May 30, 2008

Business Values - Corporate Ethics and Motivation at Work

Business Values: Ultimate Test

“A well run business must have high and consistent standards of ethics”
Richard Branson Virgin Airways

“Defining the purpose of the corporation as exclusively economic is a deadly oversimplification, which allows overemphasis on self-interest at the expense of consideration of others.” Originally published in 1989 – former editor of Harvard Business Review and Professor at Harvard Business School.

The purpose of business is a better world

The promise to customers is a better life

Corporations that are passionate about purpose, deliver on promise, and focus on process (provision of proven products and services for profit), are likely to be rewarded with long-term success - so long as they also pay attention to one other factor.

One vital element is still missing, hence all the attention given recently to single issue activism, consumer campaigns, corporate values, social responsibility, corporate governance and mission statements. We have already touched on many of these things in earlier chapters on leadership, marketing, advertising, change management, war for talent, motivation and strategy.

“Capitalism is the astounding belief that the most wicked of people will do the most wickedest of things for the greatest good of everyone” Milton Keynes

Keynes was making a joke in this famous quote, but at the same time was making a serious point which is that capitalism does not always deliver on the business promise of a better future.

History shows that “market forces” are often unstable, erratic, violent, dispassionate, blind to human suffering, insensitive to tragedy and deaf to cries of injustice, tyranny and environmental destruction.

In growing recognition of this problem, business ethics is now attracting huge media attention, which in the current climate can be far more damaging to profits and customer relationships than winning or losing a legal battle. Public opinion often changes long before regulations and the legal process, and can be a powerful warning to corporations to clean up their act.

People talk about ethics in business but the real issue is ethics in life. Bill Pollard

70% of chief executives say that Corporate and Social Responsibility is (now) an essential issue to their business. The reason is that they know the world has changed and companies run on a narrowly defined shareholder-value philosophy are likely to hit a crisis. 89% of marketing directors say that business should be involved in addressing social issues of the day – because they can’t sell otherwise.

But what should those business ethics be based on, and how should that be expressed in community action?

I believe business has a social responsibility. In the communities where you work you ought to help create an environment where you can develop and attract the kind of people you need.” Lawrence Weinbach, Unisys

Many organisations have tried to define their own Codes of Conduct. Huge efforts have been spent spelling out what should or should not be done, how people should behave, what their wider responsibilities should be. At the same time, business schools have made attempts to adjust old-style MBA programs and executive training.

So where do we draw the line between right and wrong, ethical and immoral? The lazy response is to hide behind the law – deferring all ethical questions to politicians. “If it’s legal, it must be alright”. But laws vary between countries which is very confusing for a law-obsessed global corporation. Are we saying that a particular action is morally right in Poland but not in Spain? Getting corporations to obey laws is certainly a major challenege: two thirds of 500 largest US corporations have acted illegally in the last decade.

“Managers would be mistaken to regard legal compliance as an adequate means for addressing the full range of ethical issues that arise every day. “If it’s legal it’s ethical” is a frequently heard slogan. But conduct that is lawful may be highly problematic from an ethical point of view”. Paine. Ethics HBR

If strict legal compliance cannot keep a corporation ethically sound, what then?

Many organisations talk about bench-marking against so-called best-practice, but best-practice is not enough either: it merely implies conformity with informal guidelines, or accepted ways of doing things.

“Best-practice” is usually associated with “operational excellence” more than morality – and the two can be in direct conflict, for example in a manufacturing facility that copies “best-practice” to reduce costs, but also poisons the water-supply.

“Living well and beautifully and justly are all one thing” Socrates

“Bench-marking” is completely useless from the ethical point of view, because all it does is encourage corporations to copy each other’s “bench-mark” or ways of working – a foolish and hazardous course, unless we are sure that example is ethical in the first place.

Corporations often hide behind “bench-marking”, by arguing that they followed “widely accepted practice”, but this is cowardly and demonstrates total abdication of moral responsibility. There are too many examples in history of collective madness or moral blindness.

“Morality transcends not only markets but also cultural boundaries” Robert Soloman

We can see from all this that we urgently need a simple ethical test for all corporate activity, which works in every culture and every time-zone, and will continue to provide safe guidance for executives in future. We need a widely-applicable moral value, against which all decisions can be measured: an easy-to-grasp, universal principle of business action, which provides an practical reference point for those faced by ethical dilemmas.

“Cultural relativism is morally blind. For relativists, nothing is sacred and nothing is wrong. For absolutists, many things that are different are wrong. Neither extreme illuminates the real world of business decision making. The answer lies somewhere between.” Ethics HBR Donaldson
“People want their company to be a good citizen. They want it to show true concern for the world, for the environment. They want it to have a social conscience.” Jorma Ollila, CEO of Nokia

Donaldson proposes three principles:

1. Respect for core human values which determine the absolute moral threshold for all business activities eg right to health, economic advancement and improved standard of living.

2. Golden Rule recognised in all major religions and ethical traditions – treat others as you would like to be treated yourself

3. Respect for local traditions: the belief that context matters when deciding what is right and what is wrong.

But his three principles can be reduced almost entirely into a central core ethic for all business decisions – his Golden Rule in fact summarises most things, once one spells out what it actually means:

Treat others as you would like to be treated

Or put another way perhaps more relevant to corporate activity:

Behave as you would like others to behave

Treat other customers, workers, shareholders, communities, nations, competitors, business partners as you would hope to be treated if you were in their place. We should also extend this with the importance of example, which is closely related.

Universal Code of Business Practice

• Serve as you would be served
o principle of reciprocity
• Set good examples in all you do
o Principle of reproduceability

Serve as you would be served

This principle of reciprocity is based on timeless truths expressed by Confucius, Jesus Christ and many others, and rephrased in a thousand ways:

• Do as you would be done by
• Do unto others as you wish them to do to you
• What you do not wish done to you, do not do to others

Some further questions:

• Is this how I would like to be treated?
• Is this how I would like my own family to be treated?

The Principle of Reciprocity applies in practical ways to all we do:

• Lead as you would like to be led
• Advertise as you would like others to advertise
• Honour commitments as you would like others to honour theirs
• Do business as we hope all business will be done
• Trade as you wish others would trade
• Buy as you would wish others to buy
• Sell as you would wish others to sell
• Work as you would wish others to work
• Pay bills as you would wish to be paid

Set good examples in all you do

The Principle of Reproduceability is this: is this a sustainable pattern of business assuming that many others will act the same way? If everyone else acted in a similar way, would it be a good thing?

• Is this how you would like others to behave?
• Does this set an example worth following?
• Is this a great example for others?
• What would happen if many other corporations behaved like this?
• Are we setting an example in cultural sensitivity?
• Is our example sustainable in the long term?

These two principles together form a Rule of Business against which all activity can be measured.

Run your business as others should be run, setting a good example in all things

When we serve as we would be served and set good examples in all we do, we not only act in ways that all regard ethical, but also enhance corporate reputation, brand image, customer relationships, workplace morale and strengthen the fundamentals of the business.
Unchanging values in a changing world

“Morality transcends not only markets but cultural boundaries too” Robert Soloman

But do these two principles of “doing as we would be done by”, and “being a good example”, really work in all cultures? Standards and expectations vary, and the yardstick needs to be applied with care.

Take for example the stresses and strains arising from the growing inequality between wealthiest and poorest nations, perhaps the greatest moral challenge of our generation. If the poorest and most marginalised three hundred million people in Africa were already as politicised as many Islamic groups in the Middle East, there is little doubt that we would now be experiencing a very turbulent new chapter in human history.

How can we create a better world without tackling evils such as hunger and violence first? Eckhart Tolle - The Power of Now: A Guide to Spiritual Enlightenment

For many hundreds of millions of people, daily life has got worse over the last twenty years, despite huge earnings in some countries from oil or minerals, plus large amounts of development assistance. Two factors in this are AIDS and civil wars.

The combined assets of the world’s top three billionaires exceed the combined GDP of all the least developed countries, where over 600 million people live. One in five of those alive today consume 86% of the world’s good’s and services – hardly surprising when you realise that 66% of the world’s population lives on less than $2,000 a year, and most Africans earn less than $1 a day.

DeBeers, the diamond mining corporation, told a London gathering of executives that it costs around $1bn to create a new mine. Based on the daily wages of workers in the area, for the same cost you could employ 100,000 local workers for 30 years. That’s People Power Parity: measuring costs not in $ but in multiples of a daily wage.

The growth machine rolls on. The combined assets of the world’s top three billionaires exceed the combined GDP of all the least developed countries, where over 600 million people live. One in five of those alive today consume 86% of the world’s good’s and services.

Expect mood and fashion swings in wealthy nations to clash with the aspirations of poorer nations, resulting in resentment, conflict and added pressures for mass migration.

We need to be careful not to impose a set of current Western values which are the product of 150 years of industrialisation, on nations which are just emerging from rural subsistence living.
Oil and mineral mining – huge ethical challenges

If fundamental problems of injustice and corruption are not sorted, extraction of oil or minerals could become almost impossible due to terrorist targeting of uniquely vulnerable and costly infrastructure. Quite simply, some of these companies will be out of business.

10% of all Shell profits come from Nigeria, the 6th largest crude oil producer in world. A single barrel of oil buys a local labourer for more than a month. Mineral resources are 25-90% of exports in Botswana, Ghana, Guinea, Liberia, Senegal, Mauritania, Namibia, Niger, Central Africa Republic, Sierra Leone, Congo, Zambia, Zimbabwe. In theory the economies of these countries should be roaring ahead, but the reverse is largely true.

A 2003 World Bank study shows the curse of extraction wealth on the poorest nations: countries with greatest income from mining / extraction usually see lower economic growth, more corrupt and oppressive regimes and greater contrasts between wealthy and poor. They are also more likely to suffer from wars and ethnic violence. There is often a coalition of interests between a wealthy and well-armed ruling elite and a multinational looking for stable conditions for long-term extraction.

Mineral wealth means the currency becomes valuable, so small business exporters can’t sell what they grow or make and go out of business, making the country as a whole even more dependent on extraction.

Answer: Identify multinational profits by nation, so that it is easier to justify ploughing back some profits into the relevant communities. Make sure that such community funding is totally transparent at every level, with community involvement, health and education infrastructure, encouragement of small enterprises, encouragement for human rights and no forced resettlement without proper compensation.

The age of the very special child

Child labour is an example of a very controversial issue where some in poor nations are being severely judged for acting in a way that would have been completely legal in developed nations at a similar stage in their economic development.

Child labour was only abolished in countries like Britain around 150 years ago. Developed nations now live in an acutely child-sensitive age. It’s partly because many parents in these countries are having fewer children and often later in life. Children have become a symbol of innocence and purity in a worrying world.

It’s all part of a natural desire to create the best kind of life for children, without pain, suffering, unhappiness, violence, emotional abuse, seduction or rape.

At least that’s the idea…..

Every time a young child is discovered in India working in a factory making products for Western markets the same thing happens. The company gets into big trouble, and the children get into mortal danger.

Over 50 million children in India depend for their daily existence on whatever they can get by begging, selling or working. If you don’t work in some way you starve, and if you starve you’re soon dead.

So every child in India is a working chid, unless completely supported by parents. But over a hundred million families in India are so poor that a child has to earn his or her own food. Everyone from the age of five has to help – whether harvesting crops, carrying water, making a fire, or sitting on the pavement selling flour.

And then there are the runaways. And the orphans. And the outcasts.

My wife and I have visited a railway station in Mumbai which is home to hundreds of children, aged three to fifteen. Twenty to thirty new children arrive every day, each a runaway from home. One girl has given birth three times alone on the roof of one of the platforms – aged thirteen , fourteen and fifteen..

Girls of ten to twelve get picked up on the streets within hours by older boys, who offer affection and a meal. Wthin a week, many of these vulnerable young girls are on a one-way ticket to almost certain death. Recruited as commercial sex workers, they are forced to have unprotected sex up to ten times a night. It’s only a matter of time before they get HIV.

Building a better world for children is a noble ideal but if we are not careful, we can find that blind pursuit of Western ideology can kill the very children we want to protect.

So how do we apply our universal code in such a situation?

Treat others as we would like to be treated – may lead us to place ourselves in the shoes of destitute, orphaned children who beg at the factory gates. At the very least it leads us to find small ways to make a big difference, even something as little as feeding those who come, for a handful of dollars a day, right through to setting up some kind of a work-skills programme with food and shelter at night.

Setting an example worth following – leads us to be very sensitive to local situations, resistant to knee-jerk moralism and misplaced charity, but actively investing back into the impoverished communities from which our workers and customers come.

Quite often there is a disconnection for historic reasons between where the business operates, and where community donations land up. So for example, a large US multinational may have offices in most of the poorest nations, and major revenue from some of them, yet the entire donations policy may be to support community projects in American cities.
Community development develops markets

66% of the world’s population lives on less than $6 a day. It is easy to write off such a vast number of people from the commercial point of view, but it is a large market with significant collective buying power. That is one reason why revenue growth for multinationals with the right products for poorer nations is often so rapid eg Avon Cosmetics in Russia with annual growth rates of up to 70%.

Another example is Hindustan Unilever which introduced candy made from fruit juice and sugar for a penny in India. The new candy became the fastest growing item in their product range – with estimated sales potential of $200m a year. They have seen similar results with low-priced detergent and iodized salt.

Slum-dwellers pay larger proportions of income on basics like food and phone. Water can cost up to 100 times more than elsewhere, food 20-30% extra. Local moneychangers may be charging 10-15% per day or as much as 2000% a year.

As a result, non-profit micro-banking has flourished, offering small loans to groups of around 14 women who act as security for each other. Typical repayment rates are around 99.5% within 12 months and defaults almost unknown.

Investing in microbanking, education, health and infrastructure is a sound policy from the corporate point of view, as the result in general terms is development of future markets.

Why Milton Friedman’s views look so out-dated

Friedman argued that business should only spend money to make owners wealthy, and anything else was wrong. But as we have seen, this approach can actually damage the very wealth one seeks to protect.

Well-directed community support can improve corporate image, consumer loyalty, product attractiveness, morale, workplace productivity and the size of local markets. Indeed, strategic philanthropy can provide such strong business advantages that some argue that it hardly deserves to be called philanthropy.

Friedman’s second assumption is that giving is no more effective when done corporately, than by people, so there is no moral logic to it: reward your shareholders and let them decide themselves how much to donate. But Friedman failed to see that corporate donations can have far greater impact than large number of acts of individual generosity, grouped together in a donation of identical size.

Larger corporations can encourage changes in law, local practices and government action – for example by offering conditional support for national programmes. Business can also encourage staff largesse with donation-matching schemes, or volunteer release programmes or with gifts in kind of services or products.

This multiplying effect has been created by Pfizer over the last few years. The corporation has an excellent treatment for trachoma – a common cause of blindness in the poorest parts of the world. They made a decision to attack the problem on a massive scale. They not only donated drugs, but also worked in close partnership with Edna McConnell Clark Foundation and the World Health Organisation to distribute therapy and set up clinics.

In 12 months alone the incidence of trachoma fell 50% in target populations of Morocco and Tanzania. The programme has grown with support from Bill and Belinda Gates and the British government, aiming to treat more than 30 million people.

Cisco knows the power of developing your own markets and workforce with strategic philanthropy. Cisco created Networking Academies: training centres and virtual training environments designed to produce a rapid increase in the number of people who can set up and repair computer networks – vital to a corporation who sells them.

When it comes to social engagement, more than 50% of Americans prefer companies to be active on a local (59%) rather than national (26%) or global (9%) basis, with priority on quality of public schools, youth programs and environment. People prefer specific programmes with tangible results. 56% of global companies have not reduced their social responsibility programme spending in the recession – 4% have actually increased spending.

"A civilization flourishes when people plant trees under which they will never sit" Greek Proverb

YPO stories – Alex Cappello

Competitive advantage of corporate philanthropy

Michael Porter is perhaps the world’s leading authority on competitive advantage. With Mark Kramer he has argued that corporate philanthropy can create competitive advantage.

5 steps to identify context-focussed philanthropy investments

• Examine competitive context in each territory
• Review existing donations pattern
• Assess existing and potential giving in light of advantage
• Seek possible collective action / clustering
• Evaluate results eg sponsorship of sports event in brand awareness, using mailing list of organiser / club and so on

Porter dislikes the term “Strategic Philanthropy” – often loosely used. He feels that cause-related marketing is not really philanthropy at all, because of the obvious commercial benefits. But this is hair-splitting: the end result is still a very different relationship between community and corporation than Friedman ever approved of.

Foundations may not be the answer

Many large corporations have set up charitable foundations, but donor benefits have often been disappointing – they would be like to fail the strategic philanthropy test. These charitable bodies are usually independent, and strongly resist pressure from founding companies to make donations that could help their business. It is unfortunate that corporations can find they are attacked for lack of philanthropy, despite generous gifts of capital or shares in the past.

For example, the Wellcome Foundation was endowed by the Burroughs Wellcome drug company, for medical research. The corporation was later swallowed up into GlaxoSmithKline, who has been attacked for high-priced anti-AIDS therapies, despite the fact that the Wellcome Foundation continues to make huge donations to AIDS research, but under the old name.

Motorola code of conduct - bribery

Motorola code of conduct: “We will always act with constant respect for people and uncompromising integrity”. Bribery: “funds and assets of Motorola shall not be used directly or indirectly for illegal payments of any kind” and spells out “the payment of a bribe to a public official or the kick-back of funds to an employee of a customer…” Codes of conduct need to be specific eg.. “Employees of Motorola will respect the laws, customs and traditions of each country in which they operate, but will at the same time engage in no course of conduct which, even if legal, could be deemed to be in violation of the accepted business ethics of Motorola or the laws of the United States relating to business ethics.”…

Bribes as an example of varying culture and standards

Whose ethics and whose values? Until recently bribes were tax deductible in Germany, encouraged actively therefore by Inland Revenue. Some differences in culture have been described as Conflicts of Relative Development: situations where it is helpful to ask what kind of decisions we would have made in our own country at a similar stage of economic development. Examples include wage levels, safety standards – and bribery. Is it right for a large ship, contaminated with asbestos, to be stripped and refitted in a developing country using dangerous processes which would be widely condemned if carried out in a European or American port? Is it right to pay these workers less than 10% of what Europeans would be paid? And is it right if the contract was only won after providing a generous holiday in the Bahamas to an official and his family?

Bribes or other irregular financial inducements were until recently tax-deductible expenses. The definition of corruption used to be : “Use of public profit for private gain” , but many have broadened the definition to “use of entrusted powers for private benefit”.

Embezzlement, nepotism, bribery, extortion, interest peddling, fraud and other irregular benefits – these things challenge development, undermine democracy and government, distort the legal process and weaken leadership (because a bribe wins power). In corrupt countries people get promoted by who they know rather than by what they know.

Corruption destroys rules of competition, since only the most corrupt get the best deals, rather than those with the best products and services.
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