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News Report on Public Confidence
in the State of the Nation
2013
The Future of American Democracy Foundation
Book Excerpts
From the book Profit With Honor: The New Stage of Market Capitalism by Daniel Yankelovich (Yale University Press, April 2006).

Profit with Honor is an original look at how American business is ushering in a new era of market capitalism. At the same time, business must overcome its legacy of mistrust from scandal. Yankelovich’s book shows how to juggle these two immense tasks.

Written from the unique perspective of a trend watcher and corporate board member, this book lays out a roadmap for new ways to balance profit and social good. Americans will find its optimistic conclusions encouraging in a period of seemingly unsustainable problems.

Selected excerpts:

On the one hand, a wave of business scandals

Enron and its CEO, Kenneth Lay, Tyco and its CEO, Dennis Kozlowski, WorldCom and its CEO, Bernie Ebbers—in each case, colorful men, gifted with more than a touch of good old American con artistry—had apparently enlisted the aid of younger men with specialized accounting skills to cook the books. It took years of trials, mistrials, bald-faced denials and evasive legal maneuvering for their cases to move to the courts.

Among the business scandals, Enron topped all others. The Enron story unfolded in slow motion, a miasma of complex financial detail obscuring its full scope. It took a long time for the extent of Enron’s apparent fraud (abetted by its accounting firm, Arthur Andersen) to reach full public consciousness. But when it did, the one fact that stood out most vividly in the minds of the public was that the big boys had enriched themselves while the savings of loyal employees and small stockholders were wiped out.

In the months following the outing of these and other alleged accounting scandals, most business executives continued to plead the “few bad apples” defense. They acknowledged (how could they not?) that the gaming tactics of Enron and its accountants were out of control. But they put the blame on a handful of rogue companies and personalities, vehemently denying that the abuses were systemic.

The public, however, never bought into the “few bad apples” story. And now, the scandals eat away at public goodwill like maggots. Instead of basking in the warmth of public approval and respect, corporate CEOs are seen as greedy opportunists seeking to enrich themselves at the expense of their employees, customers, and the general public.

On the other hand, a new stage of market capitalism

The vast changes taking place in the global economy make it essential that we evolve to a new stage of market capitalism. American business needs to develop a new ethic, not only to counteract the forces leading to the scandals, but more importantly, to meet the demands of the global economy that call upon business to take on many new responsibilities.

Domestically, the business sector is responsible for maintaining high levels of productivity, employment, capital investment, and stimulation of consumer spending. Internationally, the business community has the great responsibility—and privilege—of helping to lift the majority of the world’s population out of poverty, poor health, and deprivation. Today’s multinational corporations, with their powerful integrations of capital, technology and managerial skills, constitute just about the only force capable of transforming billions of people subsisting on meager incomes of one or two dollars a day into active participants in thriving market economies.

The methods of realizing this sort of bold vision are varied. Mainstream banks like Citigroup have adopted micro-lending practices (pioneered by the Grameen Bank of Bangladesh) and expanded them into countries like Mexico and India. Consumer companies like Procter and Gamble are experimenting with low-cost water purification methods in developing nations. Technology companies like Hewlett-Packard are seeking new ways of bringing technology to third-world countries, opening up new markets. A few large energy companies are seeking ways to counteract the worst effects of climate change.

The good news is that a number of leading American corporations are moving in this direction. The bad news is that most are not – and least, not yet.

Understanding the cause of the scandals.

Why is our culture suddenly confronted with so much corporate wrongdoing? What are the forces giving rise to the scandals? Can they be countered in ways that encourage the transition to the new era of market capitalism?

The scandals 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. By removing the legal restrictions that prevent blatant conflicts 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. Deregulation had the perverse consequence of transforming the gatekeepers—the accounting firms, the investment bankers, the business law firms, the regulatory agencies—into enablers. Instead of saying a firm “no” to questionable business initiatives, many of these supposed watchdogs (like the once highly regarded accounting firm, Arthur Andersen) said instead, “Here’s how you can do it and get away with it.”

Converging with deregulation is the second trend—the practice of linking the major part of CEO compensation to the vagaries of the stock market. Tying executive incentives to the price of the company’s stock has become common practice. The intention is to align the interests of a company’s managers more closely with those of its owners—the company’s shareholders. This is the most popular way the economic doctrine known as “shareholder value” has been implemented.

In practice, however, rewarding executives with stock options potentially worth tens of millions of dollars on top of rich salaries and bonuses has proven to be a debasement of the theory of shareholder value. With such huge sums of money at stake, executives are sorely tempted to take questionable shortcuts or even to cheat. The pressures on a CEO to put the short-term price of his company’s shares ahead of the long-term interests of the company, its employees, and the society as a whole become almost irresistible.

The third and more intangible trend is the importation of winning for myself social norms from the larger culture into corporate life. Ironically, American business, whose deepest tradition is rooted in the ethic of enlightened self-interest, now finds itself caught up in a frenzy of unenlightened self-interest. Traditional enlightened self-interest led business executives to search for strategies that benefited others as well as themselves. But the cultural norms of recent years celebrate an ethic of winning for oneself—a zero-sum social Darwinian conception of winning under which if I win, you must lose. Many of today’s business executives consider it a challenge—and fun—to find ways to manipulate the system for their own personal benefit.

Combining these three forces invents a machine for scandal. Their convergence made the scandals almost inevitable.

Fiddling with the law lies within our comfort zone; transforming ethical norms does not.

To counter the scandals, our first impulse is to turn to the law. But excessive reliance on laws is part of the problem. We have counted too heavily on the blunt instrument of the law to fix our ethical problems. Legal finagling combined with looser ethical norms created a storm of bad corporate behavior. Not only did it tempt corporate executives to cheat, it tempted the watchdogs and guardians of the public trust to cheat as well. The results were devastating.

If we now rely primarily on new legal mechanisms to repair the damage, we will not get very far. We will force the gamesters of the system—clever lawyers and accountants and financial executives—to be more ingenious and more careful. But we will not transform the ethical climate. As a society, we need to develop a better understanding of how to use the law to support higher ethical standards, not to substitute for them.

As a society, we are quite comfortable with transactions that involve the legal structure on which corporate governance rests—passing laws, introducing regulations, leveling fines and criminal charges against those who break the law, and even eventually tossing them in prison, however high and mighty they may once have been. Our legal mechanisms are well developed. We have the institutions we need to execute these tasks, the apparatus for implementation is in place, we understand at least some of the benefits and drawbacks of our legal system, and we are well endowed with committed professionals to do what needs to be done.

When it comes to reversing the effects of destructive norms, however, we have left our comfort zone far behind. Norms are social values—the unwritten rules that dictate what sorts of behavior are acceptable or unacceptable. We don’t ordinarily think in terms of norms, we don’t make sharp, clear distinctions between norms and laws, and we don’t have institutions whose main task it is to change norms when they need changing. In practice, this means that our society has to gain enough comfort with the idea of norms to be able to make the changes necessary to our future well being.

We fall back on legalistic solutions not because we are confident that they will work, but simply because these are the tools that fit most cozily into our comfort zone. But in reality, you can’t fight bad norms solely with laws and regulations. The only way to get rid of the bad norms that currently pervade corporate America is to replace them with norms that are sound both practically and ethically.

At present, our culture is less adept at juggling norms than at juggling legal strategies, but if this is what it takes, we are surely resourceful enough to learn how to do it better.

Stewardship ethics reconciles profit making with social good

I have labeled the package of norms that I believe are best for the economy and the society as a whole as stewardship ethics. Stewardship ethics offers the ideal way of bridging the gap between two visions—the dynamism and vitality of the free market with the strong ethical grounding of civil society

Key attributes of stewardship ethics:

  • Stewardship ethics always involves selectivity and caring—selecting those whom the company cares for and how it expresses that caring.
  • Stewardship ethics emphasizes the community side of the corporation—the need to develop communal values.
  • Stewardship ethics always seeks to leave the institution better off than it was when the CEO’s stewardship began.
  • Stewardship ethics responds positively to the society’s insistence that more is expected of those with substantial resources and economic power.
  • Stewardship ethics emphasizes the conscious effort required to reconcile profitability with social good.

A number of companies are moving toward stewardship ethics. Starbucks gives special care to its suppliers, its coffee growers. Southwest Airlines is clear about its selectivity: its president has been quoted as saying, “We have the pyramid upside down. Employees are first. Passengers are second. Shareholders are third.” Procter and Gamble regards community as an essential part of its core values. The former CEO John Pepper writes: “I believe being a community is Procter and Gamble’s greatest competitive advantage.” High among Hewlett-Packard’s core values is the belief that the company exists to make technical contributions that will benefit society and not just make money. G.E. is making a conscious effort to reconcile profitability with using new technology to meet pressing environmental needs. As Dell became a leader in the computer industry, it faced ever-greater pressures to take the lead in recycling, and now Dell treats recycling as a profit center.

Pragmatists will recognize that the traditional what’s-good-for-business-is-good-for-the-country ideology is sometimes correct but sometimes badly off-target. Detroit’s love affair with SUV profits comes at the expense of the nation’s energy independence. By remaining in denial about the nation’s need for greater fuel efficiency, Detroit’s automobile manufacturers have defined their self-interest in ways that pit it against the common interest. Big pharma’s habit of demanding huge price hikes for marginal improvements in existing drugs comes at the expense of hard-pressed consumers and the public at large.

The most creative challenge of stewardship ethics is to learn how to make profitability and society’s interests more compatible. A company can, for example, pursue environmental policies in ways that undermine either its own profits or the environment, or it can develop strategies toward the environment that make profits and sustainability compatible. A number of the world’s largest oil companies are finding new ways to reconcile the search for sustainability with profitability.

The incentives for adopting stewardship ethics are powerful

Reforms will probably begin in the boardrooms of companies whose stock has fallen from favor because of the scandals. In corporate retreats, thoughtful directors and company executives will begin to design new incentive programs that align the company’s interests not only with those of shareholders and with short-term goals but also with its long-term strategic goals, as well as with the interests of customers, employees, and the community. This is a first step toward stewardship ethics.

Companies tainted by scandal must accept the reality that restoring their reputation is a priority that they cannot shirk. Their boards cannot responsibly let them do otherwise. At the same time, companies untainted by scandal are starting to recognize the great competitive advantage they can reap by strengthening their reputations for integrity and good stewardship.

The probabilities for success are high

Adapting to the new era of market capitalism must come company by company. Individual CEOs who become convinced that stewardship ethics will give them a strategic competitive advantage in the marketplace will lead the initiative. These will be the CEOs who know how to use their boards for judgment, support, and validation. They will provide success models for other companies to emulate.

This is an optimistic conclusion. It is a bet on stewardship ethics to become the legitimate successor to shareholder value and the doctrine of corporate social responsibility (CSR). Within each company, making the shift will depend on the mindset, determination, and leadership of a tiny number of people—no more than fifteen to twenty. If they decide it is in the best interests of the company to make the change, they have the power, the influence, the knowledge, and the skill to bring it about. If they do so, others will follow. In our culture, where events move so quickly, the transformation to stewardship ethics may take place without even being widely noticed. But its effects will register in enhanced trust in the business sector, in improved long-term profitability, and in significant advances in global well-being.

Purchase Profit With Honor: The New Stage of Market Capitalism
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