"Profit with Honor is a refreshing antidote to the Enronic plague. It charts a path to a restored confidence in the American business ethic."—Daniel Schorr, Senior News Analyst, National Public Radio
Profit with Honor: The New Stage of Market Capitalismby Daniel Yankelovich
This wise and optimistic book examines the rampant scandals that plague American corporations today and shows how companies can reverse the resulting climate of mistrust. By seizing the opportunity to address some of the nation’sand the world’smost serious problems, business can strengthen its reputation for integrity and service and advance to a new stage of ethical legitimacy. Daniel Yankelovich, a social scientist and an experienced member of the corporate boardroom, describes the toxic convergence of cultural and business trends that has led inexorably to corporate scandals. Yet he offers reassurance that opportunity exists for positive change. Creative business leaders can advance market capitalism to its next stage of evolution, building upon business norms that simultaneously emphasize the legitimacy of profit making and the importance of the care that companies give to employees, customers, and the larger society.The book asserts that American culture has abandoned its old tradition of enlightened self-interest, of “doing well by doing good.” A narrow legalism has taken over (“I didn’t break the law; therefore I didn’t do anything wrong”). Yankelovich argues that attempts to deal with such flawed ethical norms by means of more laws and regulations cannot succeed. He offers a series of case histories to show how and why stewardship ethics can strengthen individuals, corporations, the nation, and the world economy.
"Warning that trust in business cannot be restored by regulations alone, Dan Yankelovich proposes an alternative well suited to both realistic executives and concerned citizens."—David Mathews, Kettering Foundation
"Based on insights gained from decades of in-depth public opinion studies, Yankelovich has marshaled compelling data documenting the decline in public trust in major institutions such as government, business, medicine, and the media. In an effort to reverse this dangerous decline, he focuses on corporations that he believes must take the lead in advocating 'stewardship ethics' as the next phase in the evolution of the corporation for the well being of both business and society."—Dorothy Zinberg, Harvard University
"This is the one book that every Chairman and CEO must read this year. With an extraordinary background as social scientist and board member, Dan Yankelovich lays out what we must do to address public mistrust of the corporation."—Ged Davis, World Economic Forum
"Profit with Honor is an extraordinary book. Dan Yankelovich not only identifies the reasons why some of America's best known corporations went wrong, but more importantly provides a road map for all corporations to help society, improve their image, and avoid the sins of the past. Must reading for all CEOs and Boards of Directors."—Jack D. Rehm, Chairman (retired), Meredith Corporation
“In Profit With Honor Daniel Yankelovich takes us to the future frontiers of global capitalism, showing how companies can regain the trust of society while enhancing their earnings at the same time. He has written a short, engaging book with a very big and important idea. It should be widely read and debated by business leaders and the shareholders, employees, customers, regulators and other constituencies with whom they interact.”—Jeffrey E. Garten, Juan Trippe Professor of International Trade, Finance and Business, Yale School of Management, and author of The Politics of Fortune: A New Agenda for Business Leaders
"Yankelovich highlights the lessons business leaders can draw from and shows how combining good products and solid returns with socially responsible corporate reputations can be the recipe for success. A thoughtful and analytical view of ethics as a business fundamental and how corporate leaders can still do well for themselves and their shareholders and do good for their workers and communities."—Mack McLarty, Kissinger McLarty Associates
“As positive and perspicacious as ever, noted public intellectual Daniel Yankelovich urges American corporations to transcend the recent scandals. In crystalline prose, he argues that a higher standard of stewardship ethics will serve the interests not only of big business but also an increasingly market-driven world.”—Paul W. Drake, University of California San Diego
"Yankelovich gives us a vivid account of what has gone wrong in corporate America and argues that firms will succeed by including all the stakeholders—investors, employees, units in the supply chain, customers, community—together with a strong sense of ethics. A superb, well-crafted book, certain to stir debate."—Peter Gourevitch, University of California, San Diego
"Yankelovich as always is a seasoned observer and participant in the American business culture. His focus on improving ethical values in the commercial world is important and wise."—Pierson M. "Sandy" Grieve, Retired CEO, Ecolab Inc.
"Another brilliant diagnosis and a thoughtful, productive recommendation to deal with a major problem. This creative approach offers real potential for better corporate governance."—Robert A. Burnett, Chairman and CEO, Retired, Meredith Corporation
"Executives often argue that, in a large corporation, it is impossible to be everywhere. A few bad apples, they suggest, can ruin it for all the good people. Daniel Yankelovich contradicts that false view. Once embraced, stewardship ethics effectively places the CEO and all management everywhere—all the time. The book reviews and reveals the process—and the key."—Sidney Harman, Executive Chairman, Harman International, and author of Mind Your Own Business
"Not since Peter Drucker identified the shift from the traditional money capitalism of plants and equipment to the volatile capitalism of knowledge work has anyone marked a change so fundamental as Daniel Yankelovich now reports in Profit with Honor: The New Stage of Market Capitalism. Nor could anyone else weave together this book's original sources—a world class researcher's unique knowledge of basic value trends that drive markets and many years of pragmatic experience as director of many corporations and consultant for many more. Dan's best book, and best written, brings compelling evidence that the flawed ethical norms of recent years will not lock multinationals into a permanent moral depression."—T. George Harris, Beliefnet.com, Psychologie Heute, Spirituality & Health Magazine
"This volume is an informed, pragmatic and urgent wake-up call to the business, political and civic leaders of America. Its powerful and persuasive message is too vital to be ignored."—William F. Winter, Former Governor of Mississippi
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Profit with HonorThe New Stage of Market Capitalism
By DANIEL YANKELOVICH
Yale University PressCopyright © 2006 Daniel Yankelovich
All right reserved.
Chapter OneThe Wrong Way to Stop the Scandals
The new century started with some heavyweight 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 and mistrials and bald-faced denials and evasive legal maneuvering for their cases to move to the courts. Only the decades of sexual abuses in the Catholic Church-and the hefty fines the church paid to get out from under the resultant scandals-proved a greater shock to the public.
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 observers throughout the nation was that the big boys hadenriched 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, on the other hand, never bought into the "few bad apples" story. By wide margins, average citizens saw the abuses as more general. In July 2002 a Wall Street Journal poll found that fewer than one in five Americans thought the scandals were confined to a "few bad apples." The same month a CBS News survey reported that two-thirds of the public believed that most corporate executives were dishonest, Newsweek found that almost seven out of ten put the blame for the scandals squarely on the shoulders of corporate executives, and a Business Week/Harris survey discovered that 79 percent believed that "most corporate executives put their own personal interests ahead of employees and shareholders."
But even the skeptical public was unprepared for the flood of scandals that followed in the next few years. Enron, WorldCom, and Tyco had involved out-and-out chicanery. The scandals that followed described a different kind of corporate malfeasance, involving less blatant violation of the law. Instead, we saw instance after instance of conflicts of interest that may have stayed within the letter of the law but certainly flunked the smell test. Hardly a day has passed without news stories of ethically challenged corporate behavior, especially on Wall Street. Some of the nation's-and the world's-largest, most successful, most highly respected corporations found themselves squirming in the media spotlight as they attempted to defend highly questionable actions.
A Day's Worth of News Coverage
In later chapters, we will look more closely at some of these companies. For present purposes, let us take a quick snapshot of an average day's news as reported in the Wall Street Journal and the New York Times. We might have picked any day at random. For this exercise, I picked December 16, 2004. The date has no special significance.
Here is what these two national newspapers reported on that day in the field of finance:
The head of the Securities and Exchange Commission ruled that the giant mortgage finance company Fannie Mae had violated accounting rules and must restate its earnings. Time Warner settled two separate complaints against its AOL division. In one, the Justice Department agreed to defer prosecution on securities fraud charges provided that AOL operates under strict oversight. The Times reported that the three executives named in this complaint "have agreed to cease violating securities laws but can remain in their current posts and will pay no penalties." The insurance broker Marsh and McLellan closed a $3 billion credit agreement with a variety of banks that had withdrawn their financing in the wake of charges of bid rigging and kickbacks. In the WorldCom class action suit, a judge rejected investment banks' efforts to have the case thrown out. The banks had claimed that they did not need to notify investors of their own reservations about WorldCom securities because they had an auditor's report indicating that the company's financial statements were accurate. The judge rejected this argument and the case went to a jury. The federal Pension Benefit Guaranty Corporation, which insures companies' pension plans, discovered that it faced a huge shortfall. The problem arose because the system encourages companies to make risky investment decisions and pass losses on to the pension guaranty agency. Morningstar, a research firm that rates mutual funds, was under investigation by the SEC and the New York attorney general on allegations that its advice to investors was compromised by payments from investment companies. First Command Financial Services agreed to pay $12 million to settle accusations that it used misleading information to sell mutual funds to military officers. Tyson and its ex-CEO offered to pay $1.7 million to settle an SEC investigation into improper company perks. A former sales director of a biotech company was indicted for offering doctors kickbacks in exchange for writing prescriptions for the company's AIDS drug. The doughnut company Krispy Kreme announced that it might need to restate its financial results for 2003. This was the latest in a string of questions about its accounting practices, which were under investigation by the SEC. The New York Stock Exchange banned a floor clerk from the exchange for "front-running" customer orders (leaking word of pending orders to a client). The NYSE head of market surveillance said, "We want to make it crystal clear that at the exchange, the customer comes first." Regulators examined whether insiders at Wall Street firms were tipping off favored investors about deals that might cause stock prices to fall.
Nor are ethical lapses confined to business and finance. Here is what was covered in the New York Times and Wall Street Journal on that same day in some other domains:
It was announced that one of the principal authors of the new Medicare drug law would become president of the chief lobbying organization for drug companies. Critics decried this as another example of the revolving door between government and industry. Revelations continued in Bernard Kerik's aborted nomination to head the Department of Homeland Security. Incredibly, Kerik's problems-which ran the gamut from debt to multiple extramarital relationships to possible mob connections-had not been spotted by White House or New York City investigators. A commentary piece concluded that political favoritism had blinded the watchdogs from doing their job. Another article examined the possibility that the undocumented nanny who provided the pretext for Kerik's withdrawal from consideration might not actually exist. A high-level weapons buyer in the U.S. Air Force admitted to awarding billions of dollars in contracts to Boeing at the same time that she was secretly negotiating with the company for jobs for herself and members of her family. Several former military lawyers decried attorney general nominee Alberto Gonzales's memos supporting the use of torture in interrogating terrorism suspects. They maintain that these memos, and Gonzales's claim that the president is not bound by international or federal laws banning torture, opened the door to widespread abuse of prisoners in Afghanistan, Iraq, and Guantánamo Bay.
The New York State Police raided several racetracks and seized documents as part of an investigation into weight rigging and jockey misconduct. A University of Tennessee football player was dismissed from the team for cheating on a drug test, which he failed. "I just never thought I would get kicked off the team," the player said. "I always thought it would work out." An outfielder for the Los Angeles Dodgers began serving a jail sentence for driving away while a police officer was writing him a speeding ticket. The founder of the Bay Area Laboratory Co-operative (BALCO) was under investigation by the International Olympic Committee for providing steroids and other performance-enhancing drugs to elite athletes. In an op-ed piece, a journalist reported that the scandal, corruption and win-at-all-costs ethos that plagues professional and college sports is now trickling down to the high school level.
A British production company filed suit against the Fox television network, claiming that the Fox reality series Trading Spouses was in fact a blatant copycat of the British company's hit series Wife Swap.
This cross-section of a single day's news coverage depicts the sorry state of the nation's ethical norms as seen through the lens of journalism. When we turn to the nation's response, we see lots of action.
Reliance on Legalism
The main effort to stop the ethical deterioration is taking place in the legal/regulatory domain. Legal authorities have levied huge fines. Well-heeled corporate executives have been forced to resign or to pay some of the fines out of their own pockets. Some have ended up taking the "perp walk." To produce better financial reporting, Congress has passed stringent new regulations (like the Sarbanes-Oxley Act) that impose a huge accounting burden on business. State prosecutors like New York's Eliot Spitzer have relentlessly tracked down conflicts of interest in the mutual fund and insurance industries. In the overheated drive to make an example of someone, Martha Stewart got tossed into jail for five months-mainly for being a celebrity who happened to trade some shares on inside knowledge and then lied about it. Her transaction involved a few thousand dollars-a piddling sum compared to the many billions of dollars that the real pros bilked from small investors and employees.
These well-publicized legal and regulatory actions momentarily appeased the public. But experts close to the scene do not believe they have done much to remedy the problem. On the PBS program Wall Street Week with Fortune, the financial journalist Maggie Maher stated that conflicts of interest on Wall Street routinely persist after all the fines, regulations, and firings. She said flatly, "Mutual funds continue to pay brokers to recommend specific funds." On the same program Edward Siedle, a former SEC enforcement attorney, pointed out that the mutual fund industry is "still allowed to self-regulate, self-adjudicate, self-insure, and even control public access to the criminal and disciplinary action of its membership," with the result that the public thinks that doing business with brokers is much safer than it really is. Siedle observed that "the biggest lesson to be learned in the past few years is that anybody who purports to offer objective advice probably isn't. Most providers of advice have been corrupted, because there is far more money to be made offering tainted advice."
Under a practice euphemistically called "revenue sharing," mutual funds make secret payments to brokers to push their funds. Edward Jones, which operates the nation's largest network of retail brokerage offices (ten thousand sales offices) was fined $75 million and its top executive was forced to resign when it was revealed that its brokers earned posh vacations and cash if they pushed the mutual funds of firms making secret payments to the company. Regulators found that more than 95 percent of Jones's mutual fund sales were of this sort. Maggie Maher asked rhetorically, "Do you really want your brokers to recommend funds because they've been essentially bribed to do so?" And Siedle concluded, "Nothing [on Wall Street] has changed."
In Search of Better Norms
Traditionally, the law marks the border between criminal and noncriminal 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 the society rest. It is not, and cannot be, a substitute for the ethical norms that sit atop it.
Every viable society depends on ethical norms to guide and restrain conduct. For most forms of conduct, norms are far more important than legal constraints. The law prescribes minimalist standards of conduct-one can act legally and still not act ethically. Ethical norms fill in the blanks necessarily left by the law, which cannot provide a complete blueprint for how individuals or institutions should behave.
In most societies, the legal foundation is relatively thin, while the layer of social ethics that sets the standards for how people and institutions should act is heavier and thicker. Society's legal underpinnings are formal and codified. Its ethical norms are informal and left mostly uncodified. Even though they may not be written down, however, ethical norms play an indispensable role in the healthy functioning of society.
One consequence of America's cultural revolution in the 1960s and 1970s was a weakening, a thinning out, of its ethical norms. The result is that the ethical standards of today are often put to the minimalist test of whether an action is legal or illegal. Today it is not uncommon to hear the claim: "I didn't break the law, so I didn't do anything wrong." Such a rationale for unethical behavior would have been unthinkable in the 1950s or earlier periods of American life, when society assumed that people's responsibilities encompassed far more than merely satisfying the minimal standard of legality.
The decline in ethical norms is not confined to America's corporate sector. It is also on display in incivility in public places-road rage, obscenity, violent public confrontations-and has led to the proliferation of crudeness, violence, and cheapened sex in popular culture and entertainment.
Most Americans are unhappy about the deterioration of our ethical norms. Opinion polls consistently register the public's desire for a higher level of ethical standards. But we don't seem to know how to go about the task of repairing them.
Our first impulse is to regulate or deregulate or both. Part of the fix we are in can be blamed on relying so heavily on the blunt instrument of the law to fix our ethical problems. There is an important lesson to be learned from the perfect storm. Deregulation 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.
I believe that if we rely primarily on regulatory and 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 as a substitute for them.
Excerpted from Profit with Honor by DANIEL YANKELOVICH Copyright © 2006 by Daniel Yankelovich. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Meet the Author
Daniel Yankelovich is chairman of Viewpoint Learning, of Public Agenda, and of DYG, Inc. He is best known for his work in the field of social values and public opinion and has served on the boards of numerous corporations, including CBS, Educational Testing Service, Meredith Publishing, Loral Space & Communications, and USWest. He is also the coeditor, with Norton Garfinkle, of Uniting America: Restoring the Vital Center to American Democracy, published by Yale University Press.
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