When Does “No” Mean “No”?

Note: This article was published in The Globe and Mail on March 3, 2015. The version below includes additional hyperlink references not published in the original.

gam-masthead

On big resource projects, when does ‘no’ mean ‘no’?

By Joel Gehman and Michael Lounsbury
March 3, 2015

A recent column lamented that getting to “yes” on energy projects in Canada has never been tougher: Fossil-fuel developments, pipelines, mines, dams, transmission lines, and even wind turbines “are frequently contested, delayed or blocked.” But do such outcomes mean there is a problem? And if so, what kind of problem is it?

The argument – ‘Getting to Yes’ – assumes that “yes” is somehow on the side of angels. But a critical element of any great strategy is saying “no.” It’s Strategy 101. No organization – whether a corporation, a nation-state or a non-profit – can say “yes” to everything. Choices must be made. In his classic article “What Is Strategy?,” Harvard professor Michael Porter put it bluntly: “The essence of strategy is choosing what not to do.”

Clearly then, “no” is often the better strategic choice. And yet, organizations often fall into a “yes” trap. This is because, once set in motion, strategies are hard to reverse. There are sunk costs, learning effects, organizational inertia and network externalities, among other issues. And so, an organization can easily escalate its commitment to a losing course of action. But in real-time, as these strategic decisions are unfolding, the folly is often hard to stop.

One famous example is New York’s Shoreham Nuclear Plant. First proposed in April, 1966, the plant was expected to cost $75-million and come online by 1973. The plant was eventually completed in October, 1985, only to be decommissioned in March, 1989, having never sold any electricity. By that point total costs had ballooned to $5.5-billion. Predictably, the plant’s owner, Long Island Lighting Company, was unable to survive as an independent company. All because it refused to take “no” for an answer.

On the heels of President Obama’s recent veto, some advocates of the Keystone XL pipeline have proudly proclaimed they won’t take “no” for an answer. Perhaps their persistence in the face of “no” will prove prescient. Or perhaps Keystone XL is another Shoreham Nuclear Plant in the making. Only time will tell. But all of this suggests that perhaps Canada doesn’t have a “yes” problem; perhaps Canada has a “no” problem.

Entrepreneurs in Silicon Valley have a saying: “If you’re going to fail, fail fast.” By comparison, getting to “no” on Canadian energy projects has been taking longer and longer. That prompts some interesting questions. Why has Canada been taking so long to get to “no”? How can we get to “no” faster? Why do so many organizations keep chasing “yes” in the face of “no”? And, perhaps most importantly, what are the costs to Canada of not taking “no” for an answer?

Joel Gehman (@joelgehman) is assistant professor of strategic management and organization and Southam faculty fellow at the Alberta School of Business. Michael Lounsbury is associate dean of research, professor of strategic management and organization and Thornton A. Graham chair at the Alberta School of Business.

The Fossil Free Divestment Movement

Note: This article was published in The Globe and Mail on February 17, 2015. The version below includes hyperlink references not published in the original.

gam-masthead

What the divestment movement could mean for Alberta and Canada

By Joel Gehman and Michael Lounsbury
February 17, 2015

Recently, Norway’s $1.25-trillion sovereign wealth fund revealed that over the last three years it had divested from 115 companies engaged in coal mining, oil sands production, coal-fired electricity generation, and cement production, among others. According to Fossil Free, it was “likely the biggest divestment decision to date.” Closer to home, the University of British Columbia faculty last week voted 62 per cent in favour in a referendum asking its board to divest some $100-million in fossil fuel assets from the university’s $1.2-billion endowment. Certainly the fossil fuel divestment movement provides a potential legitimacy threat to Alberta oil sands firms’ social license to operate.

In the face of this growing momentum, a number of commentators have criticized the fossil free divestment movement. In one op-ed Martha Hall Findlay and Jean Charest offered two main points.

First, while agreeing that greenhouse gas emissions are a problem, the authors claimed: “The problem lies with the demand – it’s not the fault of those meeting the demand.” In other words: follow the money. Although we believe this depiction overly simplifies a complex problem, does the divestment movement violate its prescription? Clearly not. Even if a society limited itself to demand-side solutions, by definition, reducing demand for fossil fuel assets would qualify.

Second, the article claimed: “But investment decisions for university endowments must be based on one thing: which investments will bring the best financial returns.” In other words, maximize portfolio returns. Although we doubt all university endowments share a single investment strategy, is there evidence that divestment harms returns? Again, the answer is no. A comparison of the MSCI ACWI IMI index, which covers some 99 per cent of the global equity universe, with an index that excluded 247 fossil fuel reserve-owning companies found a return differential of 1.2 per cent in favor of the “ex Carbon list,” as well as a potential reduction in overall portfolio risk.

Clearly, a society that agreed with Hall Findlay and Charest’s twin prescriptions – follow the money and maximize portfolio returns – would not agree with their conclusions. Using their criteria it turns out that divestment is actually a “good idea.” By simply excluding fossil fuels from their portfolios, universities can meet or beat the market while reducing overall risk.

Although divestment may seem like a no-brainer, as scholars, we are curious: does the movement have any chance of succeeding? Past evidence is mixed. For instance, Nelson Mandela credited the University of California’s 1986 divestment of $3.1-billion as significant in abolishing white-minority rule in South Africa. Other campaigns have targeted child labor, land mines, and cigarettes. Recently, investors with more than $45-trillion in assets have signed the UN Principles for Responsible Investing, committing to incorporate environmental, social, and corporate governance (ESG) issues into investment analysis.

One big ESG issue for these investors is carbon. By any reasonable calculation the world has more carbon than it can afford to burn. According to the International Energy Agency’s World Energy Outlook 2012, “No more than one-third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the 2C goal, unless carbon capture and storage (CCS) technology is widely deployed.” Using this same logic, Deutsche Bank concluded: “Peak carbon rather than peak oil becomes the primary driver of oil prices.”

For the companies and economies implicated, these issues connected to the fossil fuel divestment movement pose clear strategic challenges. For instance, if not all carbon is burnable, which carbon gets priority? One possibility is de-commodification, in which qualifications such as “ethical oil” and “dirty oil” may be consequential. Similarly, while some analysts have claimed that divestment is merely symbolic, as Keystone XL and the tailings pond ducks make clear, when symbols take hold they can have potent effects. For both Alberta and Canada, it may be useful to more seriously consider the role of diversification in balancing carbon-based development and growth with carbon-free leadership in clean technology and related entrepreneurial initiatives.

Joel Gehman (@joelgehman) is assistant professor of strategic management and organization and Southam faculty fellow at the Alberta School of Business. Michael Lounsbury is associate dean of research, professor of strategic management and organization and Thornton A. Graham chair at the Alberta School of Business.