As 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. In his eagerness to start running the business, he’d put the issue off, but the bank was already confronting two problematic requests, one involving fracking and another concerning guns.
Without clear ethics rules, Jay worried that his already divided directors would fall into bitter squabbling, which could lead to resignations, negative media attention, and a flight of investors.
Ethical banking had seemed so benign when Jay had decided to enter the industry. Now it seemed like a hornet’s nest.
(Editor’s Note: This fictionalized case study will appear in a forthcoming issue of Harvard Business Review, along with commentary from experts and readers. If you’d like your comment to be considered for publication, please be sure to include your full name, company or university affiliation, and e-mail address.)
A Green Vision
Jay hadn’t needed this job. At age 50, he had years of entrepreneurship behind him. He had founded a bank in Maryland, expanded it to six branches and $400 million in assets, and sold it for a substantial profit. While looking for his next project, he happened to see the movie An Inconvenient Truth again and decided, during the sleepless night afterward, to build something meaningful out of his concern for the environment, 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 directors: Four successful entrepreneurs, a lawyer, an ex-mayor of the city, a former executive in the Maryland bank (who had been more than willing to make the move West), a doctor who was a school friend and sometime hunting partner, and an evangelical (and ardently environmentalist) leader of a megachurch Jay had attended a few times.
To drive home its mission, the board hired a famous architect to make the bank’s headquarters an environmental showcase, with prototype solar-power windows, a set of wind turbines, and a butterfly roof that channeled rain and meltwater into underground cisterns. Bike racks and charging stations for electric cars ringed the building. Every lightbulb was an LED.
Articles and TV segments about the building and about Jay, the returned native son with a passion for the environment, helped attract local depositors and small borrowers, who’d grown disenchanted with the big national and global banks. Rocky Mountain Green Bank’s promise of timely, personalized service sounded good to a lot of people. And Jay’s track record in Maryland drew investors, who were eager to see their money double or triple in a few years, when (they assumed) he would sell the bank. Deposits grew at a healthy rate, but to succeed 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. In the branch’s second-floor boardroom, with its soaring view of the mountains, rifts among the directors had started to appear. The first sign of conflict had come 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 afternoons 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 bouldering champion, Neitha considered herself a pragmatic environmentalist, but 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 doing CPR on a wounded child, who later died, had been all over the internet, though she’d refused to discuss the incident.
Two other board members had agreed with her about the gym, so Jay had scaled back those plans and hadn’t even mentioned his healthy-eating initiative, an agreement with a catering company to make sandwiches, salads, and smoothies on-site.
Neitha had been the one to solicit the first problematic loan application. She’d been talking to the head of a Colorado engineering company that developed pumping systems used in hydraulic fracturing—fracking—and wanted to expand into making the polymers, emulsions, and surfactants the industry relied on. These materials, the executive had said, would be significantly less toxic than those currently in use. Though ambivalent about fracking in general, Neitha had recommended that the executive approach Rocky Mountain Green Bank, and he had seemed interested.
On hearing about this interaction, Neitha’s fellow directors were divided. One side touted the economic and employment benefits of fracking, while the other insisted that the environmental and seismic risks outweighed any good that could come from it. The 300-million-year-old sedimentary rock under the Denver 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, injecting, and waste disposal. It was a growth industry, but warnings from experts about the risks of groundwater 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, solicit opinions from each director individually, and come back to the group with a proposal.
The next day, Jay visited the board member he knew best, Fred Keeler, a gastroenterologist who had been trained at Harvard. “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 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. He quoted from a mural that he said could still be seen near Harvard Square: “Indication of harm, not proof of harm, is our call to action.”
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 effects, one for the positives,” he said matter-of-factly. “Figure out a way to quantify the effects, then do the math.” Simple.
It was while he was wrapping up his meeting with Clyde that Jay received an e-mail from the bank’s chief loan officer. “Wow—three 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 multimillion-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, with a record of support for military-related philanthropic initiatives like the Wounded Warrior project. But its business was manufacturing lightweight small arms technologies, so-called LSATs, for the U.S. government.
“A gun manufacturer?” Clyde asked in horror.
“A military contractor,” Jay said.
“A gun manufacturer,” Clyde corrected him. “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 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, at the start of the meeting, “I got into this business because I was excited by the environmental mission. And I think you all joined me because you felt the same way.”
“But,” he added, “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 they had nothing to worry about: 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 situation,” 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 or from customers drawn by the bank’s mission accounted for just 1.8%, surveys showed.
“We’re pioneers,” Jay said. “And part of being a pioneer is knowing your limits. Probably our biggest impact on sustainability comes not through the loans we make 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 already have one of those applications on the table. It’s from Field Force.”
Apparently, Clyde had prepared for the meeting by recruiting other directors, including the ex-mayor and two of the entrepreneurs, 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 considerations…” 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 unsuccessful attempts to shed its investment in the company that made the weapon used in the 2012 elementary-school shooting in Newtown, Connecticut. 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 will be fine. Next point?”
Clyde put down 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 Values.’ What would other members of that alliance 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 environmentally 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 making 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, who had been uncharacteristically silent. She gazed at the other board members in turn, as if trying to decide how to respond. Finally, she said, “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 Keeler. “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 confused. He loved his gun collection, from the flintlocks to the Uzis, as Jay well knew. Fred asked, of no one and everyone, “But what is ‘harm’? What is ‘evil’?”
Question: Should Rocky Mountain Green Bank deny a loan to a gun manufacturer?
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