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The Evolution of Capitalism

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Dinosaurs fightingIn 1986, I attended my 10th MBA reunion. I sat in a class taught by Joseph Bower, along with the classes of various years ending in a “6” or a “1.”

Bower talked about global over-capacity in the chemical industry and what could be done about it: “co-opetition” was his solution. The 5-year people looked somewhat bored by it. I found it quite fascinating, as did others in my year.

But the old guys were apoplectic. They spluttered and muttered things like ‘what has this school come to, don’t they know it’s a business school,’ and the like. To them, it was but a short hop to socialism.

It was never that simple. At that time there were already newspaper company joint operating agreements, which amounted to co-opetition in the very newsprint these old gents held in their hands at the Club in the evening. But no matter, ideology dies hard.

Their form of ideology—competition to the death, but in a gentlemanly kind of way—went through a resurgence in the 1980s with the advent of competitive strategy. We heard some about strategic alliances, but as far as I was concerned, co-opetition didn’t get back to the front page.

New Assaults on Old Business Ideologies

But as Michael Jackson once said, that was then: this is now. Now there is some serious re-examination going on about the nature of capitalism.

Umair Haque, who’s based in London, is burning up the Harvard Business Review blog scene by writing about constructive capitalism and about the economics of good and evil. 

At Harvard itself, Bruce R. Scott  writes with great perspective and wisdom about the complex relationship between democracy and capitalism. Sorry, die-hard fans of Adam Smith’s invisible hand; it just ain’t that simple.

And speaking of the Invisible Hand, Adam Smith first used that metaphor in his earlier book, the Theory of Moral Sentiments. He used it to describe the natural working of human sympathies for each other. Over a decade later he resurrected the metaphor to do double duty in Wealth of Nations, where he used it to describe the workings of a competitive market.

At the Boston Consulting Group, Philip Evans and team have done great research into just how it is that Toyota is so much more cost-effective than Detroit at building cars. It’s not pension and health care costs—it’s more effective process innovation, which in turn comes from—omigosh, collaboration. I imagine the old-timers from my reunion popping a blood vessel over that one.

I’m currently reading Winner Take All: How Competitiveness Shapes the Fate of Nations,  by Richard Elkus. Elkus was present at the creation—and destruction—of the US consumer electronics industry, working for Ampex.

Ampex coulda been Sony, or Toshiba. The reason it wasn’t is excruciatingly obvious as Elkus tells the tale of US management doing its best: valuing the transaction over the relationship, focusing on competition not collaboration, channel-loading and fudging costs, and converting all business issues into present value financial calculations.

Up against an Akio Morita, who actually believed in alliances and collaboration, who understood interconnection in technologies, and who worked for the long term, Ampex didn’t stand a chance. Nor Zenith. Nor, I would add, Detroit. The colossal disadvantage of our national economy at this point, he argues, is that we have sold all our technology for licensing fees, outsourced all our manufacturing for low input costs for quarterly earnings, and made ourselves little else but master marketers and consumers.  We exited what BCG called ‘dog’ businesses, and ended up dog food.

The Coming of Collaborative Capitalism

I’ve played around with various terms for it, but I’m liking “collaborative capitalism.” It’s light-years beyond 1986’s co-opetition, because it’s not just capacity-sharing.  It’s true collaboration and trust, working beyond corporate walls and across companies.  Many of us are seeing this trend at the same time.

Way back in 2002—a couple recessions or so ago—I wrote a little article called The Death of Corporations.  It basically said companies who competed against each other were, to use Robert Frost’s metaphor, disappearing not with a bang, but a whimper, as commerce gradually begins to operate across and through companies, rather than in the form of mega-goliath companies clumsily "competing" against each other, spouting their platitudes.

I still think that article’s going to be an overnight sensation, it just needs a little more time…

 

Tiger, Tiger, Burning Trust

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In case you haven’t heard, the world’s best and most famous golfer has got himself into a bit of a mess.

A sex scandal? To be sure. A public relations debacle? You betcha. But what does it tell us about trust?

The Longer You Wait…

It started back on November 27; that’s 23 days before I’m writing this. That’s a long time in scandal-years to go without comment by the protagonist.

It was December 14, two weeks and change into the story, that Accenture dropped Tiger. That too was a long time, but Accenture was by far the earliest and most definitive of his endorsements to drop him. On the day Accenture dropped him, Nike and Pepsi conspicuously announced their continued endorsement. (Tag Heuer, part of LVMH, hedged its bets, later dropping him).

Woods has been visibly silent to date. Now, he is being given public advice by none other than Snoop Dogg.

Tiger didn’t lack public relations advice from the public. The NY Times on November 28 quoted Mike Paul, founder of MGP Associates, a PR firm:

“My advice to Tiger is pretty simple,” Paul said. “Own it, say it yourself, say it yourself with full conviction and responsibility and get it out of the way.

“You have an opportunity to change rumor and innuendo into truth. Moving past fear and doubt — that’s something they did not do well during the first 24 hours.”

Even a Saturday Night Live parody isn’t the height of bad PR. Yesterday’s NYTimes op-ed by Frank Rich now positions Woods as the poster child for a generation of liars and posers. Heavy stuff.

Predictions are risky, of course, but we probably all agree that Tiger’s delay makes it more difficult, not less, for him to stage a comeback in the court of PR.

The PR Perspective: Tiger Just the Latest to Be Taught the Watergate Lesson

Maybe Tiger was listening to his lawyers. In such cases, criminal defense attorneys often warn their clients not to say anything. Hindsight is 20-20, but it seems that Tiger’s legal issues were nothing compared to his PR issues.

You would think that if the world learned nothing from Watergate, it was that the cover-up is always worse than the crime. And yet, consider the list of public figures that continue to figure they can outrun the capacity for the truth to embarrass them. John Edwards, Bill Clinton, John Ensign, Jim McGreevey, Kobe Bryant, Eliot Spitzer, Bernie Kerik, Newt Gingrich, Jimmy Swaggart, Gary Hart, Larry Craig, Mark Foley, David Letterman, Ted Haggard, Mark Sanford. And on, and on.

From a PR perspective, the answer is clear. Get the truth out, fast. It’s what I teach as Name It and Claim It. It is first and foremost an acknowledgement of reality. It may, or may not, then lead to an apology. Job 1 is stop pretending you’re in charge of reality—get the truth out, because if you don’t, it will most definitely out you.

What Scandals Tell Us About Trust

At the heart of trust is one’s relationship to the Truth. The Trust Equation consists of credibility, reliability, intimacy and self-orientation. If someone ranks high on the first three and low on the last, we consider them trustworthy. And if someone lies, it calls all four into question.

He who lies is, by definition, not credible. If he lied in a calculated, ongoing way, we have to question his motives—which suggests very high self-orientation. If he lies in a careful, calculated, painstaking manner, then we question his intimacy—we can’t trust what he says even in confidential, seemingly intimate, moments. And if he carefully lies from selfish motives, we certainly don’t find him reliable.

This is damning stuff. But what troubles us most is the implied sense of arrogance. The implication is that the liar believes we are stupid enough to be played for saps. And the longer the delay in telling the truth, the more the continued arrogance. It suggests the liar still believes he can spin us.

Consider Spitzer—damned for his hypocrisy as a do-gooder, then caught. By contrast, his successor Governor Patterson, on his 2nd day, called a press conference to pre-emptively confess all sorts of drug use and sexcapades by himself and his wife. Yawn, said the press.

But it’s more than just truth-telling. We want the hypocrisy dealt with as well. Letterman owned up immediately, but he also apologized. Interestingly, Patterson confessed quickly, but didn’t apologize. Both are in the American tradition. We’re not as Puritanical as Europeans make us out to be; we are a tolerant nation when it comes to all sorts of activities. But what we don’t want is someone who lies about his motives. It’s OK for Barney Frank to be gay; it’s not OK for Larry Craig to torturously insist he isn’t.

What Tiger Can Do

If Tiger were single, it’d be easier for him. What he can’t do, however, is to continue being hypocritical by pretending to be the marrying kind (unless he undergoes some massive conversion). Nor can he continue to pretend he’s in charge of the Truth by insisting on some right to privacy. He gave that up when he received endorsements.

There is one party that came out of this well, I think, and that is Accenture. Tiger’s rectitude was more important to them than to Nike, given their respective businesses. Accenture took decisive action, which is what values-based companies do.

Their silence about their decision, unlike Tiger’s, I take to be principled: preaching ethics in an ethics scandal just highlights your own form of arrogance. Best to be silent and let others formulate their own opinions.

What’s yours?

Bank Credit Cards: Not-Illegal Does Not Equal Ethical

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The bloated pig...This past May, the US Congress passed, and Obama signed into law the credit Card Accountability Responsibility and Disclosure act (CARD, of course, for short).

It provides for significant consumer-friendly reforms, due to take effect in February 2010.

These regulations are going to cost bank card issuers some significant chunks of change, as they’ll no longer be able to do things like apply your payments to the lowest-interest part of your debt, charge rates like 29.99% and hit you with large fees for slight transgressions. 

That is, when the law takes effect.

A Funny Thing Happened on the Way to the CARD Act Effective Date

Something happened between May and now–something that has caused many bank card issuers to raise their rates, accelerate their payment terms, and increase fees for those who can’t comply.

Now, why would that be happening?

The obvious deduction is that the banks just couldn’t resist getting in a last feast on their already burdened consumers by jacking up rates until they are forced to behave in a way society, through its duly elected government, has dictated they must.

Oh, what to do?  Bend to the will of the people?

Nah.  How about one last feeding at the trough, while it’s still legal.

That’s how Christopher Dodd, chairman of the Senate Banking Committee, sees it, and he’s not alone. Last week, the committee passed legislation to move up the CARD implementation to December 1.   And yesterday, he proposed freezing rates in the interim.

Sometimes, the obvious conclusion is the right conclusion. But that doesn’t stop some banks, and their industry spokespeople, from trying to argue the opposite.

Says Scott Talbott, SVP for Government Affairs at the Financial Services Roundtable:

…the bill was based on the faulty premise that credit card interest rates were going up because of legislation.
Instead, he said, interest rates were rising because of risks posed by the unsteady economy and by card holders themselves, who are defaulting on their payments or paying late more often.

In other words, we’re raising your rates because interest rates are going up in this recession, and because you greedy customers are abusing us poor folks at CitiBank and BankAmerica by withholding your money from us.

(Just to be clear: these actions are being taken by the banks who issue the cards, not by the MasterCard and Visa folks who create and brand them).

This is not a function of US culture only–it seems to be endemic in the business.  Over in the UK, where they’re presently considering US-like regulation, we get a similar argument from the banks:

One senior credit card executive pointed to the United States, where the supply of credit is already shrinking and its cost rising as a result of similar reforms, which are to come into force in February 2010.

In other words, if you restrict our profits, we’ll yell and pout and gouge you and generally behave badly; consider yourself warned, you’re responsible for our bad behavior.   

Responsible Business Behavior? Or Merely Not Illegal?

Most people can intuitively understand the difference between ethical and legal, and between unethical and illegal. Most of us want to live in a society where laws are ultimately derived from a sense of ethics—not the other way around. Just because something is not illegal hardly implies it is ethical.

But it seems increasingly that business is becoming deaf and blind to this simple distinction. Consider the Congressional testimony by several health care executives this past summer.

When asked whether they would voluntarily forego rescission (cancelling policies in effect) except in cases of intentional fraud, the executives one after another said they would not. Why?

Because, they said, what they were doing wasn’t illegal.

You have to ask the question, are these people stupid? Or venal?

In favor of the argument for stupidity, one can point to a modern penchant to substitute process for judgment. How else to explain a school principal suspending a 6-year old child for eating with a cub scout knife’s spoon? Or mechanical SEC procedures that Madoff and his whistle-blower Markopolis both called stultifying? 

While I think stupidity is the more usual culprit, in this case I vote for venal.  How arrogant do you have to be to insist that raising rates is the fault of economically challenged customers?   To tell your PR people to stand down?  And to argue that not being a crook entitles you to a seat at the table of responsible businesspeople?

I was privileged to share a platform this Monday morning with an entirely different kind of leader. I wish the heads of credit card operations in some of our major banks would take a look at this CEO, Aaron Feuerstein, in a 60 Minutes video.  And to hear him on Monday describe in the simplest terms why good corporate citizenship must be rooted in a sense of personal values. 

Not being illegal is nowhere near close enough.

 

 

Fixing What Ails Wall Street: Ethics, or Incentives?

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ShrugThe financial and insurance sector of the US economy has more than doubled  since the 1960s. Compensation levels in that sector have way more than doubled, and in way less time. Finally, the finance sector is highly responsible for the recent massive losses in asset value, with the attendant down economy, unemployment, etc.

If you’re with me on those three statements, then you probably agree that something is wrong on Wall Street. But just what?

Are warped incentives to blame? A Gordon Gekko-ish culture of greed? A mugging of economic thinking by anti-Keynesian theorists? An over-emphasis on competition? A failure of regulation?

(And let’s not go to the ‘we need to be less trusting, because there are bad people out there.’  We do not need more suspicion in the world today; we need more trusting, and more trustworthiness of those who would be trusted.)

If we force it, most answers boil down to two: it’s either the greedy financiers’ fault, or the fault of the system to restrain natural greed. Let’s look at some recent examples of both views.

In This Corner: The System’s to Blame

Eric Dash, in the blog Economix,  does a fine job running down several reasons why pay packages got so out of whack with performance. He focuses particularly on moral hazard and timing issues. If you can gain big by risk, but can’t lose, then the game is rigged against the public. And if you take the money and run, then no one can hold you accountable.

But in the end, Dash suggests culture is key—the culture of correctly linking risk to pay–or not–encouraged by those at the top.

It seems curious to cap a structural critique of the industry with a conclusion that is based on a human-nature sort of thing like culture.

Curious, but rather right.

And in This Corner: It’s Ethics That Are At Fault

Over at Investment Business Daily, Gary Stern reports that companies are cutting back significantly on ethics training. “The decision by some firms to cut back on ethics training may haunt them,” reports Stern. “Analysts say creating an ethical culture can help sustain long-term growth, not hamper it.”

Interestingly, Stern also cites a strong culture as the ultimate source of ethical behavior.

But the quotes above illustrate a weakness at the heart of much of the arguments for ethical behavior. They often try very hard to prove that ethical behavior is profitable behavior, hence we can have our cake and eat it too.

Problem is: if the ultimate test of ethical behavior is profitability, then it makes a complete hash of ethics.

I happen to believe that for the most part, behaving ethically is indeed profitable; the longer the timeframe and scope, the easier it is to prove this (sustainability initiatives are a good case in point). But to use bottom-lines to justify ethical behavior is hugely back-asswards.

The Worst of Both Worlds.

What happens when we combine a reliance on structural issues with a casual view of ethics that defines moral behavior in terms of profitability?

A striking example, it seems to me, occurred this summer in healthcare legislation hearings. Representative Stupak of Michigan asked  three health insurance industry leaders whether they would commit to ending the practice of rescission unless there were fraud or misrepresentation.

They fact that the companies refused to so commit is not surprising, or even troubling, to me. There could have been valid business reasons not to knuckle under to such a public hijacking.

But then the leaders opened their mouths to explain why they would not so commit.

“No sir we follow the state laws and regulations,” said one leader.

“No, I would not commit. The intentional standard is not the law of the land,” said another.

Allow me to translate. ‘The reason we won’t stop nailing innocent people to the wall and rescinding life-saving policies for trivial reasons is—because it’s not illegal for us to keep doing it.  And we’ll keep doing it until you stop us by making it illegal.’

What?

I suggest that’s the result of decades of decay in ethics. We have come not only to over-rely on structural solutions, but have produced business ‘leaders’ who blithely abdicate any ethical responsibility in favor of laws passed by state legislatures.

How can business be trusted if it has no ethics beyond a lawyer’s opinion?  What kind of ethics is that?

The law should be based on ethics, more than ethics should be based on the law. Law schools, business schools, corporate boards, industry and professional associations should all be ashamed that they have lost track of the difference, and have got it thoroughly backwards.  They need to be held accountable for encouraging this kind of bland monstrosity.

What’s really wrong with Wall Street? Not misaligned incentives, but misaligned views about who owes whom: it’s business that has an obligation to society, not the reverse.  Apparently not everyone got the memo.

 

 

Hire for Trustingness, Train for Trustworthiness

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You may know the HR saying, ‘Hire for attitude, train for skills.’ Our own Sandy Styer reminded me of that the other day.

The reminder came at an opportune time, as I was reading Eric Uslaner’s  excellent 2002 book The Moral Foundations of Trust, a book I’m embarrassed to say I haven’t read until now.

I’ve written before that trust is an asymmetrical relationship between one who trusts, and one who is trusted. (Most recently, in Why Trust is Assymmetrical, and What that Means for Trust Strategies).

Since 2000, when The Trusted Advisor came out, I have autographed my books with the simple phrase, “May you trust—and be trusted.” They are not the same thing.

Trust, Trustworthiness, and Trusting

Uslaner writes mainly about trust. Steven Covey Jr writes mainly about trusting. I have tended to write mainly about trustworthiness, and something about the interplay between the two (see The Dance of Trust.)

But I have to confess, the insight expressed in the title of this blog didn’t really come to me until I connected the HR insight and Uslaner’s work.

Uslaner eloquently makes the point that there are two kinds of trust. There is the kind you read about every day in surveys and headlines about ‘trust in Wall Street down last month,’ or ‘most trusted brands decline compared to internet,’ or ‘Obama’s trust rating down 10 points in 3 weeks.’   That kind of trust is pretty short-term, situational, and closely resembles things like reputation, brand image and customer loyalty.

There is another kind of trust: what the academics call social trust. That kind of trust is literally learned at home in our childhood. It doesn’t change rapidly or easily, is maintained in the face of specific events; it is, as Uslaner so correctly claims, in my humble opinion, a moral value. And it is that kind of trust–or its absence–that undergirds civil society. 

Hire for Trustingness, and Train for Trustworthiness

How does one become trusted as an advisor, a salesperson, and internal advisor, a consultant? The short answer is: be trustworthy. How do you do that? Read my blogs and articles for the last 2-3 years, or buy my books.

But how do you create an organization that lives on trust? How do you create a trustworthy people-creating organization? How do you lead and manage a business that runs itself on trust principles? 

There are a number of answers, but it may be that number one in that list is: hire people who learned that deeper attitudinal moral value of trust at the age of 3 or 4. Hire trusting people. Hire people who know how to trust, and are not afraid to do so.

Hire people who treat trustingness as a moral value. Because that is hard to teach.

Get an organization full of high-trusting people, and you have amazing potential. Such people can quickly ‘get’ the skills of trustworthiness. By being surrounded by others they trust and who trust them, they get a lot done.

By contrast, high-trusting people may not be changed by low-trust organizations—but they’ll leave.  And low-trust people likewise may not be changed by high-trust organizations; but they’ll be a drag on things.

I’ll be writing much more on this. For now, the catch-phrase is:

Hire for trustingness, train for trustworthiness.
 

Institutionalizing Trustworthy Social Behavior

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I am an occasional correspondent with Jim Peterson.

Jim’s resume is built for perspective. He is American, but has worked in Europe for many years; he is a lawyer, but also was 20 years in-house with the CPA’s at a Big 4 Accounting firm.

Finally, for many years he wrote a column for the International Herald Tribune. These days he writes a blog, Re:Balance. One of his enjoyable posts suggested all you needed to know about Bernie Madoff was that Donald Trump suggested he (Madoff) habitually cheated at golf.

Jim has well thought out and well backed-up opinions about many of the issues of our times: Madoff, accounting scandals, international relations.

I asked him the other day if he’d be willing to pontificate at a very high level How To Fix The World. Well, anyway, the world of perfidy, scandal and untrustworthiness in business. Here’s his response:

Of course, that’s difficult — especially when talking more broadly about basic principles on which societies regulate themselves. Your partner Stewart’s piece on school-kids the other day resounds — and causes me to mention the book "Nudge,” by Richard Thaler and Cass Sunstein, two really smart guys from the University of Chicago. There is discussion there that compares the results of coercive, top-down law enforcement with the setting of normative behavior by broadly-achieved social consensus, and where to draw the line on the tolerance level for deviant behavior.

My own examples and contexts would include, for example, the complex issue of drinking age rules on college campuses, the neighborhood decisions on cleaning up after dogs, and (as I remember) the de facto legalization of marijuana use in Central Park back in my early New York days.

As put in "Nudge," pedestrians don’t stop at cross walks because it’s illegal to jay-walk, in other words, but because it’s the social convention that cars generally won’t run you down (but there’s always the possibility).

In the corporate world I put weight on these principles:

– Law enforcement will always be reactive, behind the social curve and typically not effective as a deterrent.

– The American reliance on good quality disclosure and investor responsibility has generally served well, and better than most other systems, but requires serious re-calibrating.

– "Tone at the top" by way of management quality is of paramount importance, trumps almost everything else in the areas of ethics trainability, and can be observed and measured from the outside if investors and other users are only willing to do the work. (And per contra, Madoff and others demonstrate that sub-standard behavior is observable and measurable.)

That’s at least what comes top of mind to me.

What comes top of mind to you?
 

The Banality of Bad Behavior in the Financial Planning Business

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My eye was caught by a headline in registeredrep.com: “When Bad Firms Happen to Good Advisors.”

Some well-regarded experienced financial planners, the story said, signed on with the most recent mini-Madoff–Sir Allen Stanford and his Stanford Financial Group. Then they got burned.

Interesting story, I thought; even really good, ethical planners got sucked in, it seemed. Here is Bob Hogue, a Houston planner looking to move from Bank of New York:

Stanford offered service providers he knew well: Lockwood Financial’s platform of money managers, with which he had already built his business on, top-notch client and data management technology provided by Odyssey Financial Technologies (a leading European vendor), and a custodial relationship with Pershing, the custodian he was already using. Adding to the appeal, Pershing guaranteed easy transition of client data, no change in account numbers, if Hogue and the three FAs in his Dallas office moved to Stanford. “There weren’t any other firms offering all that,” says Hogue. He and the three other Bank of New York financial advisors joined Stanford’s Dallas office in November, 2007.

There was all the hooplah, too—yacht cruises, fabulous food, beautiful facilities. But Hogue et al weren’t seduced by that.

Or were they?

What Passes for Good Behavior in the Financial Planning Business

Stanford advisors got incentives for selling the CDs, including a 1 percent commission and, depending on the size of the sale, eligibility for a 1 percent trailing fee for each year on the CD’s contract, as well as trips and bonuses and invitations to the annual sales meeting, awarded based on how much money an advisor funneled into Stanford International Bank. [italics mine]

Wait a minute. What do CDs yield– – 3-4%? At those rates, commissions would eat up half the owner’s yield. We cry “usury” at credit card charges in the 20% range–how about 40-50%? And on a CD?

And, if these CDs were in fact yielding higher—7%, 8%–then they were far outside the normal risk range of the usual buyers of CDs.

What kind of a financial planner rakes 50% off the top of a “conservative” product that his customer could buy for nothing at an FDIC-insured bank? Or sells a highly risky product to people looking for conservation of wealth?

According to registeredrep.com, apparently the answer is “good advisors.”

50% fees on CDs? Good? In what dictionary? Let’s get real.

What Good Behavior in Financial Planning Should Look Like

A financial planner friend tells me that when she gets calls from wholesalers pitching products for her to sell, after they describe their new product, their next line is typically “let me tell you how much commission you can make on this.” When she says, ‘never mind that, what’s the yield for the customer?’ the response is usually, ‘uh, hang on a minute, let me look that up.’

That’s the normal pitch. Wholesalers are not stupid. This means: the average financial planner is not in it for you, they’re in it for themselves; that’s why the wholesalers lead with commissions, not benefits to clients.

The same planner tells me she often finds clients who have been put 100% into a variable annuity product, for example, when they have near-term needs for retirement or college expenses. “It makes no sense,” she says. Until you check out how the previous planner made 5%, 6%, 7% commissions up front by selling them this concoction. Then it makes a ton of sense. For the advisor.

Earth to registeredrep.com–bad advisors do this, not “good” advisors! This is the banality of evil. The incessant trickle-down of selfish, anti-customer, opaque behavior eventually makes routine, daily ripoffs get termed “good.”

Madoff and Stanford are anomalies. But the daily, garden-variety, grinding low-ethics, customer-hustling, devious behavior is all too common. See, for example, Michael Zhuang’s comment on a blogpost of just last week.

Can Ethical Behavior Be Increased in Financial Planning?

There are many ethical, customer-focused, honest, trustworthy planners. I know some of them, they do exist. They are as good professionals as in any industry. And there are seedier, greedier industries out there.

But so what? Since when is “he’s worse” an excuse for unethical behavior? Just last month the SEC charged a former President of NAPFA, one of the industry’s two professional associations, with kickbacks.  (Well, at least he wasn’t a Madoff….)

What can you do as a consumer? Search hard for the good planners. Don’t let yourself get snow-jobbed. Ask a lot of questions. Do not be intimidated. This is still a caveat emptor business. So caveat.

But–if you run a financial planning firm, you can make a real difference. Dare to be above average. Look at client-focused behavior in other industries. Talk to highly successful firms who are known for straight dealing. You know who they are in your business–emulate them. Read up on trust. Conduct focus groups. Talk to your critics. Steep yourself in the literature on how short-term anti-customer behavior kills long term shareholder wealth. Dare to do good!

Call me naïve, but I still believe that a critical mass of people in the financial planning business know the difference between today’s norm of selfish, short-term anti-client mindset and the longer-term client-focused strategy that is possible, and that in fact creates loyalty and mutual profitability. 

If I’m right about that, then it just takes some concerted courage by a few to speak up and start making a difference. And if you’re still reading, maybe you resemble that remark.

Ethics and Compliance: What’s Trust Got to Do With It?

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I believe words matter.  They affect the way we think, therefore the way we perceive, therefore the way we act.  Words are not passive things, acted upon by our blind behaviors; they are cultural repositories of memory.  Ontogeny recapitulates phylogeny in language as well as in biology.

So it has always bothered me to hear “ethics” and “compliance” in the same phrase.

I’m aware I’m in the minority; it is casual usage to combine the two. 

  • There is the Society of Corporate Compliance and Ethics and their Institute. 
  • Back in 2005, a speech by the SEC talked about the decline in ethics and compliance.
  • Corpedia Corporation “offers a wide variety of innovative and user-friendly compliance and ethics solutions.” 

So, it’s commonly used.  Then again, we also live in a world that obsesses over Britney Spears.

Defining "Ethics" and "Compliance"

Let’s try the dictionary.  First, ethics:

1. (used with a singular or plural verb) a system of moral principles: the ethics of a culture.
2. the rules of conduct recognized in respect to a particular class of human actions or a particular group, culture, etc.: medical ethics; Christian ethics.

Now, compliance:

1. the act of conforming, acquiescing, or yielding.
2. a tendency to yield readily to others, esp. in a weak and subservient way.

These two words don’t live together easily.  In fact, if we try to substitute “Wall Street” for “medical” or “Christian” in the ethics definition, we get what most people would call an oxymoron: Wall Street ethics. 

I would argue this is a serious issue.  Entire industries—financial and pharmaceutical come to mind—have come to conflate the two words, and we are all the worse for it. 

When “ethics” becomes a soul-less matter of ticking the boxes, when we substitute acquiescence for a conscience and subservience for principles, we have lost a great deal.  In particular, any meaningful sense of the word “trust.”

How can a financial planner aspire to being a fiduciary through procedures alone?  How can a company achieve client focus through quarterly behavioral competencies alone?  How can we create trusted regulatory agencies if all they do is enforce processes and paperwork?  How can you give multiple choice ‘tests’ that ‘certify’ people as being ‘ethical?’  But that is generally how "compliance" programs are executed. 

That way lies Bernie Madoff, and a thousand other example of people who have lost track of simple guidelines like be transparent, tell the truth, serve your clients, and work for the long run. 

You Can’t Comply Your Way into Ethical, or Trustworthy, Behavior

A focus on compliance alone can never create ethical behavior.  Perversely, all it does is incent slightly bent people to become more bent by focusing on exploiting the inevitable gray areas that crop up in any set of behavioral rules.   There are plenty of professionals who are 100% compliant with their industries’ lax standards, and are, by many customers’ judgment, highly untrustworthy, selfish sleazeballs.

Law schools can take some blame here; law is the only profession in which the notion of ‘truth’ is non-existent, replaced by ‘evidence.’ 

MBAs are hardly blameless; their mindless pursuit of markets, transactions, and micro-measurements have fueled the replacement of “character” with “observable behaviors that achieve sustainable competitive advantage.”

But that’s too easy.  We’ve all gone along with it.  We’re all infatuated with “science,” neuro-proof, lawsuits and fix-it drugs. Ethics?  Get with it, dude.  

I know this sounds like an old-fart rant, and in part it is.  But there are plenty of businesspeople who behave well, and even prosper because of it.  And they’re also to blame for tolerating the shades of gray. 

We don’t have a crisis of trust and ethics so much as we have moral sloppiness–a willingness to tolerate mediocrity.  Most of us have remarkably similar instincts about what’s right and what isn’t.

What we’ve all got to do is get mad about how far we’ve strayed.

And compliance is not an excuse.
 

Rationalization – At the Heart of Ethical Challenges

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Guest Blog:  By David Gebler, President, Skout Group, LLC

By and large, corporate leaders who get into ethics trouble are otherwise honest people. They believe in the Golden Rule; they think that they would always do the right thing.

So what happens to them? What makes them cross the line? Why do some people fall prey to temptation and others don’t?  The answers lie in how well a leader prepares his motivational defenses.

Rationalization Lights the Path to Unethical Behavior

The ladder to success requires a great deal of ambition. Leaders have to be assertive, if not often aggressive, in meeting tough objectives and demanding the most of their people. How well do leaders balance a desire to do the right thing with the drive to win and be successful? When those values and goals conflict, which can happen many times a day, how do they reconcile them?

But “balance” is not the right word to use, because this really is not a fair fight. Sitting in ambition’s corner is the power of rationalization. Rationalization is what allows us to devise self-satisfying, but incorrect reasons for our behavior. 

We all of course rationalize our actions all the time. We even rationalize our illegal actions, such as driving over the speed limit. But the greater the ambition, the stronger is the power to find reasons to justify actions that we know are not the right ones.

Managers face many options in making decisions on how to meet a wide variety of goals. Taking the most cautious and risk averse path is not what they are paid to do. They are expected to weigh the balance of risk and reward, but most often the bias is clearly towards the reward.

It often starts quite innocently. “If I have to wait until Form X is signed off on, we’ll miss the customer’s deadline.” Or, “I would never have stolen those documents from our competitor–but if they are in my inbox, am I expected to not open them?” 

Someone once said “inside your head is a very dangerous neighborhood.” Left alone, we spin our own web of rationalizations, of ends justifying means.  And as we have seen, the more powerful the ambition, the more shocking is the rationalization, all the way up to the New York Governor’s hotel suite.  That’s human nature, and that’s not going to change.

Defenses Against Rationalization

What we can do, however, is to bolster our defenses. In many instances managers make these risk-reward calculations alone. How many times have we convinced ourselves to do something–and then changed our minds at even the thought of asking a loved one or trusted confidante their opinion. 

Yet managers too often view seeking counsel as a sign of weakness or indecisiveness. They will often raise the dilemma only with subordinates who may be hesitant or unable to question the boss’s judgment.  Rationalization is very easy if you don’t get outside views from people you trust.

Intuitive leaders understand the need to seek the opinion of others before making close-call decisions. And forward thinking companies have set up processes that channel managers to verbalize both sides of the issue before making decisions that could have ethical consequences.

Human nature isn’t going to change. But if acknowledge it, we can do a better job at managing it.

Note from Charlie: I’m re-posting this one because it only got one hour in the limelight yesterday before being superseded by the ebook on sales.  David Gebler is a powerful thinker and consultant on this subject, and I want to give TrustMatters readers more time to absorb his simple but profound message.

Why ‘Corporate Ethics’ is Usually an Oxymoron

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David Brooks, as he occasionally does, knocks it out of the park in The End of Philosophy, in yesterday’s NY Times. The subject: moral reasoning.

Wait wait–don’t run away! It’s interesting–I promise!

We often think of morality as principles-driven. Whether religious or philosophical, if we hear “moral,” we’re inclined to think rule-following or deductive reasoning of some kind.

Not so, says Brooks, surveying current literature. Moral reasoning is much more emotional and intuitive than we think. It evolves evolutionarily, as part of our social development. Which, interestingly, puts it on a par with competition.

Evolution isn’t just survival of the fittest. Evolution also favors those groups who have learned to cooperate—competition isn’t just individual, it’s between collaborating groups.

Which means the urge to collaborate is about on par with the urge to compete. Both come from the same parts of the brain, the emotional centers.

This makes common sense on several dimensions. One is that ethics is fundamentally about relationships—not about rules. Even Immanuel Kant—about as principles-based a philosopher as they come—agrees with this (ethics consists in treating others as ends, not means).

Quick cut to business ethics programs. Sometimes phrased as “ethics and compliance” programs. Which leads us to oxymoron number 1: if you’re talking about complying with the law, you’re probably not talking about ethics.

When Harvard Business School started its ethics program in 2004, here’s how the new course (Leadership and Corporate Accountability) was positioned:

"LCA stems from a belief that business leaders play a crucial role in society. They and the companies they build and lead are expected to deliver strong financial results for investors, superior goods and services for customers, attractive work environments for employees, and innovative ideas for the future. At the same time, they are expected to observe the laws of the countries in which they operate, respect society’s ethical standards, and contribute to the communities of which they are part."

It’s hard not to see this as a course about the art of balancing. Balancing competing demands is something at which HBS does a wonderful job. But the course sounds no different at root from other courses that describe balancing competing constituencies in marketing, or production, or business strategy.

Corporate ethics, by this view, is far more corporate than ethical. It is about navigating a company through a minefield of, among other things, people who believe in something called “ethics.”

This view of ethics is to real ethics as a professor of religion is to a churchgoer. Oxymoron Number 2 is “corporate ethics.”

Programs like this almost always still have one assumption at root: the survival of the corporation in a complex, often hostile world. That is the same assumption at the heart of a course in corporate strategy. Proof? How many ethics courses contemplate the disollution of the company? About as many as strategy courses envisioning the same. Zilch.

Just as Machiavelli linked war and negotiation as alternative means to the success of the State, this view links strategy and ethics as alternative means to the success of the Company. In this environment, cooperation is not about ethics–it’s about negotiation to achieve competitive aims. It’s cooperation as means, not ends. It’s not ethical.

No surprise. Machiavelli doesn’t come to mind as a foremost ethicist.

The continued existence and prosperity of a Corporation or a State is very much what competition is about. It is not at all what ethics is about. In an increasingly connected world, a course about ethics would talk about the value of collaboration across and between companies, and how to manage based on it. I don’t see that happening.

Competition and ethics may both derive from evolutionary, emotional sources. But as long as one is subordinated to the other—as long as they’re teaching ethics down the hall from competitive strategy, with a common philosophical goal of corporate competitive success–the winner will be competitive strategy, and the loser will be ethics. No contest.

Too bad, because old-think in a new world is not what we need.