The Sincerity Edge

How Ethical Leaders Build Dynamic Businesses

Alexandra Christina, Countess of Frederiksborg, Timothy L. Fort

• Publisher: Stanford Business Books
• Year: 2017
• ISBN:
  9781503603356
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Wirtschaftssethik

Recognizing their role as "corporate citizens, " companies are seeking guidance on how to be true to their missions, principled in practice, and well regarded for their contributions to society. As this book reveals, the key lies in sincerity—the sum of values like authenticity, integrity, and trust.

Countess Alexandra Christina, a European corporate director, and Timothy L. Fort, a leading American scholar, delineate a clear and actionable model for bringing sincerity to the business context. Their vision for sincerity complies with law, aligns corporate social and financial performance, and values corporate ethics in its own right, rather than as a means to an end. Underpinning this model is a synthesis of the top research in the field and a suite of new interviews with current and former CEOs. Tracing inspirational tales and scandals alike, this book shows how leaders can head up companies that more reliably make good decisions and conduct themselves in a trustworthy manner. It then concludes with twelve concrete actions that businesses can take to cultivate "the sincerity edge."

PART I

Foundations and Stories

1

What’s Going On?

If a board of directors sought to improve a given corporate function—strategy, marketing, or human resources—where would they begin? A common starting point would be to benchmark what the company does against a set of “best practices.”¹

But what if “best practices” were not good enough? Ford Motor Company has long been a manufacturer of automobiles, but in recent years its board has realized that if they regard Ford as only a distributor of cars, it will not be recognized as a broader-based transportation company.² The Ford board now seeks best practices in terms of helping to design transportation networks for metropolitan areas, rather than best practices to simply make and sell more vehicles. A company’s best practices thus depend on the template being used.

This analogy holds true today. Stakeholder demands—including those stakeholders called shareholders—press the agenda of corporate boards today very differently than they did, say, fifty years ago. Perhaps, as Norwegian investment banker Per Saxegaard argues, this is because the Internet provides a way for any interested party to have a voice, to capture a corporate indiscretion via a cell phone and immediately publicize it, and to organize a wide array of kindred spirits to put pressure on companies.

Companies need to make decisions about these issues. Are these decisions the domain of strategy? Philanthropy? Compliance? These issues could be called corporate social responsibility (or “CSR”), but even that name is unclear.

Practitioners and scholars differentiate among CSR, compliance, ethics, citizenship, shared values, and a host of other names for companies’ efforts to adhere to obligations other than maximizing short-term profit. When people tire of the criticisms of one name, they adopt another term to shed the baggage of the first. Whether the effort is contributing medicines to Third World countries or instituting a values-based model of human resource management, we use terms such as CSR and ethics interchangeably because a larger issue lies at the heart of these semantic debates.

Why should businesses pay attention to ethical and social norms? Is it because they will make more money for the business in the long run? Is it because companies will be more likely to comply with the law or perhaps to obtain more leniency from a prosecutor or a judge given a company’s conscientious history? Is it because people in a given company believe that integrity, trustworthiness, and authenticity have their own independent value worth pursuing?

These issues of trustworthiness, integrity, and compliance, as well as those of strategy, profit, and sustainability, are not new. They are the result of forces that have always affected companies. Some businesses ignore these forces; indeed, some of these forces can be minimized during certain times. Yet they do not disappear; a businessperson needs a template of these forces to navigate through what is going on today.

Drawing a Template

Illegal business behavior is not new, nor is unethical business conduct. As long as there has been trade, opportunities have existed for cheating. One need only look to ancient sacred scriptures to see the regulations and punishments set to deter cheating. Similarly, legal scholar Reuven Avi-Yonah has traced the notion of corporate social responsibility to Roman antiquity, arguing in part that governments provided companies with the benefit of limited liability in exchange for engaging in activities that benefited the public.³

Economists realize this as well. Nobel Prize–winning economist F. A. Hayek comments that if two people met in an isolated area, one party might kill or steal from the other; a person who could get away with it might just do that. However, to the extent that a community exists, sanctions will be imposed on the killer or cheater because it is not in the long-term self-interest of the members of the community to allow such behavior to occur. What is in their self-interest is encouraging productive behavior such as trading while discouraging killing and stealing. What fosters trade is for people to honor their promises, to tell the truth, to produce, and to sell high-quality products and services.⁴

It is arguably harder to pursue good virtues and profitable business today due to the rise of large business organizations combined with fluid global markets. Many commentators have noted that when management becomes separated from ownership, a new dynamic is introduced to corporate governance. A company with a dominant majority shareholder or a family-owned business will likely take on the values of the founder or owner(s).⁵ In such cases, the differences between the leader’s personal values and those of the company are not likely to be dissonant, and messages concerning appropriate behaviors will more easily flow through the organization.⁶

However, once companies undertake their initial public offering (IPO), the game changes. New investors enrich the company’s capital structure (as well as providing cash for the founders). These new shareholders possess the same rights to voice their views as the company’s existing shareholders with respect to how the company will govern itself. Many shareholders place a primary value on economic performance. At the same time, some companies do take steps to preserve their traditional way of doing business at the time of an IPO, and so some values—including noneconomic values—may persist in a company’s culture over a long period of time.

A prominent example of this is the legendary case of Johnson & Johnson (J&J). When the company made its public offering in 1944, the founders attempted to perpetuate the company’s (and founding family’s) values through J&J’s Corporate Credo, which set out duties and aspirations for the company, including service to, ranked in order, customers, employees, communities, governments, and finally to shareholders.⁷ The company conducted training programs around the Credo for decades, making it a criterion for hiring and promotion decisions as well as daily conduct for J&J employees.⁸ The pervasiveness of the Credo in J&J’s culture was given significant credit for J&J’s famous 1982 decision to remove its best-selling brand, Tylenol, from the dispensaries nationwide when an outside party sabotaged the product, resulting in six Chicago-area deaths.⁹ J&J’s CEO at the time, James Burke, explained that the company had to take such a drastic action because, without such action, “We couldn’t live up to the Credo.”¹⁰ At the time, that unforced recall was considered to be a questionable business action tantamount to admitting guilt, but over time it proved to be a brilliant defense of the company’s brand and its lead product.¹¹

J&J’s action proved to the public that it was a company that people could trust, keeping its products safe for the public and standing behind its promises. Tylenol had been J&J’s best-selling product, producing 17 percent of the company’s net income in 1981.¹² Two months after the recall, the company brought Tylenol back to the market with a market share that had plunged from 37 percent to 7 percent. A year later, the market share was back up to 30 percent.¹³

As admirable as J&J’s commitment was, it is a difficult orientation to maintain in a publicly held company. Institutional investors, day traders, or individual investors using various mutual fund options are more likely to be interested solely in monetary returns.¹⁴ Technology allows near instantaneous trading so that investors can move in and out of the market on an hourly basis.¹⁵ That opportunity furthers investors’ ability to evaluate companies on a very short-term basis. For such investors, monetary returns typically take priority over long-term strategies that emphasize values or corporate culture.¹⁶

In addition, investors from around the globe are likely to bring with them a diversity of values that may well challenge those that had been enshrined prior to a company’s IPO.¹⁷ And with 24/7 stock trading, the emphasis on ongoing evaluation of companies further enhances the importance of short-term monetary performance.¹⁸ According to this template, honesty and integrity are not highly rated.

In spite of these pressures, the aim to create strong ethical cultures persists, as well as the aim for these companies to be perceived as having a social conscience. Even in the midst of these acute pressures for financial performance, evidence also suggests that ethical corporate cultures are correlated to economic success.¹⁹ Lawmakers consistently pass legislation that attempts to rein in corporate excesses.²⁰ The public and civil society continually press for more responsibility and more social engagement. We will discuss the moral reasons for this throughout the book, but it is important to delve further into the economic reasons for why ethics is important to business leadership.

ETHICS EMBEDDED WITHIN ECONOMICS

Four leading economists provide examples of the argument that at the core of economics is a noneconomic ethical dimension that foundationally allows economics to exist and allows trade to develop.

Adam Smith is at the forefront of this supposition.²¹ Smith, a moral philosopher, is most remembered for notions such as the “invisible hand” that creates social welfare even when “individual bakers and butchers” are acting from their own self-interest.²² Yet Smith also argues that those individual bakers and butchers fill roles as citizens of a society with moral sentiments and obligations for the well-being of that community.²³ Businesspeople, in this light, are not only self-interested; they are also citizens concerned with obeying the law and being ethical.²⁴

We have already introduced the Austrian economist F. A. Hayek, who took this connection a step further. Hayek argues that free trade benefits society in at least two ways. The first way pertains to how trade allows the production and accumulation of more material goods, creating a robust economy and the positive aspects that go with it (such as employment, better education, improved health).²⁵ Second, Hayek also argues that increased trade leads to international peace.²⁶ His argument is that trade creates relationships. Sustaining trade requires that those relationships be nourished by some straightforward ethical practices, such as truth telling, promise keeping, and the production of high-quality goods and services. This is one of the reasons that trade embargoes are so controversial. On the one hand, sanctions and embargoes provide a pressure point short of actual violence and so may provide the necessary pressures for changes without bloodshed. At the same time, the consistent lack of a trading relationship further isolates parties from each other, which may make subsequent peace-building efforts more difficult.²⁷

A virtuous cycle can be created, Hayek argues, with parties recognizing that expanding trade requires such practices, which leads to more trade, which leads to a wider set of relationships, with a result that parties to a trading system will recognize both the value of...