Paul Holmes 04 Dec 2006 // 12:00AM GMT
It’s less than a month since the death of Milton Friedman, one of the most influential economists of the 21st century—his free market fundamentalism is the dogma of the current American administration—and author of the famous dictum that “there is one and only one social responsibility of business: to use its resources and engage in activities designed to increase its profits,” a view quoted approvingly earlier this year in The Economist as that magazine sought to portray the corporate social responsibility movement as naïve and unnecessary.
So it’s an appropriate time to review a new book by Daniel Yankelovich, for the past 50 years one of the leading researchers in America (he founded research giant DYG as well as two other companies) and on the evidence of Profit with Honor: The New Stage of Market Capitalism, one of the most thoughtful.
Friedman’s only qualifier to his paean to the primacy of profits was to note that business should “stay within the rules of the game… engage in open and free competition without deception or fraud.” It is one of the strengths of Profit with Honor that Yankelovich paints a vivid picture of what that philosophy has wrought.
The United States, according to Yankelovich, is now experiencing a third wave of mistrust in business and other institutions.
The first wave occurred in the 1930s, as a result of the Great Depression and the accompanying mass unemployment; the second wave occurred in late 1960s and lasted the best part of two decades, the result of Vietnam and Watergate. In 1964, before the wave of mistrust hit, three-quarters of Americans believed “you can trust the federal government to do the right thing,” but by 1980 that number had declined to about one quarter. Trust in business declined from 70 percent to around 29 percent over the same period.
The current wave of mistrust began in 2002, in the wake of the Enron, Tyco and Worldcom scandals, and “if it follows the same pattern as the other two waves, it is still in its early stages.” Moreover, Yankelovich says, “the groundwork of mistrust laid down in earlier years will make it far more difficult to recover the public’s trust.”
Indeed, Yankelovich believes “we should take the new wave of mistrust seriously. Mistrust is a corrosive emotion that distorts everything it touches.”
He quotes financier Felix Rohatyn, who once observed that “only capitalists can destroy capitalism,” and suggests how that might happen: “Market economies now dominate the world stage; they are too strong and too well-ensconced to be destroyed by anti-capitalist movements like socialism, communism or Islamic fundamentalism. But they can be undermined by the actions of those currently in charge…. The smooth functioning of the market depends on trust. And the surest way to undermine our market economy is by letting mistrust run amok.”
To regain the trust of the American people, he says, business “must institute far-reaching changes, or else suffer punitive reforms imposed by government….
“The time has come for market capitalism in the United States to advance to a new stage of enlightened self-interest. American business needs to develop a new ethic—a coherent set of social norms—both to counteract the forces leading to the scandals and to meet the challenges of the global economy that call upon business to take on many new responsibilities.”
The scandals of the past decade, he believes, “have shocked the business sector into realizing that something is seriously wrong with its current practice,”—a claim that seems to me to require more supporting evidence than the author presents.
There’s no question that business leaders should be taking the challenge to their collective and individual reputations seriously.
“In a democracy, reputation is all important,” Yankelovich insists. “The reputation of a company and its associated brand names may be a company’s most valuable asset—and all thoughtful business executives realize this. The care and feeding of the company’s reputation is a vital aspect of the CEO’s responsibilities.”
But whether business leaders are doing anything more than paying lip service to the idea of change is at least arguable.
Yankelovich quotes IBM chief executive Samuel Palmisano: “All businesses today face a new reality… Businesses now operate in an environment in which long-term societal concerns—in areas from diversity to equal opportunity, the environment and workforce policies—have been raised to the same level of public expectation as accounting practices and financial performances.”
And Roberto Goizueta, former CEO of Coca-Cola, perceived a similar shift in expectations. “While we were once perceived as simply providing services, selling products and employing people, business now shares in much of the responsibility for our global quality of life.”
But most CEOs, it seems to me, still adhere—in practice, if not always in their public comments—to the Friedmanesque notion that their companies exist exclusively to create wealth, and that any other approach is not only risky in terms of the likely market reaction, but quite possibly also a breach of their legal responsibility to their owners.
It’s adherence to that notion that is primarily responsible for the growing mistrust of business. But Yankelovich sees a variety of factors at play, a “perfect storm” of circumstances.
“The scandals,” he says, “are not the result of a national outburst of greed, contempt for the law, the arrogance of power, or a breakdown in corporate governance, though elements of each are present. The main cause is an extraordinary convergence of three trends, the sort of rare phenomenon that generates what people like to call ‘a perfect storm.’
“One trend is deregulation. The rage for deregulation that dominated the 1980s and 1990s had many unintended effects. By removing the legal restrictions that prevent blatant conflict of interest, deregulation tempted some of the gatekeeper guardians of the public interest to sacrifice the principles of their professions for their own economic gain.” (A cynic, I suppose, might argue about whether this consequence was in fact unintended.)
The second trend, he says, is “the practice of linking the richest part of CEO compensation to the vagaries of the stock market.” Then there’s a third, and “more intangible” trend: “the steady importation of social norms from the larger culture into corporate life.”
Those social norms, he says, “celebrate an ethic of winning for oneself—a zero-sum social Darwinian concept of winning under which if I win, you lose.”
It’s here, I think, that Yankelovich is on slightly shakier ground. For one thing he provides—oddly, given that he’s a researcher by background—little empirical evidence of a shift in social norms. For another, it seems to me that there is at least a case to be made that the norms have in reality flower in the opposite direction: from the corporate world into the larger culture.
Indeed, Yankelovich comes close to conceding as much when he starts to describe two competing visions of America. One is the “vision of the free market,” which holds that “in the new global economy, the free market, driven by technology and entrepreneurship, will shape a more prosperous and secure world.” The other is the “vision of a civil society,” which “sets out to renew America’s dram of creating a better a more just society by strengthening some of our most cherished social values: community, faith, responsibility, civic virtue, neighborliness, and mutual concern.”
Each of those visions is incomplete, Yankelovish argues.
“The vision of the free market lays heavy emphasis on the ‘creative’ side of capitalism’s capacity for ‘creative destruction’ but neglects its ‘destructive’ aspect… More subtly, free market visionaries attribute ethical virtues to the market that it does not, in fact, possess…. Some executives, companies and governments that wield market power use this mechanism wisely and compassionately. Others use their raw economic power mindlessly and couldn’t care less about its destructive fallout.”
But while the vision of the free market appeals to hyper-individualism, “it undercuts the traditional value of ‘enlightened self-interest’—the notion that in serving their own interests intelligently, farsighted individuals and institutions can also contribute to the interests of the larger community.” (Friedman rearing his ugly head once again.)
But the vision of civil society also has a darker side. “In today’s America, the connotations of community are all warm and fuzzy. But historically, tight community bonds have also been associated with narrowness, bigotry, xenophobia, mistrust of outsiders, prying eyes, and stultifying social conformity—characteristics not absent from the America of the 1950s.”
There’s something of a false equivalence here, as if in arguing for a third way between the two extremes Yankelovich feels the need to find something negative to say about the “civil society” notion. As a result, he ends up balancing something essential to the free market—rapacious competition that is often devastating on an individual level even as society as a whole grows wealthier—with something that few proponents would see as inherent in a civil society.
The same thing happens when the author attempts to find middle ground between the current enthusiasm for shareholder value as the driving mission of business and calls for more emphasis on social responsibility.
“CSR’s biggest liability was that its early proponents had a deeply ambivalent attitude toward corporate profits,” he says. “Many of them wanted to see companies that followed CSR principles make a profit, but profit making was a secondary consideration and for some barely an afterthought. To put it mildly, this tendency limited CSR’s appeal to the corporate sector.”
Pointing to the fact that several scandal-plagued companies had voiced a strong commitment to corporate social responsibility, Yankelovich argues that “neither laissez-faire nor CSR seems to be successful as stopping the scandals. The unpleasant reality is that the explosion of business scandals happened under the aegis of these two frameworks.
“The laissez-faire framework—with its assumption that honesty, integrity, and value for the money are part of ordinary business practice—has proven impotent to halt or slow the scandals. And CSR hasn’t done much better. Many of its corporate advocates (like Citigroup and Fannie Mae and Time Warner and the former smooth-talking Enron) have found themselves enmeshed in scandals.”
Castigating the entire social responsibility movement because some companies sought to mislead stakeholders about the depth of their commitment to genuine CSR strikes me as a little unfair. It’s a little like pouring scorn on the benefits of peace because some countries claim pacific intentions while actually preparing for war.
But Yankelovich is arguing for what he believes is (to quote his subtitle) a “new stage of market capitalism,” an approach that balances the need for corporate profits with the need for rebuilding trust in institutions, an approach he calls “stewardship ethics.”
Companies, he says, operate at several levels of ethical rigor. “The lowest level is one in which the legal department is consulted to make sure that the company is not breaking any laws, or at least none whose violations might get it caught. The next level up is the ability of company policies and actions ‘to pass the smell test.’” But Yankelovich would like to see more companies adopt a third approach, “stewardship ethics,” which he defines as “the commitment to care for one’s institution and those it serves in a manner that responds to a higher level of expectations.”
Stewardship ethics, Yankelovich says, involve caring for multiple stakeholders, emphasize the need to develop communal values, respond positively to higher societal expectation, recognize the conscious effort retired to reconcile profitability with social good, and always seek to leave the institution better off than it was when the CEO’s stewardship began.
Stewardship ethics are based in an understanding that companies need to go beyond Friedman’s requirement that they “stay within the rules of the game,” that mere compliance is sufficient.
“Laws and regulations by themselves do not ensure compliance,” Yankelovich argues. “One of the most prominent features of the scandals is gaming the system—finding clever ways of circumventing the rules and regulations…. The law can’t inspire the far-sighted corporate leadership that is so badly needed. It can’t enhance the contribution that the business sector can and should make to the larger society…. The law marks the border between criminal and non-criminal behavior. Ethical norms, on the other hand, mark the border between right and wrong, without reference to the law.
“The law is a floor—a foundation on which the norms of society rest. It is not, and cannot be, a substitute for the ethical norms that sit atop it.”
Norms, Yankelovich says, are “social values—unwritten rules that dictate what sorts of behavior are acceptable or unacceptable. Norms refer both to standards for acceptable behavior and to punishments meted out to those who violate the standards…. A coherent set of norms constitutes an ethic: a generalized way of understanding one’s relation to other in a tightly organized polity and society.”
And he identifies what he calls “the seven deadly norms,” which include equating wrongdoing exclusively with illegality; the win-at-any-cost mentality; the notion that gaming the system is good sport; that conflict of interest is for wimps; hat the CEO is modern royalty; the belief that free market economies require deregulation; and the distortion of the notion of shareholder value, a subject to which he devotes an entire chapter.
“The doctrine of shareholder value has become highly controversial and polarizing,” he says. “Its advocates support it passionately; its opponents denounce it with equal fervor. Its advocates assume that those who oppose it must be naïve anti-business liberals; its opponents assume that its supporters must be greedy, blind, or indifferent to its abuses.”
Some of that conflict, he says, stems from the fact that both groups use the same term to refer to something quite different. Advocates define shareholder value by its intent, which is to align the interests of the managers of corporations more closely with those of its owners.
“This is a desirable objective—when the interests of both parties are focused on the long-term health of the company. The proponents of shareholder value take this long-term focus for granted; they assume that for its own future well-being, a company will want to be responsive to its employees, customers, and the public, and that this is the best way to realize true shareholder value.”
I think Yankelovich is being generous here. Those who deal with shareholder value in theory—Friedman comes to mind—may make that assumption; many of those whose interest is more practical and immediate—speculators and the not inconsiderable number of executives who run their organizations with the speculative markets in mind—don’t appear to give the long-term implications of their decisions much consideration at all.
“When its opponents look at shareholder value, however, they see a radically different phenomenon. They see shareholder value as it actually works in practice, and they see that its customary practice makes a mockery of the original intent. Managers, these opponents say, have debased and hijacked the concept of shareholder value to enrich themselves. They do so by linking their compensation to the share price of the company’s stock, which they then manipulate by managing earnings and playing other accounting tricks.”
Getting rid of this debased version of shareholder value is the “first step in moving toward stewardship ethics,” Yankelovich says. At the same time, he quotes approvingly Clive Crook, the editor of The Economist who penned that magazine’s attack on corporate social responsibility earlier this year. Crook wrote that he would like to see two criteria applied to any act of “supposedly enlightened corporate citizenship”: does it improve the company’s long-term profitability and does it advance the broader public good.
Saying he welcomes those two questions, Yankelovich argues that “the cardinal point about stewardship ethics is that it squarely meets both criteria while… CSR meets only one.” He believes that “as CSR evolves, it is likely to overlap with stewardship ethics more than it has in the past.” Nevertheless, he sees a significant difference between the two: “With its roots outside the business sector, the interests of CSR will naturally focus on the social good that corporations can do, irrespective of their profitability; stewardship ethics will focus on decisions that advance the good of the company.”
I would make the case that the mainstream CSR movement has already undergone that evolution, that most of its proponents today now recognize the need to make what is called the “business case” for CSR, that companies can—indeed must—do well and do good at the same time. In other words, I am not sure the “stewardship ethics” Yankelovich proposes are really all that different from the new conventional wisdom of the CSR movement he criticizes.
The biggest question about stewardship ethics, he says, is not whether it is justified (the question many have raised about CSR) but whether “such a high standard of ethics can be realized in today’s harsh business environment; that is, whether stewardship ethics are practical from a strictly pragmatic point of view.
“While most business leaders endorse the maxim that you can do well by doing good, not all of them truly believe it deep down. And even when they do, they are not sure how to carry it out in practice under the day-to-day pressures of Wall Street. They surely have a point…. Doing well by doing good is not a formula for a smooth and easy life. But for those willing to do the hard work, a stewardship ethics strategy opens a path that does reconcile long-term profitability with the greater public good.”
Not surprisingly, Yankelovich believes stewardship ethics will take hold.
“I suspect that companies will gradually shift away from giving shareholders top priority for two weighty reasons. One is that so many shareholders are short-term.” In some companies, the turnover of the stock is more than 100 percent a year. “The second reason is that the effort to give shareholders priority distracts CEOs from their most difficult task, which is to balance competing interests.”
A cynic might suggest that the focus on shareholder value is attractive to CEOs for precisely that reason: it relieves them of the responsibility to balance the sometimes conflicting needs of different stakeholder groups.
Nevertheless, Yankelovich imagines a future in which stewardship ethics can be adopted widely. To take advantage of the opportunity, he says, the CEO might select a small group of no more than a dozen of the company’s more thoughtful executives, says Yankelovich, who suggests that the team might include marketing executives, engineers, scientists, and representatives of finance and human resources. (Despite the fact that he is talking about a fundamental shift in the way the company relates to its key publics, it doesn’t occur to him to suggest that public relations people might be included.)
That group “will be charged with the task of conducting strategic dialogue on how best to take advantage of changes occurring in the markets in which the company operates.”
And so he sees a future in which “the wave of scandals serves as a learning experience and a wakeup call. Proliferating success stories demonstrate that stewardship ethics can be quite profitable. Executives realize that it means a lot to their employees and to their own self-respect and self-esteem. They learn how much competitive advantage they can gain through building and strengthening their companies’ reputation for integrity and effective problem solving.”
Employees, he says, would be among the first to regain their trust in companies that practice stewardship ethics. In the 1980s, his firm’s research shows, fewer that one out of four employees (22 percent) said they were willing to “give the best they had” to their employers. By the turn of the century, the number had declined to about one in five.
The reason is that while companies may pay lip service to the idea that employees are their most valuable assets, most treat their people impersonally, “reflecting their conviction that labor costs are a function of the market,” managing people the same way they would manage any other asset.
“But employees are not the same as plant and equipment and other capital expenditures,” he says. “People react; machines do not. Moreover, people react differently than expected. When they feel expendable or exploited, they react by holding back as much of themselves as they can without risking their jobs. They may sell their time and raw labor for money, but not their dedication, loyalty and commitment.”
Yankelovich research, he says, shows that employees no longer believe that their jobs will be secure even if they perform well, that companies expect loyalty without offering any in return, and that many people have lost confidence that they will be rewarded for learning or expanding their skills. “They are beginning to suspect that expertise gained through effort and experience on the job as making one a more expensive employee.”
But he sees a future in which “companies discover that as stewardship ethics take hold, employee commitment rises dramatically. As competition in the global economy grows more vigorous, corporations realize that a high level of employee commitment is indispensable to competitive success. As this realization sinks in, companies give renewed attention to employee motivation and commitment—a consideration that had been long neglected in most companies.”
In an even more optimistic scenario, Yankelovich envisages that corporate policy might begin to shift in favor of consumer interests. “Some companies now lobby for policies that benefit their customers as well as themselves.” (Automotive companies, for example, might support consumer demands for greater fuel efficiency.) “As this new reality seeps into public consciousness, pro-consumer companies begin to win greater consumer loyalty, especially when consumers see a direct benefit to themselves flowing from the company’s policies.”
I’m not sure such enlightened self-interest—in this case, the enlightenment seems to outweigh at least the short-term self-interest—is any more likely than a wholesale embrace of social responsibility, or that the “stewardship ethics” Yankelovich proposes offer any more hope for real change than the voices of business critics.
I am sure, however, as Yankelovich is, that unless business changes, trust will continue to decline and running a successful company will become an even greater challenge.