Tales from the “Real World” – how much ethics can the world of business tolerate?

In my last blog post I described a concrete example of a moral dilemma that I faced while I worked in the international business arena (and I use the word “arena” for a reason…). I posed the question as to what realistic options are available to business leaders should they like to take the moral high road. The answer hinges upon, I think, how we should like to define “realistic”.

Would it have been “realistic” for me to go sign up the fledgling start-up as our distributor in Tunisia, foregoing engaging the established Dutch firm? As much as I am loath to admit it, I think not. The company I worked for was operating in a highly competitive industry where thin profit margins provided for very little largesse in choices that were not tightly aligned to short-term profitability. In another industry, with a pioneering product with no immediate competitors, or in a domestic market artificially shielded by high entry level costs or tariffs, there might have been more room to maneuver. But when one was competing tooth and nail for survival, this was not a viable option.

Prior to working in the low profit margin apparel industry, however, I worked in a radically different industry for a medical laser manufacturer where profit margins hovered around 60%. While obviously also a competitive industry (after all, everybody was scrambling at getting a piece these dream margins…), there certainly was more room for maneuver from a moral point of view. Regrettably, this option was not always exercised. A case in point: over the course of several years I had the pleasure – and it was indeed a pleasure – to nurture a start-up firm in Russia to be our distributor in this promising market. They were highly motivated and worked endless hours. Even though they had very limited resources, they sent one of their engineers over to the United States for a one week product training program we offered to our distributors. After two years of major investments and working the market, the company was finally poised to make some important sales. This was, however, also the point in time when the medical laser company I worked for was bought by another medical device company and consequently overnight we had two distributors in virtually all of our markets.

Our new owners insisted on using their own distributors in all of the countries where they themselves were present or alternatively forced our distributors to become sub-distributors, which for our distributors essentially meant giving up all control of the business and taking a major cut in their earnings. I remember being on the phone with a manager at our new parent company and him telling me to terminate the sales agreement we had with our Russian partner. When I explained to him that our Russian partner had worked for two years to build up the necessary relations in a market that had very long decision making procedures, he told me that “first cut him, bring him to his knees and then we renegotiate our terms with him from a position of strength.” So the basic strategy was to first make him desperate (he would lose two years worth of investments!) and then try to squeeze the max out of him so that he could salvage at least a pittance of what he had invested. Hardly a win-win strategy.

While many people sincerely tried to do their best to remain “humane” in an essentially a-moral system and things seem – at least in public discourse - to be changing somewhat these days, many of the things I saw and heard while in the business world were diametrically opposed to a human centered, win-win, stakeholder approach. A few of the ones I still remember I wish to share with you here (some are paraphrased by me, their essence is however retained):

·         “There is no ethics in the business world”

·         “If we don’t do it, somebody else will”

·         “No matter how much you may like somebody and how close you get to them in your work dealings, never make the mistake to think that they are your friends”

·          “The [neo-liberal] economic system as it is today reflects a deeper reality that is inherent in all of nature and therefore cannot be changed: just look at Communism!"

·         “Survival of the fittest”

·          “Markets always know best”

·          “If you can’t beat them, join them”

·         “The corporate world is essentially one of war without weapons”

·         “Money is success and success is no coincidence”

·         “Make money first, then do good”

·         “Too much ethics is a weakness and we have no place for weak people in our management team”

·         “The business world is the only real world and we who actually operate in it have nothing much to learn from researchers and intellectuals as they live – at best - in a naive utopian, imaginary one”

What all these quotes reveal is that, at the end of the day, there was a widely prevalent attitude (even if not voiced thus publically) that ethics, a humane stakeholder approach and the competitive business world simply don’t mix. Regrettably, the way our current economic system is set up and the widespread normative mantra of “profit and shareholder value maximization” inculcated into students, employees and managers, this has become in many ways a self-fulfilling prophecy.

In my next blog posts, we shall take a look at these proclamations and how they fit or don’t fit into a sustainable economic system.

Manuel Heer Dawson

The Need for Humanism in Management Across the World

Over the last weeks I spent my summer holidays travelling through northern and western Madagascar – a wonderful country with charismatic people, a variety of landscapes and unique flora and fauna. But this is not meant to be a travel report and to my delight I frequently stumbled across what is supposed to be the underlying subject matter of my research topic – microentrepreneurs or commercially active people living on a few bucks per day. For example, there was this artisan group of neighboring women producing gorgeous silk embroideries and selling them in a small shop on a veranda. In another village, there was a man crafting delicate artwork and articles for daily use out of polished cow horn with the help of an old washing machine’s engine. Like in every developing country, the majority of Malagasy people, however, were working on fields, planting rice and spices or farming cattle. Here and there, I spotted agencies of microfinance institutions (MFIs) in surrounding villages, indicating that financial services were potentially available for the aforementioned random acquaintances.

Back home, I found the report of the Microfinance Banana Skins Survey 2012 from the Center for the Study of Financial Innovation (CSFI) fresh from the press (www.csfi.org). With the title ‘staying relevant’, this is the 4th edition of what can be regarded as the most comprehensive risk perception survey in the sector. According to this year’s report, the most pressing risk is - for market observers unsurprisingly - overindebtedness among microfinance borrowers. However, the overindebtedness problem is symptomatic of deeper difficulties in the industry - first of all the overemphasis on growth and profit at the expense of prudence and the lack of good governance, management skills and professionalism in local MFIs: “Corporate governance is widely perceived to be inadequate, failing to provide sufficiently strong leadership to keep MFIs on a healthy growth path. Management quality is also seen to be lacking in many markets…, including the quality of risk management which is seen to be low or nonexistent in some sectors” (p. 8).

Reflecting on my holiday experience with regard to the responsibility of business schools and research for establishing a new paradigm of leadership, this made me realize that it is clearly not only western, industrialized countries, for which a new generation of managers and leaders is needed, but certainly also developing countries. Although they weren’t directly liable for the recent crises in the global economy or necessarily affected by the numerous management scandals in multinational corporations, narrow-mined short-term thinking with a sole focus on profit-maximization there too takes its toll. The microfinance experience in developing countries shows again that economic progress and societal development cannot be sustainable without appropriate management education and responsible business leaders with a sense of solidarity for all their stakeholders. The humanistic mission of initiatives like “People for People” seems therefore equally important for fighting inequality across the world and the aspiration for prosperity of underdeveloped regions.

Marc Moser

Value Creation with the Humanistic Mission of ‘People for People’

During the last several years both business and society are undergoing substantial change. A few key examples illustrate this change: the oil spill in the Gulf of Mexico; the nuclear catastrophe in Japan; the ongoing European debt crisis and social movements such as “Occupy Wall Street” that have spread around the globe. All these changes show that it is not simply single actors who are salient, but rather networks of actors. This interconnectedness is the critical feature of today’s reality. Value creation takes place between firms and stakeholders in networks to achieve greater service to society. Such networks of value creation encompass the boundary of sectors (economic, political, and societal) as well as the degree of institutionalization (formal and informal).

Business schools are responsible for preparing new generations of leaders for a networked globalized society in which intra- and inter-network cooperation is key. The responsibility of business schools was also the topic at the caucus session we conducted at the annual meeting 2011 of the Academy of Management (AoM) (http://www.fh-hwz.ch/g3.cfm/s_page/63780/s_name/socialmovementinitiativeteaching). The focus was to assess whether there is sufficient interest in the core challenge of nurturing humanism in management education by creating a network of interested scholars. The shared understanding of participants was that it matters what business schools do in educating future leaders and managers. The participants came to the conclusion that as educators of future leaders and as world citizens we have to foster teaching and research that contributes to the humanistic mission of ‘People for People’. "People for People" describes the humanistic mission of all management: human beings helping others.

If you are interested to advance the humanistic mission in management education please join us for our Professional Development Workshop at the annual meeting 2012 of the Academy of Management (AoM) in Boston. Joseph Mahoney (University of Illinois) and I organized this workshop for the following divisions of AoM: Business Policy and Strategy (BPS), Human Resources (HR) and the Social Issues in Management (SIM). Panelists include Sandra Waddock (Boston College), Robert Phillips (University of Richmond), James Post (Boston University), Tom Donaldson (University of Pennsylvania), Ed Freeman, (University of Virginia). The workshop takes place on 03. August 2012, 2:45pm, pm Boston Hynes Convention Center, Room 301 (http://program.aomonline.org/2012/subMenu.asp?mode=setmenu&menuid=14).

I am looking forward to see you there.

Sybille Sachs

Humanistic Perspectives in Management

This June, the Humanistic Management Network organized a conference at the University of St. Gallen, Switzerland, with the topic “Happiness and Profit – Wellbeing as Alternative Objective Function for Business?”. This network has as its objective to promote an economic system which operates in the service of human well-being in the larger context. Out of the many ideas that one could reap at this occasion I would like to highlight the following three:  

1.      Professor Binsweanger, an economist, reminded us that the original economic theory made the comprehensive concept of utility as the goal of our dealings and not the narrow objective of the multiplication of money as has been brought to prominence in both theory and practice these past years. Such a broader understanding of utility is incompatible with both the narrowly conceived shareholder value thinking as also the notion that the gross national product accurately reflects the prosperity, much less happiness, of a society. The financial crisis and the bonus discussion have shown that narrow monetary goal conceptions lead us astray and are nefarious to our common good. This understanding is fully in line with the people for people project espoused here. http://stakeholder-peopleforpeople.blogspot.ch/

2.      Various conference contributions elucidated possibilities as to how the use of multidimensional criteria grids could create indices which reflect the utility of economic as well as ecological and social dimensions. They complement already available approaches in this direction as for example the Global Reporting Initiatives. The utility contribution of a firm or a project is thereby reflected in a more sophisticated manner then a mere monetary measurement. A considerable number of firms already today produce such common-wealth balance sheets and common-wealth reports. Such firms should in the future be privileged by their customers or by the attribution of public commissions, as they serve the common good in a more deliberate fashion. Regrettably, there were no representatives of public institution at the conference; they would, however, have a model function with the promotion of such a common good thinking.

3.      I was especially impressed by an entrepreneur (Mörkisches Landbrot – a bread bakery) who conducts a consequential stakeholder management which is rarely seen in practice. Through a systematic cultivation of the interactions with important stakeholders (for example suppliers or co-workers) he could not just attain a high degree of motivation and loyalty, but also valuable impulses for the increase of innovation and quality. Thereby his operation is also oriented towards a broad segment of the society. This understanding of value creation which he has pragmatically developed reflects to a high degree the theoretical concept which we also elucidated in our book http://tinyurl.com/8ay79k7. He would be a valuable interview partner for our new leadership project http://tinyurl.com/88qqpxy

The most valuable aspect of the conference was the orientation towards practice. The conference also showed me that there is a considerable need to bring these pragmatic approaches onto solid theoretical basis, so that they will not drift off to arbitrariness.

Edwin Rühli

The Empowerment of a Tiny Shareholder through Blogging

Corruption defines the Russian public live at all levels. In the Corruption Perception Index 2011 by Transparency International, Russia is on the rank 143 from 182 (http://snipurl.com/243n31f). It shares this position with countries like Nigeria, Belarus and Mauritania. Preparing for the Winter Olympics 2014 in Sochi, corruption reached such extremes that businesses involved in preparing the Black Sea resort report having to pay kickbacks of more than fifty percent. A Russian magazine calculated that a road in Sochi is so costly that it could have been paved with three and a half inches of Louis Vuitton handbags (http://snipurl.com/2439t4z)!

Former President Dmitry Medvedev was eager to fight corruption in his country. One measure was the online posting of all government requests for tender initiated in 2008. Nonetheless it is said that the size of the average bribe quadrupled. In 2010 three percent of the Russian GDP disappeared annually on government contracts. On the one hand the increase of corruption can be explained by the growing risk of accepting bribes. As it became riskier the price went up. On the other hand people fear that everything is going to collapse, so they want to grab as much as they can (http://snipurl.com/2439t4z). However, thanks to Medvedev’s initiative the prominent blogger Navalny could launch his latest project, the web site RosPil. With the help of citizens the site collects information on obvious violation within the governmental procurement system.  

In 2007 Navalny’s campaign against corruption began by buying small stakes in publicly traded state-owned companies, which normally have senior government officials in their boards. Through public listings these companies can obtain crucial capital and international legitimacy. In exchange public listings force them to a modicum of transparency that is absent from Russian politics (http://snipurl.com/243apl0). By using his status as a part owner, Navalny harasses senior management with unpleasant and delicate questions for example about suspicious expenses. Navalny publishes all his uncovering of wary acts and his efforts for the rights of minority shareholders in major Russian oil and gas companies, banks and government ministries on his blog (also available in English). With these actions Navalny demonstrates that stock can be more effective in controlling Russia’s ruling class than the ballot box. He earned many admirers in the Russian blogosphere and the independent-minded media. In Russia the blogosphere is a very important forum for free political discussion and gives people an opportunity to become civic activists. Through his blog the stakeholder, who was originally a shareholder interested in a secure investment, became a stakeholder, who is representing the civil society in his fight against the corruption that pervades Russian business and government.  

In December 2010 Navalny launched RosPil.net. The idea for RosPil came up when Navalny heard about the invitation of the Ministry of Health and Social Development to build a two-million-dollar network to connect doctors and patients. The winner of the contract had only sixteen days to develop the site. Navalny was sure that the webpage had already been designed for a much lower sum. He asked his blog followers to send official complaints to the Federal Anti-Monopoly Agency. Nearly 2’000 of them did. The Health Ministry annulled the contract. The idea was born to design a site where people can submit a government request for tender and discuss it. If an associated expert finds the price, the schedule etc. unreasonable Navalny posts the alleged fraud on his blog (http://snipurl.com/2439t4z). Since RosPil started, more than a thousand users and 500 experts have registered to it. According to a tally on the webpage, the project has caused requests for tender worth 6.6 million US-Dollars, to be annulled.  

This example shows that even a tiny shareholder can become an important stakeholder, who can alienate the powerful. Furthermore it demonstrates that things can be changed by enforcing the dialogue between the stakeholders and the companies. By the help of social media Navalny has become a representative of the civil society. We should always keep in mind that Navalny has undertaken all this in a country where a number of people investigating such matters have been beaten or murdered.

Sabrina Stucki

How to measure well-being? OECD’s Better Life Index

In recent years increasing concerns emerged regarding the issue of how to measure people’s well-being and, ultimately, how satisfied people are with their life in general. The traditional economic approach to get to grips with this issue is to use statistics related to a country’s Gross Domestic Product (GDP). In this regard, GDP per capita is a widely used indicator to measure people’s actual economic well-being and its change over time. I would like to highlight just two out of many shortcomings regarding this approach of measuring people’s well-being. First, GDP per capita is calculated as a proxy for the average economic well-being of people living in a specific country. This is problematic, because if inequality in a country increases enough relative to GDP per capita, it is possible that most people can be worse off, although the average income is increasing. Second, statistics related to a country’s GDP are a very distal indicator for people’s well-being, as GDP mainly measures market production in monetary units. This is problematic, because on the one hand, many services relevant for people’s well-being do not have a market price, and on the other hand, individuals assess the different aspects of their well-being by drawing on their subjective values and norms.

During the last years, a lot of work has been conducted to face the challenges of measuring people’s well-being. One out of many promising approaches are the recommendations made by the Commission on the Measurement of Economic Performance and Social Progress (CMEPSP) set up by Joseph Stiglitz, Amartya Sen, and Jean-Paul Fitoussi. These recommendations include, among others, two important basic principles. First, indices should focus on the well-being of people in each country, rather than on the macro-economic conditions of economies. Second, both objective and subjective aspects of living conditions and their appreciation by individuals should be integrated to understand people’s well-being.

By drawing upon those recommendations of the CMEPSP, the OECD has identified 11 dimensions as being essential to people’s well-being and included them in a first attempt to provide a comparable and comprehensive set of indicators at an international level. These indicators include both the people’s material living conditions but also their quality of life. The OECD Better Life Index is available online (www.oecdbetterlifeindex.org) in a sophisticated and fancy tool to compare the different dimensions across countries but also to create one’s own Better Life Index. Give it a try!

Despite my enthusiasm to complement the GDP-based indices for economic wealth by drawing on objective and subjective indices of well-being, the latter are in an early stage of development. They still need to prove that they are a reliable, but also valid measure for people’s quality of life and, finally, could provide policymakers with the information they need to make improved decisions for people’s well-being.

Tom Schneider

Real value creation in banking

Since the financial crisis and the enduring dangers of the ongoing European debt crisis, the banks are under strong pressure not only to rethink their traditional strategies for growth and value creation but also for regaining trust. Additional industry developments, including consolidation, regulation, industry specialization, changing workforce needs and new technologies, are challenges for banks today. A prominent addition to these challenges seems to be the concept of “industrialization”, which has been discussed since the 90s in the industry itself, but also in the scientific community. Similar to the manufacturing industry, banks focus now on optimizing the whole value creation chain, especially on the improvement of the efficiency of the operational processes and the centralization of their back offices and support functions (http://tinyurl.com/8256vh9). This optimization is obviously an adaptation and transformation of the success of the manufacturing industries, especially the highly rationalized automotive industry. The two large Swiss banks have also committed themselves lately to adapting industrialization processes to their operations (http://tinyurl.com/8xpewgf).

Industrialization thus promises to reduce costs and improve productivity. But even more important, industrialization in banking offers the chance to rethink a stronger connection to “real” value creation. This means creating value for shareholders, customers and other stakeholders by fostering value chains for innovative solutions. Such operational optimization creates a strong foundation for subsequent sustainable strategic positioning and for people oriented real value creation, which has to follow operational optimization. Leaders in banks today are not only challenged to reduce costs to overcome shrinking margins but also to regain trust. Professionalism at the operational and the strategic level as well as a strong focus on the human side of their business creates trust. ‘Nomen est omen’ for the industry.

 Sybille Sachs

Discretionary Morality in a Competitive World?

In the heady days of younger years I thought and felt strongly that I could chart my own path through this world of ours without compromising what I intrinsically believed to be “right” or “wrong”. As you might expect, this belief turned out to be rooted more in naiveté than reality, and latest upon entering the corporate world did reality bite back. Let me give you one particularly illustrative example.

In charge of developing the overseas markets for a US manufacturer in the apparel industry, I was evaluating potential business partners in numerous countries to distribute, install and service our products. Due to the high labor costs in the US or Western Europe, the fabrication of clothing was rapidly shifting to areas of the world in which labor was still affordable enough so as to allow a reasonable profit margin in an increasingly competitive industry. A country of interest was then for us Tunisia, which promised to have the right mix of low labor costs with a reasonably reliable legal framework so as to make doing business there a relatively low risk venture.

I had singled out two companies in Tunisia which seemed promising business partners. The first was a start-up led by an enthusiastic and eager young woman having just returned from Canada where she had done her studies in the design and production of apparel. The latter was a large manufacturing company from the Netherlands which had been established in the Tunisian market for the better part of three decades. Meeting first with the young woman entrepreneur (in a male-dominated society!), I was immediately invited to her home to share a dinner with the entire family. It not only turned out that her business “headquarters” was the house’s basement, but that the entire family was poised to participate – as deeply vested stakeholders – in the venture. The mother, working at a local bank, was to be in charge of finances, the brother in sales, the father figured as the presidential formal “figure head” of the company (important in a patriarchic society), and the young, female entrepreneur was the effective Chief Executive Officer.

The following day I met with the director of the Dutch company and was shown around an expansive manufacturing plant which included several hundred workers busily hunched over sewing machines, churning out mounds of pants. He outlined for me the various sales channels they had throughout the country, and I was shown a well-equipped repair shop for technical support. In as much as servicing a sophisticated technical product as was ours is at least as important as just selling it, I was duly reassured.

That night at the hotel, however, the moral dilemma which I faced struck me with full poignancy. From a business perspective, the choice was as simple as could be: the established Dutch company disposed of vastly more resources, experience and connections to make our market entry in Tunisia a profitable and smooth one. By contrast, the small start-up lacked all of these crucial elements necessary for fast and profitable market development.

From a sustainable, human perspective, however, the choice was also as simple as could be: the established Dutch company lacked the heart-felt enthusiasm and commitment of the small venture and could readily do well without the benefit of adding our product to their already extensive product mix. But giving it our business would do little to nothing for developing the sprouting, indigenous economy in this area, and most of the profits would be ciphered off to the Netherlands. If I gave this business opportunity to the small start-up, however, I would be able to nurture the local, grass-roots economy, transferring not only financial resources to the locals, but also valuable know-how, so as to provide for the emancipation not only of the local economy from the dominance of the wealthy West, but, in this particular case, also of women in a still conservative, patriarchic Muslim society.

It was, however, equally apparent that it would be nothing but impossible (and virtual professional suicide) to justify going with the small start-up from a business point of view: I already pictured myself explaining my decision to my boss, the company’s CEO  - and then, following the food-chain upwards – him to the board of directors and the investors: “well, I know that we are rapidly losing market share in this highly competitive industry and our sales are imploding, but take a look at how much grass-roots, sustainable nurturing we are able to do in poor countries, taking heed of all the involved stakeholders!”

In essence, I was damned if I do, and damned if I did not. So what was the solution, and how would you choose if you were faced with such a decision?

For me, the solution was to leave the business world for the academic one, where I hoped to at least find an intellectual microcosm where I could align what I believed in with what I worked on and actually practiced. Moral of the story: I capitulated not by becoming entrenched in a system that was profoundly out of sync with what I believed to be “right”, but by stepping out of – or, if you like – fleeing a system I felt I simply could not change from the inside out. But capitulating will certainly will not change matters for the better…

The above account raises many questions about to what extent leaders should – and in a certain manner are even at a liberty to – live by what they believe is “right” or “wrong”. It also raises many questions about our social and economic system as a whole. In particular, how can leaders walk the moral high ground in an increasingly competitive, globalized world that so often punishes those who seek a more long-term perspective?

We shall take a closer look at this in a subsequent post. Stay tuned.

Manuel Heer Dawson