CRO POV: CR Offense vs. Defense

The surprising corporate responsibility impact of private equity

By Jay Whitehead

Last week’s big sustainability business headline was that Texas’ largest utility, TXU, was pursuing a heavy lobbying program to get 11 new dirty coal-fired plants approved before the Bush administration leaves office in 2008. The news generated a firestorm among sustainability and environmental activists, lawmakers and concerned citizens. Even rival utility leaders such as Duke Energy’s CEO Jim Rogers were outspoken in their criticism of the cynical move.

Enter an unexpected group of white hats. Sunday, Feb. 25’s The New York Times front page announced that a proposed $45 billion buyout by private equity players Kohlberg Kravis Roberts and the Texas Pacific Group would dump plans to build eight of the 11 plants.

What? Why would a group of the world’s most profit-hungry private equity guys take a huge money-making opportunity off the table? Has the world gone mad?

In a word, no. But this announcement—potentially the largest leveraged buyout ever—represents a sea change in large investors’ attitudes. The shift has to do with three interrelated factors, at least two of which are directly related to the positive impact of the corporate responsibility movement.

The first factor is the law of big numbers. A buyout this large is too big to flip fast. Typically, when private equity guys take a public company private, the plan is to spiff its balance sheet up, grow it and then quickly take it back to the public markets for a rapid return-on-investment. But TXU is just too big to do that with. It is a long-term hold. We may not see it back on the public markets for a decade or longer. As a result, the investors’ thinking has to be more than short-term in nature.

Second, being a company responsible in efforts to abate climate change will be a marketable strategy long into the future. Goldman Sachs, the investment bank representing the buyers, has long been a climate change activist. The New York Times reports that the investment firm even sends its bankers home at night in hybrid limousines. As a result, the company’s long-term value would be hurt by a short-term attempt to grab profits that would harm its sustainability profile.

Third, capital hates regulatory uncertainty. Were the eight dirty coal plants to be built, they would face an uncertain regulatory future. They may be required to execute expensive environmental remediation. Or worse yet, they could face mandatory shut-down prior to the end of the plants’ effective lives.

The fact that private equity, which has generated insane wealth for its practitioners, is behind a corporate responsibility-friendly practice represents a new chapter in the history of modern capitalism. It represents the tipping point from “defensive” corporate responsibility to “offensive” corporate responsibility.

“Defensive” corporate responsibility had to do with compliance and governance, and was driven in the U.S. by Sarbanes-Oxley, federal sentencing guidelines and state regulations such as California’s AB 1825, which requires employers to execute ethics and compliance training for employees. Today, corporate spending on this sort of “defense” represents over $20 billion dollars to nearly 400 professional service providers.

But the new “offensive” corporate responsibility, in which companies use corporate responsibility practices to raise capital, sell products or recruit talent, promises to be much bigger. If TXU’s deal with KKR and TP goes through, it will create a much larger market for “offensive” corporate responsibility practices, solutions and services. And a much larger set of career and professional opportunities for CROs.