we may be at a peak of anti-bribery efforts”, says a spokesperson of Transparency International. Western firms in the mining and oil-and-gas industry grumble that rivals from China, Russia or elsewhere have “advantages” bidding for contracts in say, parts of Africa, as they face few limits on bribe-paying. If such complaints grow loud, pressure not just to stand still on anti-bribery standards but actually to lower them could return.
  • In India, women are less likely to work than they are in any country in the G20, except for Saudi Arabia. They contribute one-sixth of economic output, among the lowest share in the world and half the global average. The unrealized contribution of women is one reason India remains so poor.
  • On Danone: The latest effort is to win certification as a “B Corporation”, a label meant to reflect a firm’s ethical, social, environmental practices. Smaller outfits, such as Patagonia, a clothing firm, or Ben and Jerry’s ice-cream (now part of Unilever) were early B Corps. Some 2,500 have been certified in the past decade or so.

Ecology

Interesting facts taken from all articles in the group ‘ecology’:

  • Humans have had a profound impact on the prevalence of other species: the biomass of wild mammals has decreased to a sixth of its previous value. Meanwhile, the carbon count of domesticated poultry grew to three times higher than that of every species of wild bird combined.
  • Columbia BIO is a huge project to survey Columbia’s biological assets. The government’s aspiration is that biodiversity itself might be harnessed as an economic resource, and that this might contribute as much as 2.5% of Columbia’s GDP by 2030.
  • The Great Barrier Reef has died and then been reborn (with rising and falling sea levels) five times during the past 30,000 years. Bleaching is now threatening the reef for the sixth time. In the short term, global warming really does look like a serious threat.
  • Sudan, the last male northern white rhinoceros on Earth, died in March. He is survived by two females. IVF seems the last hope for the northern white rhino.
  • Around 40% of bee species globally are in decline or threatened with extinction. Beekeepers in North America and Europe are losing hives at an abnormally high rate. Why? Diana Cox-Foster, an entomologist, offers the theory of the four Ps: parasites, poor nutrition, pesticides and pathogens.

Environmental Laws

Interesting facts taken from all articles in the group ‘environmental laws’:

  • Since the 1970s enormous farms growing irrigated crops such as cotton and nuts spread across the Murray-Darling basin in Australia. Illegal extraction of water is a problem. Farmers are meant to use meters to monitor how much they pump. But last year, cotton irrigators were accused of tampering. Wide-scale abuse has been possible because states and local governments have failed to enforce the rules.
  • Shipping accounts for only around 2% of global carbon emissions, but is quite dirty. Burning heavy oil, the industry produces 13% of the world’s sulphur emissions and 15% of its nitrogen oxides. And by 2050 ships will be producing 17% of all carbon emissions if left unregulated.
  • The International Maritime Organisation agreed to halve the industry’s carbon emissions by 2050.
  • The Trump administration is committed to undoing the Clean Power Plan —which sought to reduce carbon-dioxide emissions from power plants by 32% from their levels in 2005 by 2030—before it comes into effect. Its new proposal, the Affordable Clean Energy (ACE) rule, is much less ambitious because it would let states decide their emissions-reductions targets (including having none at all). Its name is Orwellian. The EPA’s own analysis shows that retail electricity prices would be reduced by a mere 0.1%-0.2% by 2035—but that use of coal, a pollution-belching fuel, would shoot up by as much as 9.5%.

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Embedding ESG-risk into Your Risk Management Framework (COSO)

We wrote about integrating environmental, social, and governance (ESG-) risks into your overall risk management framework before, see blog post Feb2018.

This short video shows you why this is so important to businesses nowadays:

The Reporting Exchange (an exhaustive source of information for anyone preparing sustainability reports) and COSO (organization that supplies risk management models and tools) have teamed up to integrate ESG-risk in your existing Enterprise Risk Model. It includes seven related modules and underlying methods and tools:The detailed guidelines can be found here (PDF download link): COSO ESG guidelines.

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Summer Reading 2018: Time for Reflection and Re-Creation

The last two years I started the introduction to the summer reading list with the same quote (read all my blog post on reading via this link). For a different reason, I repeat it one more time:

. . .  the worst thing one can do to feel one knows things a bit deeper is to try to go into them a bit deeper. The sea gets deeper as you go further into it, according to a Venetian proverb. Curiosity is antifragile, like an addiction, and is magnified by attempts to satisfy it – books have a secret mission and ability to multiply, as everyone who has wall-to-wall bookshelves knows well (Nassim Taleb, Antifragile).

For this list, I tried to find books that get you a bit deeper inside yourself, instead of getting deeper in history, science, philosophy or (business) decision-making (i.e. some of the ‘things’ Taleb is talking about).

I picked up just these books because I did not read a lot of new books this year relevant for this blog. (I guessed you didn’t really want a review of books with titles such as Baby-led Weaning, Babywise or Your Baby Week by Week; as those were the books I did read the last months.) Picking up books that you’ve read before, and reading through underlined sections and annotations, is a great way to reflect on yourself: Why did you underline it? What notes did you make? Does it still make sense? Which things did you forget but you really should remember from now on? Etcetera.

Whilst flipping through the pages, the books below magically seem to build on one another like this:

  • You build something big, anything, by working on it bit by bit every single day. Things add up, like training for a marathon. One day, you look back and see all the work you have done leading to the thing you wanted to achieve. This concept is found in Bird by Bird and is mostly about writing but it goes for everything you want to achieve in life really.
  • To achieve the above, you need rituals. You have to sit down (or move about) at the same time every day. This helps prepare your unconscious for the task ahead. Rituals are introduced in Bird by Bird but are the prime subject in Daily Rituals.
  • But what should you be building on? That, of course, is something that you have to find out for yourself. Some intriguing thoughts on that can be found in David Foster Wallace: The Last Interview and The Three Marriages. What struck me is that finding the thing you should work on, is not about rationality. According to these two books it’s more about intuition and gut-feeling. But even then, it is hard work getting there.
  • Hard work and maybe insight. Wisdom too. And prudence. Those are the subjects of The Art of Worldly Wisdom and would make a nice addition to any reading list. But the emphasis on prudence (i.e. acting with or showing care and thought for the future) makes it especially helpful if you want to build something big.

Here is my list for this summer to inspire you to get a little closer to what drives you. Or maybe make some welcome changes as you read through these pages filled with wisdom.

Bird by Bird by Anne Lamott. A book about writing. But at the same time about life. The struggle to write a book, and how to start, can be read as a metaphor for anything you would like to achieve in life. One of the bits I loved:

You get your intuition back when you make space for it, when you stop the chattering of the rational mind. The rational mind doesn’t nourish you. You assume that it gives you the truth, because the rational mind is the golden calf that this culture worships, but this is not true. Rationality squeezes out much that is rich and juicy and fascinating.

Daily Rituals by Mason Currey. Currey, in the introduction, describes what this book is about:

The book’s title is Daily Rituals, but my focus in writing it was really people’s routines. The word connotes ordinariness and even a lack of thought; to follow a routine is to be on autopilot. But one’s daily routine is also a choice, or a whole series of choices. In the right hands, it can be a finely calibrated mechanism for taking advantage of a range of limited resources: time (the most limited resource of all) as well as willpower, self- discipline, optimism. A solid routine fosters a well- worn groove for one’s mental energies and helps stave off the tyranny of moods. This was one of William James’s favorite subjects. He thought you wanted to put part of your life on autopilot; by forming good habits, he said, we can “free our minds to advance to really interesting fields of action.”

You can see why this is a great companion to Bird by Bird. This is not a book to read in one sitting. Currey has a little chapter on the routines of more than hundred authors, philosophers, artists and musicians. It’s a good book to put on your night stand for the holidays. Or a book that you can pick up if you already know you will not have more than ten minutes undisturbed reading at a time. There are some big names here: Freud, Hemingway, Murakami, Proust, Louis Armstrong, Stephen Jay Gould and Andy Warhol, to name a few. A lot in this book echoes what Anne Lamott writes in bird by bird. Consider Murakami’s routine:

When he is writing a novel, Murakami wakes at 4:00 A.M. and works for five to six hours straight. In the afternoons he runs or swims (or does both), runs errands, reads, and listens to music; bedtime is 9:00. (..) “The repetition itself becomes the important thing; it’s a form of mesmerism. I mesmerize myself to reach a deeper state of mind.”

The Three Marriages by David Whyte. A book about work-life balance:

The current understanding of work-life balance is too simplistic. People find it hard to balance work with family, family with self, because it might not be a question of balance. Some other dynamic is in play, something to do with a very human attempt at happiness that does not quantify different parts of life and then set them against one another. We are collectively exhausted because of our inability to hold competing parts of ourselves together in a more integrated way.

What follows is a very unusual treatment of the work-life balance. It changed the way I look at my work and relationships. If you want to reflect deeply this summer, pick up this book. But only if you like a very new way of looking at your life:

The pursuit of the self is the pursuit of that part of us not defined by our worries and anxieties. [I had to pause here for at least 10 minutes.] But this pursuit begins only by admitting that human anxiety is endless and to be expected. These waves of existential anxiety may knock down the surface self, but there is another, deeper self with a larger perspective that was never knocked down at all. (..) The pursuit of the self is also the pursuit of that part of us that is untouched by our successes and accomplishments.

David Foster Wallace: The Last Interview. This little volume of interviews with the writer David Foster Wallace makes me want to read his fiction. Zadie Smith said of him: “In a culture that depletes you daily of your capacity for imagination, for language, for autonomous thought, complexity like Dave’s is a gift”. Again, there’s a lot on routines and rituals here, but also some good thoughts on life and work:

[W]hen you’re a child I don’t think you’re aware of how incredibly easy you have it, right? You have your own problems and you have your own burdens and chores and things you have to do. (..) I think when they [i.e. his parents] went into these quiet rooms and had to do things that it wasn’t obvious they wanted to do, I think there was a part of me that felt that something terrible was coming. But also, of course, now that we’re putatively grown up there’s also a lot of really, really interesting stuff and sometimes you sit in quiet rooms and do a lot of drudgery and at the end of it is a surprise or something very rewarding or a feeling of fulfillment.

Definitely a nice little volume for your summer reading list. For the Dave Eggers fans out there: he is one of the interviewers.

The Art of Worldly Wisdom by Balthasar Gracián. Written in the 17th century by a Jesuit priest. A keen observer of human behavior, his 300 observations give you excellent advice on how to get ahead in life. Although the book was written long ago, it still holds truths that you can use in your work as a manager and business decision-maker. This little volume, for some, is therefore included in a list of three great, timeless wisdom books: Machiavelli’s The Prince, Sun-Tzu’s The Art of War, and, thus, Baltasar Gracián’s The Art of Worldly Wisdom. I am only halfway through this book. Here are some quotes I found especially useful in a work setting:

Don’t outshine your boss. When you counsel someone, you should appear to be reminding him of something he had forgotten, not of the light he was unable to see. It is the stars who teach us this subtlety. They are brilliant sons, but they never dare to outshine the sun.

Never exaggerate. It isn’t wise to use superlatives. They offend the truth and cast doubt on your judgment. By exaggerating, you squander your praise and reveal a lack of knowledge and taste. (..) To overvalue something is a form of lying. It can ruin your reputation for good taste, and  ̶  even worse  ̶  for wisdom.

Be diligent [i.e. careful and conscientious in work and duties] and intelligent. Fools are fond of hurry: they take no heed of obstacles and act incautiously. The wise usually fail through hesitation. Fools stop at nothing, the wise at everything. Sometimes things are judged correctly but go wrong out of inefficiency and neglect. Readiness is the mother of luck. It is a great deed to leave nothing for the morrow. A lofty motto: make haste slowly.

For all management consultants out there:

End well. [B]e careful of the way you end things, and devote more attention to a successful exit than to a highly applauded entrance. What matters isn’t being applauded when you arrive  ̶  for that is common  ̶  but being missed when you leave. Rare are those who are still wanted.

And for everyone out there:

Be careful when you inform yourself about things. Much of our lives is spent gathering information. We see very few things for ourselves, and live trusting others. The ears are the back door of truth and the front door of deceit. Truth is more often seen than heard.

This wonderful book is to be read like Daily Rituals: take it in in small doses and do a lot of thinking about the deeper meaning and consequences for your strategies in work and life.

I hope this list inspires you to read this summer. Need more recommendations? Check out all my book reviews via this link.

Enjoy your summer.

 

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Track the Most Important Planetary Boundary Yourself

Curbing climate change is arguably the most important non-financial topic your firm should be reporting efforts on; read here why (January 2018 post) and how (February 2018 post).

To push yourself to become familiar with the numbers for climate change, internalize the range where the world enters a zone of uncertainty, see the table below by the Stockholm Resilience Center (excerpt from a list with all their planetary boundaries):

Then see for yourself that we already crossed this boundary on the excellent CO2.earth website:

Do as I do, and bookmark their daily CO2 count in your web browser and follow CO2-count on a regular basis to internalize the parts-per-million concept of CO2 (on May 14 on 412 ‘parts per million parts in total in the atmosphere’. Here is a link to their daily count: https://www.co2.earth/daily-co2.

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Which ESG-Topics Should You Disclose Using The Economist as a Proxy?

Digging through the first four months of The Economist for relevant ESG-articles, I thought it would be nice to group the articles and see which groups get the most coverage in this highly regarded newspaper. My effort in the form of a Materiality Matrix is shown above, with the number of articles per topic on the Y-axis and the – debatable – impact on a firm’s profitability if this topic is not tackled by its management, on the X-axis. If The Economist can be used as a guide, the topics that should be covered by your organization are thus governance, green technology, pollution and climate change.

Some interesting snippets taken from the articles can be found below, grouped per topic. (Almost all quotes are adopted directly from The Economist).

Governance

  • Must read governance-article on women on boards: Skirting Boards
  • Norway introduced compulsory quotas requiring stockmarket-listed companies to give women at least 40% of their board seats.
  • In Belgium, Germany and France women make up 30-40% of board directors in large listed firms.
  • Quotas have done little to advance women further down the career ladder: in Britain, France, Germany and the Netherlands 80-90% of senior-management jobs are still held by men.

Green Tech

  • Oil firms Shell and Total plan to take on utilities in deregulated markets to provide electricity and gas direct to homes and businesses. They are toying with a strategy that could move their core business from oil to electricity. Must read article: From Mars to Venus
  • Solar cells made from perovskite (a compound of calcium, titanium and oxygen) are coming to the market and might drive silicon-based cells out of business. It’s early stages though.
  • Solar power gets a lot of attention but generates only 2% of the world’s electricity.
  • Microchip costs have fallen a million times faster than those of solar panels.
  • Solar suffers from “value deflation”: the more solar is installed, the less of the electricity that is produces in the middle of the day is needed. Unless it can be stored, the more costs it imposes on the rest of the system.
  • In an article on electrical vehicles, The Economist doubts if batteries will displace diesel in trucking anytime soon. Batteries have to replace part of the cargo and that makes it too pricey for a thin margin business.
  • To see how hard governments can push for renewable energy, look to South Australia: all coal-fired power stations have been closed, it gets 50% of its power from renewables and recently set a target of 75% renewables for 2025.

Pollution

  • Must read article on plastic pollution: Plastic Surgery
  • China is not only the world’s biggest emitter of carbon, but the world’s largest recycler, treating just over half of exported plastic waste. On January 1st China banned the import of 24 categories of waste, including household plastics.
  • China furthermore has taken a harder line and pressed on with pollution controls, hitting coalminers, cement-makers, paper mills, chemical factories, textile firms and more.
  • The European Union launched a “plastics strategy”, aiming, among other things, to make all plastic packaging recyclable by 2030 and raise the proportion that is recycled from 30% to 55% over the next seven years.
  • On current trends, by 2050 there could be more plastic in the world’s waters than fish, measured by weight.
  • Just 10% of 3.6m tonnes of solid waste discarded each day the world over is plastic. Whereas filthy air kills 7m people a year, nearly all of them in low- and middle-income countries, plastic pollution is not directly blamed for any.
  • Researchers have identified 400 species of animal whose members either ingested plastics or got entangled in it.
  • Trucost, a research arm of Standard & Poor’s, puts the overall social and environmental cost of plastic pollution at $139bn a year.
  • To put that into perspective, the United Nations Development Programme says that the costs of overfishing and fertiliser run-off amount to some $50bn and $200bn-800bn a year, respectively. By 2100 ocean acidification, which is caused by atmospheric carbon dioxide dissolving into water, could cost $1.2trn a year.

Climate Change

  • Must read article on including carbon pricing in decision making: Low-Carb Diet
  • Of the 6,100-odd firms which report climate-related data to CDP, a British watchdog, 607 now claim to use “internal carbon prices”.
  • Investors increasingly demand that companies take a carbon tax seriously.
  • The atmosphere contains two-and-a-half times as much of methane (a powerful greenhouse gas) as it did before the Industrial Revolution.
  • Methane emissions must be slashed. Several giants have made strides to limit fugitive emissions. If all the world’s gas producers attained BP’s leakage rate of 0.2%, instead of an industry average of over 2%, it would prevent 100m tonnes or so of methane from entering the atmosphere every year. This would spare Earth as much warming as cutting all the carbon dioxide emitted since the 19th century by one-sixth.
  • The X Prize Foundation awards companies that come up with carbon capture and storage techniques: Four of the finalists plan to produce sturdy building materials such as cinder blocks made from the slag left over from steel production, cured with carbon dioxide. Another four will fashion the gas into plastics or carbon-fibre composites. The remaining two have invented ways to turn the stuff into carbon monoxide or methanol, which are industrial raw materials.
  • Shipping and airlines were the only greenhouse-gas-emitting industries not mentioned in the 2016 Paris climate agreement.
  • Shipping produces 3% of the world’s greenhouse-gas emissions, similar to an economy the size of Germany’s. Lack of cleaner shipping technology is not a constraint. Zero-carbon fuels are becoming available. Slowing ships down by 10% could reduce fuel usage by almost a third. Diplomats argue that the slow progress is because their actions affect not just the shipping industry, but exporters too. If regulators move too aggressively they may reduce the competitiveness of seaborne trade.

This was a first attempt to a materiality matrix inspired by articles that appeared in the Economist in the first quadrimester of 2018. I hope to also create materiality matrices for the remaining quadrimesters of 2018.

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The Most Surprising Thing I Learned from Finishing a Climate Change Course

There’s a lot of good knowledge packed into the SDG Academy’s Climate Change course. You learn about the science behind climate change, what the Paris Agreement entails, and which multi-stakeholder initiatives try to combat climate change. The one thing that was maybe lacking was a chapter on how climate change poses threats to individual businesses; in the form of reputational risk, funding risk and any direct consequences of climate change. (For a comprehensive discussion of these risks, please refer to Climate Smart Business Decision-Making.) The biggest eye-opener for me, though, was the realization that most IPCC scenarios include a form of carbon capture to keep the planet well below 2°C warmer than pre-industrial levels.

It is time to start the debate on capturing carbon directly from the air, now that the price of capturing a ton of CO2 has fallen considerably. Of course, there are numerous arguments against capturing CO2, such as:

  • it promotes coal-fired energy plants;
  • it distracts from a move towards renewable energy;
  • there is little support for storing CO2;
  • it’s better to stop producing CO2 than to capture and store it.

But the most persuasive argument that I can think of in favor of capturing CO2 is the realization that most of the IPCC scenarios include it to be able to limit warming to 2°C. Add to that a growing number of jurisdictions that either implement a carbon tax or a cap and trade system (and a falling price for carbon capture), and you have a possible business case for companies to start capturing CO2.

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