Posts

Sales, Surgeons and Profits

/9 Comments/in , /by

iStock_000002256780XSmallThe NYTimes recently published Salesmen in the Surgical Suite, a look at some questionable sales practices in the US surrounding a robotic surgical technology called the da Vinci Surgical System, a product of Intuitive Surgical Inc. The article cites a case of severe damage to a patient due to inadequate training of surgeons, and a variety of documented practices by Intuitive pushing the limits of proper training and supervision.

My point is not to argue the case for or against the company; that’s being done already in a case filed against them. What I do want to touch on is how we should think about issues like this. In other words – just what kind of a problem do we have here?

Profit vs. Patients?

The ultimate issue, I suggest, is the relationship between a for-profit business and the well-being of the end-user customers. Health care is an extreme case, because of the direct link between the two; but in a sense, this is the same issue we face in a capitalist society for any good or service. Healthcare, and surgery in particular, are extreme cases, thus useful for clarifying issues.

There are three commonly heard points of view:

1. There is an innate conflict between the interests of the profit-seeking business sector and the ultimate good of the patients; this conflict must be regulated by a third party of some sort.

2. There is no innate conflict between business and patients, except insofar as business is regulated by governmental and other third parties, who inevitably just distort the ideal workings of pure markets.

3. There is no innate conflict between business and patients, except insofar as business misreads its own long-term self interest by being addicted to short-term fixes, leading to regulation – a self-inflicted shooting in the foot.

The first two arguments are endlessly hashed over, with much heat and little light, in all the various venues of the day: from Congress to HuffPost to talk radio to coffee shops. (I suspect this debate is largely a US debate, as most other developed economies have tilted toward the first viewpoint, far away from the second). I’m not going to change anyone’s mind about the relative merits of one and two.

But number three is interesting: it suggests that the business-society conflict is unnecessary, and that the solution lies largely within the hands of business itself. All that right vs. left, redneck vs. socialist shouting is nothing more than noise.

Is this a utopian, pollyana-ish view? Or is it very real?

The Best Interests of Business

We can reframe the issue as simply, “Is there or is there not a long-term fit between the interests of business and consumers?” Karl Marx answered in the negative, and claimed that the tension would ultimately result in revolution. I suggest that any right-thinking capitalist must answer in the affirmative – there must be a commonality of interest, else the doctrine of capitalism is of little use or interest.

But if that’s the case in the long run – why then isn’t it in the short run? Why do we see salespeople play with endangering people’s lives in order to get the order in before the end of the quarter? Why do companies fight for less regulation, commit economically foolish acts in order to smooth quarterly earnings, and prefer the net present monetized value of almost anything, rather than the longer-term asset that comes from brand, history and culture?

We live in a very imperfect business world, I suggest. We do not do a good job of assessing economic good, or even of assessing business value. We rely on definitions of value which are narrow, solely financial in nature, and short-term. The tyranny of the discount rate leads us to forego thinking about the next generation – it’s just un-economic to worry about something 40 years out, there’s not enough present value in it to justify it.  The Chinese have a history of looking at hundred-year timeframes; the US struggles to get past quarterly, and three years might as well be a lifetime.

The poverty of our financial calculus can be described several ways. Economists would say we do not take into account externalities, so we delude ourselves about the costs of degrading the environment. Social scientists describe it as resulting in a poverty of the spirit (a tone we hear echoed by those who preach ‘the final days of the empire’).

This poverty of calculus is supported by impoverished thinking. Adam Smith was brilliant; the caricatures of him that came down through Ayn Rand and the Chamber of Commerce retain nothing of his focus on the good of society, much less his work on the moral sentiments. Even business theory is impoverished – NPS and Five Forces just don’t have the sweep that we saw from Peter Drucker or even Sun Tsu.

What I’m suggesting is that business needs to radically re-think itself, across the board, into a long-term partnership with the rest of society. The commercial instinct of mankind ought to be a driver of value and wealth creation for all of society, and not hostage to an ongoing battle between haves and have-nots. Whether we need more or less government, more or less regulation, should not be the issue.  The issue should be how can business and society line up on the same team?

We really should be able to do better.

Serving To Win

/17 Comments/in /by

Which of these statements resonates more with you?

1. I try to win, because losing sucks.

2. I try to serve my clients, because then I win too.

3. I try to serve my clients, which generally works out best for me as well.

If you chose #1, OK, I get it, I like competing as much as the next guy, but come back another time, we’re not talking to you today.

Today we’re talking about service, winning, and the link between them.

Do you serve to win? Does serving cause winning? Or is winning an occasional byproduct of serving?

What it comes down to is: Why are you serving?

Does Doing Good Cause Doing Well?

There’s a myth being perpetuated by well-intended, wishful-thinking, creative, holistic people out there: the myth that if you do right, you absolutely will do well.

In its more extreme forms, this belief would suggest that all highly ethical and socially responsible companies always make more money, every quarter.

Of course, there’s no shortage of cynical, embittered, hard-bitten “realists” who just can’t wait to whump the idealists upside the head with a good “oh-yeah-take-Bernie-Madoff” or two.

Who’s right?

Prisoner’s Dilemma

Social scientists and game theorists are enamored of The Prisoner’s Dilemma, a two-person game about cooperation and competition. In each game, each player can choose to cooperate or compete.

  • If one chooses to cooperate and the other to compete, the cooperator gets 10 years in prison, while the competitor goes free.
  • If they each choose to compete, they each get 5 years in prison.
  • If they each choose to cooperate, they each get 6 months in prison.

The person economists assume we all are—rational maximizer of self-interest—will rationally choose to compete. So will his competitor. Boom.

That approach sums up approach number 1—play to win. Turns out that businesspeople in controlled tests of prisoner’s dilemma strongly favor approach number one; it fits with what they learned in business school, be number 1 or 2 in your market, competitive advantage, etc.

In a connected world: boom. So much for statement number 1 at the outset of this post. Because in the real world, prisoner’s dilemma doesn’t just get played once.

Playing the Game More than Once

Part of the “trick” of prisoner’s dilemma is to play it more than once. Over time, the optimal strategy turns out to be “tit for tat,” i.e. assume the other party will cooperate, and do likewise. This generally ends up in iterative decisions to cooperate, with only occasional breakdowns of order.

But why do people continue to choose “cooperate?” Is it because the economists are right, and we’re all rational maximizers of self-interest who look at the long run? Do we calculate the odds and figure that the net present value of cooperating is greater than that of competing? Turns out it’s a little murkier than that.

Playing the Game With More Than One Player

In addition to frequency, the game is affected by participation. If there are high levels of information, visibility and interaction about how other players are engaging in the same game, then the cooperation strategy becomes even more dominant. There are fewer defectors from the cooperative strategy trying to squeeze in that last little bit of competitive edge.

Fewer Madoffs.

But: if you have more people choosing to tweak those odds, looking for just the right moment to sucker-punch the other guy after having lulled them into somnolence by a series of apparently cooperative gestures, looking to gain that final advantage—then the system starts to fall apart.

Why We Play the Game Matters

Prisoner’s dilemma is a pretty good metaphor for life. The economists’ fiction of individual actors is just that—a fiction. Francis Fukuyama puts it this way in The Origins of Political Order:

It is in fact individualism and not sociability that developed over the course of human history. That individualism seems today like a solid core of our economic and political behavior is only because we have developed institutions that override our more naturally communal instincts. Aristotle was more correct…when he said that human beings were political by nature.

The only serious debate is between statements two and three. Do you cooperate to win? Or do you cooperate because—that’s what you do? It’s the latter attitude, held by enough people over a long enough time period, that drives economic wealth.

  • A business strategist who advises any given company to be socially responsible because they’ll make more money that way is detracting, not contributing, to social responsibility;
  • An investor looking for socially responsible companies solely in order to make more money on their investment is a risk-seeking investor;
  • A society of people who cooperate “in order to win” is in trouble.

The Paradox of Trust

Belief number two—serving your clients because that way you win—is ultimately self-defeating. Because if “to win” is your ultimate goal, you’ll sooner or later end up facing a situation where you have to choose between serving and winning. And you’ll choose winning.

And then people will stop trusting you. And that disease is communicable.

Two variables make it all work: time, and numbers. Play the game enough times, with enough players, and it works. Where it goes wrong is when we:

  • Start managing to quarterly earnings
  • Start analyzing performance metrics in the short term
  • Analyze individual psychology outside of group psychology
  • Use the language of self-interest instead of group interest.

The paradox is: economics work if we justify it ethically. But if we try to justify ethics economically, it all falls apart. Beware of those who justify ethical behavior by the bottom lines.

Answer three—serve your clients because things generally work out better that way—is the “right” answer for all of us. If we remember to keep it long-term, and keep it social, then it works.

Competitive Theory and Business Legitimacy: BusinessWeek.com Article

/2 Comments/in /by

Rather than write two posts today, I’d like to point you to my article at Businessweek.com on Michael Porter, competitive theory and business legitimacy.  Or rather, on how business can regain its legitimacy, which is at generational lows.

The issue of business legitimacy was raised in Businessweek.com by my old (and very distinguished) professor Michael Porter, who suggested that legitimacy has to be regained not through charity but by having part of businesses core purpose be to do good.  I think this is correct, as far as it goes, but I suggest taking a long term perspective may be more successful than his way.

Click on over to BusinessWeek.com and read today’s post there.  Let me know what you think, because it’s about more than just legitimacy, it’s about how and why we run our businesses.

Financially Justifying Ethics: A Faustian Bargain?

/28 Comments/in /by

Many readers are familiar with Goethe’s Faust  in which the protagonist sells his soul to the devil in return for having his way here on earth. Those who are not familiar with it will find the same theme echoed in Robert Johnson’s Crossroads song, in which the singer sells his soul to the devil in return for fame as a bluesman. (Still more of you may only know this through its 1986 insipid version with Ralph Macchia, redeemed through a transcendent performance by Steve Vai in the role of the Devil’s hands).

But never mind. What I want to talk about is the justification of ethical corporate behavior by referring to its profitability. It is, I suggest, a slippery slope.

Is Ethical Behavior Profitable?

Many writers and organizations suggest that socially responsible behavior is also profitable. Variations on the theme include the profitability of high transparency, candor, employee engagement, customer loyalty, green-is-good-business, etc. In the jargon, you do well by doing good.

I applaud these kinds of studies, because they highlight imperfections in market pricing: usually short-termism. To the extent they are right, they hold short-term managers’ and investors’ feet to the fire to justify their self-aggrandizing decisions. 

But they are not perfect. Ethical business propositions may get tagged as unprofitable for one of four reasons. One is market imperfection, one is venality, and a third is stupidity.

But the fourth is where I want to focus. Sometimes the “right” thing simply is not profitable. Stretch out the timeframe as far as you can, fix your cost accounting all you want, remove moral hazard to zero—and it may still not be profitable. There are simply times where the “right” thing does not work out to be profitable for the entity in question.

Enter Mephistopheles.

Justifying Ethics Financially

When faced with an ethics-vs.-profit decision, a moral capitalist like CEO Aaron Feuerstein knows the answer. You do the right thing, he said, simply because—it is the right thing. That’s why they call it ‘the right thing.’ It needs no external justification.

But they’re not listening to Feuerstein much these days. And so the CSR movement has become enamored of proving the profitability of doing good.

There’s a real risk, I would argue, when ethicists and corporate social responsibility advocates put nearly all their emphasis on this line of thought. Simply put, it becomes indistinguishable from justifying ethics on the basis of self-interested materialism. Which destroys ethics.

It’s always been an appealing argument. Think Pascal’s wager, for example, in which self-interest justifies theology. Thus cheapening the theology. Chris Maher makes a wonderful parallel case for the pernicious influence of ROI calculations on charitable giving in an unpublished article.

Perhaps nobody does the integrity-is-good-for-you argument better than Jack Zwingli at Audit Integrity. In a brief conversation with him a few months ago, we discussed this point. Jack suggests that do-gooders are howling in the wind if they don’t speak the corporate language. “It just doesn’t work,” he says, “and that’s the simple argument against it. You have to show companies and investors that there are financial consequences for behaving badly.” (my paraphrase).

As a descriptive statement, it’s hard to argue the contrary. But as a moral statement, it’s well down the slippery slope.

Let’s be clear what’s at stake. Saying “those who behave well make more money,” is a mere figleaf away from saying, “you should behave well because you’ll make more money.”

From there, it’s an easy stumble to saying, “if it’s ethical, it’s profitable,” then, “if it’s not profitable it’s not ethical.” And now we are at, “If it’s not profitable, I’m not doing it—because it’s not profitable. Period.” Ethics is completely subsumed by profitability at this point.

(And don’t give me that old ‘the purpose of a company is…’ routine; I’ll deal with that in a later post.)

Talking About Ethics Without Making a Faustian Bargain

It is surely a good thing that the pro-good analysts continue to highlight stupid, inefficient and self-aggrandizing decisions. The results of better decisions are helpful in both moral and economic terms. And in the long run and in the aggregate, the vast majority of “good” decisions also do “well.” The alignment of the economic and the moral benefits society.

But not every decision presents itself so neatly. When faced with doing the moral thing, which may not be the profitable thing, that is when the Devil comes for his due.

If you have given away your moral high ground by consistently monetizing it, then you no longer have a moral leg to stand on. Companies will flatly reject your pleas, because “it doesn’t make money. Surely you don’t expect us to lose money, do you? After all, you’ve always argued…” And they’d be right.

This is not mere theory. Look at the response of health insurance companies this summer at a congressional hearing. Asked to voluntarily give up their anti-human policy of rescissions, they demurred. Their reasoning? We don’t have to; state law doesn’t keep us from doing it, so we won’t. Why should we? We’d lose money.

Where was the moral high ground on that one?  Squandered, out doing the devil’s work by implicitly permitting moral argument from profit.

So where is the high ground? It lies in public shaming. Editorials, demonstrations, op-eds, blogs, YouTube videos, politics. Moral high ground comes from appealing to a larger set of beliefs from a larger group of stakeholders. 

Zwingli tells me, “been there, tried that, it doesn’t work.” He is surely right, at least about working in the trenches.   But public shaming in a Massachusetts election got Obama’s attention. Public shaming got Goldman’s CEO Lloyd Blankfein to drop a zero from his bonus package. Public shaming cost Tiger Woods an image, and Toyota an untarnished brand.

Real change doesn’t come from the top down. As Margaret Mead put it, “Never doubt that a small, group of thoughtful, committed citizens can change the world. Indeed, it is the only thing that ever has.”

Ethicists and CSR advocates: don’t stop fighting the good/well fight–but don’t give up the high ground by monetizing everything either.  

Don’t sign that piece of paper out there at the crossroads.