The Tyranny of Low Cost Strategies and the Gospel of Walmart

High Frequency Trading is in the news again. HFT is highly computerized stock trading, which secures faster execution for bigger computers located physically closer to the stock exchange. It now amounts to over half the daily flow on the stock exchanges.  Critics argue it amounts to legalized front-running, is unethical, and should be illegal.

The issue was raised starkly in a July 24 2009 CNBC interview  wherein a critic of HFT (Joe Saluzzi) accuses a proponent (Irene Aldridge) of defending unethical behavior. Aldridge’s reply:

“How dare you accuse us being unethical! We are the ones cutting margins, you are the ones being unethical.”

Ms. Aldridge’s response captures perfectly the moral flip-flop that business has achieved in the past few decades. Never mind whether HFT amounts to front-running, involves collusive behavior by the exchanges, or is unfair to retail investors, says Ms. Aldridge – the moral high ground, the Ethical Trump Card, is Low Cost. In the name of lower prices, even fractions of pennies, all is justified.

The Gospel of Walmart

Let’s leave Wall Street for Main Street. We all know the Walmart story – low prices all the time. But as a Fast Company article wrote, back in 2007:

The giant retailer’s low prices often come with a high cost. Wal-Mart’s relentless pressure can crush the companies it does business with and force them to send jobs overseas. Are we shopping our way straight to the unemployment line?

If revenue were GDP, Walmart would be the world’s 25th largest economy. That is pretty big market power.

Walmart’s benefits are clear: lower prices, all the time, for millions of consumers. But along with those costs come trade-offs. The reduction of brand power. The exporting of jobs. The reduction of pay and benefits for workers in the name of lower costs to consumers.

More insidiously, what we get in the Walmart deal is lowest-common-denominator consuming. We get buyers who aren’t presented with quality alternatives, can’t recognize them if they are presented, and are trained to view low price as the primary Pavlovian trigger for purchasing.

That’s how we get tramplings at 5AM holiday store openings; that’s how the US produces twice the garbage per capita of Sweden; and I suspect (though can’t prove it) it helps us move toward becoming a nation of hoarders.

Is it all worth it?

The Tyranny of Low-Cost Strategies: Linking Wall Street and Main Street

What links high frequency trading to Walmart?  There is a common ancestor in the family tree of business thinking.

In the 1970s, thinking about business strategy took an abrupt turn – from CUS to COM.  That is, from being about the company’s relationship to its customers, to being about the company’s relationship to its competitors. (If you’re interested, the leading thinkers were Bruce Henderson, Michael Porter, and the Boston Consulting Group).

By 1980, the conversion was complete: anytime anyone said “strategy,” you knew it meant “competitive strategy.”

One of the most powerful points Porter made in his classic Competitive Strategy was that there were two successful generic strategies, and the first of them was Low Cost Producer. He who got the lowest cost got the greatest volume, which led to higher market share and higher profits, which led to lower costs, and so on. It was a road toward legal monopoly, insofar as laws permitted.

Porter’s rules were learned very well: by Jack Welch at GE, by Walmart, by the mortgage business, by Wall Street traders, and by every exec ed program in every business school in the world. It became – and I do not use the word lightly – gospel truth that the highest business good was to lower costs.

The root purpose of lower costs was to gain sustainable competitive advantage for the company. But the collateral benefit, the offshoot which could be spun for great PR, was that the consumer benefited as well. Allegedly.

This insight took only a little bit of tweaking (let’s revise Adam Smith and Milton Friedman, season with a dose of Ayn Rand and a dash of Alan Greenspan, and voila!) to come up with an ideology that said not only is low cost a successful business strategy, it is also the Key to Capitalism, which in a capitalist society is also the source of ethics. Allegedly.

This is how we get to Ms. Aldridge’s high dudgeon at being accused of unethical behavior (“Moi?!”) In this all-too-common alternative view of the world,  profit underlies ethics, business success is the root of morality, and low cost is the Ur-explanation that requires no further referent point for ethical discussion.

“We are the ones cutting margins – you are the ones being unethical.” In that statement, the transformation is complete: low cost is the new moral high ground.

Be careful what you wish for.


Is Trust Trending?

Here are six events I’ve noticed recently. I think there’s a connection, and perhaps even a trend in them. Help me sort out what that connection and trend might be, will you?

1. In mid-October, 100 of the world’s leading authorities on corporate disclosure gathered at Harvard Business School to attend an event called “A Workshop on Integrated Reporting: Frameworks and Action Plan” sponsored by the school’s Business and Environment Initiative. (Very briefly: Integrated reporting means combining traditional financial reporting with non-financial, i.e. Environmental, Social and Governance, issues). You can download a free ebook from the event with papers by about half the participants—it’s excellent.

2. The new Dean of Harvard Business School—who among other things had been a counselor to the MBA Oath program the year before—opened the conference, saying: "It’s a matter of great concern to me that society has lost so much trust in business.  It’s something that I think each and every one of us needs to pay great and serious attention to.  We live in a time in which business leaders are often trusted even less than politicians."

3. The New Yorker magazine printed an article titled, “What Good is Wall Street? Much of What Investment Bankers Do is Socially Useless,” whose tone is considerably less strident than its title might suggest.

4. October saw the release of the documentary “Inside Job,” a serious (and seriously critical) look at the recent financial crisis by Charles Ferguson, an MIT PhD in political science.

5. The MBA Oath, something that many considered faddish a year ago, seems to be gaining steam

6. Robert Ketchum, head of FINRA, seems to be advocating for a fiduciary standard of some sort for the brokerage business. 

One robin doth not a Spring make; and maybe I’m generally an optimist. But I think there’s something positive going on here.

When I see integrated reporting discussed by 100 people—not just non-financial reporting, but integrated reporting—I think that’s significant.

When I see global business institutions like the Harvard Graduate School of Business Administration making serious trust-talk at the Dean’s level (and Dean Nitin Nohria was appointed in part, I’m sure, because he talks that way), I think that’s significant.

I realize the New Yorker is not Forbes magazine, but when they decide that it’s time to write a serious business article, and to do so with their high standards of journalism, I think that’s significant. 

When the financial legislation was passed earlier this year, the fiduciary issue was left out of the mandated laws, and left to the discretion of the SEC. Given the recent election results, I wouldn’t have predicted FINRA’s reaction. That feels significant.

What I think is significant about all this is not that an argument is being won or lost. This strikes me as refreshingly not about good and evil. It’s about a new willingness to take seriously some complex issues of trust. How do we integrate stakeholders? What does trust mean for governance? Can we have intelligent regulations that increase trust? 

Most of all, I sense a willingness to bring trust to the business table as a core and valid agenda item—a willingness that I don’t think was there as recently as just 12 months ago. 

Is something going on? Or am I on drugs? What do you think?

The Purpose of a Company Is…

Thinking that the purpose of a company is to make a profit is like believing that the purpose of living is to eat.

Now that we’re clear about where I stand, and that this is going to be a bit of a rant, here we go.

The Purpose of Living is Not to Eat

I’m with whomever it was that said the ‘purpose-of-a-company-is-to-make-a-profit’ thing is back-asswards.

But let’s not start at full rant level. Let’s start by actually parsing the word “purpose.”

May I suggest that the statement “the purpose of [whatever] is…” does not actually mean anything unless given a context. And there are many contexts.

A sociologist (structural-functionalist variety) would look at a company and ask, ‘what social role does that kind of entity fulfill?’ Here are just a few answers.

• From the point of view of a state or local government, one role of companies is to fund a tax base and employ local citizens;
• From the point of view of a federal government, a corporation is a vehicle for implementing tax collections, health care policy, and vaccinations;
• From the point of view of the Supreme Court—at least recently—a company is indistinguishable from a human being when it comes to contributing to electoral campaigns and free speech;
• From the point of view of shareholders, it is to provide a return on shareholder investment;
• From the point of view of customers, the purpose of a company is to create customers (this in fact was the view of Peter Drucker).

A religious person might look at a company and say, “The role of a company is to allow man the means to fulfill God’s mission on earth.”

An anthropological historian might say the role of a corporation is to aggregate capital to fund larger-scale economic activities than could be done by individuals working alone.

I don’t know what Milton Friedman meant when he said it; he could perfectly well have meant, “if a company is making a profit, it’s doing all the other things it’s supposed to be doing, no need to inquire further.”  But it’s clear that Friedman has since been hijacked by those who have a far narrower, and more corporatist, agenda to pursue.

And so on. Without any context, absolute statements about the purpose of anything reveal either intellectual laziness or a political opinion—usually the latter. But let’s continue.

Corporations Are Not Granted Divine Rights

Often what people mean when they equate corporate purpose and profit is to suggest that the concept is primary, fundamental, or very basic, or a core principle; not quite revealed truth, but not far from it.

So it’s worthwhile remembering the source of legitimacy of a corporation. The first were formed in England in the 17th century, e.g. the Hudson’s Bay Company; they were formed by authority of the government.  In the US today, companies are chartered by the States. Again, legitimacy derives from the government. In whatever country we’re talking about, corporations are granted their legitimacy by way of the state.

There is no ‘right’ to profit for a company. There is no Bible that imbues companies with extra-legal status. No tablets were handed down, no assembly of people blessed companies with a ‘purpose’ agreed upon by all.

What about corporate charters that require companies to be responsible to shareholders for earning a return? I’m not a lawyer, but I’m reasonably well-read, and I’m not aware of any shareholder suits that invoke that clause to argue against excessive management compensation. From which I conclude there’s probably a lot of latitude for interpretation.

The Role of Companies

The real role of companies is hardly self-evident; in fact, it’s an excellent subject for public policy debate. The key question is: what do we want the role to be?

A company is a creation of the state, which in turn is beholden to its citizens. The question of the role of a company is on the same footing as the role of any other civic institution; what do we want to be the role of our public schools? Of our prison system? Of our approach to civil rights?

It’s a great question, and very timely. Let’s not shut down the discussion by assuming there’s some pat debate-ending answer.

(For anyone interested in pursuing this line of thinking further, I find the Wikipedia entry on “philosophy of business” to be thorough and thought-provoking.)



Ethics and Trust: Interview with Dr. Robert Hoyk

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.

The MBA Oath: Interview with Peter Escher, Executive Director

Springtime of the second year in an MBA program is when students turn reflective.   For the class of 2009, it was also a year in which the job market for MBAs looked daunting, to say the least. With the economy in the pits and the degree in some disrepute, several members of the Harvard Business School class of 2009, encouraged by faculty members Rakesh Kurana and Nitin Nohria, developed an earlier version of an “MBA Oath,” and began to publicize it.

In late May 2009, when the New York Times caught wind of and wrote about it, roughly 20% of the class of 2009 of Harvard Business School had signed the MBA Oath. On June 8th, when I wrote about it, the numbers had jumped significantly.
By June 11, when BusinessWeek wrote about it, over half the class had signed. Today, in November, 65% of the HBS graduating class has signed.

Perhaps more importantly, the Oath has become something of a movement. It has a permanent home, at . It is a 501(c)3 organization, and has an Executive Director, Peter Escher (signer number 5 of 1704, as of today). It has spread well beyond Harvard Business School, and in fact the mission is to develop chapters globally.

I sat down (virtually) with Peter Escher to chat. Excerpts follow:
CHG: What’s the essence of the MBA Oath?

PE: It’s an embodiment of our belief that things have changed over the past few decades, and that business has responsibilities to do things right, and obligations to society. Mechanically, it’s a preamble about the role of business, and eight specific tenets. A key part of the statement is “my purpose is to serve the greater good.” A sample tenet is “I will act with utmost integrity and pursue my work in an ethical manner.”

CHG: It has really taken off; were you surprised?
PE: Candidly, yes. It turned out we were part of a very big wave. It’s humbling, as well as exciting.
CHG: What drove you to do it?

PE: The spring was a time of reflection—the role of an MBA was very much on our mind, what with Harvard MBAs in leadership positions at so many Wall Street institutions, and the indictment of business leadership in general. Rakesh and Nitin pointed us to some early versions of the Oath that had been developed, along with the World Economic Forum. We took it from there, aiming just to get 100 signers. Of course it went well beyond that.

CHG: On the face of it, the Oath sounds unobjectionable. But you have gotten objections, yes?
PE: Oh yes. The top ones are:
1.    I don’t need an oath to be ethical; in fact, this implies I’m not.
2.    I won’t sign because there’s no enforcement mechanism.
3.    It’s all just Harvard spin.
CHG: And how do you answer those?

PE: To the oath/ethics connection, we note that law and medicine have very similar oaths. We are trying to get business to emulate those models.

To the enforcement issue, the oath won’t prevent bad actors from acting badly; but it can give aid and comfort to those who want to do the right thing by saying it publicly, along with others.

To the Harvard spin, we want to make this very much not about Harvard, but about business and MBAs in general. As to spin in general, well that’s a sad indicator of how big a hole we’ve dug ourselves as MBAs and businesspeople.

CHG: What activities are you undertaking to move forward?

PE: We have oath signers from over 250 MBA school programs at this point, and have active participation (attend our conference calls and the like) from over 25 campuses. We’d like this active participation to grow to even more schools. We want to expand our Board membership to other schools.

We held a Fall Summit, with representatives from 9 business schools, and from the Aspen Institute and the United Nations Global Compact.

CHG: What are your ambitions?

PE: We’d like to get 10,000 MBA signers by next year at this time. Since the top-55 US-based MBA programs (according to US News & World) generate roughly 12,000 graduates annually, it implies that we need to focus on US and non-US programs, and alumni as well.

CHG: How do you wish the MBA Oath will be used?

PE: As a touchstone, a guideline for discussion, and a tool for education.  It is a way for like-minded people to identify each other. We’re not out to codify rules or procedures for every situation. We want to productively guide discussions, and to enable signers to have guidelines in mind before they go into challenging situations.

CHG: Trust seems clearly implied in some of the Oath; is that how you see it?

PE: One thing we’re aware of is that transaction costs in the economy are increasing massively. Trust is the scale answer to cutting down on transaction costs. If you didn’t have trust, business wouldn’t happen at all. And if we had more trust, it’d work a lot better.

CHG: You’ve got the bully pulpit; anything more you want to say?
PE: Just read what we’re about; agree or not, please have a point of view. Our website is
CHG: Peter, thanks very much for your time, and best wishes to you and MBAOath.

Smoking Guns in the Rear View Mirror: Madoff and the SEC

Experienced bloggers tell me to lead with the headline, as in newspaper stories.

So here it is: read this link. It’s the document sent to the SEC in 2005 accusing Bernie Madoff of running a gigantic Ponzi scheme.

More specifically, it’s the Wall Street Journal’s copy of the letter, separately identified as coming from Harry Markopolos, the Deep Throat of the Madoff scandal. But that’s not the point.

The point is this: take 2 minutes to click on the link and give it a quick look.

Come on, you can afford 2 minutes, this is history we’re talking about. It’s only a 17-page .pdf file, and you don’t have to read all of it.

There, that wasn’t so bad, was it?

Now—what did you think? OK, let me help you out.

It wasn’t all that hard to read, was it? Some jargon, but largely around technical terms whose connotation was clear in context. Markopolos outlined it pretty well, right? You got the sense that something was most definitely fishy, and that this guy sounded like he pretty much knew what he was talking about—right? When he says "Madoff Securities is the world’s largest Ponzi scheme," did you get the sense he was telling the SEC that Madoff was running a Ponzi scheme? Yeah, me too.

Now—if you were a staff member at the SEC and received this letter—what would you do?

My own gut-level instinct—based on nothing more than having worked 6 months for the feds 30 years ago, knowing a whole 2 SEC employees, and having lived on this planet for a few years—is that at least a couple hundred human beings at the SEC are more than capable of of understanding it at least as well as you or I. And I’m sure several got the chance.

Which begs the obvious question: why, oh why, did nothing happen?

There are several really obvious answers, which I won’t belabor. Just now. (Though venality and incompetence generally head the list of usual suspects).

Now, at the risk of losing the bloggers, let’s get past the headline. When something in retrospect is shockingly obvious, it should at least raise the possibility that it might not have been so obvious looking forward. Consider the law of gravity, for example. Or Obama’s election. Not to mention this smoking gun of a document.

What kinds of things get in the way of clear forward perception? High on the list, I think, are beliefs. Not the opacity of data; not a lack of IQ; not a conspiracy of coincidence. Beliefs.

Beliefs: preconceptions, ideologies, inclinations, habits, norms, assumptions, conjectures, presumptions, presuppositions, expectations. A word for "stuff" in the mind that the neurobiologists haven’t yet "explained," but which laymen nonetheless manage to understand quite well.

Business doesn’t believe in beliefs these days. It believes in behavior, results, measurement—these it considers incontrovertible proof.

I have two suggestions. First, go see the movie “Doubt.” It raises questions about the effects of moral certitude.

Second, go back and read that Markopolos’ document again. It does exactly the same thing.

Why did the SEC look so pole-axed? Place your bets. Venality? Incompetence? Or blindness due to moral certitude? What’s your bet?

And by the way, who owns the movie rights?

Enron Revisited: Commonsense from the Trade School of Capitalism

Mal Salter, of the Harvard Business School, has written a new book: Innovation Corrupted: The Origins and Legacy of Enron’s Collapse (Harvard University Press),

Before you say “oh no, not another Enron book,” let me suggest this is Harvard Business School at its best.

In HBS’s always-provocative Working Knowledge series, Salter is interviewed by Martha Lagace in Innovation Corrupted: How Managers Can Avoid Another Enron It’s clear we have here not just a take on Enron, but a take on business takes.

Salter writes about Enron not as morality play, conspiracy, tragedy, or bubble (though if you like Trust Matters you’ll love Malcolm Gladwell’s indictment of “the war on talent” using Enron as the smoking gun in The Talent Myth: Are Smart People Overrated). Instead, Salter writes thoughtfully about an important phenomenon in our society—with the aim of gleaning practical lessons for improving our social future.

Salter doesn’t force upon us databases, 2×2 matrices, or even structural functionalism. There are “villains,” but they are not the stuff of fantasy—they are all too real and like us. Grotesque, maybe, but born of our own lauded institutions—including Harvard Business School. A cause for concern.

I always liked to think of Harvard Business School as Harvard’s only trade school. The other obvious candidates—law and medicine—are in thrall to the academic model, graduating professionals, not tradespeople. (Not that there’s anything wrong with that. The “profession” label probably fits law and medicine better anyway).

But academia breeds methodologies and specialists. Peer reviews. Tenure. Snobbery is a distinct possibility.

Yet honor doesn’t require “professionalism” or academics. There is great honor in the trades. A tradesperson takes great pride in his or her craft—and doesn’t confuse it with art or science.

I learned only one methodology at Harvard Business School—3 times a day, 5 days a week. It was simply to remember to ask, “What should Joe do? What would you do?” I think of that as a tradesman’s methodology—Git ‘r done, done right, and done well. For career value, it’s as good as they come.

A trade is best taught not by the smart, but by the wise. Inductive reasoning is favored over deductive. Reductive models are suspect—yet reductive commonsense is prized.
Fine tradespeople don’t take themselves too seriously, though they are serious. Character is a big deal. So are some sense of worth, mission, and purpose.

Mal Salter writes that way about Enron.

He is clear and positive about the brilliant innovations Enron—particularly Skilling—introduced. He is equally clear, and just as conclusive, about Mr. Skilling’s abysmal character defects (also an HBS graduate; not, however, one who learned much from Salter).

Here is Salter’s statement of the essential problems of Enron:

* Enron’s stated purpose was too general to permit disciplined and responsible decision-making in the face of difficulty.
* The lessons of Enron relate to strengthening board oversight, avoiding perverse financial incentives for executives, and instilling ethical discipline throughout business organizations.
* Directors of public companies can adapt key aspects of the private-equity governance model to ensure that they fulfill their oversight responsibilities.
* Incentive systems should reward accomplishments other than economic performance, and penalize failures.
* Companies can take steps to help senior executives avoid the two sources of leadership failure at Enron: personal opportunism and flights to utopianism.

Those are dense, content-rich, jargon-free, meaningful statements. They demand to be read carefully, else they yield up nothing. That is not the often dumbed-down “business English” of today. But neither is it fluff or jargonish. It’s dense because it packs a punch.
His aim is very much about practical conclusions—as he puts it:

I outline organizational processes that are required to reinforce the kind of discipline that was noticeably lacking at Enron.

These processes include:

1. Liberating evaluation processes by adding qualitative judgment to whatever standard quantitative measures of performance that business plans may require
2. Designing and implementing incentive systems that reward accomplishments other than economic performance, and penalize failures
3. Conducting routine, systematic audits of critical decisions by key executives where the rules of the road are clearly ambiguous
4. Helping senior executives avoid the two sources of leadership failure at Enron: personal opportunism and flights to utopianism

Too much of today’s business academia looks at statements like these and says, in deed if not in word:

• Qualitative judgment? No no, Mr. Salter, “if you can’t measure it, you can’t manage it.”
• Rewarding non-economic performance? And penalizing its absence? Hey I thought you were teaching capitalism!
• Routine review of decisions made in ambiguity? Don’t study the decisions, Mr. Salter, bulldoze the ambiguity for Pete’s sake!
• Personal opportunism and utopianism as leadership threats? What is this, Mr. Salter, a liberal arts curriculum?

Salter’s take on Enron is radical in its distance from today’s thinking. And it’s conservative in the sense of preserving the best of the past.

Writing like this is old school in the best sense of the word. Above all, he celebrates commonsense—which despite the term, isn’t common at all. In this respect Salter is like, for example, Tom Peters, David Maister, Jim Heskett and Peter Drucker.

Not bad company, in my view.

Who Should You Trust on Trust in Business: Yankelovich or Fortune?

Whom do you trust on the subject of business trust?

Before I give you any data: write down which you’re most inclined to trust on the subject:

a. Daniel Yankelovich, doyen of opinion research, who says trust in business is down these days;


b. Fortune Magazine, who says trust in business is up these days.

Here’s what each has to say.

Fortune, April 30, says:

the big picture showing a broad business return to a respectable role in American culture is undeniable. Americans today trust business far more than at any time in recent years, at least by some measures. A new poll from the New York City-based Edelman PR firm, the latest in a series conducted since 2001, shows the highest level of trust in business that the poll has yet recorded: 57% say they trust business to "do what is right." That’s even higher than in the palmy days before the Enron scandal broke.

By contrast, Daniel Yankelovich, interviewed in McKinsey Quarterly (subscription only), says:

A lot of business people are under the impresion that because there isn’t as much talk about the scandals, mistrust of business has receded. Research shows the opposite: the lack of trust in business has grown. At the peak of the scandals—say, in 2002—36 percent of the public agreed that you could trust business leaders to do what is right most of the time or almost always.

Since the scandals now seem to be behind us, you would think that the level of trust would rise. Instead, it fell to 31 percent in 2004, and to 28 percent in 2006. So there’s a continuing erosion of trust.

[we’ve had] three waves of mistrust in business and other institutions over the past 75 years…the other two waves lasted about 12 years, and we are now in the 5th to 6th year of this one…you shouldn’t be misled by the lack of media attention to the scandals, because the mistrust continues to grow.

There. Now that’s cleared up—what can we conclude?

1. Surveys depend strongly on how one words the questions
2. That’s especially true for terms like “trust.”

To find out the answer, we turn to you, dear readers.

What do you think? What has happened to trust in business in recent years?