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Whereas in the past, companies were measured purely on their financial performance, they are now held to a different standard. How they demonstrate moral intelligence in their dealings with employees, customers and other constituencies is becoming as important as increasing shareholder value. Companies are no longer just convenient devices for pooling capital. Value Shift demonstrates the development of the moral personality of the corporation and how it is changing the face of business.
Until recently "business ethics" was considered a contradiction in terms. The market and corporations were amoral, and ethics generally meant corporate philanthropy. In light of recent corporate scandals, ethics has now become an important corporate concern. More than a frill or indulgence, values are becoming an integral part of effective management.
When asked about their interest in values, executive rationales cluster into the following main areas:
When AES Corporation went public in 1991 its prospectus stated that in a conflict between values and profits, the company would try to adhere to its values, even if that diminished profits. Because of this position — at that time, extraordinary — the SEC insisted that the values be listed in the prospectus under "risk factors"!
Attitudes are changing, and executives are beginning to see that ethical stances can actually have a dollars and cents value.
Certainly, managing a company without ethical standards can lead to illegal acts and scandals. Allegations trigger customer defections, leading to depressed revenues. Employees doubt the company's future, and injured parties file lawsuits. Investors demand higher returns, credit ratings are downgraded, funding costs rise, and the financial pressure is felt throughout the organization. Politicians and lawmakers call for more investigations and hearings, which exacerbate the deterioration.
Avoiding high-profile scandal, however, is not a compelling case for values. What about the low-grade misdoings, such as betrayals of confidence, neglected promises, and evasion of responsibility?
Principles that rule out these behaviors lead to many cost advantages. Workers who are truthful, reliable and conscientious reduce the cost of expensive oversight and monitoring. A high level of trust can lower contracting costs for agreements with prospective customers and suppliers.
Trustworthy companies usually have an easier time dealing with non-corrupt politicians and regulatory agencies. They are more likely to be believed when making an argument. Self-imposed commitments can also reduce compliance costs by reducing the need for restrictive laws and regulations.
Commitments to truth, reliability, fairness and respect enhance management and efficiency. Without them unnecessary time and money go toward evaluating proposals, resolving disputes and mobilizing teams, because nothing can be taken at face value.
Reputation is key. A good reputation attracts customers, employees and investors, which leads to increased revenue, market share, access to talent, and premium prices for the company's goods or for the company itself.
As the corporation becomes moralized and the new performance standard sets in for the foreseeable future, companies will need leaders who can meld high moral standards with outstanding financial results.
Values implementation is not a task that should be delegated. Executives define and shape values through everything they do, and at the same time everyone in a company does values implementation every day. The approach must be comprehensive, management-led, and oriented toward a moral center that recognizes social and economic responsibilities.
To become center-driven, companies must make fundamental and comprehensive changes in their operating systems. Though there is no specific model for a center-driven company, Royal Dutch/Shell, which has been implementing their sustainability model since 1988, is a good example:
A center-driven company defies traditional methods of operation and develops creative innovations to satisfy both moral and financial obligations.
Center-driven management is not a technique or collection of best practices, but a philosophy of management grounded in assumptions about business that challenge key tenets of traditional management.
These assumptions include the premise of a corporate personality; that superior corporate performance consists of moral and financial excellence; that corporate accountability extends beyond shareholders; that corporate conduct consists of all actions taken by its members or representatives on its behalf; that human behavior is multifaceted and can express mixed motives and varied aspirations; that rationality means using reason to enhance life; and that progress is not inevitable and needs to be fought for continuously. Companies looking to achieve the new performance standards will need to cultivate leaders who understand these broader accountabilities. Copyright © 2003 Soundview Executive Book Summaries
The Turn to Values
Business has changed dramatically in the past few decades. Advances in technology, increasing globalization, heightened competition, shifting demographics—these have all been documented and written about extensively. Far less notice has been given to another, more subtle, change—one that is just as remarkable as these more visible developments. What I have in mind is the attention being paid to values in many companies today.
When I began doing research and teaching about business ethics in the early 1980s, skepticism about this subject was pervasive. Many people, in business and in academia, saw it as either trivial or altogether irrelevant. Some saw it as a joke. A few were even hostile. The whole enterprise, said critics, was misguided and based on a naïve view of the business world. Indeed, many had learned in their college economics courses that the market is amoral.
Back then, accepted wisdom held that "business ethics" was a contradiction in terms. People joked that an MBA course on this topic would be the shortest course in the curriculum. At that time, bookstores offered up volumes with titles like The Complete Book of Wall Street Ethics consisting entirely of blank pages. The most generous view was that business ethics had something to do with corporate philanthropy, a topic that might interest executives after their companies became financially successful. But even then, it was only a frill—an indulgence for the wealthy or eccentric.
Today, attitudes are different. Though far from universally embraced— witness the scandals of 2001 and 2002—ethics is increasingly viewed as an important corporate concern. What is our purpose? What do we believe in? What principles should guide our behavior? What do we owe one another and the people we deal with—our employees, our customers, our investors, our communities? Such classic questions of ethics are being taken seriously in many companies around the world, and not just by older executives in large, established firms. Managers of recently privatized firms in transitional economies, and even some far-sighted high-technology entrepreneurs, are also asking these questions.
Ethics, or what has sometimes been called "moral science," has been defined in many ways—"the science of values," "the study of norms," "the science of right conduct," "the science of obligation," "the general inquiry into what is good." In all these guises, the subject matter of ethics has made its way onto management's agenda. In fact, a succession of definitions have come to the forefront as a narrow focus on norms of right and wrong has evolved into a much broader interest in organizational values and culture. Increasingly, we hear that values, far from being irrelevant, are a critical success factor in today's business world.
The growing interest in values has manifested itself in a variety of ways. In recent years, many managers have launched ethics programs, values initiatives, and cultural change programs in their companies. Some have created corporate ethics offices or board-level ethics committees. Some have set up special task forces to address issues such as conflicts of interest, corruption, or electronic data privacy. Others have introduced educational programs to heighten ethical awareness and help employees integrate ethical considerations into their decision processes. Many have devoted time to defining or revising their company's business principles, corporate values, or codes of conduct. Still others have carried out systematic surveys to profile their company's values and chart their evolution over time.
A survey of U.S. employees conducted in late 1999 and early 2000 found that ethics guidelines and training were widespread. About 79 percent of the respondents said their company had a set of written ethics guidelines, and 55 percent said their company offered some type of ethics training, up from 33 percent in 1994. Among those employed by organizations with more than 500 members, the proportion was 68 percent.
Another study—this one of 124 companies in 22 countries—found that corporate boards were becoming more active in setting their companies' ethical standards. More than three-quarters (78 percent) were involved in 1999, compared to 41 percent in 1991 and 21 percent in 1987. Yet another study found that more than 80 percent of the Forbes 500 companies that had adopted values statements, codes of conduct, or corporate credos had created or revised these documents in the 1990s.
During this period, membership in the Ethics Officer Association, the professional organization of corporate ethics officers, grew dramatically. At the beginning of 2002, this group had 780 members, up from 12 at its founding 10 years earlier. In 2002, the association's roster included ethics officers from more than half the Fortune 100.
More companies have also undertaken efforts to strengthen their reputations or become more responsive to the needs and interests of their various constituencies. The list of initiatives seems endless. Among the most prominent have been initiatives on diversity, quality, customer service, health and safety, the environment, legal compliance, professionalism, corporate culture, stakeholder engagement, reputation management, corporate identity, cross-cultural management, work-family balance, sexual harassment, privacy, spirituality, corporate citizenship, cause-related marketing, supplier conduct, community involvement, and human rights. A few companies have even begun to track and report publicly on their performance in some of these areas. For a sampling of these initiatives, see Figure 1-1.
To aid in these efforts, many companies have turned to consultants and advisors, whose numbers have increased accordingly. A few years ago, Business Week reported that ethics consulting had become a billion-dollar business. Though perhaps somewhat exaggerated, the estimate covered only a few segments of the industry, mainly misconduct prevention and investigation, and did not include corporate culture and values consulting or consulting focused in areas such as diversity, the environment, or reputation management. Nor did it include the public relations and crisis management consultants who are increasingly called on to help companies handle values-revealing crises and controversies such as product recalls, scandals, labor disputes, and environmental disasters. Thirty or 40 years ago, such consultants were a rare breed, and many of these consulting areas did not exist at all. Today, dozens of firms—perhaps hundreds, if we count law firms and the numerous consultants specializing in specific issue areas—offer companies expertise in handling these matters. Guidance from nonprofits is also widely available.
What's Going On?
A thoughtful observer might well ask "What's going on?" Why the upsurge of interest in ethics and values? Why have companies become more attentive to their stakeholders and more concerned about the norms that guide their own behavior? In the course of my teaching, research, and consulting over the past two decades, I have interacted with executives and managers from many parts of the world. In discussing these questions with them, I have learned that their motivating concerns are varied:
An Argentine executive sees ethics as integral to transforming his company into a "world-class organization."
A group of Thai executives want to protect their company's reputation for integrity and social responsibility from erosion in the face of intensified competition.
A U.S. executive believes that high ethical standa
Excerpted from Value Shift by Lynn Sharp Paine. Copyright © 2003 by Lynn Sharp Paine. Excerpted by permission of The McGraw-Hill Companies, Inc..
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|Preface and Acknowledgments|
|Ch. 1||The Turn to Values||1|
|Ch. 2||Does Ethics Pay?||29|
|Ch. 3||Time for a Reality Check||55|
|Ch. 4||The Corporation's Evolving Personality||81|
|Ch. 5||A Higher Standard||107|
|Ch. 6||The New Value Proposition||133|
|Ch. 7||Performing at a Higher Level||167|
|Ch. 8||A Compass for Decision Making||199|
|Ch. 9||The Center-Driven Company||227|
|App.: Emerging Standards||251|