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Trust Inc.: Strategies for Building the Trust Asset – Chapter 1

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Trust Inc coverThis is an abridged version of the opening chapter – “The Business Case for Trust” – of the just-published  Trust, Inc.: Strategies for Building Your Company’s Most Value Asset. 

The book is a collection of 30-plus articles by diverse authors on trust in business. Edited by Barbara Kimmel of Trust Across America, the book covers issues ranging from measuring trust, diagnosing its presence or absence, managing trust and increasing trustworthiness, to improving people, companies, industries and societies.

Barbara and I co-authored the opening chapter. Other authors in the book include names like Steven M.R. Covey Jr., Ken Blanchard, James Kouzes and Barry Posner, Peter Firestein (investor relations), Laura Rittenhouse (financial candor), Jim Gregory (branding), and Linda Locke (reputation). And more.

Have a taste of the book, below. And click through here to see a complete table of contents and authors list. Whatever your interest in business in trust, you’ll find something here the addresses it.

The Business Case for Trust

by Barbara Brooks Kimmel and Charles H. Green: from Chapter 1 of Trust, Inc.,publisher Next Decade, November 2013.

Trustworthiness — once exemplified by a simple firm handshake — is a business value that has suffered erosion. We see this in how the public has grown increasingly cynical about corporate behavior—with good reason.

The PR firm Edelman found in a recent “Trust Barometer” survey that trust, transparency, and honest business practices influence corporate reputation more than the quality of products and services or financial performance. And yet, scandals and bad behavior continue to pile up.

Our view is that a company seriously interested in its reputation must increasingly focus not just on “business performance” as it is traditionally understood, but on being seen as trustworthy too.

We believe there is an important, material business case for trust. This doesn’t mean that trust isn’t or shouldn’t be justified on moral or societal grounds. Of course it should. But trust makes for good business as well. This essay will put forth the business case for trust by exploring the gap between low- and high-trust organizations’ performance. We will also offer a framework for assessing corporate trustworthiness, and point the way toward strategies for creating a trust-enhancing business model.

First, let’s look at the costs of low trust.

How low trust affects stakeholder outcomes

Low Trust in Society

Business operates in a social context; because of that, low trust in society-at-large costs business. Indirect examples include the TSA airport security program ($5.3 billion, not to mention the impact on tens of millions of business travelers), and the criminal justice system ($167 billion in 2004). Both of these examples are funded by taxes on individuals and business.

Businesses also shoulder direct tangible losses from crime ($105 billion), where they are often the victims.

A more obvious social cost for business is the cost of regulation. Economist Clyde Wayne Crews releases an annual report entitled “The Ten Thousand Commandments” that tallies federal regulations and their costs. In 2010, the federal government spent $55.4 billion dollars funding federal agencies and enforcing existing regulation. In 2013, The Washington Post reported that “the federal government imposed an estimated $216 billion in regulatory costs on the economy (in 2012), nearly double its previous record.”

Doing business in a low-trust environment is costly. Whether or not you believe that companies can, or should directly impact social conditions, one thing is clear. In aggregate, business bears a lot of weight for the cost of low-trust in our society.

Low Trust in Business Practices

Social costs on business, however, are just the tip of the iceberg. Far bigger costs are exacted by simple business practices. Consider the
need for detailed financial audits. The Big 4 accounting firms’ aggregate global revenue is $110 billion5, of which about one quarter is made up of audits in the U.S.

Consider lawyers: there are over 1.2 million licensed attorneys in the United States, more per capita than in 28 of 29 countries (Greece being the 29th). The cost of the tort litigation system alone in the United States is over $250 billion—or 2% of GDP. It’s estimated that tort reform in health care alone could trim medical costs by 27 percent.

All these are examples of transaction costs: costs we incur to protect or gain (we hope) larger economies of scale, markets, or hierarchies. Transaction costs add no value to the economy per se; they just foster favorable market conditions so that other economic factors (e.g. markets, scale economies) can add value.

But there comes a point at which the addition of more non-value-adding transaction costs ceases to be positive and becomes burdensome. It’s clear to us today that we are well past this point. A Harvard Business Review article from 8 years ago (Collaboration Rules by Philip Evans and Bob Wolf, July 2005) suggests that nearly 50% of the U.S. non-governmental GDP was, as of 2005, comprised of transaction costs. Imagine the impact of redirecting even a small proportion of these monies to value-adding actions.

Their research goes on to say that, in such an economy, the most productive investments are often not those that increase scale or volume, but those that reduce transaction costs. And the most viable strategy for reducing massive transaction costs? Trust.

Low Trust and Employee Disengagement

Disengagement occurs when people put in just enough effort to avoid getting fired but don’t contribute their talent, creativity, energy or passion. In economic terms, they under-perform. Gallup’s research places 71 percent of U.S. workers as either not engaged or actively disengaged. The price tag of disengagement is $350 billion a year. That roughly approximates the annual combined revenue of Apple, General Motors and General Electric.

According to The Economist, 84 percent of senior leaders say disengaged employees are considered one of the biggest threats facing their business. However, only 12 percent of them reported doing anything about this problem.

What does disengagement have to do with trust? Everything. In a Deloitte LLP ethics and workplace survey, the top three reasons given for employees planning to seek a new job were:

  • A loss of trust in their employer based on decisions made during the Great Recession (48 percent);
  • A lack of transparency in leadership communication (46 percent); and
  • Being treated unfairly or unethically by employers over the last 18 to 24 months (40 percent).

A lack of trust in the employer is at the heart of each of these reasons. To the extent that plans to find a new job are a proxy for disengagement, the case is clear. Lack of trust drives away employees.

In discussing the survey, Deloitte LLP Board Chairman Sharon Allen notes:

Regardless of the economic environment, business leaders should be mindful of the significant impact that trust in the workplace and transparent communication can have on talent management and retention strategies. By establishing a values-based culture, organizations can cultivate the trust necessary to reduce turnover and mitigate unethical behavior.

The survey also provides some interesting data on the business case for organizational trust. When asked to rate the top two items most positively affected when an employee trusts his or her employer, employed U.S. adults made the following top rankings:

  • Morale (55%);
  • Team building and collaboration (39%);
  • Productivity and profitability (36%);
  • Ethical decision making (35%); and
  • Willingness to stay with the company (32%).

As Mary Gentile eloquently states later in this book, “Very often the most visible, most costly challenges to the public trust in business are fairly predictable: deceptive marketing practices; falsified earnings reporting; failure in safety compliance; lack of consistency in employee relations; and so on.”

In other words, the ability to manage the costs of low trust –whether arising from society, from business practices, or from management practices—is to a great extent within the control of the corporation. And yet, it is largely not being done—with sadly predictable results.

Continue reading:
How high trust improves stakeholder outcomes
A framework for assessing trustworthiness
Trustworthiness in Action

Expense Sheets and Cultures of Trust

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Business travelers know the taxi expense fiddle. You ask the taxi driver for a receipt. He winks at you and gives you a blank form, implying you can fill it in later, and who’s to say how much that ride cost, wink-wink, nudge-nudge.

How honest are you about the number you write down? How honest do you think others are? Do you think it varies by occupation? By income level? By geography? Would a college professor from Ohio State be less, or more, honest than an associate at a New York private equity firm?

Does the typical response look different in Beijing than in New York? What about Paris? Or Buenos Aires?

What are the cultures of trust? And what drives them?

Chinese Receipts and American Rentals

In China, street vendors hawk fake receipts for sale, as if they were DVDs or watches or fast food.   An American instinctively thinks, “How corrupt!” And yes, it is.

The news is also rife with stories of massive graft in Chinese government, with mid-level officials buying Mercedes and expensive wines. We also hear horror stories emanating from China about food safety.

Clearly China has a problem with trust in government and business. We in the West can comfortably turn up our noses and tell ourselves that at least our trust issues are far more evolved.

Or are they? Consider the NY private equity partner and lawyer who engaged a broker to find a scarce rental in the Hamptons.  When the broker found them one, they brazenly approached the owner to cut out the middleman broker.

Consider the Big Company which, when charged with violating their self-advertised objectivity, independence and integrity came up with the novel defense that hey, nobody believes that crap anyway, so don’t hold us to it.

Leaving aside whether those kinds of violations are more “evolved,” they surely are different in kind. What are those differences?  What are the kinds?

Cultures of Trust

We often talk about trust in business as if it were a single, universal trait. It is not. Francis Fukuyama, in his seminal book Trust, wrote well about this. In China, the level of trust is very high within extended family relationships – but quite low outside it. The reasons are linked to China’s historical development.

By contrast, French society has a great deal of confidence in centralized, bureaucratic institutions, e.g. the Ecole Polytechnique, or wine labeling.  Trust in Japan is high within the island-bound nation/culture of Japan itself, but much lower when it comes to gaijin. In southern Italy and Eastern Europe, trust is often more tribal.  And so forth.

What is the culture of trust in the US, particularly in business? Given the nation’s short and melting-pot  based history, it’s not driven by a common culture or religion. Instead, there are two ideologies that play a particular role in determining the nature of trust in the US: freedom and capitalism.

The “brand” of the US has always pitched freedom as front and center, and not just religious freedom. For countless millions, it has meant freedom to make it economically, through the fruits of your own labor, if not for you then for your kids.

Closely linked to that is our view of capitalism. While of course there are nuances, the main view of business throughout our history has been a belief that the pursuit of individual good ends up benefiting society as a whole. Adam Smith’s Invisible Hand has been a welcome metaphor for US business over the years.

There are a whole lot of things to admire about that ideology; the US can point to its own economy as Exhibit A. But it does mean we look at trust in a  slightly different way than do Chinese, or Russians, or Chileans.

In particular, we look at it like rules in a game.

The rules of the game are clear, but they can change. We generally don’t like rules, but admit that some are necessary. We have referees to help interpret and enforce those rules. Occasionally, the refs get over-matched, and social change results (though usually not before some disaster makes it politically unavoidable).

The main rule is, stay within the rules. All else is fair game, until and unless the rules change.

That kind of ideology makes trust a little more conditional in the US than elsewhere. And there is good and bad in that as well. The good part is that Americans can move with the times, adjust, be flexible about issues of trust when the need arises. The rules of trust may change, but the game itself keeps its integrity.

The American trust problem arises, I think, when we stop treating business as a game. And we have. Etiquette is out. Simple agreements are so last-century – now they need hedging with counter-parties. And handshake deals? Last millennium.

The rules become exogenous to the game, seen as a hindrance, and only one rule survives– survival of the fittest. That’s where we’ve gotten to, and the results are ugly. The doctrine of competitive strategy says, at its heart, that relationships are a cruel myth – the only thing that matters is sustainable competitive advantage, over your customers, your employees, and everyone else.

We’ve marinated in that solitary stew long enough. In an increasingly inter-dependent world, the view of every-man-for-himself is a recipe for a circular firing squad.

A New Business Ideology?

Are things changing? Does Capitalism 2.0 require Adam Smith 2.0, or something even more radical? I’ll talk about that in an upcoming post.

Unconscious (Ethical) Incompetence: The Curious Case of SAC Capital Advisors

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Should Have Seen That ComingNoel Burch is credited with formulating the Four Stages of Competence model. It describes the psychological states involved in a progression of competence, as in:

1. Unconscious Incompetence
2. Conscious Incompetence
3. Conscious Competence
4. Unconscious Competence

The model has always struck me as one of those so-obvious ideas (like spreadsheets) that the miracle is no one ever thought of it before. It just makes sense.

It is usually applied to the mastery of skills, expertise, or knowledge. It is equally interesting, however, to apply it to the concept of moral development in people and in organizations. Which brings us to the curious case of SAC Capital Advisors.

SAC Capital: The Contradiction

Last week, SAC Capital Advisors was indicted by a Federal Grand Jury in New York for insider trading. The firm pleaded not guilty, and of course nothing I say here should be construed as an opinion on the merits (and my legal credentials are zip-squat anyway).

In reporting on the story, New York Times financial reporter James B. Stewart highlights an interesting question:

According to SAC Capital Advisors, the wildly successful hedge fund now accused of systematic crime, the firm not only has “a strong culture of compliance” intended to “deter insider trading,” as the firm put it recently, but may also have one of the most rigorous and “cutting edge” hedge fund compliance programs in the country.
The firm said it spends “tens of millions of dollars,” on compliance, “deploys some of the most aggressive communications and trading surveillance in the hedge fund industry,” has hired big-name lawyers like Peter Nussbaum and Steven Kessler to oversee compliance, and has a staff of “no fewer than 38 full-time compliance personnel.
Which sets up the question: What were they doing?

What indeed.

Two Scenarios for Going Bad

Let me suggest a continuum of answers to that question, with the two extremes reflected in the following two purely hypothetical internal conversations at SAC following the indictment:

Version A: “Can you believe our bad luck? Just when everything was going so great, some flunky up and blows the whistle on the greatest inside deal since Teapot Dome. It was perfect! I guess it was too good to be true, something had to go wrong some day and we’d get found out.  Well, let’s fight the hell out of it and see what we can still walk away with.”

 

Version B: “Can you believe our bad luck? We take compliance seriously around here, nobody spends on compliance like we do, we’ve got the best systems in the business, the best programs, the best communications and the best lawyers to make sure we’re squeaky clean, and – a couple of lousy bad apples come in and ruin it. Not only for us, but for our clients as well. If they only knew the opportunities we pass up… For crying out loud, when is enough; blood from a stone. We are over-regulated to a T already, how much more compliant can you get?”

I don’t know about you, but I’d put money on the B end of the continuum. What looks like clear malfeasance from the outside all too often looks like business as nearly usual on the inside, with shrill grenades of  misunderstanding being lobbed in from the outside. Whether it’s SAC, Enron, WorldComm, or the generals in charge of preventing rape in the military, most frogs sitting in the water don’t notice the temperature rising to a boil.

Which raises the ethics conundrum – Scenario B is a form of Unconscious Ethical Incompetence. The doers of badness do not recognize that it is badness they are doing. Indeed, they often see it as goodness.

In the Four Stages model, unconscious incompetence is the first step in the process. That heightens the contradiction, because the evil-doers in such cases think they are actually at the opposite end of the scale – having already internalized the right behaviors so that they are unconsciously competent. Nothing could be more wrongheaded and insulting, they think, than to suggest they are actually at the bottom of the scale!

Hence the reaction – not guilt, or even remorse, but pained indignation. Moi?  Nous?  Surely you jest.

You Can’t Depersonalize Trust and Ethics

Cases of this sort highlight a vicious circle in managing for trust. Violations of trust are met with new processes or procedures for preventing it in future. Since so much of business is about processes and metrics, this is seen as a perfectly normal response.

However, by turning trust and ethical issues into issues of process, they are robbed of their context in a relationship, and therefore stripped of their human quality. The predictable result of this is to lower the internal standards of conscience and social behavior, which then leads to more violations. And on, and on.

This is the substitution of quantitative, transactional, impersonal focus for qualitative, relationship-based, human phenomena. Unless checked, it only gets worse. Financial services is only one of the most obvious industries in which this happens. You can see it in pharma, in many sales organizations, even in academia.

Unfortunately, most outside consultative solutions to institutional trust issues tend to focus primarily on traditional change management factors – incentives, structures, communications (or culture, which I tend to see as the result of all the other things). But those traditional change management factors, which work so well when introducing quality or customer focus initiatives, have limited range when it comes to issues of trust and ethics. In fact – they make it worse, by implicitly suggesting the issues are ones of incentives, structure and communication.

What is sorely needed is something that sounds too old-fashioned – personal role-modeling of character-based behavior by leaders. Personal actions at the most minute level – comments, reactions, shading of language, confidence of decisions, personal displays of integrity in the moment. These are the things that employees notice, absorb, and emulate.

Former SEC Chairman Harvey Pitt had done some consulting for SAC. He told reporter Stewart that he “Came away from his visit to the firm unimpressed. ‘My sense was that it was a check-the-box mentality, not a serious commitment,'” he said.

Whether he was right or wrong about SAC, the distinction is powerful. As Mr. Pitt also said, “When it comes to compliance, you have to live, eat, breathe and drink it. It has to be embedded in a firm’s DNA.”

And the route to the firm’s DNA (metaphorically) goes straight through that of the leaders (literally).

How to Increase Trust in Organizations

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Increasing Trust Within Your OrganizationI was grocery shopping Saturday. It was 2PM, 96 degrees out – pretty hot for New Jersey – and I was in the checkout line. The cashier had started sliding my purchases through the register, when suddenly I noticed a bag left over from the customer before me. She had left and gone to her car.

The woman doing the bagging noticed it at the same time. She grabbed the lady’s bag and dashed out into the heat. She was making pretty good time for a woman in her 60s, and we all could see her out the window as she finally caught up, handed over the bag, and started back.

Then the cashier suddenly exclaimed, “Omigosh, she left two other bags as well!” Looking quickly at me and the woman behind me in line, she said, “Will you two please excuse me for just a minute? I’ll be right back.” And she too took off after the forgetful lady, with two bags in tow. She was in her 20s, and made very good time.

It occurred to me I could slide a few groceries over the line and into my bag and escape without paying. (I don’t do such things, but the idea did show up in my mind). Then the elderly woman behind me in line said, “You know, I don’t mind one little bit waiting for someone who’s doing a good deed like that.”  Neither did I, I said, neither did I.

When the cashier and the bagging lady came back, we both complimented them, and they blushed a bit and said thank you. (I sent a complimentary email to ShopRite’s HQ later that night with the store number, employee name and cash register number, all of which were on the receipt).

So my question is: how do you get employees to behave like that? I mean generously, based on principle, willing to take certain risks, confident to act in the moment. How do you keep from getting sullen employees who talk about “career-limiting moves,” who won’t lift a hand or take a risk to help another?

How Do You Induce Values-based Behavior in an Organization?

Earlier that same day, I had the opportunity to briefly visit a Sears store, a Macy’s store, and a Bed Bath and Beyond unit. Sears was awful – employees keeping their distance from customers, 100 feet away, pretending not to notice. Macy’s was a little better, but still sullen, under-staffed, and radiating not-helpfulness.

BB&B was a huge contrast. Several employees, busy doing other things, asked me if they could help. I asked two for help, and they both went out of their way to do so.

How does this happen?

The standard answer in most businesses, I’m afraid, is to focus on the wrong things: typically  incentives, communications, and procedures.

The more I see of business, the more convinced I become that the single most powerful way to create values-based behavior is none of the above – it is to do it yourself, and to talk about it with others.

The Usual Suspects

Incentives appeal to the individual’s rational economic or ego-satisfying needs. Fine and dandy, but if you’re trying to incent selfless behavior, the concept of rewards is just a tad self-contradictory.

There is probably (I’m guessing) more money spent on communications than on any other “solution” to issues of trust, ethical behavior, and customer-focus. Companies love to pronounce their values to their customers, and reinforce them internally in posters, newsletters, and blogs. The problem is, impersonal companies communicating about personal relationships is some kind of category mistake.

And procedures? The whole point of values-based behavior is that the employee extrapolates from principles in the moment. Rehearsing and drilling doesn’t help extrapolate values, it replaces that process with rote memory.

Role Modeling

Think of how we learn from our parents. Think of the sports or public figures we admire (there are still a few). In all cases, we are influenced by what they do – not by what they say they will do, or did do, or wish they’d done.

When it comes to values, I suspect BB&B has leaders in their operations organization who both walk the talk, and talk it too. People who lead by example, and who are convinced that values like customer assistance are valid only if kept sharpened by use.

I suspect Angie the cashier at ShopRite was hired partly because she exhibited values. I suspect that the folks managing her store make a point of being helpful and customer-focused, and engage customers about values like that. I suspect it didn’t occur to her that she shouldn’t take the risk of leaving her cash drawer and my groceries unattended – because her leadership would have trusted their customers and done the same thing – and she knew it.

We have overdone the behavioral, incentives-based, needs-maximizing best practices model of human resources. We have under-estimated the human power of changing humans. After all, the business of relating to other people is personal.

S&P and the New Challenge of Integrity in Business

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We’ve all read tales of corporate wrongdoing – think Bernie Madoff, Enron, LIBOR. In most cases, managers engaged in nefarious behavior, knowing they were doing wrong. There are a few cases where the miscreant could plausibly argue ignorance, or good intentions – Martha Stewart, perhaps.

But a recent courtroom defense by Standard & Poors in response to a Federal charge of fraud, opens up a whole new threat to corporate ethics.

Subordinating Ethics to Legal Arguments

Back in April, S&P responded to a Justice Department’s complaint that S&P’s claims of ratings objectivity, independence and integrity were false, and part of a scheme to defraud investors.

S&P’s creative approach was to argue that such statements were only “puffery,” and that a reasonable investor would not depend on them.

Let’s underscore this. S&P, as a legal strategy, decided to disavow its own declarations of objectivity, independence and integrity, saying in effect, “everyone knows we’re just blowing smoke.”

  • Picture Boeing saying, “About that 787 safety stuff – you didn’t really think we were serious, did you?”
  • Picture Legal SeaFood saying, “Oh, you thought we meant genuine bluefish?  Ha ha, silly you.”
  • You get the picture.

This is not a company trying to avoid being caught. It’s not a case of extenuating circumstances, or offsetting benefits.  It is not even arguing an interpretation of what is wrong.

S&P is arguing – as part of a legal strategy – that “integrity” is just a marketing tool. This subordinates “integrity” to both marketing and legal considerations. It puts it somewhere on a par with market research or creative ad spots.

 The Name of the Problem

It’s not just S&P that is confused – the media is implicated too. In his Bloomberg News story on the issue, Jonathan Weil characterizes the problem this way:

The problem is that sound legal strategies sometimes create public-relations nightmares…Often PR and legal professionals end up pursuing conflicting agendas if they don’t work cooperatively. There’s an old test that everyone in the public eye should use when making important decisions: How would this look if you read about it on the front page of a major newspaper or website?

Where S&P’s lawyers confuse ethics and legal arguments, Weil is reducing ethical issues to ones of reputation and PR.

At least Bernie Madoff had a moral compass. He knew what he was doing was wrong, and tried to hide it. But if “integrity” is a marketing tool, justified by ROI or PR, then we are in uncharted waters.

A Simple Problem

This should not be hard to manage. If someone brings a legal strategy of “integrity as puffery” to the Chief Counsel or CEO, this is what they should say in response:

“Excuse me – you are deeply confused.  This is not a legal or marketing strategy issue. There will be no analyses of riskiness, ROI, or trade-offs with reputation. Integrity is not something we bargain with. It is a core value. That means precisely what it says.

“Throw away immediately any work you were doing in that direction. And I want to know tomorrow at 9AM, in writing, why it was you were even thinking in this misconceived direction. Am I clear?”

Which would you trust?  A company with leadership that answered this way? Or a company that went to court with integrity for sale?

Judge Carter, who heard the case, was clear:

The court cannot find that all of these ‘shalls’ and ‘must nots’ are the mere aspirational musings of a corporation setting out vague goals for its future. Rather, they are specific assertions of current and ongoing policies that stand in stark contrast to the behavior alleged by the government’s complaint.

Exactly.

 

 

 

Sales, Surgeons and Profits

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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.

The Case of the Untrustworthy Managers

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The Power of Deduction and TrustA long time ago, in a land far away (known as “Texas”), I once had a consulting client. They operated a chain of convenience stores, and we had been brought in to address a serious case of high store manager turnover.

Turnover was running about 150%, which meant the average store manager lasted only about 9 months. It was a tough business. Most sales came from gasoline and beer, and the clientele wasn’t the most genteel. So obviously the company was doing a poor job of selecting managers.

Obvious, that was, until a clue smacked me in the face. As with many retail businesses, shrinkage was a problem. Therefore, every month, every store manager was given a lie detector test. And sure enough, a great many managers eventually flunked the test and were fired. On average, this happened at about the ninth month of employment.

Nice Work, Sherlock

The astute among you can already see what took me an embarrassingly long time to figure out. The lie detector tests, intended to uncover deceitful behavior, in fact induced that very behavior. Management practices were suborning thievery.  After a while, each manager would figure, “Well somebody must be getting away with something, maybe I should try,” and another self-fulfilling prophecy would come to pass.

Put another way – management’s distrust of its store managers caused them to behave in an untrustworthy manner.

Cause, Effect, and Reciprocity

Herman Melville’s novella Billy Budd was about a completely honest, trustworthy young man. But rare it is that character alone can withstand the attacks of low expectations; the environment we live in plays a key role as well. Employee trustworthiness isn’t purely bought through hiring. It can be reinforced, or incapacitated, depending on the corporate culture that new employees encounter.

The case of the convenience store highlights the vicious circle of low expectations resulting in low trustworthiness. But it works the other way too.  “The fastest way to make a man trustworthy is to trust him,” said Henry Stimson. And apparently Hemingway. And maybe Gandhi, too. And Steven M.R. Covey. In other words, it’s pretty much received wisdom now.

As someone else once said, “Whether you expect good or ill of someone – that’s what you’ll get.”

If you want a trust-based company, start trusting the stakeholders all around you.  That means your customers, your partners, your employees, your bosses, your suppliers. And expect them to return the gesture. The power of reciprocity in human relations is such that you will, far more often than not, have your expectations fulfilled.

Trust, Gun Control, and Neuroscience

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It may be hard to imagine, given the horrific events of Newtown Connecticut, but violence of almost all types has been declining rapidly in the US and around the world.

That’s the story in the book The Better Angels of Our Nature: Why Violence Has Declined, a sweeping psycho-historical view of human nature by Harvard psychology professor Steven Pinker. Pinker makes the case with some compelling data, though his ideas may be even more interesting than the statistics. And, they have something to say about Newtown and about gun control.

One theme Pinker touches on is self-control. Have you heard of Walter Mischel’s marshmallow experiment with kids? Young kids grappled with the choice – to take one marshmallow now, or to get two if you can wait a bit? Pinker perfectly describes the accelerating discount rate that we apply to near-term gratification vs. long-term: how much more is a bird in the hand worth than two in the bush?

The answer is, it partly depends on how “in the hand” the bird is. Faced with a two-for-one tradeoff at two points in the distant future, we have no trouble – imagine choosing between two investments, one with a 10% payoff in a year, another with a 100% payoff in two years.

Self-Will and the Proximity of Temptation

The problem comes when that 10% payoff is right here, right now. Deciding whether you should have a grilled chicken salad or a Big Mac for lunch tomorrow is pretty easy.  But what about right now?  When you just happen to be standing in front of a Mickey D’s. And it’s lunchtime.

The closer we are to temptation, the weaker our self-will becomes when up against it.  We know not to shop for food when we’re hungry.  AA reminds alcoholics not to hang around bars. We put the candy on the upper shelf where the kids can’t get at it. “Just say no” has proven no match for making condoms available when it comes to halting teen pregnancy.

In short, moral development and ethical behaviors aren’t just a matter of self-will and integrity.  Good behavior is greatly affected by the social milieu – some of which can be designed into the environment.

Gun Control and Self-Will

We give up all kinds of rights in order to not tempt bad behavior. We post speed limits on roads, and enforce them.  We enforce guidelines about additives in food, and advertising guidelines about health. First amendment rights of free speech don’t extend to shouting “Fire!” in a crowded theater.

Yet in the gun control debates, the United States is conspicuous by its refusal to recognize this simple fact of moral design – the fact that availability of guns per se is a driver of gun-based violence.

Proponents of gun control insist on framing it as an issue of self-control, pure and simple –it’s psychology, they say. But even advocates of gun control have been co-opted; they generally focus on approaches like background checks, to make sure mentally impaired people can’t acquire guns.

Screening for gun purchasers is not the problem – the problem is ubiquity, pure and simple. The marshmallows guns are lying all around, tempting the unhinged to seek immediate gratification for their fevered fantasies.

Consider: Per capita gun ownership in the US is double that of any other country – the second-highest being Yemen, far behind. We have more guns in the US than we do passenger vehicles. We have 300% more guns per capita in the US than they do in France, Germany or Austria.

The result is as predictable as it is horrific. The rate of death by assault is about 300% higher in the US than in any other OECD country.  Two-thirds of murders in the US are committed with guns. Our gun-related murder rate is second only to narco-war-afflicted Mexico.

The solution does not lie in buyer screening. The problem is that we are awash with guns in the US.

Yet the response of pro-gun forces to mass murders is always the same – to focus on the self-will of the perpetrator, or on greater defenses by potential victims. This is akin to arguing for greater investor education in the face of a Bernie Madoff, less provocative clothing in the case of rape victims, just-say-no lectures in the case of teen pregnancy.

I don’t think we’ll hear anyone arguing that 1st-graders should be armed to protect themselves. And yet, sure enough, some argue that the solution is armed teachers. Enough insanity.

It in no way reduces the moral culpability of wrong-doers for us to focus on removing the source of the temptation. Why torture a kid with marshmallows if you’re trying to teach him self-control? Why allow ourselves to be surrounded by guns if we’re serious about cutting gun violence?

If we want to create a trust-based society, rather than regress to a Hobbesian world of armed camps (and schools), we have got to recognize the critical role that society plays in establishing norms, taboos, ethics, codes of conduct, and moral behavior. What we do is greatly influenced by what’s around us.

We are not born into the world with fully-formed moral codes that can be appealed to as sufficient conditions for ethical behavior. Ethics is a social construct as much as it is innate. The gun control debate needs to move not just toward tightened purchase requirements and limitations by type of weapon, but toward significantly fewer guns, period.

The Tyranny of Low Cost Strategies and the Gospel of Walmart

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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.

 

Cheating at Harvard: Shocked, Shocked!

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Perhaps you heard: half of a 250-person undergraduate class at Harvard has been accused of cheating on an exam. Here are:

Let’s get the irrelevancies out of the way.  First, the class was “Introduction to Congress.” Pause for yucks.

Secondly, there are the occasional whiners: “it was really hard, not fair,” or “they didn’t tell us how to define things.” Let’s not pause here either.

Moving right along, now, let’s assume that Harvard is no better or worse than other schools. You may agree or not, but I think the interesting issues lie elsewhere.

David Gebler, ethicist and author of the recent The Three Power Values, says: “It’s the worst hypocrisy to create a set of social norms and expectations in our society of which Harvard is the pinnacle, and then act as shocked as Inspector Renault in Casablanca that the students are acting unethically.”

He’s right. There are three interesting student reactions that seem to crop up in articles about the scandal:

  1. You mean, that was “cheating?”
  2. Come on, everybody does that.
  3. What do you expect me to do, the point is to win.

All three are serious causes for concern, but for very different reasons.

You Mean, That was Cheating?

This isn’t as dumb as many may think on first hearing.

The class in question was conducted making heavy use of teaching aides and study groups. This makes great sense given the need for collaborative workforces in the future. Unfortunately, if learning is primarily group learning, it puts pressure on the academic program and faculty to be very clear about boundaries between individual and group accountability.  (There’s a parallel here between group and individual bonus bases within corporations).

That raises many challenges, chief among them that the exam was “open internet.” In a day and age when everyone can share everything with everyone else in real-time, this goes beyond being just a barn-door of a loophole; it’s a fundamental failure to articulate the distinction between individual and group accountabilities.

This doesn’t mean students didn’t behave unethically; but it puts if anything more of a burden on institutions, particularly on schools, to delineate the boundaries.

Come On, Everybody Does That

To the extent this is true – and it’s considerable – shame on the role models.

As Howard Gardner points out in When Ambition Trumps Ethics, within the hallowed Ivy halls alone there are plenty of examples of

“professors [who] cut corners — in their class attendance, their attention to student work and, most flagrantly, their use of others to do research.

Most embarrassingly, when professors are caught — whether in financial misdealings or even plagiarizing others’ work — there are frequently no clear punishments. If punishments ensue, they are kept quiet, and no one learns the lessons that need to be learned.”

Gardner cites frequent, broad-based, research over time that suggests students over the last 20 years have become blasé about violations.  The majority think firing faculty for falsification of resumes is an over-reaction, and they don’t see much wrong with the behavior of the Enron gang in manipulating prices. After all, “everyone does it.”

I needn’t mention the coverups of the Catholic church, the repression of the ruling class at Penn State, or the general defense of cyclist Lance Armstrong, just to pick a few recent examples. And for heaven’s sake let’s not talk the fate of truth at political party conventions. Sadly, everyone really, really does do that.

“Everybody does that” is no excuse, widespread though it is. Cheating is unethical and should be condemned. But those doing the condemning are frequently those who, like Renault, are by default encouraging the behavior by their failure to act.

What Do You Expect – the Point is to Win

This is the most shocking of the attitudes. While the other two reflect some ambiguity in execution, this argument attacks ethics directly, claiming that ethics should be subordinated to the pursuit of success. A classic ends justify the means argument, which is in principle anti-ethical.

Rich Sternhell, retired executive, says he was not surprised by Gardner’s piece.

“By the time people get to Harvard (or Yale or Penn State or wherever) they have had to compete in ways that never tempted my generation. I note David Brooks’ observation of the recent GOP Convention, how all the speakers with the notable exception of Condoleeza Rice talked about “I” rather than “we”.

Every individual example of ethical violation weakens our community bond.  Baseball players worry about their contracts not the team. CEOs worry about their parachutes or share value, not the legacy of the company.  The concept of stewardship is rarely heard.”

I would throw in for equal blame our leading business thinkers.  We have become subconsciously infected by the doctrines of competitive advantage, shareholder value, and an Ayn-Rand-lensed perversion of Adam Smith’s invisible hand, so much that we have a generation that can’t tell ethics from economics.  We actually have game theorists in the Harvard Business Review arguing that throwing a match in the Olympics is in principle no different from a lob shot in tennis – since after all, the ultimate goal is to win.

People, the purpose of business is not to make a profit.  That way lies madness. And a generation of cheaters.

They are still morally to blame, but the people who raised them, taught them, trained them and role-modeled for them are at least as culpable.