March 2009

Climate policy and The Black Swan

March 29, 2009

How we do we live in a world we don’t understand? That question has been on my mind lately because I’m again under the sway of Nassim Nicholas Taleb, author of The Black Swan. Taleb did a podcast recently with the free-market (or, if you prefer) the Smith-Hayekian) economist Russell Roberts, available here at EconTalk and highly recommended.

They didn’t discuss climate policy but their conversation got me wondering what Taleb would say about the threat of climate change, particularly since I’ve been thinking about how to respond to a thoughtful commentary on climate and energy by Jesse Jenkins of The Breakthrough Institute, who blogs as Watthead, Jesse and I serve on the blogger board for The Energy Collective, a website that attracts people who are interested in the nitty-gritty of energy and climate policy. It’s a good place to keep up with people like Joe Romm and Robert Stavins.

In his post, Jesse argues in his post that a cap-and-trade policy or carbon tax designed to “put a price on carbon” – that is, to raise the cost of burning fossil fuels – won’t do nearly enough by itself to reduce greenhouse gas emissions and respond meaningfully to the threat of climate change. That’s because any policy that drives prices high enough to discourage people from burning coal and oil will, by definition, be politically unpopular. Jesse writes:

The ultimate effectiveness of a strategy premised centrally on an effort to make dirty energy more expensive will always be limited by this fundamental reality of the political economy of energy — which we at the Breakthrough Institute have dubbed “Global Warming’s Gordian Knot.” If the price of carbon must rise too high to drive emissions reductions, various cost containment mechanisms or public backlash will kick in — either of which effectively abrogates the emissions cap. Yet if we constrain the price of carbon, it will have very little impact on emissions absent a steady supply of low-cost emissions reductions opportunities.

Instead of trying to make dirty energy expensive, Jesse argues, we need to make clean energy cheap. This requires what he calls “a coordinated, well-funded and effective strategy to accelerate clean energy innovation and drive major improvements in the price and performance of clean energy technologies.” Yep, that means lots of government spending, perhaps $50 billion a year.

What does this have to do with Taleb? I’m wary of trying to summarize his worldview but Taleb essentially argues that we know a lot less than we think we know. “My major hobby,” he writes on his website, “is teasing people who take themselves & the quality of their knowledge too seriously & those who don’t have the courage to sometimes say: I don’t know….”  In essence, Taleb says we are not very good at understanding the past or present – his first book was called Fooled by Randomness–and that we are downright horrible at predicting the future. (Although he sort of predicted the global financial meltdown.)

I don’t know what Taleb thinks about climate policy or, for that matter, climate science, but I suspect that he would not have much enthusiasm for a federal government effort to spend $50 billion a year to research and commercialize technology to make clean energy cheap. None of us know  how to make clean energy cheap, and the government has a pretty poor track record of picking marketplace winners.

Here are several examples. In 1980, President Carter signed legislation to establish the U.S. Synthetic Fuels Corp., to find ways to create alternatives to petroleum and promote energy independence. It flopped, of course, and one reason why is that it got caught up in pork-barrel politics. “Fuel-cell projects under the SFC, for example, were allotted to each of the 50 states, regardless of economic viability,” according to a book called “The Government Role in Civilian Technology,” by the National Academies of Science and Engineering and the Institute of Medicine.

Not long ago, Congress gave us FutureGen, the “public-private partnership to design, build, and operate the world’s first coal-fueled, near-zero emissions power plant, at an estimated net project cost of US $1.5 billion.” Well, good luck with that. An environmentalist pal of mine likes to refer to FutureGen as NeverGen.

More recently, we had the biofuels mandate in the 2007 energy bill, which was a boon to Midwest farmers and the corn ethanol industry, at least until oil prices dropped last year and big ethanol refiners went bankrupt. The politics of biofuels are incredibly complicated – the mandate was opposed by environmental groups like Friends of the Earth and by oil-state Republicans – but figuring out which biofuels make economic and environmental sense and which do not is no job for Washington.

Only markets will do that.

Now let me be clear. I am not arguing that venture capitalists or energy startups or academics or big oil companies are any smarter or more capable than U.S. Senators or DOE researchers. What I am saying is more voices (i.e., the market) are better than a few (politicians and civil servants). The way to make clean energy cheap is to create a market that promotes as much tinkering and experimentation by as many people are possible (crowdsourcing, if you like) and not by giving the government $50 billion a year to spend. Nobody knows today how to make clean energy cheap. Together we may be able to figure it out.

Best as I can tell, the best way to unleash that experimentation is with cap-and-trade or a carbon tax, by making dirty energy expensive. Ideally, by making it very expensive. This is logical and just. So long as we allow the fossil fuel industry to dump global warming pollutants into the air at no cost, that’s what the industry will do, and future generations will pay a terrible price. Better to pay more for electricity and gasoline today, right?

The question remains, how can environmentalists and their political allies persuade people to pay more for fossil fuel energy in the short run? Americans haven’t been very good lately at making sacrifices today for the sake of future generations. But with the right leadership, that can change.

One way to begin is to get our metaphors right, as Steven Chu, the new energy secretary, has argued.

Some people have said the clean energy revolution will require a national effort like the Manhattan Project or the Apollo project to send a man to the moon. Wrong—those were government-funded efforts, involving small numbers of people, aimed at a very specific goals.

Here we have a much broader goal—cheap clean energy—but no clear path to get there. Will it be wind, solar, wave or geothermal power, or clean coal, or nuclear power, or all of the above? What we need—and all credit to Chu for this metaphor—is something more like the mobilization of the U.S. economy during World War II, which involved everything from Victory Gardens (local food!) to energy conservation (“Don’t Travel—Unless Your Trip Helps Win the War”).

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Put simple, the best way to untie the Breakthrough Institute’s Gordian Knot is with politics. We need to persuade people that it’s worth paying more for dirty energy today to save the planet for our kids and grandkids.

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Google’s favorite car company

March 25, 2009

Think about the aerodynamics of jet plane, a sailboat and a minivan. When we build things to fly through the air or propel us through the water, we design efficient vehicles. Not so with cars.

Aptera, an auto company startup, aims to change that. In just three years, the Carlsbad, Ca.-based firm  has designed and built a remarkably sleek and snazzy three-wheeled, two-seat electric car.

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“If a plane looked like an SUV, it wouldn’t take off, “ says entrepreneur Bill Gross, who is a founder and board member of Aptera. “Dophins don’t look like SUVS for a reason. Cars need to look like dolphins, not SUVs.”

Here are a couple of videos showing the car, one from ABC News and another from Popular Mechanics.

The Aptera is “the most aerodynamically efficient vehicle ever,” says Gross. By contrast, according to the company, an average car traveling at 55 mph uses half of its energy just to push air out of the way.

If you pay attention to business, you’ve heard of Bill Gross. He’s a lifelong entrepreneur and the CEO of Idealab, the incubator for new businesses in Pasadena, CA. Bill has birthed spectacular successes and  big flops, among them Knowledge Adventures (educational software, now part of Vivendi), Picasa (photo sharing software, acquired by Google), eToys (an online toy store that overextended itself and failed) and CitySearch (local directories.) Idealab’s GoTo.com introduced the idea of paid search to the Internet, and as such is the underpinning of the $20-billion search market now dominated by Google.

So it’s fitting that Gross is currently doing lots of business with Google. Google is an investor in eSolar, a utility-scale solar thermal power company that recently announced big projects in India and in the Southwest. (You can listen to an interview that I did with Bill Gross about the solar projects and about Aptera at Greenbiz Radio at www.greenbiz.com.) Google has invested in Aptera, too, and it turns out that the company’s beginnings go back to a  Google search.

As Bill tells the story, he was doing some casual research on the Stirling Engine a few years ago when he stumbled across a web page created by Steve Fambro, the founder and now chief technology officer of Aptera. Fambro, an electrical engineer, had posted a design for a vehicle that would be safe, comfortable and fuel-efficient; his initial idea was to make kits so people could build the car themselves. Gross was impressed by the idea of a super-efficient car. “Your dream is my dream,” he recalls saying.“Let’s get together and start a company.” They joined forces with Chris Anthony, who is CEO of a company called Epic Boats (they build wake boats) and an expert in composite materials.

Using computer-assisted design, Aptera’s engineers went on to design a car that weighs just 1,700 pounds with a body made from an impact-resistant material that is lighter than steel but three times as strong.  The car will run 100 miles on a single charge and it’s got some nifty features, including butterfly-styled doors that pop open and a solar-assisted climate control system. Its top speed is 90 mph and it goes from zero to 60 in less than 10 seconds.

“The car is very unusual looking,” Gross says.  “It looks like a futuristic Jetson  vehicle.  But we feel that that’s what it takes to actually make an impact on our energy use and transportation.”

Aptera, which is based in Vista, CA., began taking orders for the cars from California residents at the end of 2007. “Very quickly, we got 4,000 pre-orders,” Gross says. Buyers put down a $500 deposit. The entry-level price for the car is expected to be about $25,000.

Last summer, Google.org announced that it had invested a total of $2.75 million Aptera and a company called ActaCell that makes lithium ion batteries for plug-in hybrids and electric cars. Google didn’t say how much money went into each company but it’s not a lot of dough in any event. Aptera has also raised money from Idealab, Esenjay Petroleum, The Quercus Trust and from Donald R. Beal, the retired chairman and CEO of Rockwell, about $30 million in total. But the company obviously needs a lot more to go into production. Last year, Paul Wilbur, a career automotive executive who worked for 26 years at Ford, Chrysler and a sunroof maker called ASC, was brought in as president and CEO.

Only five of the cars have been built, so far.

Gross tells me he expects to raise the cash in a few months. “Most people would not want to invest in a new car company at a time like this,” he says, “but investors are quite warm to this.” We’ll see.

The U.S. government is a potential source of funding for electric car and battery companies, through the Department of Energy’s advanced technology loan fund. But Aptera has run into a brick wall in Washington. Apparently the government has classified the Aptera’s vehicles as motorcycles, and they aren’t eligible for loans.

I’m delighted that Bill Gross (below) will be at FORTUNE’s Brainstorm Green conference about business and the environment in April, to talk about both eSolar and Aptera. Here’s a chart comparing Aptera’s aerodynamic drag to other vehicles. It’s hard to see, I know, but the company says Aptera is more aerodynamic than a 10-speed bike and 2.86 times more aerodynamic than a Prius.
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McKinsey: The next oil shock

March 23, 2009

Two-dollar a gallon gasoline is one of the few brights spots for consumers during this economic slump. Evidently, people expect cheap gas to be with us for a while. The Wall Street Journal reports today that small cars like the Honda Fit, Toyota Yaris and Chevrolet Aveo have all but stopped selling. Says one dealer: “We’re big people and we like big cars.”

That could be a big mistake. Cheap gas prices probably won’t last. So, at least, says a new report from the McKinsey Global Institute, called Averting the Next Energy Crisis: The Demand Shock. While energy demand will stagnate during this recession, the report says, the world will need more coal, oil and gas once the global economy recovers. And, while the supplies of coal and gas appear to be plentiful enough to prevent long-term price inflation, McKinsey expects demand for oil to outpace supply, thereby creating another oil-price shock as soon as 2010 to 2013.

“As soon as we get the economy up and running again, we’re going to find ourselves in a world when prices are going to fly up,” says Scott Nyquist, a leader in McKinsey’s energy practice.

Like most of what comes out of McKinsey, this report is smart, fact-based, packed with charts and graphs, thorough (150 pages), and neutral when it comes to policy. Here are its key findings, based on a “moderate” case economic scenario, which assumes a global economic recovery in 2010:

Energy demand will grow by 2.3% per annum from 2010 to 2020. This will happen even if, as expected, energy consumption in the U.S. and Japan remains virtually flat. Indeed, McKinsey expects energy demand to decline in some sectors, such as cars, which are becoming more efficient and in the pulp-and-paper industry, as people shift from paper to digital media. (The upside of the decline of newspaper, if you like.) Developing regions will account for 90% of the energy growth, the report says:

Emerging bands of middle-class consumers and industries in emerging markets, particularly China and the Middle East, are crossing the $5,000 per household or $1,500 per capita income threshold above which consumers and industries have historically demonstrated a strong demand for the comfort, convenience, and environmental benefits that come from using oil.

CO2 emissions will grow, but slightly more slowly, by about 2 percent a year from 2006 to 2020. Air transport, steel and petrochemicals will be the fastest-growing sectors. Again, much of the increase is projected to come from China and India—so it’s imperative for business, governments and environmentalists to do all they can to spread clean energy technology to China and India to slow that growth down.

Interestingly, McKinsey’s forecast of oil supplies is lower than those of the IEA, EIA and OPEC. Such forecasts are notoriously unreliable, depending as they do on the politics of such countries as Nigeria, Mexico, Venezuela and even the U.S. (think about the ban on drilling in the Artic National Wildlife Refuge), as well as potential improvements our ability to extract  oil. The report doesn’t attempt to forecast oil prices but it does see the likelihood of “significant volatility as the market moves from a level at which production is marginal ($30–$40 a barrel), to a level at which that new investment is marginal ($60–$80 a barrel), to scarcity pricing (above $100 a barrel) in relatively short periods.”

Is this cause for worry or government action? After all, if prices rise, people will consume less oil and turn to alternative sources. That’s how markets are supposed to work. So while the looming supply-demand imbalance of interest to people in the energy sector (as well as to car buyers), do governments need to respond?

Nyquist suggests that they do. “We have a bias as a firm to be more market oriented,” Nyquist told me. “But we also see market inefficiencies in the energy sector.” There may be good reason, he said, for government policies that are designed to encourage more prudent consumption of oil or to smooth out the probable price increases.

For one thing, demand for oil can’t respond quickly to price signals. It takes time to make buildings more efficient or turn over the fleet of cars and trucks on the road. Price spikes threaten the economies of importing nations like the U.S. What’s more, there are compelling environmental and national-security reasons for reducing the U.S.’s demand for oil, even now when prices are low.

So what can be done? McKinsey identifies a number of options, including:

1. Remove subsidies that keep oil prices low in places like Saudi Arabia, Iran amd Venezuela. The chance of this happening seems slim.
2. Increase the size limit for trucks in the U.S. and Europe. Why not? Megatrucks would mean bigger but fewer trucks on the road.
3. Improve efficiency. Particularly of cars and trucks, using either standards or tax incentives to do so.
4. Remove trade barriers to sugar-cane ethanol. A no brainer. Sugar-cane ethanol has lower carbon emissions and its price per equivalent barrel of oil is about $40. Only the corn lobby stands in the way
5. Require all cars sold in the U.S. to be flex-fuel cars. The cost is about $100 a car, and the potential benefits are great because more biofuels could be blended into the gasoline supply.

Even if we take all those steps, oil prices will rise over time. So, if you’re in the market for a car, think small.  I’m hearing good things about the new Honda Insight and the new Ford Fusion.  And I love my Honda Fit. Do yourself and the planet a favor.


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It’s the directors, stupid

March 22, 2009

Do you care who in the government knew about the AIG bonuses, and when they knew it? Do you think the AIG executives who collected bonuses deserve opprobrium? I don’t. Although the $165 (or $218) million in bonuses have become a symbol of executive compensation gone wild, pointing fingers at Tim Geithner or Chris Dodd or some AIG executive who may or may not have done a good job misses the point. It’s a distraction from a more fundamental question, namely: What have the directors of companies like AIG, Citigroup and Merrill Lynch been doing and how can they be held accountable?

Can you name a director of AIG? I didn’t think so. (Hint: one former director has a prominent role in the Obama administration.) The Citi board has gotten a more attention, and thankfully several board members will be replaced. But, as shareholder advocate Nell Minow points out in this excellent column for CNN’s website, the directors of these companies have gotten off easy. They did a dismal job of managing risk and overseeing executive compensation.

Again, though, let’s be clear on the problem. Although I happen to think that most FORTUNE 500 CEOs are overpaid, the real issue is not the absolute size of their paychecks. It’s the way in which compensation has become disconnected from performance, the way in which pay practices create perverse, short-term incentives and, most of all, the fact that board of directors cannot be reigned in by share owners in a meaningful way.

To be clear: Rich people aren’t the problem. Capitalism can’t thrive without them. We don’t and shouldn’t begrudge people who have created great companies—the Bill Gates and Michael Dells of the world—their wealth because they have made a whole lot of money for other people, including their shareholders. They created jobs and products people want. (Why people would want Dell computers or Windows is a different question…) Nor, for the most part, should we be troubled by the vast sums of money paid to movie stars or athletes or musicians who put fannies in the seats or on front of TVs. The problem arises when CEOs get paid well for failure. Here the names of Carly Fiorina (Hewlett-Packard), Chuck Prince (Citi) and Dick Parsons (former CEO of Time Warner and lead director of Citi) spring to mind.

Here’s what’s worse: On Wall Street, compensation practices promoted dangerous risk taking. As best as I can tell, the people who packaged CDOs and MBSs got bonuses each year that were tied to the number of deals that they made and the amounts of dollars involved. (Just as mortgage brokers got paid when they wrote mortgages.) It didn’t matter whether those deals made money in the long run, or whether the mortgage loans would be paid. If you pay people to make deals, they will make deals, for better or worse. As Robert Weissman of CorpWatch wrote last fall:

Wall Street players knew they were speculating in a bubble economy. But the riches to be made while the bubble was growing were extraordinary. No one could know for sure when the bubble would pop. And Wall Street bonuses are paid on a yearly basis. If your firm does well, and you did well for the firm, you get an extravagant bonus. This is not an extra few thousand dollars to buy fancy Christmas gifts. Wall Street bonuses can be 10 or 20 times base salary, and commonly represent as much as four fifths of employees’ pay. In this context, it makes sense to take huge risks. The payoffs from benefiting from a bubble are dramatic, and there’s no reward for staying out.

So what is to be done? It’s unlikely that the Obama administration will be find a way to regulate executive compensation that doesn’t lead to unanticipated and unwelcome consequences. I favor a simple solution—giving shareholders access to proxy statements, so they can nominate candidates for the board and thereby seek to replace directors who have failed on the job. By giving shareholders proxy access, the SEC can end the self-perpetuating system that permits CEOs and incumbent boards to hand-pick director candidates. Here’s an AFL-CIO website devoted to proxy access.

As for the AIG board, the director alluded to above was Richard Holbrooke, who is the state department’s special envoy to Pakistan and Afghanistan and Friend of Hillary and Bill. Holbrooke served on the AIG board from February 2001 until last July and, according to Huffington Post, he “may have earned as much as $800,000 in cash and company stock.” (The stock’s not worth much now.) From 2001 to 2005, Holbrooke was on the board’s compensation committee.

It gets worse. Holbrooke was not only on the AIG board, he was one of the “friends of Angelo” who got special treatment from Countrywide Financial and its CEO, Angelo Mozillo. (Chris Dodd was another.) Holbrooke, his wife Kati Marton and his son David  got sweetheart deals from Countrywide, which is now out of business, as Portfolio reported last year:

Holbrooke’s wife, author Kati Marton, received loans totalling $1.4 million to refinance two properties in 2002. “Look for these,” one Countrywide manager wrote in a September 27, 2002, email, alluding to Marton’s loan applications. “These loans are incredibly important to Angelo and as such they are incredibly important to us.”

The next year, Holbrooke borrowed $1.2 million to refinance a vacation home in Telluride, Colorado. Countrywide waived at least 1.25 points, or $15,000. “Per Angelo, this loan is to be at zero points,” a Countrywide manager wrote in a February 20, 2003, email. Also in 2003, Holbrooke’s son, David, and daughter-in-law Sarah received a half-point discount on a $559,500 loan, or about $2,800, when they refinanced their Brooklyn high-rise co-op, and five-eighths of a point discount on a $428,000 loan, or about $2,600, when they bought the floor above it. Neither Holbrooke nor his wife and son returned messages.

Director of AIG? Borrower from Countrywide? If we have to point fingers, let’s point them at people like Mr. Holbrooke.

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Chu: Scientist, cyclist, energy czar

March 20, 2009

The Obama administration has unveiled a $2.4-billion grant program to promote plug-in hybrid cars, which will travel 40 miles on a single electricity charge and 100 miles on a gallon of gas. You’ll rarely have to fill the tank if you don’t drive much.

The only drawback, energy secretary Steven Chu indicated, is that if you don’t run the engine much, the battery gets weak, as he learned first hand some years ago. “When I was at Stanford, I rode my bike everywhere,” Chu recalled. “I went through batteries like crazy because I didn’t drive enough.”

How cool is that? The guy in charge of America’s energy department used to get around mostly on his bike. Chu, who is slight, soft-spoken and 61–you can read a brief autobiography here–spoke this afternoon at an energy forum sponsored by the The Washington Post and Siemens. He made clear that he committed to help move the United States away from fossil fuels and towards a low carbon economy, and he argued that “science will supply us with a lot of the answers” about how to get there.

Wind power, solar power, geothermal power—they will all help slow the growth in carbon emissions, jump-start the economy and reduce our dependence on imported oil. But the future of the U.S. depends, above all, on developing its brainpower.

“We have to invest in our intellectual capability, because it is the intellectual horsepower of the country that will create new wealth,” Chu said.

That’s a welcome, if not surprising, point of view. Chu is a brainy, even geeky, physicist who shared the Nobel Prize in 1997. Hee directed the Department of Energy’s Lawrence Berkeley National Lab before coming to Washington. And he spoke passionately about the nine years he spent during his 30s and early 40s at Bell Labs, the storied industrial laboratory run by AT&T.

“When I got to Bell Labs, it was an incredibly eye-opening experience,” Chu said. “They did not hire proven winners. They hired young kids… We all grew up together.” Five of his colleagues went on to win Nobel Prizes. But the story does not have a happy ending. “Sadly, Bell Labs is no more,” Chu said. Today, only a handful of companies—IBM, Microsoft, Intel, GE, United Technologies—operate industrial labs, and they tend to focus on later stage research.

Chu spoke hopefully about a DOE project known as ARPA-E, which will invest government funds in research that could lead to breakthrough findings — but more often will not.

“The plan is to invest in high risk (projects) with a significant potential for failure,” he said. “It’s like venture capital, squared, if you will.”

The trouble is, the energy department has an unimpressive track record when it comes to spurring new technology. It’s famously bureaucratic.

Indeed, Chu made a bit of news at the event when he announced a $535 million loan guarantee to a company called Solyndra, which makes thin-film solar panels. This is a good thing—the company has an impressive technology, it can’t raise private capital in this economy without the guarantee, and its new factory in Fremont, Ca., will create 3,000 construction jobs and 1,000 permanent jobs. But if I understood Chu correctly, this is the first loan guarantee approved under a program adopted back in 2006. He said the program has been been plagued with excessive paperwork that the department is now trying to streamline. “We’re working as hard and as fast as we can,” he said. The DOE is tracking its progress at this website, www.energy.gov/recovery. It may turn out that the department needs a strong administrator and policy person more than it needs a scientist like Chu.

Still, there’s something refreshing when a cabinet secretary comes across more as a professor than as a politician. In his unassuming way, Chu showed a few slides about global warming—pine forests in British Columbia ravaged by beetles, a melting glacier in Greenland—and warned of the “potential for very serious consequences of climate change.” He said we need a World War II-like effort to conserve energy, showing a poster with the headline, “Should Brave Men Die So You Can Drive?” And he ended his talk with the famous photo of the earth taken from Apollo 7.

“There’s nowhere else to go,” Chu noted. “We really have to focus on that.”

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The Low Carb(on) Diet

March 19, 2009

You’ve probably heard of the Atkins diet, the South Beach diet and the Best Life diet. Now it’s time to consider Low Carbon Diet. It’s good for the planet, and good for your health, your waistline and your bottom line. What’s not to like?

While the impacts of agriculture and food production on global warming are complex, the Low Carbon Diet is pretty simple. You eat less beef and cheese. You throw away less food. And you try, when possible, to eat locally grown food.

This would be of no more than passing interest, except for one thing: a food service company called Bon Appetit, which operates more than 400 cafeterias in 28 states, is putting the Low Carbon Diet into practice, and it seems to be affecting the way thousands of Americans eat.

Two years ago, Bon Appetit, which operates cafeterias for Target, Cisco, eBay, MIT, Wheaton and Oberlin Colleges, among others, launched the Low Carbon Diet on Earth Day. For a day, it served no hamburgers for lunch.

More important, the company set a goal of reducing beef consumption by 10%. A year later, every site had reduced beef consumption by at least that much, and the system as a whole cut it back by 23%.

“It’s time to become accustomed to thinking of meat and cheese as ‘special food’ rather than simply as lunch and dinner,” says Helene York, the architect of the Law Carbon Diet and the director of strategic initiatives at Bon Appetit. York also runs the Bon Appetit Foundation, where her job, in part, is to spread the word about the connections between diet and global warming.

By some accounts, the food system accounts for as much as one-third of global greenhouse gas production. Some of my favorite writers—Michael Pollan, Mark Bittman, Peter Singer and, long before any of them, Frances Moore Lappe —have written eloquently about how we eat can change the world. Food has become a big environmental issue in the blogosphere. (See the Ethicurean, Sam Fromartz’s ChewsWise and Tom Philpott’s Victual Reality columns at Grist.) These conversations will shape individual behavior. But only when big companies like Whole Foods, McDonald’s and Wal-Mart get into the game will change come at the scale we need. That’s what got me interested in Bon Appetit.

Founded by a couple of chefs and based in San Francisco, Bon Appetit a division of a $20-billion-a-year public-traded British food company called Compass PLC. The company, whose slogan is “food services for sustainable future,” employs more than 500 chefs, many classically trained, who prepare meals from scratch when possible. Bon Appettit began a “farm-to-fork” initiative encouraging chefs to buy locally back in 1999, it rolled out a sustainable seafood program in 2002 (after winning the food service contract at the Monterey Bay Aquarium) and it made a national commitment to buy cage-free eggs in 2005.

York, who is in her late 40s, found her job at Bon Appetit on Craigslist. A Yale MBA, she had worked at Aetna and Citigroup, then managed a Jewish theater troupe before getting into the food business. She launched the Low Carbon Diet in 2007, with a goal of curbing the company’s greenhouse gas emissions by 25% over three years.

You can check out the diet at www.eatlowcarbon.org. It’s instructive, if not comprehensive or precise. You can see, for example, that a chicken and cheese burrito has more than three times the global warming impact of chicken noodle soup, or that a breakfast of toast and jam will warm the planet less that a bowl of cold cereal and milk.

More interesting than the diet itself is how Bon Appetit persuades its customers to change their habits. “You lead with flavor, and I don’t say that lightly,” York told me. For example: a chef named Chip Griffin, who runs a Cisco Systems café in Boxborough, Mass., created what he called “the best-tasting turkey burger in Massachusetts” for Earth Day last year. He worked at the grill station himself, touting his healthier choice. Afterwards, hamburgers went back on the menu, but the turkey burger has outsold them ever since.

This year, Bon Appetit has pledged to eliminate all air-freighted seafood, reduce tropical fruit consumption by 50 percent and reduce cheese and meat consumption by 25 percent (from the 2007 baseline). The company has also begun to measure all of the food that it throws away because when food is disposed of in landfills, it decomposes and emits methane, a potent greenhouse gas. Where feasible, Bon Appetit has set up composting programs or looked for ways to get its food scraps back to farmers who feed them to pigs and chickens.

“We’re looking at food scraps as a resource, rather than as waste,” York says.

These are solid steps, but as you dig into the environmental impact of food, things get complicated in a hurry. Measuring the carbon footprint of the food on your plate is an inexact science. Is it better to buy local or buy organic? Are farmed shellfish sustainable—or not?

No ordinary person can be expected to sort out all those choices, but they matter. Which is why we need more companies like Bon Appetit to guide us.

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When money doesn’t talk

March 17, 2009

Million-dollar bonuses handed out by failed companies like Merrill Lynch and AIG stir outrage for many reasons—not the least of which is that they are paid, in part, with taxpayer dollars—but they have an added sting right now because, elsewhere in America, not many people are getting raises or bonuses.

Which raises a question: If companies can’t motivate people with money, how can they get the behavior they want from their people?

Here’s one answer: Instead of motivating people or trying to coerce them, companies can inspire them.

So, at least, says my friend Dov Seidman, who is the CEO of a company called LRN.

“We cannot get performance out of people through carrots and sticks,” he says. “We can inspire it in them through values and beliefs.”

It’s not just Dov saying this.

Rosabeth Moss Kanter, the Harvard Business School professor and former editor of the Harvard Business Review, has a book coming out called SuperCorp: How Vanguard Companies Create Innovation, Profits, Growth, and Social Good (Crown, September 2009). She writes about companies like IBM and Procter & Gamble “that have decided to manage through values, principles and a sense of purpose.”

Such talk may sound squishy, but it isn’t. I’ve seen people inspired by a sense of purpose and a desire to serve at a number of companies I’ve covered: They include Southwest Airlines, UPS, Timberland, Google, the theme parks at Disney and Herman Miller.

Dov and Professor Kanter spoke yesterday at LRN’s Knowledge Forum, an event for the company’s clients in Santa Monica, CA. ((Disclosure: LRN is a consulting client of mine. The company helps people do the right thing in the workplace, primarily through online courses about ethics and compliance.)

“This is the moment to turn to things that are more powerful than money. And more sustainable,” Dov said. “Values. Ideas. Optimism. Inspiration.”

He talked about Google and its famous mission—“to organize the world’s information and make it universally accessible and useful.” Now there’s a reason to get up in the morning and go to the office.

It reminded me that Jeff Immelt, CEO of GE, has said that the biggest payoff of GE’s eco-magination effort was that it made people feel better about working for GE.

The trick is to connect people who work at a company–no matter what they do–with the company’s efforts to solve problems that matter.

Kanter told a story about P&G, which developed a product called PUR that was designed to make water safe for drinking in the developing world, where tens of millions of children die each year because they lack access to clean water. PUR was sold in tiny sachets, at a low price but “it was very hard to sell,” she said. People didn’t make the connection between the product and the health of their children. PUR was losing money, she said, but P&G felt an obligation to make it available. So the company set up a nonprofit in cooperation with NGOs like Care and World Vision and with USAID, in an effort to get the PUR packets into the field. You can read the rest of the story  at a terrific website, Children’s Safe Drinking Water.

“These creative partnerships,” Kanter said, “were a result of having a company shaped by purpose, values and principles.”

Here’s a final example of people being inspired by coming together to accomplish something big and important: Wikipedia. Yesterday morning, I took a run along the Pacific Ocean  and listened to a terrific podcast from EconTalk in which the host, Russ Roberts, interviewed a founder of Wikipedia, Jimmy Wales. Wales talked about many things—the Hayekian influence on Wikipedia, whether kids should use it as a research source (yes, so long as they are still in elementary school), its reliability (good) and its growth (slowing a bit).

I came away impressed, more than anything else, by the sheer scale of the volunteer effort that created Wikipedia, which has nearly 2.8 million articles in the English edition alone, all created by people writing without pay.

“It’s been a good ride,” Wales said.

Roberts asked him to elaborate a bit. Wales replied: “Where it hits me most is when I’m traveling. Just last week I was in the Dominican Republic touring community technology centers in the poorest areas… There were kids there using the Internet and they use Wikipedia every day. Kids living in shacks with tin roofs who would otherwise have very little access to knowledge and education. That’s really rewarding.”

Wales, who is 43, started Wikipedia in 2001 after a failed attempt to create an online encyclopedia using a centralized structure in which all the entries were assigned and vetted. By opening up the process—tapping into people’s passions and their desire to make a contribution—he made possible the creation of something bigger and better than anyone could have imagined.

Why don’t more companies generate passion like that from their people? I can’t imagine a more sustainable source of competitive advantage.

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High-flying Dov

March 16, 2009

Since leaving FORTUNE at the end of last year, I’ve thought a lot about how to spend my most precious asset—my time. Happily, I’ve had choices, and so as I sift through them, I’m looking for work that will (1) make a difference in the world (2) enable me to keep learning (3) be fun and (4) pay the bills and, ideally, replenish my downsized 401-k. I also want to work with people whose values I share. Yes, I know, that’s a lot to ask, especially in these dismal economic times.

Yet that’s what led me to Dov Seidman. Until recently, I’d never met Dov and I was only vaguely aware of his company, LRN. Tom Friedman writes about Dov in The World is Flat and he has devoted a couple of columns to Dov’s 2007 book, HOW: Why How We Do Anything Means Everything…In Business (And in Life). This Friedman column, Why How Matters, explains why HOW is relevant to the financial meltdown:

Seidman basically argues that in our hyperconnected and transparent world, how you do things matters more than ever, because so many more people can now see how you do things, be affected by how you do things and tell others how you do things on the Internet anytime, for no cost and without restraint.

“In a connected world,” Seidman said to me, “countries, governments and companies also have character, and their character — how they do what they do, how they keep promises, how they make decisions, how things really happen inside, how they connect and collaborate, how they engender trust, how they relate to their customers, to the environment and to the communities in which they operate — is now their fate.”

Last year, LRN acquired the sustainability consulting firm, Green Order, whose CEO, Andrew Shapiro, is a friend. At Andrew’s suggestion, I met Dov last month in New York.

We hit it off right away. We share some fundamental beliefs—essentially, the idea that the most principled businesses are also the most profitable in the long term. That’s been at the core of my writing for nearly a decade. For his part, Dov, who is 44, started LRN in 1994 and turned it into a successful company that has helped millions of employees, managers and leaders do the right thing in the workplace. Privately-held LRN has 350 employees, with headquarters in Westwood, Ca., and offices in New York, London and Mumbai.

LRN’s core business today is online courses—750 of them in 50 languages—that help companies make responsible business conduct a part of their everyday practice. “At LRN, we apply philosophy, especially ethics, to the rough and tumble world of business,” Dov says. “In so doing, we help workers do the right thing.”

Philosophy? That’s not a word you hear a lot in corporate America. But the study of philosophy helped shape Dov, whose personal story is unusual. Dov was raised by a single mom in a bunch of places–San Francisco, Tel Aviv, Jerusalem, and Los Angeles—and for years he struggled in school.

“My high school transcript boasted A’s: two of them, in Phys Ed and auto shop,” he joked, when he gave the commencement address at the UCLA in 2002. His SAT scores never topped 1000. Only later did he realize that he was dyslexic.

But he wangled his way into UCLA, and then stumbled into a philosophy class because other courses were full. It was a good fit for a kid who didn’t like reading. “By rewarding me for the careful consideration of one idea instead of reading hundreds of pages of text, philosophy helped me conquer dyslexia,” he says.
Philosophy and ethics became his passion, and he went on to earn a B.A. and an M.A. in philosophy from UCLA, a B.A. in philosophy, politics and economics from Oxford (where he captained the Balliol college crew team) and a law degree from Harvard. Not too shabby.

Soon after leaving Harvard, Dov started LRN as a way to make legal research more widely (and democratically) available, to explode some of the mystique created by the guild of lawyers who like to overcomplicate what they do. LRN—the initials stood for Legal Research Network—began as a subscription business, offering legal research to companies for less than it would cost them to hire their own counsel. This was a disruptive idea. An article about LRN in The Wall Street Journal ran under the headline: “Law Firm Fat Threatened by a Lean Network.”

LRN has evolved since then, from helping companies solve legal problems to helping companies prevent them through better ethics and compliance. Now Dov wants to take LRN to the next level, by helping companies “inspire principled performance.” He’s passionate and energetic about achieving that goal because he knows that companies with a sense of purpose and a great culture don’t have to worry about compliance because their people will be inspired to do the right thing.

I’m helping Dov and LRN with a variety of projects. Today, I’ll participate in LRN’s Knowledge Forum, a meeting of the company’s clients where they will talk about business, values and performance. I’m hoping to find ways to turn my knowledge of corporate responsibility and sustainability into online courses. I may lend a hand at Green Order.

Over time, Dov, LRN and I plan to develop a website about business, values and sustainability. Building off the title of Dov’s book, we’ll try to explore HOW to lead a great business, inspire people, make money and make the world a better place. My hope is to make HOW online a place where people will come to read relevant news stories, be exposed to fresh ideas and connect with others. We’re obviously going to need lots of help, so I will be calling on people I know in the corporate and NGO worlds to solicit advice, ideas and contributions. I’m going to try to make it easy and worthwhile for thoughtful, caring business people to contribute to the website and collaborate with us.

LRN is not a full-time commitment for me. I’m going to keep blogging, writing, speaking and consulting, all of which I’m enjoying. But it’s a big commitment. And I am fully committed to making it a big success.

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SC Johnson: Coming clean

March 15, 2009

As a runner, I’m a fan of GU energy gels, including a flavor called “Tri-Berry.” The ingredients include many things…

MALTODEXTRIN (GLUCOSE POLYMERS), FILTERED WATER, FRUCTOSE, GU AMINO ACID BLEND (LEUCINE, VALINE, ISOLEUCINE, HISTIDINE), NATURAL AND ARTIFICIAL BERRY FLAVOR, POTASSIUM AND SODIUM CITRATE, GU ANTIOXIDANT BLEND (NATURAL VITAMIN E AND VITAMIN C), CALCIUM CARBONATE, FUMARIC ACID, SEA SALT, SODIUM BENZOATE, POTASSIUM SORBATE, GU HERBAL BLEND [CHAMOMILE, COLA NUT (HAS CAFFEINE), GINGER], CITRIC ACID, PECTIN

…but only a passing reference to berries. Tri-Berry, indeed.

What’s inside the stuff we buy? Even when it comes to food, it’s hard to know. (Fumaric acid? Cola nut?) As for other things—including the household products that we breathe and touch, like cleaners and air fresheners, the ingredients are usually a mystery.

SC Johnson Co., the $8-billion a year, privately held company that makes Windex, Glade, Shout, Off!, Pledge, Raid and Ziploc-branded product for the home, is going to change all that in a big way.

Last week, SCJ made a couple of announcements that are likely to shake up the home cleaning industry.

First, the company says it will disclose the ingredient in all of its home cleaning and air care products. This includes products with fragrances—which, up to now, have been closely held secrets because the fragrance industry had argued that it needs to protect confidential business information.

Second, SCJ says it has told its fragrance suppliers to stop using a controversial category of chemicals known as phthalates. Right now, SCJ cleaning and air freshener products include a phthalate called DEP.

Let’s take these one at a time, because each is interesting in its own way. (That’s also why this post is longer than usual…)

The disclosure issue, which has been roiling the household products industry, leapfrogs SCJ over its biggest mainstream competitors. (Seventh Generation, a smaller company that makes natural household products, has led the way on disclosure issues for years, driven by its pioneering CEO, Jeff Hollender.) While the home products industry has adopted a right-to-know initiative that calls for household product firms to list ingredients on either a label, or a website, or an 800 number, SCJ says it will make its information available in all of those ways. You can checkout the website at www.whatsinsidescjohnon.com.

More important, SCJ will  list all of its ingredients—an unprecedented move. By contrast, the industry-wide plan makes an exception for a category called “Fragrances, dyes and preservatives,” again, because of the concern about business secrets.

Kelly Semrau, who is vice president for global public affairs at SCJ, told me last week that the company had come up with an ingenious solution to the fragrance industry’s resistance: Instead of listing ingredients specific to each product, the company will publish a comprehensive list of all of its fragrance ingredients so consumers know what could be potentially included in the products they buy.

A “palate approach,” she calls it: “We’re rather put all the ingredients up there, and begin a dialog with stakeholders, than have it be a black box.”

In a company press release, Erin Thompson Switalski of an environmental health group called Women’s Voices for the Earth is quoted as saying: “SC Johnson just raised the bar for the entire cleaning products industry.”

The phthalate decision will also increase pressure on competitors to follow suit.

Several advocacy groups–notably the Environmental Working Group—have been campaigning against phthalates with scary newspapers ads and websites like www.nottoopretty.org. that point fingers at brands like Arrid Extra Dry and Poison perfrume (“For baby, it could really be poison”) and Arrid Extra Dry.

The FDA and European regulators have approved the use of phthalates, the chemical industry says they are safe—and so, apparently, does SC Johnson. But Fisk Johnson, the company’s chairman and CEO, asked his scientists whether they could reformulate their products to eliminate phthalates.

“IF we can make our products just as good, and without the phthalates, why wouldn’t we do this?” Semrau told me. “That was the question that Fisk put on the table.”

There’s a risk, of course, of allowing scare campaigns to drive business decisions. (I’ve written about this problem when it comes to BPA and baby bottles. See Wal-Mart: The New FDA. ) Neither the media nor retailers nor ordinary consumers are trained to assess scientific research. But until we can rely on an aggressive and independent FDA and EPA to police the products we use—they have failed in the past to meet that standard–it makes sense for companies like SC Johnson to both be cautious and to stay ahead of consumer sentiment.

“We cannot walk away from science. Science should drive public policy,” Semrau says. “But when you are a consumer products manufacturer, you have to listen to consumers.”

Frances Beinecke, the president of the Natural Resources Defense Council, wrote on the NRDC blog: “What is promising to me is that SC Johnson has made this move voluntarily, after NRDC raised the issue of phthalates in air fresheners last year… The company’s response is a testament to the power of consumers to make a difference.”

I emailed Rich Liroff, the executive director of the Investor Environmental Health Network, who knows more about these issues than anyone I know, to ask him what he thought of the SCJ decision. He replied:

this represents a precautionary business judgment by SCJ that even though they believe that regulators’ judgments are on their side in terms of continued use of phthalates, the better competitive position to adopt is to side with their consumers lacking faith in regulators’ judgment and to make a focused effort with their supply chain to eliminate chemicals of concern. So rather than taking the position so many other companies have taken—“the regulators say our products and chemicals are safe” or “we are in compliance with all applicable rules and regulations”—SCJ is acknowledging that such positions are no longer adequate for consumer-facing manufacturers and retailers.

Two final thoughts. First, this issue isn’t going away. Just last week, Rich told me, a group called the Campaign for Safe Cosmetics released a report showing that that toiletry products for children contain formaldehyde. And The Walt Disney Co. released a healthy cleaning policy saying that it would take a “precautionary” approach to reducing its chemical use.

Finally, anyone who knows SC Johnson and Fisk Johnson won’t be surprised see them leading the way on an environmental issue. Back in the 1970s, SCJ took CFCs out of their products before they were banned. And at last year’s Brainstorm Green conference about business and the environment), Fisk spoke eloquently about how the company has been trying to avoid using coal-fired electricity in its manufacturing plants, turning instead to methane from a nearby landfill and wind power. I’m really pleased that Fisk will speaking again this year at Brainstorm Green.

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A Yale man’s guide to sleeping soundly

March 11, 2009

If you pay any attention to the world of institutional investing, you know David Swensen. In just under a quarter century as Yale’s chief investment office, Swensen has generated Madoff-like returns for the university – except that he made his money honestly. When Swensen, at the age of 31, left a well-paid job on Wall Street for Yale in 1985, the endowment was worth a little more than $1 billion. Last June 30, it was worth $22.9 billion.

And since then? Ouch. The endowment has lost nearly $6 million, at last count. Even great money managers have been humbled by the global financial meltdown.

In 2005, I wrote a profile of Swensen (“Yale’s $8 Billion Man“) for the Yale Alumni Magazine. I thoroughly enjoyed spending time with him—he is both soft-spoken and outspoken, a great interview, a smart and widely-admired guy who could have made a ton more money on Wall Street but instead devoted his professional life to serving a great university. We spoke again early this year for this Q&A in the alumni mag, which focuses on the economy and what it means for individual investors.

You can read the full interview here. The newsiest tidbit, which was picked up by my friend and former Fortune colleague Justin Fox on his excellent blog, The Curious Capitalist, came during this exchange about CNBC loud mouth (and Harvard grad) Jim Cramer.

Q: In the new edition of Pioneering Portfolio Management, you write: “Educated at Harvard College and Harvard Law School, Cramer squanders his extraordinary credentials and shamelessly promotes stunningly inappropriate investment advice to an all-too-gullible audience.”

A: Jim Cramer exemplifies everything that’s wrong with the advice — and I put advice in quotation marks — that is given to individual investors. Investing is a serious business. We’re talking about retirement security of American citizens, and he turns it into a game. It’s a game where his listeners lose. It’s ridiculous. These high-turnover, rapid trading strategies enrich the brokers. If you look at Jim Cramer’s approach on an after-fee, after-tax basis, the individual doesn’t have a chance.

Swensen also offers excellent advice for individual investors in the article as well as in his outstanding book, Unconventional Success. He warns against stock-picking, rails against most of the mutual fund industry. lays out his model of asset allocation and recommends index funds sold by not-for-profit companies like Vanguard and TIAA-CREF. Well worth a look…

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