Accounting for Pacific Lumber Company: Time and the Headwaters Forest
EDITOR'S NOTE: Professor Austin Hoggatt discusses an important but little-understood aspect of the economic background to the ongoing Headwaters Forest dispute in the following section of his article. He describes in clear, stark detail how business decisions and the ensuing accounting practices can fail to "account" for the true environmental cost of an asset like Headwaters. Business becomes captive to its accounting practices, and forests can fall as a result.
In the first part of this article, "Old Pacific Lumber Company and New Pacific Lumber Company" (EcoStewards Fall 1997), Professor Hoggatt examined the business history of Pacific Lumber. In Part II, "Financial and Legal Aspects of New Pacific Lumber Company" (EcoStewards Spring 1998), Prof. Hoggatt attempted "to illustrate the convoluted structures being erected by companies in extractive industry in response to environmental law." Part III follows in this issue of EcoStewards. WSI believes complete copies of this informative article should be made widely available, and we invite our readers to request a copy (see end note).
Part III: An Accounting Regime with Responsibility for the Environment
One must sympathize with managers and owners of corporations caught up in situations like those discussed in Part II. Business is difficult enough without this kind of ambiguity and trouble. The heart of the problem is that all of the economic and legal considerations of the controversy over Headwaters are limited to a few tens of years. The calculations are not commensurate with the time over which ancient forests grow. Boards of directors are mortal, and as they age the future is foreshortened and the corporate discount rate increases. Eventually we get to the decision, "Cut them all down." With a change in control resulting from a takeover, this change of corporate mind may be abrupt. Conditions that are the aftermath of the hostile takeover produce a discount rate for Maxxam that is high. Maxxam wants to cut down the old-growth redwoods and produce high cash flows now.
In this particular controversy we may hope that some funds may be found to hold off cutting of the Headwaters forest that is not covered in the "deal." Then, a second "deal" might be forged "back-to-back " that would provide logging on a sustainable yield basis. Whoever manages this forest under a policy of sustainable yield and under current corporate law would have a tough job. On October 7, 1997 the Humboldt County Board of Supervisors heard a report from Trees Foundation.1 This is a first attempt to provide a documented plan for sustainable yield for Headwaters Forest. The plan reportedly calls for annual cut rates in the range of 13 to 20 million board feet. Under "generally accepted accounting principles," the sawmills could not run profitably under this drastically reduced throughput. Recall that even the old Pacific Lumber Co. had to harvest some old trees in order to make acceptable returns. To account for a condition of more sustainable yield, changes in the future value of the timber stock will have to be included in the accounting for the net return on operations of Pacific Lumber Co.
The Headwaters problem is an example of a class of problems that must be solved if mankind is to look into the far future and see itself still in the game. This problem-solving task will challenge our best social and physical scientists to a cooperative long-term effort. Our politicians must find the will to martial resources to the task. Just now society appears to lack the will to find the capital to buy this whole forest. We might have the will to provide operating supplements to temporarily hold off the chain saws and support the search for conditions under which sustainable yield harvesting is economically viable. Consider, for example, how to charge the fisheries to defray the costs to Pacific Lumber of maintaining streamside habitat. These costs would be reflected in the retail price of salmon. At these higher prices the amount of salmon demanded for consumption would be less. Market shocks such as these need to be cushioned to reduce the trauma of transition to a new kind of market economics. Further considerations along these lines are the subject for another paper. However, there are encouraging indications of interest in these problems on the part of mainline economists. (Two examples are cited in footnote 3 below.) Finally, if society does not like this kind of situation, then society should change the rules of business--accounting, legal, and ethical--so that actors do not find themselves in such ambiguous and egregiously costly situations.
We should start with a request to the Financial Accounting Foundation 2 that the rules for asset valuation be altered to reflect, as well as possible, the social and environmental costs of business activity.3 This could start with a study to set up an Environmental Accounting Standards Board to advise Financial Standards Accounting Board (FASB) and Governmental Accounting Standards Board (GASB). As these deliberations begin to bear fruit in environmentally friendly pronouncements, the accounts that guide the decisions of directors of companies such as Pacific Lumber and Kaiser Aluminum (Maxxam's largest subsidiary) would not be so at odds with public values. The outcome would be a healthier planet and a quieter life for business executives in which their talents could be turned to creating value rather than capturing it. Do Maxxam's executives care about creating value? They say they do. Their annual report is printed on recycled paper with environmentally gentle ink. It contains discussion of many fine activities: scholarships for employees' children pensions for employees, safer working conditions, retrofitting inefficient aluminum smelters, and cutting and gluing-up clear redwood out of common boards. Free from the obligation of wringing the last dollar out of transferring costs to the environment, managerial skills could turn toward managing a safer, cleaner world for everyone. Let's ask our legislators to begin the study of a new concept for business under capitalism that includes the accounting for the full costs of production. Together we may find a way out of this Hell before the Earth is laid waste!4
Epilogue: Regret that the altruism of the owners of Pacific Lumber Company was not requited; regret that the ancient trees are in prize.
And yet, from our review of the accounts of Pacific Lumber Company, we may see the necessary conditions for an impregnable defense against the raid and capture of the trees. There was no account for the three-billion dollar forest asset, so ownership of the forest would not have altered the books of old Pacific Lumber. A sufficient condition to save the forest would have been a "Pacific Lumber Foundation." The mission of such a foundation would have been to manage the forest on a sustainable yield basis. In perpetuity, the sole customer for the foundation's trees would have been Pacific Lumber Company. The present value of a stream of income projected over 25 years at the 1984 earnings rate, assuming a 6% discount rate, would have been $850 million. Recall that the assets excluding the trees were valued at $272 million. This condition would not have launched a thousand ships, but the half-billion dollar surplus would have launched a raid. The stockholders' wars would have raged in the board rooms and rippled the financial market, but even now and in the future, there would have been peace in the redwoods.
Here is a lesson to guide the management of mankind's accounting for an environment we do not own. We will need many more such lessons and much guidance as we try to bring the other half of earth's productive resources into account.
Professor Hoggatt is Emeritus Professor, School of Business, UC Berkeley. He consults with business and government. Now developing heat metering for living space in Eastern Europe and the Far East, his goal is a reduction in the world's carbon burden.
To Request a Copy: Copies of this complete article (15 pages including graphs) available to EcoStewards readers at cost: $ 3.00 per copy, which includes postage.
FOOTNOTES:
1. S.F. Examiner, October 8, 1997, p. A8
2. The Foundation provides funds for FASB and its sister Governmental Accounting Standards Board (GASB).
3. A growing economic literature is concerned with social costs and their proper relation to private business. For an important discussion, see Paul Hawken, The Ecology of Commerce, Harper Collins 1993. Robert Costanza, Director of the Institute for Ecological Economics, University of Maryland, heads a team which has estimated the value of the world's ecosystem to be in excess of the world's Gross National Product. See "Natural Environment Gets a Price Tag--$ 33 Trillion", S.F. Chronicle, May 15, 1997.
4. In the older concept of environmental economics, the central idea was that externalities were a small part of total cost and simple patches to the competitive structure would set things right. Now the realization is that these costs are large (see footnote 3). With so much of costs left out of each optimizing decision, it is no wonder that the decision-makers get things so far out of kilter.
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