The chair of the board of this innovative holding company talks about Upstream 21's alternative transition strategies for small companies, as well as the challenges of channeling growth and profits in directions that have the most benefits for the most people and the environment.
Leslie Christian is the chairperson of the board of Upstream 21 Corporation, a Portland, Oregon-based, holding company that acquires small, privately-owned firms in the Pacific Northwest and operates them, under very focused sustainability guidelines, as wholly-owned subsidiaries. The company's carefully articulated business philosophy is grounded in the view that, over the long term, the companies that will prosper will be those that are committed to fair wages and environmental and work-life quality. It is Upstream 21's belief that small local businesses, when properly managed, can operate leaner and with less resource waste than large, global ones. Management also takes the view that companies that have learned to internalize what have traditionally been considered the external costs of doing business will be better positioned to operate in a more regulated and resource-constrained economy. Upstream 21’s unique charter (its Articles of Incorporation) states that the company’s “best interests” will always be defined by, and aligned with, those of its employees, customers, suppliers, the environment and the communities in which it operates, as well as those of shareholders.
Upstream 21 currently owns three companies in the forest products sector: Jefferson State Forest Products, a manufacturer of retail display fixtures using sustainably harvested wood; Community Smallwood Solutions, a manufacturer of posts and poles for vineyards, orchards, hops farms, and fencing; and Roguewood Furniture, a maker of hardwood home furnishings.
Upstream’s central goal is to enhance the sustainability values of the companies it acquires. Can you talk about how you go about this?
Leslie Christian: One of the key factors we consider when deciding whether to acquire a company is the willingness of the current owners to be part of our family of companies. We want them to wholeheartedly appreciate our business philosophy. They don’t have to be perfect in terms of every sustainability factor, but after we acquire them we look for opportunities to increase the level of local and environmentally sustainable practices. With Roguewood Furniture, for example, we are working to increase the percentage of furniture sourced from local wood, and we are in the process of becoming FSC (Forest Stewardship Council) certified. Most of the hardwoods used in furniture-making in the United States come from the East Coast, and we will continue to use them from FSC sources, but there are also some interesting and attractive native varieties here in the Northwest.
We tap into our own internal as well as external expertise. Bryan Gooch Redd, our CEO, is knowledgeable about wood sourcing, for example, and has extensive experience in environmental law and business management. We are using experts in manufacturing production systems to consult with us on production efficiencies and methodologies to help our companies make better quality products at lower prices. In fact, we have received grants from the State of Oregon to help fund this training. Continuous training and education of our employees empowers them to help the continuous improvement of our systems. It is that focus on continuous improvement that results in a more sustainable operation overall and more sustainable products----and helps ensure the long-term success of our companies in the intensely competitive modern marketplace.
What prompted you and your partners to create Upstream 21?
Leslie Christian: We had three motivations. First, we were deeply dismayed by the trend toward consolidation of businesses and the decline of manufacturing in the United States. We witnessed small businesses—one after another—selling to larger companies that then often proceeded to relocate the companies or close them down entirely after reaping whatever benefits were available (such as brand names, customer contracts, etc.). We wanted to provide an alternative transition strategy for small businesses. Small companies are critical to the future of our communities, and Upstream 21 is committed to strengthening these companies to help ensure their long-term success.
Second, our clients at Portfolio 21 Investments [editor’s note: Leslie Christian is CIO and CEO of Portfolio 21 Investments] were increasingly interested in investing in local businesses. We wanted to create an investment vehicle for them.
And, third, we wanted to create a company in which all stakeholders’ long-term interests would be considered and balanced. This is an explicit rejection of the prevailing model in which short-term profits that are ostensibly mandated by shareholders outrank long-term creation of value. Our corporate charter specifically states that the best interests of employees, customers, suppliers, the community and the environment must be balanced with those of the shareholders over both the short and long term.
For example, at the time we acquired Jefferson State, the company offered no employee benefits. One of the first things we did was offer paid holidays and time off as well as a healthcare plan. We also paid a profit-sharing distribution ; each employee received an amount equal to 10.5% of his/her annual wages. We consider this an important way to recognize the contributions and interests of our employees.
During this economic downturn we have of course struggled, and we have not been able to avoid furloughs and reduced hours. However, rather than laying people off immediately, which some might see as the quickest way to cut costs, we tried to defer some of our furloughs and used the downtime at the beginning as an opportunity for training and education.
We are also committed to keeping our companies in the communities in which they are located. Jefferson State is in a remote area of Trinity County, and with 28 employees it is the second largest private employer in the county. We knew if we relocated it would have harmed the community.
What is the profile of an Upstream 21 investor?
Leslie Christian: Investors in Upstream are typically individuals with whom we have separate managed account relationships. Potential investors do not always understand that we are not a fund; we are an individual holding company. Institutional investors such as venture funds or foundations often don’t know what “box” to put us in. We like to point out that we are not a fast, high-rolling company with a hockey stick trajectory for growth. Rather, we are building a family of companies that will be solid, long-term contributors to their local economies.
What are your plans for the future at Upstream 21?
Leslie Christian: We now have some solid proof that our approach works, that our management ideas are valid and solid. We are recovering from the recession and are now looking at companies we are interested in acquiring and some new projects we would like to launch.
What are your general thoughts about whether or not there must be tradeoffs between social and environmental impacts and financial returns?
Leslie Christian: This is an area that is rife with definitional challenges, contradictions, and confusion—not to mention a lot of strong opinions!
There are many different definitions of impact investing, which makes the use of the term a little frustrating. If you are talking about whether it is possible to get a market rate of return on a renewable energy investment, for example, sure, those rates of return can be competitive, but there is still the question of impact. If one’s idea of impact is to increase the green sector of the economy, then, yes, it’s possible to combine impact and financial returns. However, if one’s goal is to change the structure of economic classes or wealth distribution by building strong local economies and creating opportunities for all employees to prosper and build wealth, investing in a high growth green company most likely won’t accomplish this. These are systemic changes that involve allocation of profits across constituencies rather than assuming investors come first. It’s our opinion that this approach makes sense over the long term, but there might very well be a gap between the short-term financial returns of the “market” and this more holistic strategy.
Then, there’s the issue of defining “market returns.” I think we get caught up in the lingo and forget to ask, what does it really mean? What is a market return, anyway? And do we really want it? In the last year a market return was minus 40 percent, and the stock market’s ten-year average annual return was negative. Yet the assumption that we can make an average of 10 percent every year persists. We are not stopping to seriously consider whether this is a valid assumption given the global condition.
Finally, I think the belief that business is the best tool to solve social problems needs to be tempered. In my view, business is not a social change engine; it is a growth and profit engine. For me, the challenge is to channel growth and profits in directions that have the most positive long-term outcomes for the most people. But in terms of impact (social change), we also need political will, governmental commitment, education, and leadership. My answer to dealing with these concepts is to be transparent and say very clearly what we are doing. With Upstream 21 we say that companies will have to be environmentally sustainable or fade away. We are taking a long-term perspective, and in the short term we allocate profits to create jobs and sustainable business practices. It may mean that return on equity will be lower for the short term, but we believe that over the long term we will have a higher rate of return due to the approach we take. I don’t necessarily say Upstream 21 is impact investing; it is essential investing.
Can you talk a bit about your views on the relationship between values investing and ESG investing and how the combined fields may be leading to impact investing?
Leslie Christian: At one level, they are the same. The field of socially responsible investing (SRI) has its roots in aligning investments with personal or institutional values. In most cases, the values that underlie SRI are embedded in the ESG criteria that are used to evaluate investments. However, as it becomes more and more obvious to a growing number of investment professionals that ESG really does matter, there is a tendency to express ESG investing as smart, prudent, etc. The values base is not always called out, particularly with respect to publicly traded global companies.
Interestingly, as the field of SRI (ESG) investing expands into the mainstream, values-based investors are rethinking their asset allocation assumptions in terms of finding investment vehicles that are aligned with their values. More and more investors are considering community investing and local initiatives.
For more background: