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I’m Just a Soul Whose Intentions Are Good

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I’m just a soul whose intentions are good;
Oh Lord, please don’t let me be misunderstood.

Don’t Let me Be Misunderstood, by Benjamin, Caldwell, Marcus 

So goes the song (written for Nina Simone, made famous by The Animals). Heaven forbid: Oh lord, please—don’t let me be misunderstood.

Being misunderstood is a terrible thing, we say. My intentions are what’s important, we say—look at my intentions, not at my actions. Then you’ll understand me.

The US criminal justice system, as we’ll forever be reminded from Law & Order reruns, has two parts: the police, who investigate crime, and the district attorneys, who prosecute the offenders.

At least in the TV version, cops who are interested in understanding intention—intention leads to motive. It helps explain behavior, and leads to discovery.

In the courtroom, the crime is partially defined by intent. Killing someone with intent is generally considered more heinous than killing with no intention to do so. Sentencing, too, is affected by intent, as in ‘he still shows no remorse.’

We fear being misunderstood, of having bad motives attributed to us. Yet we attribute bad motives to others all the time. He has it in for me…he never listens to us…he only cares about getting his own…and so forth.

There is a constant interplay between intent and perception. It’s the territory that’s inhabited by PR firms and political consultants. And it’s that interplay that heavily determines trust, among other things.

Big Oil and Its Intent

While consuming gasoline this weekend in the great American pastime of driving while radio channel-flipping, I heard John Hoffmeister, former president of Shell Oil, respond to a question (I’m paraphrasing here by memory): “If BP really didn’t want a massive spill like this, then how can you explain their failure to have adequate prevention mechanisms in place?”

Hoffmeister then spoke some truth (again, by my memory): “Of course I wasn’t there, but in such situations, it’s often not the equipment—steel is steel—it’s the human, managerial part of the equation that goes wrong.”

It usually is. I sincerely doubt that a single employee of BP wants, desires, intends to spew hundreds of thousands of gallons of oil into the Gulf of Mexico. I sincerely doubt that anyone in BP is indifferent to the pain and suffering of living creatures and the ecosystem in coastal Louisiana. Yet those motives and worse are easily attributed to Big Oil. And hardly without reason.

The face of evil is far more mundane than the conspiracy theorists suggest. The excellent Wall Street Journal series  documents, at a micro-level, how good intentions can co-exist with disastrous decisions.

You can also destroy good intentions with an ongoing climate of fear, confusing goals, and conflicting pressures; see David Gebler’s account of unethical behavior.

How Good Intentions Get Subverted

It’s hard to do good from bad intentions. But Eric Burdon’s plea notwithstanding, good intentions not only won’t keep you from being misunderstood, they are impotent in the face of failure to act on them. The road to hell, it is said, is paved with good intentions.

What are some of the most common ways in which good intentions go bad? Here are a few.

1. “It’s not illegal.” Those who invoke the law as a way to justify their good intentions are scraping the bottom of the ethical barrel. Laws are simply the extreme version of social sanctions. Their presence means some proscription has gotten so odious that society chose to ossify it in a law. The absence of such ossification is so distant from evidence of good intentions as to be absurd. We rightly shame people who try to make the connection.

2. “It’s our policy.” Variations on the theme include “I was just following orders,” and “that’s just how things work.” At its best, this an evasion of personal responsibility by blaming things on a ‘system.’

3. “I had no choice.” On the face of it, like number 2, but accompanied by an anguished plea of being caught between rocks and hard places—there was no time, everybody was yelling at me to finish the job, it’s been done before…”

It’s a basal human trait to desire to be understood. More evolved human traits include the ability to detach from that desire, and at the same time do things in a ways that ensure good intentions are in fact clear.

How do investment bankers defraud entire nations? How do oil companies poison entire ecosystems? How do companies come to be mistrusted?

One step a time. One small, innocuous, seemingly inconsequential step at a time. The devil may lurk in our hearts, but he lives in the details.
 

The Language of Moral Education in Business: a NYTimes Moment in Time

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Yesterday, May 2, the New York Times initiated an interesting global experiment: asking huge numbers of people, all around the planet, to take a single photograph—all at precisely the same time, 15:00 GMT. Read more about it here. 

A cool experiment? Indeed. Imagine the impression of thousands (hundreds of thousands?) of photos, all of precisely the same moment in human history. I can’t wait to see it.

But that’s not what I want to point out. Because the way in which the Times announced the contest tells us about how to develop a sense of morality, a shared sense of ethics, in a large group: in this case, a world population.

Here’s that link again:

If you read it, you’ll be struck by the language, as were many of the early commenters on the article. Here is some sample language:

Do I have to take my picture at exactly 15:00?
No. We don’t expect atomic-clock precision. And we’d rather you send a good picture taken one minute after the hour than a mediocre picture taken exactly on the hour.

What if I cheat?
Come on. Why would you?

Look, we trust you. Besides, there aren’t enough cups of coffee in New York to keep our tiny staff awake for the time it would take to peruse the metadata in every single JPEG we receive. So we’re relying on you to understand that any significant departure from the benchmark hour only subverts the communal enterprise.

Of course, if we’re presented with evidence that your entry wasn’t taken close to 15:00, we’ll remove it from the gallery.

What about adding or subtracting or combining elements?
Again, don’t…

And if I do so anyway?
Really, why would you? We’re not going to pore over submissions looking for fakery and fraud. But we will remove any photographs that are demonstrably manipulated. Please, just spare us.

The Language of Moral (Business) Education

The Times is attempting to deal with a group. In this case, a remarkably global, diverse, and very loosely connected group. If even small numbers of people behave badly, they have the power to subvert the project.

I suggest this is a typical situation for moral education. What do you do to encourage members of a group to behave in a way that encourages the greater good for all?

  • You could simply depend on the free market of ideas, believing that if the photography idea is a good one, it will survive the market; and it doesn’t survive the free market, then it was a bad idea that didn’t deserve to live in the first place.
  • You could define a set of incentives to encourage the right group behavior, define metrics to measure the right group behavior, then tune the incentives to maximize it. 
  • Alternatively, you could enact a set of regulations about the contest. You could then have a government agency enforce them.

Or–you could choose the tools of moral education.

You acknowledge your powerlessness to compel the behavior of others. Instead, you appeal to their conscience.

What about cheating? You go directly to the potential cheater and say, ‘Really, why would you?’ What’s to keep someone from cheating? Again, make it personal: say, ‘Look, we trust you…We rely on you…to not subvert the communal enterprise…Please, just spare us.’

This is the language of moral education. Appeal directly to the individuals. Appeal to their innate sense of community. Acknowledge the absence of your power to compel their compliance. Indeed, acknowledge your dependence on their willingness to comply.

That’s the language of moral education. It’s disarmingly honest, transparent, and vulnerable. It acknowledges an individual conscience.

And it works.

Amazing, isn’t it, how infrequently we think of applying it to our challenging business situations.
 

David Gebler on Ethics in Business (Trust Quotes #10)

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David Gebler is a thought leader, speaker and seminar leader on the subject of ethics in business. Trained as a lawyer, David is a Senior Lecturer at Suffolk University where he teaches Business Ethics and sits on the International Advisory Board of the Graduate Program in Ethics and Public Policy; he is also a principal at Skout Group, a firm focused on culture change.

With globally significant public and private sector clients on his resume, David brings a broad perspective to questions of ethics in organizations.

CHG: David, thanks for joining us here. Tell me, why is it so hard for companies to get their heads around thinking about ethics?

DG: While ethics issues are of critical importance to organizations today, “ethics” as a business function is perceived as quite amorphous and hard to define. In many organizations ethics is synonymous with “compliance,” narrowing the focus to ensuring adherence to stated standards of conduct. In other organizations “ethics” is treated as a vague platitude without clarity as to how it drives behavior.

CHG: You told me once there were three approaches to business ethics: behavioral, philosophical, and legal. Can you briefly explain what those categories mean?

DG: Philosophical business ethics focuses heavily on the intention of one’s actions. Aristotle wrestles with character and virtue, while Kant is unequivocal in the need to always do the right thing, regardless of the consequences. A theoretical look at intent is often irrelevant to business which is more focused on employees’ actual behavior.

American businesses often look at ethics through the lens of compliance. “Doing the right thing” only means observing the law and the company’s code of conduct. However, there may be conflicting “right things” about which employees need guidance.

Behavioral ethics draws from social psychology and looks at what motivates behavior and what an organization can do to remove roadblocks to employees being honest.

CHG: You have come to view ethics in business as largely a function of corporate culture; you looked at the top 20% and the bottom 20% of companies in an ethical cultural study—what did you find?

DG: Most employees have a good sense of their moral values and actively seek to live those values at work. Ethics risk emerges most often when employees face pressures and external influences that drive them to do things they regret.

If an organization surveys employees only to find out if they know what they should do (i.e. the top 20% knows there is a code of conduct and a helpline), they may be missing key data on whether employees would even raise an issue if it arose.

I worked with a large global company that asked me to conduct focus groups with divisions in the top 20% and bottom 20% based on results of an ethics survey. In meeting with employees at one of the top 20% divisions, it was true that when I asked if they would report misconduct everyone said yes (i.e. top 20%).

However, my very next question was “If you found out early in the quarter that you were not going to meet your plan, would you report that to your boss?” And no one said yes. Doing such a thing would be a “CLM” (Career Limiting Move). Open communications and a willingness to raise difficult issues are more critical ethics determinants than knowing whether there is a helpline.

CHG: What kinds of culture, then, are associated with high ethical behaviors? And what can a serious manager do about it?

DG: There are several common traits of ethical cultures:

1) Open communication and respect – employees at all levels feel that they are spoken to truthfully and are respected as people.

2) Personal responsibility and a sense of control – employees are held accountable for their actions and their commitments to others and are engaged in tasks that matter.

CHG: I was surprised to hear you cite the Federal Sentencing Guidelines as a key source for investigating ethics in business. Can you say more?

DG: While business ethics and ethical companies have been around for many, many years, the focus in the US began in earnest in the 1990’s. As a result of the defense industry scandals in the 1980’s, the US Sentencing Commission developed guidelines for corporations to avoid criminal liability if they put into place an effective compliance program. These guidelines have become best practices for US companies. In 2004, as a result of the Enron legacy of scandals, the Guidelines were revised to add language focusing on ethics and organizational culture.

CHG: You mentioned that you were struck by the lack of remorse in post-financial melt down financial industry executives. Say more?

DG: The bottom line is that today’s financial market is only a numbers game. Concepts such as the fiduciary responsibility of one party to another have been lost. While leaders talk about the need for trust to grease the wheels of capitalism, there is very little of it in the system today.

CHG: What’s the difference between ethics and morals?

DG:  Social psychologists have long told us that behavior is a function of the person and their environment. Morals address one’s character, the person. Ethics addresses the ethos, the environment in which we make decisions.

CHG: I was shocked when you first told me, “In my 15 years of work, only one client once asked, "How do we define the right thing?"  So business ethics is largely about how do you get people to concur with what the agreed upon guidelines are.”

DG:  Many companies use the “newspaper test” as a decision-making model. How would you feel if your actions were reported on the home page of cnn.com? While we have a societal set of standards, there are often tough issues that pit right vs. right. Superficial guidelines of being honest may not be enough. For example, every company takes certain risks, even with quality and safety. What guidance do leaders have to know what is “reasonably” safe enough to go to market with a product?

CHG: What’s the difference between ethics and compliance? And does anyone care about the former?

DG: Compliance is the adherence to prescribed standards of behavior. Compliance training educates people on what behavior is expected of them.

Ethics is the determination of whether people will engage in the desired behavior and what should be done to encourage people to do things they know they should do, but often don’t.

CHG: Here’s a biggie for mid-level people in a number of my clients; what should an individual mid-level manager do in the face of what they perceive as “tough” behavior by their superiors, i.e. the “career-limiting move” of speaking out about things?

DG: When faced with a tough situation, managers often look at the issue as being black or white: “Do I do what’s expected of me or do I do what’s right?” Effective use of ethics would be to see whether the issue can be reframed so that it’s not so drastic a choice. Managers in tough spots need not be heroes, but they do need to be savvy:

  • Who else can I bring into this situation to guide me?
  • Who else in the organization would support me in doing the right thing?
  • How can I have a conversation with the person who is forcing me into this situation? Perhaps there is a “third-way” I haven’t thought of.

CHG: What seems to be the American take on ethics in business?

DG:  Americans are unique. We combine a rules-based culture (ever seen the NFL Rule Book?) with a cowboy heritage of heroes and independence. Americans are very results-oriented and in general, are less focused on how we got the results than are other more social cultures.

Therefore, I find that American business leaders are more interested in ethics when they can see that being ethical helps the bottom line: less time and money spent on investigations and fines, and more time spent by engaged employees doing productive work.

CHG: Doesn’t that create a tension—justification of ethics by subordinating it to the bottom line? Or are you saying it’s not so much about particular actions as it is about a culture—creating an ethical environment, which in turn tends to be more profitable?

DG: Let me give you an example from today’s headlines. Toyota shouldn’t be forced to make a trade off between safety and profit. Both are necessary because each one supports the other. Toyota’s brand is based on safety. It won’t sustain its profitability if its products aren’t safe. Similarly, safety has to be addressed in the context of products consumers can afford. We are willing to accept some degree of risk.

Ethics comes in to guide how Toyota balances these two objectives. In leading up to the recent scandal key questions must be answered: Who had information but didn’t report it up to senior leadership? Why not? Which stakeholders, internal and external, were not included in the decision-making process?

This is number 10 in the Trust Quotes series.

The entire series can be found at: http://trustedadvisor.com/trustmatters.trustQuotes

Recent posts in this series include:
Trust Quotes #9: Chris Brogan
Trust Quotes #8: LJ Rittenhouse
Trust Quotes #7: David Maister

The Trust Primer Volume 6

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Every 2 out of 3 months we publish an issue of the Trust Primer, an ebook series highlighting three recent provocative and insightful topics and conversations from the TrustMatters blog. 

Catch up on posts you missed.  See what we think is worth highlighting, and agree or disagree with us.  Pass it along to friends you think might enjoy it.  It is free, after all, and it looks pretty cool, if I do say so myself.

In this issue we touch on three different aspects of relationships: the relationship of a company to society, the relationship of a company to its several stakeholders, and the relationships between ourselves as individuals.  The individual posts are:

But you can get them all at once in .pdf ebook format by clicking below:

Get the Trust Primer volume 6 here

We hope you enjoy it.

The Difference Between Wrong and Illegal

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Do you know the difference between a wrong action and an illegal action? If you don’t, you are not alone. But neither are you to be trusted. 

The Valukas Report

The Valukas Report was commissioned by a US court to determine the causes of Lehman’s bankruptcy. Made public last week, it has caused a bit of stir in certain quarters—including Wall Street, lawyers and accountants.

In a nutshell, the report accuses Lehman of using an accounting technique (called Repo 105) to temporarily move assets off its balance sheet just before quarter’s end, in order to show lower leverage ratios, then moving the assets back on-balance-sheet shortly after the end of the quarter. See details here.

The auditors of Lehman Brothers were Ernst & Young. Lehman’s source of legal advice for the Repo 105 tactic was the venerable British law firm Linklaters. Both are critized in the Valukas report.

The Financial Times headlined the story thusly: "Damning Insight into Corporate Culture Sheds Light on Fall of a Wall Street Giant." The story quotes one ‘senior Wall Street executive’ as saying, "I almost threw up when I read the report; it makes me sick of this industry."

Let’s stipulate that this is the language of “wrong,” at least for Valukas, the Financial Times, and one Wall Street executive. What should be the response of the various parties?

Responses to Charges of Wrong Doing

Let’s start with Dick Fuld, Lehman’s former CEO. His lawyer is quoted as saying: 

Mr Fuld did not know what those transactions were – he didn’t structure or negotiate them, nor was he aware of their accounting treatment. Furthermore, the evidence available to the Examiner shows that the Repo 105 transactions were done in accordance with an internal accounting policy, supported by legal opinions and approved by Ernst & Young, Lehman’s independent outside auditor.

And what does auditor Ernst & Young have to say? 

Last week, the group defended its signing-off of Lehman’s 2007 accounts and maintained the books were "fairly presented in accordance with [US] generally accepted accounting principles."

The Valukas report also criticized Linklaters, saying that “Lehman’s … turned to Linklaters for a legal opinion blessing the use of so-called "Repo 105" transactions when it could not obtain a suitable opinion from US lawyers.”

Here’s what Linklaters has to say: 

"The examiner’s report into the failure of Lehman Brothers includes references to English law opinions which Linklaters gave in relation to a number of Lehman transactions. The examiner . . . does not criticise those opinions or say or suggest that they were wrong or improper. We have reviewed the opinions and are not aware of any facts or circumstances which would justify any criticism."

Wrong is from Mars, Illegal is from Venus

Pick your own planetary metaphor: the point is that “wrong” is a moral concept, “illegal” is a legal concept–and key players in our global economy have come to brazenly deny the distinction.

The Valukas report resonates as a moral indictment. But the responses are from Planet Law.

When the charge of “wrong” is routinely answered by “it’s not illegal”—and we accept it–it means something is seriously wrong with our moral culture.   

The Financial Times blames the “US box-ticking culture.” 

It is far easier for an accountancy firm to retain a lucrative relationship with its clients if it does not sit in judgment on their activities, but simply adheres to a set of blind rules. Auditors can more easily defend lawsuits when things do go wrong if a rule book can be appealed to. But this is precisely why the whole system is so frustrating from the investors’ perspective. The more rule-driven auditors are, the less valuable their work is as due diligence.

Jim Peterson, a noted accounting commentator, talks about the failure of the massive Sarbanes/Oxley legislation to prevent just this moral meltdown:

A program of airport security will lack credibility, if so broadly applied as to deprive ordinary citizens of their ability to carry a bottle of wine or a tube of toothpaste, but that fails to identify terrorists whose deadly threat is limited only by their inept inability to detonate their shoes or their underwear.

Sarbanes/Oxley suffers the same defect: if it could not detect and deter an “outlier” on the scale of Lehman, then what beneficial effect can its proponents claim it has accomplished, by imposing an intrusive system of box-ticking on the vast bulk of corporate registrants?

Some recommend changing regulations.  Others suggest structural changes.  Still others recommend more enforcement.  But all these solutions have limitations; in particular, they are trying to solve a moral problem with more laws.  But this only exacerbates the issue.

You can’t solve a moral dilemma with more laws. There will always be a Dick Fuld, or a Lehman, willing to push beyond moral boundaries using absence-of-illegal as a sleight of hand.  It’s up to us to call them on it.

NYTimes columnist, David Brooks, is right in saying, “The only way to restore trust is from the local community on up.”  It starts with people explaining to politicians, lawyers, newspaper editors and managers that just because it isn’t illegal, doesn’t mean it isn’t wrong.

Get mad: but get morally, not legally, mad. 

 
 

 

Too Big to Trust? Or Too Untrustworthy to Scale?

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This will be my fourth week on the road; more on that later in the week. At least all that plane time (and waiting in lines time) makes for good reading time—thanks to the iPhone Kindle Reader app.  (and no they don’t pay me for saying it).

I’m re-reading Francis Fukuyama’s 1995 classic Trust: the Social Virtues and the Creation of Prosperity. 

It’s the perfect companion for Andrew Ross Sorkin’s Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves. 

Here’s why they belong together.

Fukuyama’s View of Trust

Fukuyama makes a compelling case that economic development is strongly affected by the cultural norms of a society—in particular, the propensity to trust. In this, he is up against both neo-classical economists (who argue people are rational utility-maximizers), Marxians (who argue it’s all about the money), and a ton of management theorists (who pretty much believe both).

As Fukuyama puts it:

The Chinese, Korean and Italian preference for family, Japanese attitudes toward adoption of non-kin, the French reluctance to enter into face-to-face relationships, the German emphasis on training, the sectarian temper of American social life: all come about as the result not of rational calculation but from inherited ethical habit.

Who we trust, it turns out, radically determines the nature of business we engage in. He explains why large French companies are state-owned, and why Chinese companies find it hard to hire professional management (think Wang Laboratories). 

Fukuyama describes several cultures in the world–southern Italy, chunks of Russia, some Chinese regions—which contain high-trust pockets of communities within a broader society of low-trust intermediate institutions. 

Those high trust pockets? Think the Mafia, Chinese tongs, and street gangs.

Their values? Fierce loyalty toward each other, coupled with a level of competitiveness bordering on paranoia regarding other competing pockets and the world at large.

See where this is going?

Too Big to Fail?

Andrew Ross Sorkin’s book is riveting reading, a blow-by-blow account of who said and did just what to whom during the extraordinary market meltdown that brought down Lehman Brothers, resulted in the TARP legislation, and nearly brought the world financial system to a full stop.

Part of the charm is sorting out the black hats and the white hats; maybe I should say black and shades of gray.

Paulson and Geithner emerge as the flawed heroes. Jamie Dimon plays to the crowd, but is also the only really good manager of the lot, and the only one to show flashes of true industry leadership and something resembling responsible social behavior.

The rest, frankly, resemble refugees from a failed Sopranos casting call. Jimmy Cayne, John Mack, and Dick Fuld in particular come off as mob leaders, with Goldmans’ Lloyd Blankfein coming off better only because of a better sense of a world beyond New York. 

Wall Street as Low Trust Culture

The majority of suggestions to reform Wall Street focus on four solutions:

1.structural cures (e.g. separate investment and commercial banking functions),

2.regulatory cures (e.g. prescriptions for capital ratios),

3.enforcement (e.g. tougher sanctions, more investigative staff for the SEC),

4.compliance (more procedures).

None of those critiques draw the conclusion that feels obvious if you’ve just read Fukuyama: that the dominant model of leadership on Wall Street has been pretty much like the Mafia—or the Sopranos, anyway. Wall Street has been run by a cabal of low-trust, tribal, familistic gang leaders. 

The inability to work as a group when the industry was threatened; the tendency to circle like cannibalistic sharks when there’s blood in the water; the pathological obsession with ‘enemies’ (the most hated being the short-sellers, who as near as I can tell were never shown by anyone to have done any significant harm and who in fact did a lot of good, but were nonetheless the villain of choice); the celebration of loyalty coupled with the ability to flip allegiances on a dime. All these are traits of low-trust cultures.

A trader once told me how he was recruited. 

“The guy from [Big Wall Street Firm] walked into a room of 25 expectant recruits, and said, ‘Who here is motivated by fear and greed?’ Me and another guy raised our hands timidly. ‘The rest of you can go home,’ he said, ‘I’m only interested in these two.”

So how do these clowns get so much power? Amid all the defeatist models that posit human beings as innately susceptible to money, that assume selfish motives are immutable and can only be beaten by more rules and rewards, I still think there is a valid role to be played by culture and character. 

There are more than a few moments of perspective, responsibility and decency shown in Sorkin’s book by Geithner, Paulson and Dimon. Why aren’t there more players like them?

In Sorkin’s final pages, he warns that we’re already letting the opportunity for genuine reform slip by—and not just regulatory and structural reform either. But, he says:

Perhaps most disturbing of all, ego is still very much a central part of the Wall Street machine. While the financial crisis destroyed careers and reputations, and left many more bruised and battered, it also left he survivors with a genuine sense of invulnerability at having made it back from the brink. Still missing in the current environment is a genuine sense of humility.

Whether an institution—or the entire system—is too big to fail has as much to do with the people that run these firms and those that regulate them as it does any policy or written rules. 

Amen to that, Mr. Sorkin. We cannot afford these low-trust types wandering around with their hands on the financial world’s throat.

 
 
 
 
 
 
 

 

Financially Justifying Ethics: A Faustian Bargain?

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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.

 

The Real Lesson of Toyota: Cultural Insensitivity?

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The obvious story about Toyota—in the US anyway–is their perceived huge loss of trust. Typical is this column yesterday by David Lazarus of the LA Times, titled Toyota: What’s so Hard About Doing the Right Thing? 

Suggests Lazarus:

“Toyota’s actions throughout this mess — the initial denials, the obfuscating, the gradual acknowledgment of safety issues — suggest that its priority first and foremost has been to cover its crankcase, not safeguard its customers.”

Well…not so fast.

Not Every Moral High Ground Looks the Same from All Vantage Points.

Take Laura Silsby, the head of the group accused of kidnapping children in Haiti. Here’s what CBS reports she said in front of the court: 

Silsby told the judge: "We were trying to do what’s best for the children."

When the judge asked, "Didn’t you know you were committing a crime?" Silsby quietly answered, "We are innocent."

Personally, I have very little doubt that Silsby sincerely believed what she said. More importantly, she appears to have believed that her beliefs would shared by the vast majority of the world’s population, including a Haitian court.

As it turns out—the courts in Haiti somehow saw morality differently, believing that when due process of Haitian law regarding separating families is the issue, there’s more at stake than bureaucracy.

Or take Scott Roeder, who pleaded innocent in Wichita Kansas to murdering George Tiller (an abortion doctor), because “Those children were in immediate danger if someone did not stop George Tiller…The babies were going to continue to die.” 

As it turns out, the Wichita jury took 37 minutes to view Roeder’s plea from a different viewpoint; one in which premeditated killing over a disagreement about a legal procedure constituted the crime of murder.

Toyota’s Behavior from the American Perspective

The LA Times article quoted at the outset of this post is quintessentially American. Toyota made mistakes, the narrative goes, then did the classic Watergate move, compounding the error by covering it up.

The American narrative continues.  No forthcoming comments. No transparency. Vague claims of intent to fix. Then, more bad news, dribbling it out. Even Toyota’s American dealers—behaving more like Americans than Toyota employees–bought the American narrative and withdrew advertising from ABC affiliates because they didn’t like the press coverage. 

Why did Toyota do this? According to the American narrative, the same reason as John Edwards, AIG, Merck, Enron, Lehman, and pick-your-scandal everyone else did: to line their pockets, take the money and run, fleece the average American–a quick-buck hustle.

And, in America, they’re generally right.

Except Toyota is a very Japanese company.

Toyota’s Behavior from the Japanese Perspective

I am no expert on Japanese culture. I’ve set foot there only once. I’ll gladly take corrections from those who know the culture better than I.

But here’s what I think.

The story in Japan is not one of greed, but of hubris. And not American hubris, but Japanese. 

From JapanToday we hear: 

“It’s a “terrible blow” for Toyota because its identity is so closely linked to quality and the company seemed slow to recognize the problems, said Kenneth Grossberg, a marketing professor at Waseda University who has lived in Japan for 16 years. 

In other words, they committed a cardinal Japanese sin: the sin of arrogance, by letting down their constant vigilance of quality. Greed? The story here is not greed; it’s something much worse in Japan—loss of face.  About the company image.  And about the national obsession–quality.  The Japanese are upset about Toyota too–just not in exactly the same way we are.

In a culture that not so many years ago considered failures like this a cause for major public self-humiliation, it is not surprising that mea culpas are taken very seriously. For one thing, when Americans don’t apologize quickly, we assume it’s because they’re legally at risk when they confess. The concepts are distinct in Japan–you can apologize without risking legal consequences.

This is not a simple analysis. Brooke Crothers, who knows more than I do, attributes it in part to another Japanese trait—a desire for denial. 

Whatever your view, it’s hard not to ascribe our own unconscious belief systems to others. 

Hard, but pretty important nonetheless.

 

The Bigger the Bank, The Lower the Customer Satisfaction?

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That’s what seems to be the finding in this interesting study:

Customers of the biggest banks in the United States are the least likely to believe their financial institution does what’s best for them as opposed to what’s best for the bottom line, according to a new report from Forrester Research.

To put the rankings in perspective, large banks have generally been at the bottom of the list since the survey was initiated seven years ago, and many of the banks have alternated between the bottom spots year to year, said a Forrester vice president…

Here’s my question: how do you explain this?

And I’d like to pose the question to two classes of people: economists, and the wishful thinkers (me often included) who like to point out that trustworthy behavior is business-successful behavior.

The fact is: it’s not easy to square certain beliefs with certain data. Let’s climb up to 30,000 feet and look at this in broad, simple terms.

Bank Data vs. Economists’ Assumptions

I’ve got to be careful here because I’m not an economist. But I’ll go out on a limb and say that nearly all economists believe a few things. 

All else equal, people in a free market buy the lower-priced good. 

All else equal, satisfied customers in a free market reward the better company with higher profits and growth.

Higher size yields lower costs, thus greater profits and/or lower price and/or better quality.

Roughly right? Then how do we account for a situation where lower customer satisfaction correlates with higher size?

Here are some of the logically possible answers to the conundrum.

  1. It’s not a free market at all; never has been. And if you believe removing regulations to make it more ‘free’ will improve customer satisfaction ratings, I’ve got a bridge to sell you. (I give this explanation the highest probability)
  2. All else is never equal; things like ATM availability, extra-bank fees and aggressive marketing give big banks an advantage;
  3. The survey identified the wrong customers; the ‘real’ customers are institutional with strong ties to the big banks, and they are very, very satisfied.
  4. It’s an aberration due to recent market conditions. Um, no. Not over 7 years. That goes back to 2002. Nope, this is pretty solid.
  5. The biggest firms didn’t grow by organic growth from satisfying customers, but by acquisition of failed banks. Maybe, but that should have resulted in lower costs. And economists think lower costs drive customer satisfaction. The conundrum remains. 

Help an economist today; what are some other explanations that cover this seeming anomaly?

Bank Data vs. “Doing Well by Doing Good” Theorists

There are lots of studies to suggest strongly that trustworthy behaviors like focusing on customer service and data transparency are not only socially valued, but result in higher profitability too. I cite those studies, and so do others.

And then there is data like this, which most of us feel in our guts to be true. It really does raise the question, “Just where is the link between good-citizen behavior and good economic results?”

I hear from almost every trust cynic: they simply do not believe that behaving in a trustworthy manner is profitable. It is too risky, they say; and contrary to wishy washy thinking, behaving nicely results in getting your butt kicked in the market.

For that point of view, here’s Case Exhibit I. How can DWBDG theorists explain their way out of 7 years of uncorrelated satisfaction and market performance?

The logically possible answers to this conundrum, I suggest, are identical to the answers for the economists, 1-5 above.

But what about you? How do you explain the data? And what are the policy implications of your explanation?

 

 

Ethics and Trust: Interview with Dr. Robert Hoyk

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A few months ago I received a publicist’s offer to review a book. I usually take a quick look, but I almost always say no. This case was different.

The book is The Ethical Executive: Becoming Aware of the Root Causes of Unethical Behavior, by Dr. Robert Hoyk and Paul Hersey, and the title was good enough for me to take the review copy.

What grabbed me was their idea that ethics is usually considered a philosophical issue, but the management application of ethics is largely a matter of psychology. The Ethical Executive lists 45 psychological Traps that drive people to behave unethically.

Following is an interview with author Dr. Robert Hoyk:

CHG: First, you have three categories of Traps—Primary, Defensive, and Personality. Can you explain them?

RH: Primary Traps directly drive people to behave unethically. These are the main traps that pull us in, that provoke us or trick us into illegal or unethical transgression.
An example of a Primary Trap is Power. The more the powerholder uses his power, the more he attributes the successes of his employees to his own leadership (“My orders and influence caused the workers to perform effectively”); Over time, the more the powerholder attributes the success of his employees to his own leadership, the more he begins to devalue his employees. (“It was my success! Not theirs! They were just following orders.”)

Defensive Traps are attempts to find easy ways to reverse course after a transgression has already been committed. They are reactions to two internal stimuli: guilt and shame. Guilt and especially shame are very painful emotions. They call into question the positive view we have of ourselves.
Defensive Traps are insidious because they annihilate or at least minimize √ our guilt and shame. They help us deny our transgressions, thus setting us up for repeated unethical behavior.

An example of a Defensive Trap is Advantageous Comparison. Advantageous Comparison allows the individual who has committed an unethical transgression to lessen his guilt by comparing what he has done to something worse. For example, “Damaging some property is no big deal when you consider that others are beating people up.”
Personality Traps are personal traits that can make us more vulnerable to wrongdoing.

An example is Social Dominance Orientation (SDO). SDO is a trait that delineates one’s “preference for inequality among social groups.” It is the wish that the groups and organizations you belong to (business teams, corporation, social class, gender, ethnicity, country, and so on) be “superior” and “dominate.” SDO can be measured by a questionnaire that has been developed by Felicia Pratto and her colleagues at Stanford University.

CHG: What makes your approach to ethics different from others? What does this psychological approach reveal that other approaches might not?

RH: Most approaches to ethics are philosophical. Philosophical ethics is important because it tells us what the right action is given different situations. But there’s a problem. Even if we know what the right thing to do is, we often don’t do it. Why? We often fall prey to psychological traps. Morality will improve to a great extent when ethics is integrated with psychology. Ethics will continue its crucial job of advising us what the right behavior is and psychology will motivate us to do the right thing and help us stop our transgressions.

CHG: In philosophy, this is what’s called the problem of incontinence: how to explain knowing the right thing to do, yet not doing it.

RH: The Ethical Executive places a major focus on the root causes of unethical behavior—psychological dynamics. It inaugurates a new priority in the field that will lead to a clearer vista and fresh solutions.

CHG: I’m not sure I agree with the word ‘cause’ here; but I surely agree it helps drive practical actions.

RH: In that vein, here’s a quote from author Anthony Parinello:

"This book will not teach you how to be ethical, it will educate you to recognize the day-to-day ethical traps that we all face, analyze them and give the practical, usable information you need to respond in a way that supports good intention, fair decisions, and abundant wealth.”

CHG: Your book came out in September 2008, before the latest flood of unethical behavior, largely in the financial sector. If you were to rewrite the book with this most recent data, what primary patterns would we see revealed?

RH: The 45 traps in The Ethical Executive are universal and timeless. We might have used different examples, but the traps would be the same. Having said that, we believe there are still more traps to discover.

Type A Personality may be such a trap. A Type A Personality is “characterized by a continuously harrying sense of time urgency.” This trait activates Trap 15: Time Pressure. People who are running a hundred miles per hour take short cuts when it comes to taking the time to make good ethical decisions and even to be aware that there might be a potential ethical dilemma.

CHG: How can executives and employees protect their organizations and themselves from these traps?

RH: First, know the 45 traps. Voyagers who know the location of quicksand navigate around it. When we clearly identify danger, we can prepare for it and avoid it.
Second, hire a psychologist to be part of the ethics and compliance team. Many of the traps incite powerful emotions that in turn pull victims toward wrongdoing. In general, emotions provoked by traps are: fear, anxiety, distress, shame, anger and sadness. Emotions this strong can bring us all to our knees. Moreover, be wary, we all have the capacity to shut down our emotions. If we don’t feel anything, it doesn’t always mean our emotions are gone. A psychologist can assist executives and employees deal with their intense emotions.

CHG: What does all this have to do with trust?

RH: In general, an ethical behavior is an action that engenders trust. It is a behavior that, as much as possible, creates non-zero-sum situations.
These two terms, non-zero-sum and zero-sum are taken from game theory. In zero-sum situations, the outcomes of those involved are “inversely related.” One person’s benefit “is the other’s loss.” In competitive sports, when one football team wins the other loses.

CHG: Ethical relationships are inherently relational; Robinson Crusoe had no need of ethics, at least before Friday.

RH: In non-zero-sum situations, one group’s win doesn’t have to be a misfortune for the other. The more that the needs of all parties are identical, the more you have a non-zero-sum situation. When the Apollo astronauts were marooned in space in 1970, their needs completely overlapped. The results of their actions to get back home would be either uniformly good or bad for all three of them.

Overall, ethical actions drive non-zero-sum interactions, which create more shared benefit and mutual trust.

CHG: And overall, greater economic benefit as well.  Dr. Hoyk, thanks very much for taking the time to share your thinking with us.