I spend a fair amount of time thinking about sustainability, social enterprise, and leadership. One of the lenses that I’ve found useful in this regard is the tension between value extraction and value cultivation as I find it is at work in most economic endeavors.
A greatly simplified view: Extraction, like mining, focuses on finding and capturing value and then moving on to do it all over again. Cultivation, like farming, seeks to harvest value in a way that makes it possible to replant and harvest again from the same land. Extraction has a more short-term focus than does cultivation. Extraction is based on the assumption that there are finite value in each activity and the goal is to glean as much as possible as fast as possible. Cultivation rests on the idea that, with proper stewardship, there can be a virtuous cycle that allows almost infinite value to be created over time.
Investors tend to be extractors and the market rewards executives (who, these days, tend to be major shareholders as well if they work for public companies) for short-term results. Market players don’t care if your firm falls off a cliff tomorrow — so long as they sell the stock today. In an interesting snapshot of how equity analysts can drive short-term mania, McKinsey Quarterly recently published a chart showing that these analysts have consistently over-forecast earnings growth over the past 25 years. Analysts expect 10 – 12% but companies have delivered 6% — an over-estimation of about 100%.
Owner-operators, executives at private firms and social enterprises, and employees tend more toward cultivation: they are in it for the long haul and so don’t want to reap value to the detriment of future performance. They can be more prudent in their forecasts and profit-taking. This is a generalization in both cases but “making the quarterly numbers” is a do-or-die exercise in many public companies.
The rise of social enterprise and a heightened attention to sustainability issues, in my view, reflects a desire to reset the balance between these two forces. Cultivation was the norm in business for many years. Investors looked for income from dividends and steady growth of share price over time. This changed somewhere around 1980 with the growth of leveraged buyouts, arbitrageurs, private equity, and other variants on financial “services” that promised spectacular returns by unlocking value that was supposedly languishing in firms. Buy them up, tear them apart, lay off as many people as you can, and sell them off — the ultimate goal was to deliver immediate shareholder returns. The big shareholders, as you’ll recall, are short-term players (as opposed to average 401K-type investors saving for retirement and often using mutual funds rather than individual stocks). These weren’t activities focused on making things or delivering services but rather were pure financial plays.
There is a place in markets for quick-turn artists but it can’t be a dominant one. This isn’t an anti-profit rant; profits are essential to financial sustainability. However, just as the Earth can’t support a global population that consumes as ferociously as do Americans, our economy can’t thrive when too many people are more focused on taking out than putting in. In case you hadn’t yet guessed, I’m a fan of cultivation and I think that it is in our collective best interest to support those companies that “farm” rather than “mine” for a living. More and more firms seem to be recognizing this — and that their environmental and social impact is as significant as their financial returns. So, too, are consumers and that’s good news.
How does your organization manage the tension between extraction and cultivation?