Monthly Archives: March 2012

Shale Gas, Drinking Water, and Business Ethics: Part I

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The Katz School, like all AACSB-accredited business schools, has an obligation to provide education in the area of ethics. The obligation is intended to ensure that students are prepared for the full range of issues and circumstances they will face in their career. Business educators hope that exposure to ethics education will aid students in making honorable decisions.

Ethics issues arise in many subtle ways. It is rare that ethics questions are crystal clear. Usually they involve making decisions that benefit the organization and possibly have negative effects on some stakeholder.  Balancing the positive and negative effects is difficult – often because managers may tangibly benefit from certain decisions.  I published a study many years ago in Across the Board magazine (October and November 1990 issues) reporting the responses of a variety of national leaders to ethics questions that had been submitted by alumni of the Columbia University Graduate School of Business. The responses illustrated that ethics decisions are often complex and can lead experts to provide conflicting advice.  Since I believe that education must provide a practice field for students – some portion of the practice must be devoted to difficult questions of business ethics. This is the first of multiple posts on business ethics. I will post Part 2 potentially after I receive some comments on the scenario presented below. 

Today is an ideal time for the Katz School to give attention to business ethics.  Western Pennsylvania is in the midst of a gold rush of sorts.  Our gold is a gas that permeates the shale comprising much of our state. The natural gas trapped in the Marcellus and Utica shale layers under our feet has generated massive investment from energy companies seeking to use new drilling technologies to release the gas. Our energy independence requires us to have confidence in the hydraulic fracturing technique (fracking) employed to release shale gas and to believe that fracking will not pollute our water or otherwise harm residents.

Before continuing, I offer a tangent to help put the issue in perspective. Recall the tobacco industry and the scrutiny its executives received in the 1990s.  On April 18, 1994, seven tobacco company CEOs testified before a Congressional Committee that nicotine was not addictive. Since then, those CEOs have been criticized – and called many names, such as the seven dwarfs – especially after revelations of internal industry research indicating nicotine’s addictive power and the industry’s awareness of it. The circumstances led the tobacco industry to enter into settlements with most states to provide money for treatment of smokers. The view expressed by the CEOs was consistent with other tobacco industry arguments that no one could prove that cigarette smoking caused cancer.  Keep this in mind:  It is indeed very difficult to prove causality.

This issue of causality is important today in Pennsylvania. With the advent and perfection of fracking, it has become possible to extract the natural gas in shale formations in an economically viable way. So far, much drilling has taken place in Pennsylvania and even more controversy has emerged regarding the safety of fracking and whether the state’s water supplies are endangered because of this drilling approach. Most famously because of the movie Gasland, which features the eastern Pennsylvania town of Dimock where some residents could light their water on fire (because of methane in the water), strong public sentiment has emerged – with many people opposing fracking and many others seeking the royalties coming with gas leases. Since there is much writing and research on these matters, I refer readers to the many other sources for relevant information. Keep in mind the strongly held viewpoints and economic implications of the competing views.

My focus is on a small area of Western Pennsylvania where a controversy has arisen. After describing the situation from press accounts and identifying some assumptions and ground rules, I seek input from readers on what they would do in the situation described.

Within the past few months a dispute has developed between Rex Energy Co. and 11 families in the Woodlands neighborhood of Connoquenessing Township in Butler County, Pennsylvania. According to reports in the local media, Rex at one time provided water to the 11 families (which include 31 people and their animals) when changes were noticed in the quality of their well water after Rex began drilling for natural gas in the area. The policy of Rex is to provide water to complaining families and then to conduct testing. In this case, tests conducted by the Pennsylvania Department of Environmental Protection and an independent testing company each indicated no difference in water chemistry before and after gas well drilling. This led the company to decide it was not obligated to provide water.  People in the affected neighborhood and many others who are concerned about fracking and water quality have protested the decision. Some residents have complained about physical problems that they have experienced since fracking began. It was noted in the media that some residents have decided to pay personally for delivered water; it was estimated in one report that it cost a family about $125 per week for the water.

Now, to put things in perspective for the purpose of this post, it is necessary to make some assumptions:  (1) Fracking is a safe and effective way to extract shale gas. Note, because fracking has been used by companies for many years with relatively few reports of problems, this assumption is appropriate. When corroborated, drilling problems appear to be due to mistakes in the process and not to fracking per se; (2) the energy companies drilling for shale gas are concerned about serving all stakeholders, obeying laws and regulations, and not fouling the water; (3) the local people affected by potential water problems are legitimately concerned and not simply trying to generate a lawsuit; and (4) for various reasons, affected people have been unwilling to trust decisions made by Pennsylvania’s Department of Environmental Protection. (This means that the local governmental referee is unable to resolve the controversy.)

In light of the assumptions and the background, here is the business ethics question to consider:  Should the company provide water to the families who claim their water was harmed by gas drilling when testing suggests that the water has the same chemistry after drilling as it had before gas drilling? What would you do and why? Please be succinct.  Provide a yes or no first and give your reasons.  I will tabulate the results and post about them later.

 

 

The World is Turning in a New Direction

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I returned Thursday from a visit to our International EMBA program in Brazil.  The experience was exhilarating. I spoke at our global executive forum for students from Pittsburgh, Europe, and South America. I attended a wonderful alumni event outside of Sao Paulo, gave a speech at MacKenzie University – one of our key partners in Brazil, met with companies and business leaders, spoke to journalists, and hosted an advisory board meeting. The time in Brazil, in combination with research I did to draft my speech, convinced me that a big change is taking place.  The sun is now rising in the South. 

Much recent writing on economic activity and development has emphasized that the 21st century marks the rise of Asia and the decline of the West.  This focus is due in part to the great economic growth in China and India and the good (e.g., low cost products; rising living standards in China and India) and bad (e.g., pollution and greenhouse gas emissions; increase in commodity and mineral prices) results flowing from the change.  While observers write about the BRIC countries (Brazil, Russia, India, and China), more attention goes to the RIC countries than Brazil. This is unfortunate because a variety of reasons suggest that Brazil will be a significant economic and world leader in coming years.  For the purpose of this entry, I will focus on two factors causing the sun to rise in the Southern Hemisphere generally and Brazil in particular.  

First, Brazil’s geographic location and distance from other economic powers will be beneficial in the long run.  This view may seem odd since distance from the growing markets in Asia and mature markets in Europe and North America might seem to hinder more than help Brazil. The distance might typically be seen as making it more expensive for Brazil to trade and boost its economy relative to high-growth markets.

But the distance has advantages too.  For example, Brazil is not directly exposed to the negative externalities associated with China’s growing economy, such as pollution. Its location places it far from the instability created by the nuclear bookends – Pakistan and North Korea – surrounding Asia’s economic engines. And its relative isolation has caused Brazil to develop its energy sector in a way that emphasizes green production methods and creates near self-sufficiency in production. In fact, Brazil’s new oil reserves will likely make the nation a major energy exporter in the future.

As Brazil wires up to compete in the knowledge and web-based economy, it also has a chance to make gains in the physical economy.  Specifically, the expansion of the Panama Canal will create an opportunity for Brazil to become an even larger trading partner.   

Brazil’s geography will serve it in other ways. Discussion about the rise of Asia and decline of the West has tended to gloss over the costs and problems present in Asia. There will inevitably be fierce competition between India and China regarding the pace and nature of development and growth. Water shortages will punctuate this competition and promote regular disputes. 

As tension, competition, and externalities increase in the Northern Hemisphere, it will open opportunities for the Southern Hemisphere.  Africa is not yet ready for those opportunities.  Australia is linked tightly to Asia because of location. That leaves South America. Brazil is the engine of South America.  While many South American nations have governmental instability, inadequate infrastructure, ineffective economic policies, and educational insufficiencies, their problems are more tractable than those in the north.  Thus, many observers writing about Asia are missing the sun rise in Brazil. The serious problems in the Northern Hemisphere presage a shift, in which the sun rises in the south and sets in the north.

This monumental opportunity for Brazil contains an embedded challenge. The Brazilian people must develop stronger skills to take advantage of the new sunshine. The new sunrise will be a limited opportunity for those unprepared for a competitive global economy. Brazil must improve its educational system or import skilled workers from other parts of the world or follow both strategies.  New thinking and skillful management will fuel Brazil’s advance.

Second, a visit makes it evident that Brazil has developed as a multicultural nation and is open to people of all races, religions, and ethnicities. Although the situation has caused inequality and tension, it is well known that friction is a stimulant of innovation and creativity.  As a result, Brazil is positioned to secure a strong place in the growing knowledge economy – as long as the nation’s leaders make sufficient investments to improve educational outcomes of the people. Brazil also has a strong tradition of providing service excellence, which pleases visitors and locals, and offers a path into the high quality knowledge-based economy.  

The Brazil that many people see in videos of Carnaval and photos of Rio de Janeiro represents the flower of the nation’s natural beauty, sense of fun, work ethic and friendliness. The opportunity to show those virtues to the world at the upcoming G20 summit, World Cup tournament, and Olympics will generate more interest in Brazil. Clearly, the Cariocas (i.e., people born in Rio de Janeiro) have much to be proud of and show off.  With that interest will come even greater opportunity. To put things in perspective in a rough physical metric, I observed almost as many cranes working on new buildings near Sao Paulo’s domestic airport as I saw last year from my hotel room in Wuhan, China.

Thus, the sun is rising in the south.  This is good news for Brazil.  It is also good news for the Katz School.  As the only major U.S. business school to offer MBA programs continuously in Brazil since 2001, Katz is positioned to continue helping the nation’s business leaders manage the ongoing transformation.  Many of our early graduates now lead and run major firms and operations in Brazil (and other parts of the world). With more than 300 alumni from our EMBA Brazil program so far, Katz looks forward to continued engagement and partnerships in Brazil. Our global efforts help Katz students get an informed view of the way the global economy operates.  This in turn, prepares all of our students to be the business leaders of the next generation. We are grateful to those in Brazil who have helped us: Obrigado!

 

 

What can Facebook Learn from Kodak?

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Recent weeks have brought major news for two icons of the business world as Eastman Kodak filed for bankruptcy and Facebook prepared for an IPO. Some might dismiss the news as an example of what Joseph Schumpeter termed creative destruction (i.e., old organizations dying and new ones emerging).  Some might see the situation as two unrelated events. Even others will stress the positive and focus on the past value generated by Kodak and the potential of Facebook as a business and economic engine in the future. In truth, there are strong lessons that Facebook could learn from Kodak.

At the time of its birth, Kodak was the paradigm of new technology. It gave people an opportunity to memorialize their lives. Over time, the company’s ads stressed the opportunity for people to find “Kodak moments” or instances in which a photograph would record an important memory for posterity. Both the medium (film) and device (camera) it marketed had unlimited potential and a global market. The potential turned into an iconic brand, which was (and is) recognized around the world. What analysts say about Facebook today is similar to the word on Kodak a century ago. At its birth, no one anticipated Kodak’s aging, decline, and possible death. Its product was revolutionary. Its management stayed focused on its core business to the end. Its profitability from film remains even today.  The problem is that people have stopped using film as the primary vehicle for recording their lives.

While none of this reduces the potential of Facebook, and an IPO will generate much wealth (and publicity) for the founders, employees, and early investors, it raises the need for caution regarding the true value and potential of social media generally and Facebook in particular.  Facebook will be profitable until people stop using it to record their lives.

Experts anticipate many developments that could expand social networking, including the creation of networks with stronger firewalls, different access rights to different levels of friends, and enterprise as well as personal applications. The digital medium is seen as enduring as people continue to share their lives. But much is unknown about how long people will enjoy this approach to friendship and whether the growing noise and clutter across many ubiquitous media channels, rising incidence of fraud and crime related to information available on networking sites, and the growing audience using social media will lead people to want something different. 

Similarly, efforts to monetize aspects of people’s Facebook lives will cause regular adjustments in policies and ensure the continuation of social complaining about the firm. When Kodak emerged, the value of photos became obvious to many segments interested in monetizing the channel. Governments wished to take better and sharper photographs of places in which the military was interested. Entrepreneurs discovered that they could make serious money selling photos that challenged the boundaries of decency. Photos soon evolved into moving pictures and a new entertainment industry was born. The point is that the technology continually evolved and was always successful when it found a niche that people wished to support. The same will be true of Facebook. But the negative surprises Kodak brought will follow the positive benefits of social networking.

It would be wise to think about the way that trends will evolve. First, Facebook, like Google, represents a quantity of experience over a quality of experience. Sharing with many friends serves vanity and pride. It also objectifies interactions with others and creates a reality show world for each to broadcast individually. It allows everyone to be an American idol. These traits could ultimately undermine the medium if people seek ways to overcome the increasing noise on the channel, and as some desensitization occurs because of constant public exposure. It is also possible that people will decide not to share so openly with others as they seek more meaning in their lives.

Second, the clutter and ironic similarity of Facebook profiles and lives will intensify interest in being different and even extreme in order to get attention. Eventually, I believe people will tire of the extreme and turn to design and simplicity across the digital medium. Elegance will become a greater virtue and this will translate to other media. It will reshape the nature of networking, allowing the timid and shy to express their voice as clearly as the outgoing and gregarious.

Third, absent self-control, the patterns of information broadcast by millions on Facebook will allow governments (and data miners) to predict people’s predispositions and use the information in good and bad ways. The more people use the medium, the more precisely network trolls will understand their conscience. This will allow ever more effective government oversight and control of the medium. The control will not emerge from countries turning off the web or Facebook. It will come from subtle strategies aimed at influencing opinion and desired government outcomes. Through sensationalism and suggestion, views will be effectively advocated.

Finally, as people perfect the brand called me, they may lose more connection with the value of community, and in so doing discover less meaning in their lives. People may discover that as everyone focuses on broadcasting their lives digitally, they lose their individuality.

When Kodak emerged as a young powerhouse, we celebrated its contributions to preserving society. As Facebook shines across the world, we celebrate its contributions to individuality. Businesses will gain and lose in the contradiction of these celebrations. Thus, the biggest lesson of Kodak is to realize that a picture does not depict society as well as we presume. And Facebook has limitations that individually seem unimportant but in combination will change the world. Understanding when those limitations will lead people to seek privacy will indicate the true long term potential of Facebook.