As I was reading through Suburban Nation, an excellent book on Urban Planning , I stumbled on a very well written footnote which quickly and simply explains how the cost of capital affects long term thinking in corporations. I’m going to quote liberally, because, as I said, I feel they nailed it pretty well, and admittedly my business knowledge is pretty limited.

Cost of capital, narrowly defined, is the interest rate at which money is borrowed, but it could be more accurately described as the income that could be earned on a given amount of money were it invested elsewhere. For most successful companies, this cost of capital is well over 10 percent, and in the high-risk field of real estate, it is often 20 percent. When contemplating an investment, businesses create cost-and-income spreadsheets in which all future earnings are discounted at this rate. A dollar earned next year is worth about ninety cents this year, since it could have been invested elsewhere at 10 percent.

With this logic, the cost of dollars made or saved in the future begins to sharply decline. In ten years a dollar is worth only thirty-five cents, and in twenty it’s worth only twelve. Start to go much further beyond that and it gets virtually worthless.

When looking at an environmentally sustainable investment like geothermal heating or solar panels, which need large up-front costs but can provide an overall savings when calculated over the long term, it becomes clear how cost of capital could make an otherwise sensible long-term project much less viable.

Warren Buffet is a man who got rich the hard way, by doing huge amounts of research and making investments that were looking relatively far ahead. He was, in a sense, the antithesis of the image many of us have of investors - buying and selling all the time, taking risks and getting rich quick. Buffet has been descried as a decades trader, rather than a day trader. He buys stocks and keeps them for as long as he can .

It was with some interest that I stumbled across an article Buffet wrote in 2003 about the state of the economy in the U.S., and the rising trade deficit in particular. Buffet brings a much-needed long-term perspective, and a straightforward writing style:

In effect, our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4 percent more than we produce — that’s the trade deficit — we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own.

It seems these days that you can find a study to back up almost literally any point of view. So it shouldn’t be too surprising to see a study in the IHT trying to suggest that a company’s given stock price more often decreases when they announce green initiatives.

Two professors at the Amos Tuck School of Business Administration at Dartmouth College have tracked the movement of stocks immediately after companies proclaimed their commitment to sustainability. And they found that share prices dropped much more often than they rose.

The numbers they proceed to throw around are huge - $16 Billion losses in market capitalization. The problem with the study is that they only looked at changes in stock prices over 3 days. They were only really looking at the immediate, gut reactions of investors, and not whether going green made sense in the long run.

There has been a recent rash of public advertising here in Montréal trying to make accounting look cool and hip. They must be having huge problems getting young people to become accountants, because they’ve pulled out all the stops here. These campaigns, of which there have been several, are pretty fantastic.

The thing I like best about this first set, aside from the bad photoshop and the hilarious copy, is that this ad has the layout of a generic financial institution advertisement, but with a “cool” font and skydivers inserted. Change the font and put an older (but hip) man, woman, or couple on the beach in there and you have an ad for a bank, a retirement fund, investments, or pharmaceuticals. They must have used the same template.

The cynic in me also can’t help but think that those skydivers are probably too close to the ground to open their parachutes on time. Maybe I’m just over-thinking things.

The mountain-climber is pretty great too, and would be very much at home on the Photoshop Disasters page. Aside from this lady being a reflection-less vampire, what exactly is she holding on to?

Lastly, we have “Les Indispensables”, which casts young accountants as Super Heros . It’s much more slick, but the concept is still amusing. The billboard campaign, prominent in the Montréal Metro over the past few months, seems to have been mostly phased out. Their website continues though, en Français.

I just ran across news of this study, which suggests that investing in employee happiness is a sound business strategy in the long term.

Another, more subtle implication of the research, says Edmans, goes to the nature of short-term thinking among corporate managers. Even if managers believe employee satisfaction enhances long-term corporate performance, they may not act on their beliefs because investing in employees often reduces earnings in the short term.

It goes on:

That concern, he adds, is driven by managers who argue it is not possible to credibly communicate to investors that profits might be lower in one period in order to invest in employee satisfaction that may pay off in the future.

Jon Stewart of the daily show put it quite well in his casual observation that “It seems to me that we favor investment, but we don’t favor work.” This is something we have to change.