Re-wiring: there’s an important shift underway in corporate America, and in the UK.
Re-wiring what it means to be an ethical business leader suggests the boss needs a brain implant. Instead, it’s about raising awareness about what being ethical now demands from them.
First there’s the role of compliance and what business leaders must do to stay legal and ethical. Second, there’s a global trend to re-think the entire purpose of what a business is for. Even the cautious Financial Times launched a major re-branding of capitalism calling for a “reset.”
Despite countless explanations of how to be an ethical business leader these two forces make for less clarity about the ethical leader role.
To guide ethical and compliance decisions companies often rely on written rules. These supposedly guide individual and corporate choices–you know the typical PR fluff: “We conform to all the necessary rules and regulations.”
Claims to stay within the rules seem to suggest the firm acts in ethical ways. Nothing of the sort, Lengthy tomes can explain the ground rules governing difficult moral choices. And business leaders may fondly believe these will help them stay out of trouble. But as convicted felon, Enron’s former CFO Andy Fastow admitted about his misdeeds:
“I knew it was wrong…But didn’t think it was illegal. The question I should have asked is not what the rule is, but what the principle is.”
Explicit rules and even formal legislation seldom adapt fast enough to keep up with the ever-evolving business environment. Formal “boundaries” or compliance requirements may guide some choices. Yet these prove of limited help when what matters most is staying alert to new ethical issues and unexpected ethical dilemmas.
A new study by Quinlan & Associates analyses the cost of banking misconduct since the global financial crisis. It reveals that expensive efforts to shape employee behavior through formal compliance training does not produce meaningful outcomes. In financial terms, compliance training offers poor value for money.
Take for example the growth of AI (artificial intelligence). No amount of elaborate compliance rules will solve the varied and confusing ethical challenges increasingly posed by this emerging technology. For instance, recently, Apple apologized for keeping secret recordings made from Siri, its AI personal assistant. What happened to Apple’s moral compass in the first place?
In similar vein, Facebook recently announced its intention to encrypt children’s accounts. This would make the contents no longer available to counter effort to stop grooming and other illegal practices. A leading IT professional describes this proposal as “spectacularly harmful to children.” The UK Home Secretary agreed, calling the action “creating a digital blind spot” where paedophiles and terrorists can hide “despicable crimes.” Another moral compass in need of attention.
Google’s now abandoned “Don’t be evil”—later to become “”Do the right thing”, perhaps got closer to being a useful moral compass to apply in daily ethical thinking.
The limitations of rule-based systems explain why leaders need to keep developing their moral compass. The latter is not a tasty metaphor to be offered up at suitable moments to justify actions or inaction. Instead, it means making real judgements and constantly facing the vital question:
“But is what we’re doing right?”
For example, senior business leaders in pharma giant Johnson and Johnson doubtless recall the proudest moment in the company’s long history. Back in 1982 sabotage threatened their best-selling Tylenol product. Much of the firm’s profits relied on this source. J&J made a ground-breaking decision based on its “credo” or moral compass.
The firm’s leaders chose to recall its entire national stock– millions of bottles across the whole continent. This logistical nightmare came at a King’s ransom in lost profits.
Yet the firm’s then CEO claimed the tough decision was not as difficult as many people thought. It stemmed from the company’s “special sauce”. Its credo of core values and vision. The latter included a commitment to always act first in the best interests of its customers.
If only the clarity of that moral compass had continued. It might have helped steer the company’s senior executives away from the later controversial contribution to the US Opioid crisis. This is now coming to a head in the US courts with thousands of high cost cases awaiting settlement. Such is the scale of legal onslaught J&J could even face bankruptcy. It’s already happened for OxyContin maker Purdue Pharma which has indeed filed for bankruptcy. Its defective moral compass mortally damaged the company’s reputation.
Purpose and Shareholder primacy
There’s a second factor driving uncertainty and vagueness about what being an ethical business leader now means. And why ethical leadership itself needs wiring. This is the declining value of the widely used “Get-out-of-jail card” that puts shareholder interests above all other claims on a firm.
Followed almost exclusively for half a century, this single-minded obsession has obliterated almost every other concern, no matter how important. It successfully shouldered aside the interests of customers, employees and communities. The small print on the card read:
This narrow assertion encouraged leaders to feel safe in claiming no moral responsibility for their firm’s actions. Only their commitment to shareholders mattered. A similar corporate “blindness” prevails in today’s Tech industry.
For example, companies like Facebook or Google, persist in claiming they are not media publishers and therefore have no responsibility for their eventual impact. At best, the Get-out-of-Jail card implies a company does not need to put social concern at its heart. Such investments can be conveniently dismissed as irrelevant to a company’s core purpose. At worst, social investment can be dismissed as anti-business.
This myopic view of shareholder primacy now faces a growing challenge. Since the 1970’s this long-standing belief explains many anti-social actions from pollution to tax avoidance.
Today many business leaders though want to ditch the “investor-first” creed. For example, one the country’s largest business groups the US Business Roundtable, no longer bows before the altar of shareholder primacy.
Its 2000 members bring together leading US CEO’s and includes the bosses of JP. Morgan, Amazon and General Motors. Recently 181 of its CEO’s lent their name to a new “Statement of the Purpose of a Corporation”. This accepts that companies must include in their purpose a responsibility to
“Protect the environment and treat workers with dignity and respect, while delivering long term profits for investors.”
Whether this represents a “revolution” in what defines a company remains to be seen. Cynics question the sincerity of these business leaders. It’s unclear whether their companies will be accountable and to whom. But it’s a start. A brave, path-breaking downgrading of profit maximization as a business purpose. It’s akin to re-thinking capitalism. It re-aligns purpose into: delivering value to all stakeholders. The latter now include employees, trade unionists, suppliers and local communities.
The Round Table rightly worries about the longer term and how to divide the results of business more equitably. Falling profits though can make such a re-division harder.
Demoting the importance of shareholders is a start, not the end of re-wiring ethical leadership. As a leading economist puts it, business leaders:
Being an ethical business leader now means considering their activities in the public arena. For example, rising inequality achieved through corporate tax strategies cannot be part of defining ethical leadership.. Avoiding radical tax avoidance techniques must now play a part in the re-wiring process.
Long relegated to obscurity, a company’s social commitment now keeps surfacing in the financial world, For example, the ubiquitous ESG, standing for Environment, Social and Governance factors, now proves inescapable. A tsunami of investment vehicles offer an ESG focus, along with convincing evidence that companies driven by these factors do exceptionally well financially compared to ones less concerned with ethics.
When company or investment purpose alters to this extent, re-wiring what it means to be an ethical business leader becomes necessary:
With over £1.1 trillions of investments Legal and General is one of the largest UK institutional investors. With 34 like-minded global businesses L&G joined with the OECD to back Business for Inclusive Growth. They pledged a social commitment to help tackle inequality and promote diversity in their workplaces and supply chains.
Chicago academic Milton Friedman, who preached the gospel of profits as the sole purpose of business, must by now be rotating in his grave. For here are a significant number of global business players united against his widely adopted, but selfish view of capitalism. Instead, a new vision presents business as able and willing to help change the world, through being inclusive. The latter implies combining shareholder value with driving social progress.
Social impact is hardly new to big corporations. Several Indian major companies for example have long included a strong social commitment in their formal purpose. Elsewhere, many firms signed up to action termed Corporate Social Responsibility. These efforts though, seldom generated serious change,
Power of Values
Burgeoning society and stakeholder demands push companies to become more involved with key social issues. The latter include immigration, diversity, and equal pay across the gender divide, tackling fake news and climate change. Together these provide strong reasons for re-wiring what it means to be an ethical business leader.
Corporate values for instance, provide a regular flash point in the US political environment. This is less so in the UK, but still present. For example Edelman’s Earned Brand survey shows that people already use the power of their pocket books to reward or punish companies, based on shopper’s own values–see chart.
Of some 14,000 respondents in 14 countries, a third admitted to buying or boycotting products based on values–more than they were doing three years ago. Over half of all shoppers in one survey said:
“Brands can do more to solve social ills than government.”
This is a wake-up call for CEO’s and what it means to be ethical. The latest survey from the consulting arm of PWC shows how a decade ago, half of all CEO’s firings occurred because of poor financial performance. Less than a tenth stemmed from ethical lapses.
The latest evidence from 2018 showed signs of serious change. More CEO’s were dismissed for ethical lapses than for financial performance. The ethical issues included: fraud, bribery, insider trading, environmental disaster, inflated resumes and sexual indiscretions.
An explosion in applying values through shareholders activism provides a healthy antidote to those CEO’s who regard ethical leadership as a minor aspect of their current role. As one informed commentator puts it: “So, for better or worse, CEO’s and investors need to recognise that the world has changed.” G. Tett, FT 24th May 2019
Re-wiring what it means to be ethical business leader is now well underway. Here in this infographic are some specific implications:
H. Kuchler, Purdue grows more isolated as JPMorgan cuts ties with opioid maker, FT 23rd May 2019
R. Henderson, US Companies ditch investor-first creed, FT 20th August 2019
Business must act on a new corporate purpose, FT 20th August 2019
N. Wilson, Inclusive capitalism can change the world, Daily Telegraph, 27th August 2019
M. Wright Facebook’s encryption move “spectacularly harmful to children,” D. Telegraph 2nd September 2019.
S. Kaplan, Are companies right to abandon the shareholder first mantra? FT. 19th August 2019
Leader column: Business must act on a new corporate purpose, FT 20th August 2019
R. Henderson, US companies ditch investor first creed that has driven capitalism since 1970s, FT 20th August 2019
A. Ross Sorkin, How Shareholder democracy failed the people, New York Times, August 21st 2019.
J. Samuelson, Did the Business Roundtable just sound the death knell for shareholder primacy, Reuters August 19th 2019
G. Tett, More chief executives are paying for their ethical mils-steps.” FT 24th May 2019
N. Epley, How to design an ethical organisation,” HBR, May-June 2019
Compliance Training Failing to Deliver Meaningful Outcomes, Regulation Asia, September 2019
H.Kuchler, A target on its back, FT, 6th September 2019
G.Tett, Capitalism–a new Dawn, FT 8th September 2019
H.Kuchler, Opioid manufacturer Purdue files for bankrptcy, FT 17th September 2019
M. Wolf, Saving Capitalism from the rentiers, FT 18th September 2019
J. Ford, Business Roundtable’s makeover does not go far enough, FT 23rd September 2019