At the recent National Deal Flow Conference in Chicago, participants in the Developers Section meeting addressed an interesting and little discussed issue: the difficulty in overcoming bureaucratic inertia and employee resistance in convincing a property owner to offer a brownfield property for sale and then bringing the redevelopment of that site to fruition.
Take, for example, a company that owns a contaminated former manufacturing site. The CFO of that company understands that the rules of accounting prevent the company from writing off the liabilities associated with that site until a cleanup is completed — a process that could take years. That CFO may direct that the property be sold or the liability transferred to a third party who will assume all liabilities, thereby permitting the owner to write off the company’s liabilities immediately. However, in-house counsel and environmental managers often will have their own agendas that cause them to resist the disposition of the property. They may want to preserve their jobs, or they may fear a corporate culture that punishes their mistakes if problems arise, with little reward if the property is transferred successfully. Either way, the result is delay, if not outright frustration, of a project.
At times, the opposing forces are generated by the organization itself. The responsibility for the property may be split among different fiefdoms that are either in dispute, in which case consensus is difficult, or they are in equilibrium, in which case any major new project could upset the balance. That is the "Dilbert" effect. Another factor is the organization’s experience and history. When an organization’s view of the world is colored by a negative experience, it is extremely difficult to persuade that organization to accept any other risk scenario. General Electric, for example, is bound by its experience with a former mercury vapor lamp manufacturing facility in Hackensack, N.J. That property was sold and later developed as residential condominiums. Years later, GE was sued by homeowners allegedly injured by exposure to the residual mercury contamination in the building. Based upon this negative experience, GE has announced that it will not transfer any contaminated or formerly contaminated property to any third party. Despite the evolution of risk management tools such as environmental insurance that would virtually eliminate any risk to GE, GE is governed by the worst-case scenario, with the result that few if any of their brownfield properties will be redeveloped.
I discussed this issue with Professor Barbara Bird, at the Kogod School of Business, American University. According to Professor Bird, fear is widely recognized as a driving force in organizational behavior. "The issue is one of corporate culture: if the culture is to punish mistakes, individuals will always take the conservative, risk-free approach."
Therefore it is critical to overcome the resistance of property owners to change. How can this be accomplished? According to Professor Bird, there are several recognized techniques, "but first you need a leader, or ‘change agent,’ to champion the project within the company. That leader could be an outside consultant, who has the advantage of being outside the organization’s sphere of inertia." Once a leader is identified, the first goal is to create "small wins" —such as a small deal involving one or two properties—in order to demonstrate success to the forces of resistance. The brownfield developer can find ways to recognize and reward that leader for his or her efforts, such as by nominating a project for an award (like the Phoenix Award), recognizing the leader in public events or in statements to the media.
Overall, however, overcoming bureaucratic inertia and individual resistance is a long process. It may take years before a brownfield developer can convince an organization to recognize the benefits of a brownfield transaction. It strikes me that this is an important role for the National Brownfield Association to play. Through concerted public relations efforts, the NBA can and should be advocating the benefits of private brownfield transactions as a well-established method of transferring environmental liabilities.
I would welcome any insights readers may have into their successes and failures in overcoming individual and organizational resistance.
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