There is an emerging new standard of corporate performance that encompasses both moral and financial dimensions. In
Value Shift, Harvard Business School Professor Lynn Sharp Paine describes the turn to values in the past decades, interprets what is motivating this phenomenon and why it is significant, and explores the implications of this movement for management practice as well as organizational strategy and corporate leadership.
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:
Risk management. Values can manage and eliminate risks associated with corporate and individual misconduct. Organizational functioning. Values build a well-functioning company that encourages cooperation, inspires commitment, nurtures innovation and energizes the organization's members around a positive self-image. Market positioning. Values shape a company's identity and reputation, build its brands, and earn the trust of customers, suppliers and other partners. Civic positioning. Values establish a company's standing and reputation in the community as a progressive force for social betterment, or as a solid citizen that obeys laws and pays taxes. A better way. Values are worthwhile and fundamental principles of responsibility, humanity and citizenship, and need no corporate justification.
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:
People are committed to both moral and financial excellence. Guidance systems are aligned with financial and nonfinancial accountabilities. People use decision frameworks that integrate social and financial considerations. People assess its performance along moral and financial dimensions. People engage each other and external parties as moral actors. Company as a whole displays the competencies expected of a moral actor.
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
Soundview Executive Book Summaries