Management Trends in the 21st Century–Climate Change and Innovation play their part

I recently posted a comment on the Harvard Business School Working Knowledge website where a discussion is developing on the Most Significant Ideas in Management for the 21st Century. Below are five ideas I posted, all of which relate to management trends vs. societal trends. Of course, societal trends are almost always incorporated in forward thinking management views:

1)    Global Businesses, regardless of where they are headquartered, will be run by non-Western citizens.

2)    In the early part of the century there will be a significant age shift to a younger senior management structure effectively skipping a generation.

3)    With the accumulation and availability of investment capital outside the Western World, entrepreneurship will truly become global.

4)    A recognition of the growing real financial liability a corporation faces from not incorporating environmental sustainability and other societal issues into its decision-making will lead to widespread adoption of CSR. We already are seeing a valuation differential in the marketplace between CSR adopters and their counterparts.

5)    As the developing world begins creating its own patentable Intellectual Property, the fight over IP will become global and intense and, to some extent, may offset expanding universal access to information. The creation of IP may assert itself as a higher objective for management even though the shortened life of a new idea decreases its present value.

By the way, this is an interesting forum and I would urge others to contribute to it, .

The last two bullet points above clearly relate to what I think will be a management requirement—incorporating the impact of Climate Change on conducting business as the century progresses.  There is an implicit growing business liability related to lack of incorporation of likely legal and administrative response to emissions of various types as well as an impact on various factors of production. Some of that liability is already showing up, and in other instances, e.g.,  super fund sites, acid rain, there is some element of retroactivity that can be applied. It is not an easy present value calculation to determine if and when a corporation takes action, but it is not clear that many corporations are even making the calculation. Intellectual Property is a part of this calculation. Of course, here, it is not just related to innovations around Climate Change, but all innovations. I wrote,  in an earlier post, about steps China is taking to enhance its ability to create and protect Intellectual Property. Maybe coincidentally–or maybe not–the US is now making significantly more noise about increasing its spending on R&D and patent services in the face of significant pressure to cut federal spending. If the differential that the market place is willing to pay for reduction in liabilities through CSR investment and for ownership of Intellectual Property becomes more apparent, the pressure to lay out clearer guidelines in response to Climate Change and to improve our patent services should come from the corporate world with the government following. That is the way it should be. I hope it won’t be too late.

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About Jack Rivkin

Jack Rivkin retired in 2008 as EVP, CIO, Head of Private Asset Management of Neuberger Berman(NB) and from NB's Executive Management Committee. He was also on the Lehman(LB) Council on Climate Change(CC) and the NB CC Fund Advisory Board. He has been engaged with the United Nations and other entities on policy issues related to Private Capital and CC. He is an Associate Fellow of the Asia Society. He has continued on the NB Mutual Fund Board and with his CC responsibilities. He began his investment career in 68 as an analyst at Mitchell Hutchins(MH), and became Director of Research(DOR) there. After Paine Webber(PW) acquired MH, he served as DOR; CFO of PW; CEO of PWMH-the equity trading and investment arm of PW; Chmn of MH Asset Management and President of PW Capital. 87-92 he was DOR and, subsequently, Head of the Worldwide Equities Division of LB. 93-95, he served as a Vice Chairman and DOR at Smith Barney (now Citigroup). He was an EVP with Citigroup Investments 94-01, responsible for private equity investments. He was also an adjunct professor at Columbia University teaching a course in Security Analysis. He joined NB in 2002. He is the co-author of “Risk & Reward—Venture Capital and the Making of America’s Great Industries,” Random House, 1987. He is a regular guest on various media. He is the principal subject in a series of Harvard Business School cases describing his experience as DOR and Equity Head at LB. He has served as a director of a number of private companies and the NYSSA. He is currently a director of Idealab, Dale Carnegie, Operative, World Policy Institute and other private companies. He is a member of the Economic Club of NY, the Anglers Club, Theodore Gordon Fly Fishers, and a lifetime member of Trout Unlimited. He continues to be an active private equity investor when he isn’t fly fishing. Mr. Rivkin earned his Professional Engineering degree from the Colorado School of Mines and his MBA from the Harvard Business School

6 thoughts on “Management Trends in the 21st Century–Climate Change and Innovation play their part

  1. Pingback: Tweets that mention Management Trends in the 21st Century–Climate Change and Innovation play their part « ContraCarbon --

  2. Jack, I’m interested in the market valuation difference between companies that have CSR as a signficant part of their strategies vs. companies that do not. Where could I find more informaton?

    • Peter, I have been ignoring you on this because we are in the midst of a study to move from anecdotes to hard data. I will give you couple of teasers though: We looked at European utility valuations before and after Cap & Trade went into effect. Before, all the utilities sold within a tight range of Price/Earnings multiples. Four years later the less carbon intensive utilities sold at a premium to the previous multiple range while the more carbon intensive sold at a discount. I have also been examining two mutual funds managed by the same team where the only difference between the two portfolios is a CSR overlay. While both portfolios have done quite well and have 5 star ratings, the CSR portfolio has outperformed the other portfolio by more than a random amount. Stay tuned.

      • Interesting, Jack. I’d be interested to see the study. The first teaser could be an example of making a good business judgment resulting in a good environmental decision, i.e. a win/win because perhaps the lower carbon factor was not only a good business decision but a good environmental one as well, resulting in a higher valuation as well as doing the right thing. I wonder if that’s always the case? Are there cases where Corporate Social Responsibility is a good business decision only because it’s a good CSR decision? In other words, it costs money/profits, but still results in a higher valuation? I guess I’m wondering if people really are willing to pay a higher multiple for lower earnings when the lower earnigns are only a good CSR decision. (Not sure I’ve explained this well.)

  3. Peter,
    You raise an important point and have explained it quite well. I don’t believe that the market will pay up for CSR activities if the belief that the Net Present Value of those activities is negative. I.e., the market won’t pay for CSR just because it seems like the right thing to do. I think the market, in its collective wisdom, is saying that there is a significant liability or at least a high enough degree of risk of a liability facing those companies who have not taken CSR into account in their decision-making. Let me give you a quick example, acid rain. for many years there was a growing view that utility emissions of certain pollutants were causing health problems and agricultural issues. This ultimately got to the point where a cap-and-trade system was introduced which was designed to reduce those emissions by putting on declining caps and allowing the utilities to trade among themselves between those who were producing emissions below the caps vs. those above. The utilities which had put in scrubbers, changed fuels and introduced other emission reducers prior to the cap-and-trade system, enjoyed a significant earnings benefit. At the time they did it, it wasn’t clear if this would ultimately have a payback. It did, and, by the way, the cap-and-trade system worked and emissions were substantially reduced. I think “Mr. Market” is beginning to believe that at some point there will be something similar as it relates to CO2 emissions. This has already happened to utility valuations in Europe where there is a cap-and-trade. I think this can be extended to other CSR initiatives where there is an ultimate liability that will rear its head at some point.
    More to come.

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