Sustainability & The Dilemma of the Prisoner’s Dilemma

Q4d 2005

My 12-year old daughter loves the TV show Law and Order. And she particularly likes situations involving the prisoner’s dilemma, though she doesn’t call it that. We all know the situation: Two prisoners are brought in for questioning and placed in separate interrogation rooms. The police then say to each of the prisoners “look, we know you did it. If you confess, you’ll get off lightly and will be put in jail for 4 years while your partner will get a 16-year sentence. Of course if your partner confesses and you don’t, then he will get the 4-year sentence and you’ll be there for 16 long years. If you both confess, you’ll each get 6-year sentences.” While each prisoner knows that if they both stay silent, they’ll get off scot-free, they each calculate the various options and so both decide to confess. My daughter loves getting into the psychology of it all. “But dad, what if they decide in advance . . .what if they find a way to communicate . . .,” etc.

The challenge facing how the sustainability movement hits a tipping point and goes mainstream is no different than this simple TV scenario – with a decided twist. The perceived payoffs for companies to become sustainable is skewed in a different direction.

For most companies out there today, the perceived payoff options go something like this: Company A and all of its competitors (Company B) are currently earning $5 per share. And here comes the sustainability movement telling these companies they need to get with the program, clean up their industry, reduce waste, reduce their use of nonrenewable resources, use renewable resources at rates that are outpaced by rates of replenishment. And Company A thinks, “If I do all of these things, Company B will still be earning $5 a share while, because of our costs, our earnings will drop to $4 a share. And the market will hammer us for our underperformance. And if both we and Company B do all these sustainable things, well then we all simply will be earning $4 a share. The market might then be indifferent or worse, might decide to invest its funds in other industries with better returns. So the hell with that proposition. We’ll just stay the course.”

What’s the answer? Or, as my daughter says, “Dad, what if we did . . .”

The challenge is twofold. It is proving in financial terms to the business community that the payoff for going sustainable is indeed different. And secondly it is using these metrics to change current perceptions. After all, while we believe wholeheartedly that going sustainable pays off financially, if status quo perceptions remain unchanged, then that tipping point is never going to be reached.

Here’s how our prisoner’s dilemma needs to be re-worked. We need to be able to demonstrate that if Company A moves first and goes sustainable, it’s earning will go up to, say $10 a share. And this is because Company A will not only see greater profits as a result of reduced costs, but because of certain first-mover advantages: having the advantage of being branded as a “green leader” in its industry, creating a loyal customer base that refuses to switch as other companies follow suit, having a higher retention rate among a loyal workforce that takes pride in the leadership role its company is taking, etc. However, if both Company A and Company B decide to go sustainable, the share price of both will move up to $8 a share. In this case, there will be no premium derived from being a frist-mover, but both companies will perform better because of reduced waste and reduced costs.

There is already a growing body of literature, case-studies, showing the financial benefits to sustainability, among them: Nattrass/Altomare, The Natural Step for Business and Dancing with the Tiger; Bob Willard, The Sustainability Advantage, and of course Ray Anderson, Mid-Course Correction. But we still need to do a better job of consolidating this growing body of cost-benefit studies into a readily digestible payoff table. Keep it simple.

Even improving upon how we report results (metrics) unfortunately won’t get us there. What will is a full-scale marketing effort to alter current perceptions. But perceptions and long-held beliefs about doing business as usual are tough to crack. We face this in our own business dealings every day. Unfortunately in this prisoner’s dilemma, the truth doesn’t always set you free.

Martin Melaver

CEO