With the announcement of Detroit’s bankruptcy last week, the city could take some inspiration from Thomas Edison’s quote, “I have not failed. I’ve just found 10,000 ways that won’t work.” After decades of mismanagement, corruption, and unsuccessful attempts to fix budgetary issues, Detroit’s bankruptcy does not demonstrate failure, but rather an opportunity to revive itself by means it has never utilized before. In other words, Connecticut Bankruptcy Attorney David Falvey describes how “insolvency is not the same as going out of business,” or in Detroit’s case, bankruptcy is not the end of the city, it is an opportunity to redevelop by restructuring debts and selling off equity.
Better yet, as experts in sustainability strategy, BrownFlynn sees a connection between financial distress (for all types of organizations, including municipalities) and opportunities for sustainability initiatives that will support Detroit’s revival and long-term growth. Here are three ways that Detroit’s bankruptcy provides an opportunity for sustainability initiatives:
- Prioritization and Materiality: While emerging from bankruptcy, Detroit will need to prioritize issues with the highest impact first, which is similar to a materiality assessment. As Alan Pyke, the Deputy Economic Policy Editor for ThinkProgress.org said, “success can’t rely on bringing the whole city back, but rather identifying the parts of the city that can flourish.” During the prioritization process, Detroit can incorporate a materiality matrix to determine the most pertinent issues. A materiality assessment will expand the city’s point of view to include not only economic issues, but also social and environmental issues that will impact the city’s triple bottom line. Comparing municipalities to companies, AlixPartners explains that “with a massive challenge and very limited resources, distressed companies require clear vision of the end state that helps them see the shortest critical path from where they are to where they want to be.” According to experts from the The Sound of Ideas: Motor City Breakdown, high level issues that Detroit will need to focus on include public safety, geographic size/population density, and industry diversification. With a materiality matrix, Detroit can go further in depth on these issues and determine how to strategically prioritize them.
- Reduced Costs Through Sustainable Investments: Detroit will need to be precise in its cost cutting measures. Organizations in financial distress often use a chainsaw approach, where they cut costs aimlessly, which often leads to early recovery, but may revert them back to crisis. Instead, Detroit can focus on cost cutting measures through sustainable investments, such as renewable energy, which will reduce energy costs in the long-term, and social investments, which will encourage job growth and public safety. Examples include investments in LED lighting, hybrid public transportation vehicles, local food production, and recycling programs.
- Stakeholder Engagement: Bankruptcy is a catalyst for dialogue between major city parties: employees, residents, city and state government, and metropolitan/suburban collaboration. According to Bruce Katz, coauthor of Metropolitan Revolution, collaboration between metropolitan and suburban areas in Detroit will improve public service offerings and reduce costs, particularly with public service sharing and school district consolidation. As Detroit elects new leadership to manage the bankruptcy, there is an opportunity for improved management. A recent GreenBiz article highlights a relationship between good management, sustainable practices, and solid financial performance, as “actions to increase sustainability trigger good financial performance, which allows for additional investments in sustainability, which again improves financial performance.” In sustainability terms, dialogue and collaboration between city leaders and constituents create stakeholder engagement, which helps promote innovation, better understanding, and unified goal-setting and actions.
Fortunately, there are proven results that financial crises can encourage sustainability initiatives that improve financial results. A recent A.T. Kearney analysis reveals that during the current economic slowdown, companies that show a true commitment to sustainability appear to outperform their industry peers in the financial markets. In the consumer products industry, Unilever serves as an example of how a holistic, sustainable approach can revive brands and sales. In 2010, Unilever launched a Sustainable Living Plan after a decade of sluggish performance. The plan includes various types of programs, such as community development and fair trade. The launch of the plan correlates to improved stock performance and sales increases; from 2010-2011, sales increased by 6.5%, and in 2012, sales increased by 6.9%. Detroit can consider organizations like Unilever as a model of how sustainable investments will support the city’s revival.
An industry example closer to the Motor City is how the Auto Bailout encouraged Ford to become more sustainable, both from a financial and environmental standpoint. Since 2009, Ford has improved its supply chain management system for operational efficiency by incorporating lean manufacturing techniques and utilizing a closer supplier base. Ford pledged to accelerate development of hybrid and battery powered vehicles. For example, it has the first and only facility in North America to produce EcoBoost engines. Ford’s goal is to cut carbon emissions by 30% by 2020 and it plans to share best practices and processes for significant emissions reductions. Similar to the Unilever example, financial distress encouraged Ford to invest in sustainability initiatives, and as a result, sustainability initiatives helped improve the company’s performance.
While the scale of Detroit’s financial crisis is at a different level than Unilever and Ford (up to $20 billion in debt), there are parallels to how financial crises encourage organizations to make sustainable decisions, which in turn can revive financial performance. So, Detroit now has an opportunity. Bankruptcy is not a dead end. It is a cross road, an opportunity for Detroit to reflect on how past decisions have affected the present, and how present decisions will enable the city to head in a sustainable, prosperous direction in the future.
By Brittany VanderBeek, Analyst