English Homework HELP

EXPERIENCE HBR.ORG

Case Study Christopher Marquis is an associate professor at Harvard Business School. Juan Almandoz is an assistant professor at lESE Business School, in Barcelona.

The Experts

Ken LaRoe, chairman and CEO, First Green Bank

John Replogle, president and CEO, Seventh Generation

| B | HBR's fictionalized case studies present B l dilemmas faced by leaders in real companies and offer solutions from experts. This one is based on the HBS Case Study "First Green Bank: Bringing Bloom to Desert Landscapes" (case no. 9-413-073), by Christopher Marquis and Juan Almandoz. It is available at HBR.org.

Can an 'Ethical" Bank Support Guns and Frac king? by Christopher Marquis and Juan Almandoz

A s the founder and president of a new ethical bank focused on environmental sustainability. Jay

McGuane realized that he and his board needed to set guidelines about which loans to approve and which to reject on "values" grounds—and fast. In his eagerness to get the business started, he'd put the issue off. But now the bank was facing two problematic requests: one from a company involved in fracking, the other from a gun maker.

Without clear ethics rules. Jay worried that his already divided directors would fall into bitter squabbling, leading to res- ignations, negative media attention, and a flight of investors.

Ethical banking had seemed so benign when Jay had decided to enter the indus- try. Now it seemed like a hornet's nest.

A Green Vision Jay didn't need this job. At age 50, he had years of entrepreneurship behind him. He

had founded a bank in Maryland, ex- panded it to six branches and $400 million in assets, and sold it for a substantial profit. While looking for his next project, he hap- pened to see the movie An Inconvenient Truth and decided, during the sleepless night afterward, to build something mean- ingful out of his concern for the environ- ment, his love of his native Colorado, and his knowledge of banking. The result was Rocky Mountain Green Bank, a company with a mission to promote environmental stewardship.

He established himself in Colorado Springs and assembled a board of direc- tors: Four successful entrepreneurs, a lawyer, an ex-mayor of the city, a former executive in the Maryland bank, a doctor who was a school friend and sometime hunting partner, and an evangelical (and ardently environmentalist) leader of a megachurch Jay attended occasionally.

To drive home its mission, the board hired a famous architect to make the

April 2014 Harvard Business Review 123

EXPERIENCE

bank's headquarters an environmental showcase, with prototjrpe solar-power windows, a set of wind turbines, and a butterfiy roof that channeled rain and meltwater into underground cisterns.

Articles and TV segments about the building and about Jay, the returned native son and environmental crusader, helped attract local depositors and small borrowers, who'd grown disenchanted with the big national and global banks. Deposits grew at a healthy rate, but to suc- ceed financially, the bank needed to make big loans to a few strong companies. So far, that hadn't happened.

Moreover, the values-based approach was proving harder to implement than Jay had anticipated. îlifts among the direc- tors had started to appear. The first sign of confiict came up in a discussion of what Jay thought was a nonissue: a gym for employees.

"Oh, come on," Neitha Wellman said, shaking her head. "Are you going to have a personal trainer on-site, too?"

"Actually, yes," Jay said. "Two after- noons a week."

She rolled her eyes. "Since when does a gym or a personal trainer have anything to do with being green?"

An avid fly fisher and former boulder- ing champion, Neitha considered herself a pragmatic environmentalist, and she detested the idea of the "nanny state." She actively campaigned for Libertarian candidates—in fact, she had been at a rally at a mall when a shooter had gone after a Congressional candidate and the people waiting to shake his hand. A picture of her giving CPR to a wounded child, who later died, had been all over the internet, though she refused to discuss the incident.

Two other board members agreed with her about the gym, so Jay had scaled back those plans.

Twin Debates Neitha had been the one to solicit the first problematic loan application. She'd been talking to the head of a Colorado engineer- ing company that developed pumping sys-

tems used in hydraulic fracturing—frack- ing—and wanted to expand into making the polymers, emulsions, and surfactants the industry relies on. These materials, the executive said, would be significantly less toxic than those currently in use. Though ambivalent about fracking in general, Neitha had recommended that the execu- tive approach Rocky Mountain Green Bank.

But on hearing about the opportunity, Neitha's fellow directors were divided. One side touted the economic and employment

smoking in public areas were a perfect example, he said: Many of them went into effect before the dangers of secondhand smoke had been proved.

So if it looks bad, it is bad. Jay thought ruefully. Hoping for a more nuanced perspective. Jay went next to the pastor, the Reverend Clyde Dahlberg, who, to Jay's surprise, advocated a completely evidence-based approach: "Make two columns, one for adverse environmental impacts, one for the positives," he said

In some ways, it was just the type of loan the bank needed: Field Force was a solid performer, a growing source of local jobs, and a good corporate citizen.

benefits of fracking, while the other in- sisted that the risks outweighed any good that could come from it. The 300-million- year-old sedimentary rock under the Den- ver Basin in eastern Colorado contained one of the country's largest gas deposits, and a number of local engineering firms were working on solutions for drilling, in- jecting, and waste disposal. It was a growth industry, but warnings from experts about the risks of ground water contamination and seismic instability seemed to increase every day.

"Look, let's not get worked up about a loan application we haven't even received," Jay said, trying to lower the temperature in the room. "But when we are approached by a company like this one, we have to be ready. We need to be talking about how to make loans that reflect our mission."

Jay promised that he would research the guidelines other ethical companies used to make values-based decisions, so- licit opinions from each director individu- ally, and come back to the group with a proposal.

The next day, he visited the board member he knew best, Fred Keeler, a gastroenterologist. "I'm a believer in the precautionary principle," he told Jay. "It's the idea that in order to act, all you need is partial evidence—not proof." Bans on

matter-of-factly. "Figure out a way to quantify the effects, then do the math." Simple.

It was while wrapping up his meet- ing with Clyde that Jay received an e-mail from the bank's chief loan officer.

"Wow—3 million dollars," he blurted out. "What's this?" Clyde asked. Jay wished

he hadn't said anything: The e-mail was about an official application from Field Force, a large, local firm that had been talking informally with Jay about a multi- million-dollar loan to expand its business. In some ways, it was just the type of loan the bank needed: Field Force was a solid performer, a growing source of local jobs, and a good corporate citizen.

"A gun manufacturer?" Clyde asked in horror.

"A military contractor," Jay said. "A gun manufacturer," Clyde repeated.

"In the state of Colorado? After Columbine and Aurora and Arapahoe High School? You'd better not do anything on that without a board decision. I'd put it on the agenda for next week's meeting if I were you."

Changing the Subject Jay didn't share the aversion that some of his directors felt toward guns, and it seemed to him that weapons had nothing

124 Harvard Business Review A p r i l 2014

HBR.ORG

HBR.ORG Tell us what you'd do. Go to hbr.org.

to do with environmentalism. But Clyde was right about the necessity of a board discussion, so he notified the directors about the Field Force application and planned his strategy for the meeting.

"As you all know," he said to the group a few days later, "I got into this business be- cause I was excited by the environmental mission. And I think you all felt the same."

Heads nodded. "But," he continued, "the regulators

made it very clear that we were to be a profit-making bank first and a green bank second. To get our charter, we had to demonstrate that our mission wouldn't add significant costs or impose significant limits on our banking operations, that we wouldn't let the mission wag the dog. I remember telling them that even if we wanted to lend only to businesses aligned with our environmental mission, we couldn't—we'd go broke in a month.

"I'm not always happy with this situa- tion," he added. "I didn't get into this just to run another bank, but I accept it as the price to play."

Mark Lerman, Jay's former employee from the Maryland bank, provided a few facts and figures to support Jay's point:

"Green" loans—to green-certified builders and consultants, as well as landscapers, farms, nurseries, organic-food companies, and solar-energy firms—constituted only 7% of the bank's total; deposits from green businesses and from customers drawn by the bank's mission accounted for just 1.8%, the data showed.

"Probably our biggest impact on sustainability comes not through the loans we make," Jay said, "but through media coverage of our mission. By being a successful green bank—with an emphasis on 'successful'—we pave the way for more capital to flow to green causes.

"As I said last week, I think we need to create a decision-making framework so that we don't have to reinvent the wheel every time a loan application falls into what some of us might see as an ethically gray area. I've made a little progress on that front by talking to Fred and Clyde here—"

Clyde interrupted him. "With all due respect. Jay, we have one of those applica- tions on the table. It's from Field Force."

Apparently, Clyde had recruited several other directors to his position, and together they had drafted a statement categorically rejecting business from gun makers.

Clyde began to read aloud: "Point number one: The economic consider- ations..." The statement compared gun makers with tobacco companies, arguing that their stocks would quickly lose value as the public became more concerned about violence. The statement cited Cerberus Capital Management's unsuc- cessful attempts to shed its investment in the company that made the weapon used in the 2012 Newtown elementary-school shooting. Under pressure from investors, Cerberus had finally allowed clients to sell their individual stakes.

Jay was irritated. "No one would ever advocate that our military do without weapons," he said. "And as long as there's demand from the Pentagon, Field Force's stock vnll be fine."

Clyde put dovm the statement and looked at Jay. "Rocky Mountain Green Bank is supposed to be founded on ethical principles," he said. "What is 'green' if not an ethical principle? That's why we're part of the Global Alliance for Banking on Values. Last time I looked, it wasn't the 'Global Alliance for Banking on Selected Val- ues.' What would other alliance members think about our lending to a gun maker?

"You say that our main impact is through media coverage," he continued.

"What will the media say if we lend to Field Force? That certainly trumps our fancy LEED-certified office building. A loan to a gun manufacturer would announce to the world that we really have no principles and that the green thing is just a marketing gimmick. If that happens, I'll have to leave this board."

Lukas Hoenig, a board member who was the founder of a chain of environ- mentally friendly dry-cleaning businesses, cut in. "Let's be real here," he said to Clyde. "We're a green bank, but when did

we become the bank for the entire liberal agenda? Selling weapons to our military is not only legal, it's laudable. And we need the business."

"There's nothing unethical about mak- ing or selling arms that are purchased and used properly," Jay added. "I'm a gun owner myself, and so is Fred."

Looking for support. Jay turned to Neitha. She looked at him for moment and then said softly, "Jessica Belford was killed by a lightweight cartridge from an FF286."

It took Jay a few seconds to figure out what she was talking about: the girl on the ground at the mall, a weapon from Field Force.

"Sure, they sell to the military," Neitha said. "But you can buy the FF286 at gun shows. That's what makes it one of Field Force's most profitable products. Our bank's mission is sustainability. How can we have a sustainable society where military-grade guns are being used to kill children? How can we, in good conscience, do business with that company?"

"It's a no-brainer," Clyde said. "Jay was talking about establishing guidelines for decisions. I'm all in favor of weighing the pros and cons—let's do that when we discuss the shale gas loan. But when it comes to guns, there's only one guideline we should follow." He turned to Fred Kee- ler. "It's like the Hippocratic Oath, right? First, do no harm. Or how about this: Do no evil"

It was Fred who had advocated saying no to a loan if there was mere indication of harm, but now he looked conflicted. He loved his gun collection, from the flint- locks to the Uzis, as Jay well knew. Fred asked, of no one and everyone, "But what is 'harm'? What is 'evil'?"

should Rocky Mountain Green Bank deny a loan to a gun manufacturer? See commentaries on the next page.

April 2014 Harvard Business Review 125

EXPERIENCE

The Experts Respond Ken LaRoe is the chairman and CEO of First Green Bank.

IT'S TRUE that gun proliferation isn't an

environmental issue. But having joined

the Global Alliance for Banking on Values

and staked its claim as an "ethical" bank.

Rocky Mountain Green Bank has to do

more than simply promote "green" causes.

A loan to Field Force would suggest that

the bank's position Is indeed just a market-

ing gimmick, instead of saying yes, the

bank should affirm its commitment to a

broader set of values.

That's what we've done at First Green

Bank. While we emphasize environmental

sustainability, our mission statement refers

to "social responsibility"—a much broader

concept. As a result, our loan decisions

can be quite challenging.

When the issue of guns first came up,

we wrestled with it. (This fictionalized

case is loosely based on our experience.)

Uke Field Force, the manufacturer that

wanted a loan from us was (and still is)

a well-run company with great financial

fundamentals. About half of our senior

loan committee considered it a terrific

prospect and believed we should approve

the application. The other half—myself

included—thought that the company's

output of semiautomatics and ammunition

for those types of firearms was ethically

repugnant.

In the end, we were saved by circum-

stance: Another bank grabbed the business

by offering the manufacturer a loan at a

much lower rate.

it's OK that some sectors are off the table for us, because that's what being an ethical bank is all about.

when our bank was very small, ad hoc

decision making was fine. But as we've

grown, we've seen the value, as Jay Mc-

Guane does, of having a set of guidelines

to which everyone can refer. We explicitly

decided, for example, that we're not going

to lend to companies in the extractive

industries or to gun manufacturers.

In some cases, this doesn't have a big

impact on our bottom line; in others, there

are definite economic consequences.

Florida, where we're based, has a good

amount of mining, and a new pipeline for

fracked gas is being considered. But it's OK

that some sectors are off the table for us,

because that's what being an ethical bank

is all about. We make trade-offs on the

WHAT WOULD YOU DO?

SOME ADVICE FROM THE HBR.ORG COMMUNITY

ROCKY MOUNTAIN Green Bank should do whatever its sharehold- ers want it to do. "Ethical" is in the eye ofthe beholder, so there is no objective standard to apply to the question of which potential custom- ers are mission-appropriate. The challenge is to find out what share- holders want. Gary Phillips, CEO, Republic Finance, LLC

THE BANK should be able to succeed by operating only in the industries it deems ethical. There are many segments this bank could lend to that would not disrupt the green vision. Choosing to focus on fewer industries will increase credit risk, but with proper management and oversight, the risk can be managed. Justin Evenden, credit union director

basis of our mission to do the right thing

for the environment, our people, our com-

munity, and our shareholders.

We realize, too, that it's important to

build flexibility into our guidelines. We

might, for example, consider lending to a

company that manufactures only high-end

shotguns used exclusively for trapshooting.

Real estate is another sector that

prompts serious debate. As the central

Florida market heats up, we expect lots of

requests for loans to support the kind of

slash-and-burn development that hurts the

state's delicate ecosystems and contrib-

utes to sprawl. If we flatly say no, we'll be

rejecting a steady stream of revenue, and

other banks will support the projects.

Our hope Is instead to say yes to devel-

opers willing to make their projects more

environmentally responsible. We'd like to

help them find the right architects, teach

them to use solar and other sustainable

technologies and practices, and influence

their thinking for the future.

Rocky Mountain Green Bank should

consider saying yes to companies that are

receptive to guidance and assistance on

sustainablllty and other ethical issues. But

if the loan requests come from corpora-

tions that are clearly set in their ways, then

saying no is the only option.

ROCKY MOUNTAIN Green Bank should accept business from a fire- I arms manufacturer. The real ques- " tion for an "ethical" bank in Colo- rado is whether it should accept deposits from, and provide services to, a marijuana retailer. Kenneth Mitchell, software engineer

126 Harvard Business Review April 2014

HBR.ORG

John Replogle is the president and CEO of Seventh Generation.

THE RESPONSE to Field Force's loan

request should be obvious. Jay McGuane

founded Rocky Mountain Green Bank on

ethical principles and enrolled it in the

Global Alliance for Banking on Values. His

intention to create a bank that's a positive,

progressive force in society is crystal clear.

Given all that, he has no business even

wondering whether to lend to a maker of

semiautomatic weapons that find their

way to the street. Yet he's stuck. Why the

disconnect?

Two reasons. The first is that he has

shortcomings as a leader. In his hurry to

get the bank up and running, he missed a

crucial step: He didn't clearly define the

company's purpose. He didn't articulate

his vision and principles. Every company

needs to know its reason for being in busi-

ness, and his doesn't.

This leadership gap is evident in Jay's

interactions with the directors. He bounces

questions off them, trying to weave a path

between opposing sides. That's not what a

leader does. And he allows himself to be

dominated by the regulators' requirements.

The legal stipulation that Rocky Mountain

Green Bank be a profit-making organiza-

tion first and a green bank second doesn't

mean that Jay always needs to choose

profits over people. Once he starts doing

that, he'll find that he can rationalize any

decision. He'll destroy what was supposed

to have been the core purpose of the

organization. He would have been better

off establishing his bank as a "B corpora-

tion": an entity that focuses on social and

environmental performance, accountability,

and transparency as well as profit. Several

states, including Colorado, have passed

legislation allowing companies to choose

that designation.

The second reason forthe disconnect

is that Jay built the wrong board. His

directors are divided over ethical issues.

That's a huge handicap for a values-based

organization. The board is supposed to be

the company's North Star, looking beyond

short-term needs and providing unified

guidance on strategic issues.

So his next moves should be first to

clearly define his company's purpose and

principles and then to reboot the board.

In my view, the more explicit the purpose

and principles, the better. Companies with

clear guiding principles tend to stay out

of trouble. Lookatthe value of John-

son & Johnson's credo during the Tylenol-

poisoning crisis in 1982. The company

had explicitly determined that it would

prioritize the needs and well-being of the

people it serves, so it decided to do a

recall, despite the cost. The decision pro-

tected the company's reputation, brand,

and business.

Over time, the bank's vagueness about where it stands on ethical issues will erode its relationship with customers.

Jay can then use the purpose and

principles to recraft the board. Half of the

directors need to go. In his search for re-

placements, he should establish selection

criteria and seek the help of a corporate

recruiter who truly understands his goals.

Jay shouldn't rely on friends and acquain-

tances this time around—that's not the way

to build a professional board.

In the long run, the lack of clear prin-

ciples is going to hurt Rocky Mountain

Green Bank. We live in a transparent world.

Consumers are looking at companies'

principles and values and voting on them

with their wallets. Over time, the bank's

vagueness about where it stands on ethical

issues will erode its relationship with cus-

tomers. Jay's idealism will be for nothing,

and his bank will become a story of good

intentions gone bad. 0

HBR Reprint R1404L

Reprint Case only R1404X

Reprint Commentary only R1404Z

Oxford Leadership Programmes Join a truly international peer group to enhance your development.

Strategic Leadership Programme 11-16 May 2014

Advanced Management and Leadership Programme 8-28 Jun 2014

High Performance Leadership 18-23 May 2014

For more information about our programmes, please visit:

www.sbs.oxford.edu/ openprogrammes2014

OXFORD

Harvard Business Review Notice of Use Restrictions, May 2009

Harvard Business Review and Harvard Business Publishing Newsletter content on EBSCOhost is licensed for the private individual use of authorized EBSCOhost users. It is not intended for use as assigned course material in academic institutions nor as corporate learning or training materials in businesses. Academic licensees may not use this content in electronic reserves, electronic course packs, persistent linking from syllabi or by any other means of incorporating the content into course resources. Business licensees may not host this content on learning management systems or use persistent linking or other means to incorporate the content into learning management systems. Harvard Business Publishing will be pleased to grant permission to make this content available through such means. For rates and permission, contact [email protected].