Cover Story: The greenest capitalist

Carpet king Ray Anderson’s epiphany

Usually, the price of a product, whether it’s a pair of shoes or a kilowatt of electricity, fails to include all kinds of costs the buyer never knows about — and never pays.</
Wal-Mart serves as a familiar example of this phenomenon. One of the ways the retail giant is able to keep its prices low is to provide little in the way of benefits for hourly employees. Only one out of seven Wal-Mart employees is offered health insurance for themselves or their families. The children of those employees often receive health care from the state of Georgia’s PeachCare for Kids insurance program — at a cost not to Wal-Mart but the taxpayer.</
About 10,000 of the 166,000 Georgia children enrolled in PeachCare are the sons and daughters of Wal-Mart workers. Not providing coverage for them saves Wal-Mart roughly $16 million in Georgia — and perhaps hundreds of millions nationwide.</
An economics professor would describe these passed-on expenses with two words: externalized costs. More commonly, though, externalized costs have the greatest toll on the environment.

A new computer, for instance, sells for $350 up to more than $3,000. But that price doesn’t include compensation for the health and environmental problems — from soil contamination to birth defects — linked to the computer recycling centers where that new iBook eventually will end up. Those centers are located in China, a favored destination for computer waste from the United States and other countries.</
But the computer manufacturer doesn’t pay for medical treatments or cleanup costs at the contaminated sites. The Chinese government assumes those burdens.</
Companies hardly ever volunteer to take on — or “internalize” — costs they can get away with externalizing, such as a more environmentally sensitive way to dispose of computers. Even if executives wanted to accept responsibility for the costs they thrust on the public or the environment, they seldom would be able to do so. Because if they did, they “are basically saying, ‘I’m going to have higher costs than my competitors,’” says Ray Hill, a senior lecturer in finance at Emory University’s Goizueta Business School.</
The fairest and most common way for companies to internalize costs is through government regulation of entire industries. That way, when it comes to facing new expenditures, every company is on a level playing field.</
Hill says he can’t think of a single example of a company that willingly has tried to internalize a new set of costs that would not be borne by its competitors.</
But Atlanta has one: Interface Inc., maker of chic carpet tiles. And it all started one night in 1994, when an epiphany struck the company’s CEO while he lay in bed reading.

In the summer of 1994, customers began asking sales reps for Atlanta-based Interface Flooring Systems what the company was doing for the environment. No one had an answer, least of all Interface founder and CEO Ray Anderson. So the big industrial company did exactly what big industrial companies do when asked a simple and direct question: It formed an internal task force.</
Anderson was asked to kick off the task force by sharing his environmental vision for the company. The problem was, Anderson didn’t have an environmental vision for the company. He had never given much thought to the environment, except when it came to complying with U.S. Environmental Protection Agency rules.</
Coincidentally — or as Anderson puts it, serendipitously — an Interface executive in California had recently sent Anderson a copy of The Ecology of Commerce, written by entrepreneur Paul Hawken, who grew the gardening supply company Smith & Hawken into an empire. In the book, Hawken challenges the belief that business and the environment are inherently at odds. Essentially, The Ecology of Commerce is a pragmatic call to arms for businesses to profit while allowing the natural world to prosper. It includes examples of companies that made money while limiting their environmental impact. It also describes case studies in which human activity has decimated nature.

On the night Anderson reached the chapter “The Death of Birth,” he became so engrossed in what he was reading that he began to recite a passage to his wife, Pat.</
Sitting upright, glasses perched on his nose, Anderson focused on a single paragraph, a rather clunky and technical 202 words describing a failed attempt to populate an isolated island with reindeer. It wasn’t the beauty of the prose, but the repercussions of a concept — a species growing too fast can use up its resources and wipe out almost its entire population — that would forever change Anderson, Interface, and the carpet manufacturing industry:</
Natural and human history are full of examples in which animals or humans exceeded carrying capacity and went into steep declines, or extinction. A haunting and oft-cited case of such an overshoot took place on St. Matthew Island in the Bering Sea in 1944 when 29 reindeer were imported. Specialists had calculated that the island could support 13 to 18 reindeer per square mile, or a total population of between 1,600 and 2,300 animals. By 1957, the population was 1,350; but by 1963, with no natural controls or predators, the population exploded to 6,000. The original calculations had been correct; this number vastly exceeded carrying capacity and was soon decimated by disease and starvation. Such a drastic overshoot, however, did not lead to re-stabilization at a lower level, with the ‘extra’ reindeer dying off. Instead, the entire habitat was so damaged by the overshoot that the number of reindeer fell drastically below the original carrying capacity, and by 1966 there were only 42 reindeer alive on St. Matthew Island. The difference between ruminants and ourselves is that the resources used by the reindeer were grasses, trees and shrubs and they eventually returned, whereas many of the resources we are exploiting will not.“</
What startled Anderson was that not only did the excess reindeers die off, but nearly the entire population disappeared. It’s a common belief that only the superfluous members of a species die when a population grows past a sustainable number. But the reindeer of St. Matthew Island proved that the theory has exceptions. In St. Matthew’s case, the reindeer population became imbalanced, and once it went out of whack, the death toll spiraled far beyond the number the island originally was able to support.</
“To me, that was such a clear microcosm or metaphor for humankind,” Anderson says.</
Even more disturbing to Anderson was the realization that while the reindeer’s resources eventually would come back, most of ours — oil, natural gas, metals deep within the Earth — won’t.</
The concept was a “spear” in Anderson’s chest that made him completely rethink his role as an industrialist. Inspired by the reindeer of St. Matthew Island, he eventually set a goal for his company that many believe is unattainable. Anderson decided to turn Interface into a completely sustainable carpet manufacturer. To him, that means Interface won’t leave a single negative environmental footprint — in part by subsisting without using a drop of oil — by the year 2020.</
Anderson hopes other manufacturers will follow his lead and, in turn, bring about the dawn of a new industrial revolution. Judging from what he’s accomplished so far, he’s off to a good start.</
“If we do manage to turn the tide and arrest [greenhouse gas] emissions and draw down carbon from the atmosphere,” the author Hawken tells CL, “I believe we will be seeing Ray as we eventually saw Rosa Parks and other leaders who just wouldn’t back down from their beliefs, even in the face of ridicule or hostility.”

Ray Anderson grew up less than five miles from the Alabama border in West Point, Ga. He earned a football scholarship from Georgia Tech and was a running back for legendary head coach Bobby Dodd. Though a shoulder injury ended his football career in his sophomore year, Anderson graduated from Tech in 1956 with highest honors and a bachelor’s degree in environmental engineering. In April 1973, after bouncing between a couple of companies, Anderson partnered with U.K.-based Carpet International to found Interface.</
The thrust of Anderson’s new company was the creation of carpet tiles, which at the time were becoming a fixture in the modern office. These days, Interface makes and sells nearly 40 percent of all carpet tiles sold on Earth, and the company has the market share in all 110 countries where it does business. Interface tiles cover the floors of the corporate headquarters of Dell, Microsoft and Starbucks, but the more typical purchaser of Interface’s tiles are interior designers and decorators who appreciate the company’s environmental goals and hip designs.</
Anderson grew the company the same way any industrialist would — through acquisitions, product innovations, and spending as little as possible on environmental protection.</
“For the first 21 years,” he says. “I never gave a thought to what the company was doing to the Earth, or what it was taking from it.”</
But everything changed after that night in 1994.</
The carpet industry is particularly hard on natural resources and the environment. The traditional dying process for coloring carpet yarn requires that it be boiled for two hours in 2,000 gallons of water and soaked in colored dye for a few more hours. Then, the water typically is flushed into the nearest river, lake or stream.</
And petroleum products traditionally are used in almost every aspect of production, from powering the plant to the plastic backing that strengthens the tile’s resilience to the fibers of the carpet itself.</
As Anderson would discover, finding a way to internalize the environmental costs of the carpet industry wouldn’t be easy. There’s a reason the industrial plants of today — long, flat factories with billowing smokestacks — look like the industrial plants of 100 years ago.</
What’s more, the companies that make carpet and flooring products are among the largest manufacturers in the world. Shaw Industries, a subsidiary of Warren Buffett’s Berkshire Hathaway located in Dalton, sold more than $5 billion worth of carpet, carpet tiles, ceramic tiles, yarn and dye in 2004, according to Hoover’s. It also employs 30,000 workers worldwide. Mohawk Industries, based in nearby Calhoun, employs 34,300 and sold $5.8 billion worth of floor covering last year.</
Interface may be the largest maker and seller of carpet tiles, but it is a much smaller company than its top competitors, Mohawk and Shaw, which sell dozens of products in addition to carpet tiles. Interface employs 5,000 people — making the company small enough for Anderson to spend time on the plant floors talking to employees and leading discussions that led to drastic shifts in mentalities. That would be much more difficult in a company that employs six times as many workers.</
“When you are a public [company], company leaders tend to shut down, become conservative and analyst-sensitive. They have to be very careful about what they say and tend to lock down in terms of expressing their values,” Hawken says. “Ray went the opposite way.”</
In the beginning, Anderson was somewhat quiet about his environmental consciousness. No press release announced the company’s quest for sustainability, and Anderson didn’t mention his mission to shareholders at the company’s annual meeting. At the time, few people believed that going green could equate to an increase in shareholder returns. In fact, it probably would have turned off some investors.</
“You know, it took guts,” Frank O’Neill, publisher of the carpet industry trade magazine Floor Focus, says of Anderson’s move to sustainability. “You had a lot of skepticism about it.”</
“Over the years, we’ve been very careful with how we’ve dealt with shareholders on the issue [of sustainability],” Anderson admits. “Frankly, we didn’t have a whole lot to report in those early years.”</
But he came out of the closet in a major way in 1997, in front of an unlikely group: fellow CEOs and businessmen who were gathered to hear Anderson speak at a North Carolina State University business conference.</
“Do I know you well enough to call you plunderers?” he asked, as the audience visibly squirmed.</
Anderson went on to deliver these ominous words: “In the future, people like us will be thrown in jail.”</
Footage from that speech would become a pivotal scene in the indie documentary The Corporation, which won the Sundance Film Festival Audience Award in 2004. After the filmmakers caught wind of Anderson’s civil disobedience, they asked him to sit for extensive interviews. He subsequently was cast as one of the few CEOs trying to buck the winner-take-all philosophy of corporate America.</
Anderson says in the film that capitalism is a “present-day instrument of destruction” that will “externalize any cost that an unwary or uncaring public will allow it to externalize.”</
Inadvertently, Anderson wound up strengthening his role as spokesman for the business side of the environmental community. With that speech, he forever separated himself and Interface from the majority of corporate America, embarking on a more difficult, less traveled path.</
A 2002 United Nations Environment Programme report describing the past 30 years of environmental damage found that pollution and the destruction of habitats has put 11,000 species of animals and plants in danger of extinction.</
A 10-year study published in 2003 in the journal Nature found that 90 percent of all large fish — including sharks, marlin, tuna and swordfish — have disappeared from the world’s oceans.</
And a survey conducted by the American Museum of Natural History in 1998 found that 70 percent of biologists believe a fifth of the plant and animal species alive today will be extinct in 30 years.</
Then there are global warming predictions which estimate that the sea will rise 3 to 6 feet by 2050, flooding New Orleans, parts of Miami and coastal Georgia, and causing a flurry of diseases that could make the black plague look like the common cold.</
Regardless of whether these scenarios actually happen, Anderson fully believes they will — unless Interface and other manufacturers and industries figure out the difficult path to sustainability.</
At first, Anderson changed the little things: putting recycling barrels for soft drink cans on plant floors and recycling bins for paper in the offices, searching for greener manufacturing materials that weren’t made from petroleum products — materials that unfortunately didn’t yet exist.</
Then, as Anderson’s newfound conservatism began to seep into the company’s culture, bigger things started happening.</
Interface’s Ray C. Anderson plant, just off I-85 in West Point, is the first building you come to in the type of technology park that one typically finds off Southern interstates. It’s also unique among the dozens of Interface plants around the world. The plant’s floor plan says a lot about the impact that Anderson’s vision has had on the company.</
One-half of the plant was built before Anderson’s epiphany. It’s a dim industrial block with dozens of truck-sized machines spinning yarn and stitching carpet. In other words, it looks like a typical manufacturing plant.</
In the other half, which was built post-epiphany, skylights illuminate the factory floor and lighten the air. The machines are newer, smaller, more sleek, and devoted to reclaiming yarn that used to go straight into landfills. The machines were engineered specifically for Interface. No other company had attempted that kind of innovation before.</
It used to be that Interface wasted as much as 10 percent of the yarn needed for every batch of carpet tiles. But with the new machines, leftover yarn was respooled. The machines cost the company $5 million, but according to Anderson, they paid for themselves in three years by reclaiming yarn.</
The new machines were just one step in a company-wide reinvention of carpet manufacturing. Other plants were similarly restyled to conserve materials and resources, and to use less energy.</
Much of Interface’s yarn is now made out of corn rather than nylon, which is petro-based and does not biodegrade. And all Interface yarn is dyed using less than a 10th of a gallon of water per square yard, rather than the 50 gallons it used to require.</
Another early Interface innovation was to use one less ounce of material per square yard of carpet tile. When engineers looked into how much energy that saved at the DuPont nylon plant from which Interface bought its material, they figured Interface saved enough energy to power one of its plants for two years.</
Anderson says the experiment to use less material in each carpet tile “sold our people on this new thing, sustainability. And they begin to think differently and far more aggressively.”</
It was also during this time that Interface’s chief product designer, Donald Oakley, began to follow Anderson down his environmentalist path.</
Oakley began looking into a concept called biomimicry, the pursuit of designs that imitate processes found in nature. For example, solar panels embody biomimicry in that they turn sunlight into energy in much the same way a tree’s leaf does.</
“Sure enough, there’s this team of people foraging around in the forest looking at the forest floor and the stream beds,” Anderson says. “And, it finally dawned on us. There’s no two things alike here. There’s no two sticks, no two stones, leaves, limbs — just total chaos. Yet there is pleasant orderliness in this diversity.”</
The designers, Anderson says, came back and created the company’s most successful product yet: tiles that are similar in design but without any two being identical. Now, variations in colors and patterns in tiles — typically considered an expensive error — were encouraged. Laid side by side, the tiles looked natural, even artful. And in 18 months, the Entropy line of carpet tiles became the fastest-selling product in the company’s history.</
In addition, Interface’s LaGrange plant is now home to $15 million machines that make the company’s Cool Blue carpet tiles, which are made of discarded and defective carpet tiles. And that same plant uses energy generated by the city of LaGrange’s landfill, tapping and burning the methane produced from the decay of organic matter. That innovation earned the company an “Energy Partner of the Year” award Jan. 18 from the EPA.</
“It is a success on every front,” says David Hobbs, president of Interface’s flooring systems division, “economically, environmentally, and socially.”</
But despite the efficiency of Interface’s new technology, the company struggled financially in the decade after Anderson’s awakening.</
On the one hand, Anderson says the company reduced waste by 60 percent to 80 percent at each of its factories in the first three-and-a-half years. That saved Interface $67 million, according to an environmental accounting system Interface invented to keep track of its progress.</
But starting in the late 1990s, Interface’s profits dropped by about 20 percent each year.</
Industry analysts familiar with Anderson’s sustainability mission were skeptical. The talk in manufacturing circles was that environmental initiatives cut big chunks out of a company’s profits. On the surface, it looked as if the analysts were right. A company that voluntarily internalized costs ceded its competitors an edge.</
But the explanation for Interface’s problems, it turns out, is much more complicated. Indeed, the price of buying new machinery and tweaking its manufacturing on a global level cost the company millions of dollars. Yet all along, Anderson claimed the company’s financial problems were related to an industry-wide slump.</
Carpet tiles sell when businesses can afford to renovate or move into new offices. When hard times hit the American economy during the late 1990s, companies didn’t spend money refurbishing their offices. In all, the office furniture market declined about 40 percent during that time, according to O’Neill, publisher of the carpet trade magazine.</
“It was tough,” Anderson says. “There was never, never, not one thought of turning back. But it was very frustrating to know that the things you were doing [to become sustainable] were not showing up [as being profitable].”</
Still, in the midst of the economic downturn, Anderson pushed Interface to become sustainable, and the company invested millions of dollars in more efficient processes. It was during those lean years that Anderson installed machines capable of reclaiming yarn that otherwise would be trashed.</
But it wasn’t just the environment Interface was saving. The company’s commitment to sustainability reaped benefits in a more practical sense: Going green proved to be profitable.</
Only in the last year has the commercial carpet industry made even a modest comeback, and Interface has emerged from the slump with an advantage. “This thing that seemed like it was altruistic in the beginning has turned out to be really, really good for business,” Anderson says. “It’s just a better way to bigger profit.”</
On Feb. 22, Interface released its yearly financial reports. The company lost $55.4 million during 2004, according to SEC filings. But last year, it posted a profit of $1.2 million, with sales increasing almost 12 percent to $989 million.</
The next day, Interface’s stock increased 13 percent to around $11.40. It was a 52-week high, and several analysts now label Interface a “strong buy.”</
Anderson claims that Interface’s sustainability programs have saved the company an estimated $299 million. “We might not have made it through that recession but for the sustainability initiatives,” he says.</
O’Neill agrees. “When I see the company’s [financial reports], I think it is working,” he says. “Whether [Anderson] can reach the sustainability goal or not, your guess is as good as mine.”</
Competition among carpet tile manufacturers is intense, and, like with any other technological advancement, it was only a matter of time before greenness became a selling point.</
Interface’s sustainability mission is one of the company’s strongest marketing strategies. When Dell, Microsoft and Starbucks bought Interface carpet for their corporate headquarters last year, they did so in part because of the company’s commitment to the environment.</
Then, after Anderson blazed his trail, carpet manufacturers began trying to out-green him. Both Shaw and Mohawk now have products similar to Interface’s, and those two companies aggressively market their tiles as Earth-friendly.</
Steve Bradfield, Shaw’s corporate director of environmental affairs, notes that there isn’t a way to rank or judge a carpet’s true greenness, unlike the way appliances are graded with the EPA’s EnergyStar program.</
“It’s unfortunate that the green movement has become so competitive in the carpet tile industry, because it has both a positive side and a negative side,” Bradfield says. “The negative side is we confuse the marketplace, because everybody has their own strengths and weaknesses.”</
The truth is, companies like Shaw and Mohawk have beaten Interface with some innovative products.</
For instance, Shaw came up with a way to use non-PVC carpet backing, which saves a large amount of energy, in 1999 — almost five years before Interface did. Shaw’s new product, EcoWorx, uses a third of the energy that PVC-backed tiles do and is completely recyclable. Shaw also recently bought a plant in Augusta that will reclaim used carpet yarn.</
“It’s the first truly 100 percent sustainable product in the industry,” Bradfield says of EcoWorx.</
Anderson is at once dismissive of his competitors’ progress and happy to acknowledge his influence.</
“We simply don’t believe you can make a green product in a brown company. So, you know, if you are operating a brown company and claiming a green product, it’s just green-washing,” he says. “We don’t worry about our competitors. In a perverse kind of way, we take credit for what they are doing.”</
Anderson is no longer the CEO of Interface. In 2001, he turned that role over to Dan Hendrix, who joined the company in 1983 and was promoted to treasurer, then chief financial officer, then executive vice president. Still, Anderson has retained his position as chairman of the board and Interface’s figurehead.</
And he remains the poster boy of the sustainability movement. It’s harder to find someone with more street cred than Anderson to promote a green company.</
In 1998, he published a biography describing his metamorphosis from a traditional industrialist to a sustainability disciple. Mid-Course Correction is now in its third print run and has sold about 50,000 copies.</
Most of the time, though, Anderson travels and gives speeches, spreading the gospel of sustainability. He delivers about 150 talks each year.</
On a recent rainy Monday, Anderson drove his Toyota Prius from Atlanta to LaGrange to tape a sales training video. The video will be played at the annual meeting of all Interface sales reps, who will in turn tell Anderson’s story to potential buyers.</
In front of the cameras, he described how far he’s come in his quest to wean Interface off oil and become 100 percent sustainable. He tells the cameras that, across the globe, Interface’s greenhouse gas emissions are down 52 percent, its water usage is down by two-thirds, and the company has kept more than 84 million pounds of used carpet out of landfills and incinerators.</
It’s difficult to substantiate those claims, however. As of yet, there’s no oversight agency to audit such statements in the way the U.S. Securities and Exchange Commission reviews financial claims.</
Ask Anderson how close he is to reaching his goal, and he reckons Interface is about 40 percent of the way there. Interface now must overcome a lack of renewable energies and discover technologies that don’t yet exist. It won’t be easy.</
“The first stage is successful,” Anderson says. “But the ultimate goal is a zero footprint. The target year is 2020, and a lot has to happen by 2020 to reach that goal.”