Conscious Capitalism

Summary and Review of "Bringing Society into Strategy - The 5 R Framework" McKinsey Staff Paper by Scott C. Beardsley, Shelia Bonini, Lenny Mendonca and Jeremy Oppenheim

Until recent history most business enterprise thought bringing society into strategy was responding to consumer demand or anticipated demand for products and services.  In today’s world that is but a small part of businesses responsibility for bringing society into strategy.  Meeting societal expectations demand more than just new products.  “Bringing Society into Strategy – The 5 R Framework” (BSS) contends that society and social issues have begun to influence business globally and that there are compelling reasons for business to listen.  The forefront being the virtual transparent world of business with “……..the global expansion of capitalism, the emergence of the Internet and the near-instantaneous access to information it provides…..”  Another compelling reason is that it helps the bottom line!  As the BSS article suggests, “….the majority of most companies’ value is represented by the net present value of their longer-term revenue streams, society will be an essential component of any corporate strategy”.  “Companies that successfully bring society into strategy will create enormous value, as well as contribute to the greater good.”  It also enhances the company’s reputation which in this global economy could lead to greater growth and opportunities in the future.  Conversely, companies and industries that neglect societal issues will lose future opportunities and may be faced with greater governmental restrictions.  In short, for business to live up to its full potential in the future it must shift from a paradigm of “The Business of Business is Business” to The Business of Business is Meeting Societal Demands.  This type of shift will not only meet the need of society by producing new products and services but will also meet the needs of society with respect to the environment, fair labor practices, community service and sustainability.  

The underlying theory behind the BSS article is that business and society have a contractual relationship in the form of formal contracts, semiformal contrasts and frontier issues.   The formal contract being in the form of governmental acts, laws and regulations, the second being in the form of current societal expectations and the third in the form of potential societal expectations in the future.    In support of bringing society into strategy the BSS article details a methodology, called the “The 5 R Framework”.  This framework assists business in incorporating societal needs into strategy, prioritizing society’s needs and provides for monitoring mechanism to determine the strategies success.   According to the writer’s of BSS the 5 R’s are interdependent and consist of risk, renewal, regulation, relationships, and reputation.   Risk is continuing to conduct business practices in a certain way as social expectations change in a way contrary to the practice.  It emphasis the need identify and manage or preempt the new risks that arise.  Many risks if identified early turn into a chance of renewal.   Renewal is identifying new sociopolitical trends or changes in social expectations and shaping them into new opportunities to meet or exceed social expectations.   These new opportunities, if identified early, can take the form of the reengineering of products, launching of new products, shaping, influencing regulations and building relationships with grassroots civil-society groups.  Regulation is centered on identifying potential future short-term and long-term regulations early enough in order to help shape it.   The goal of influencing regulations would be to produce legislation that produce “win-win” scenarios for both society and the company’s commercial interests.  Often individual businesses within an industry will group together to influence or prevent legislation.   The relationship “R” assists the company to identify where to invest resources in order to build and maintain positive and productive relationships with various stakeholders.  To achieve the company must not only identify the stakeholders but also indentify their individual issues and expectations.  Once individual stakeholder expectations are identified, the business must them attempt to meet them as well as the expectations of the core business and other stakeholders.  Reputation is centered on building credibility and trust for the company, its brand and values.  The goal is to overcome the often public perception that most companies are largely self-interested and have limited commitment to social issues.  In bringing society into strategy and using the 5 R framework many businesses will be faced with having to develop a new business model that may include the additional of new department and greater cooperation between existing departments.  It may also necessitate the need cross-department councils working together to meet new business issues and opportunities.   According to the BSS article, the role of the CEO is also likely to change.  With the globalization of most industries, the CEO will often take the role of “statesman” engaging more of their time in “business-in-society” issues.  Also with the CEO being the personification of the company their personal reputation will often become that of the company.  If the company wants to become and be viewed as a conscience socially responsible entity, the CEO within the organization must personify the qualities of a conscience socially responsible individual concerned with the greater good. 

Given our point in history, the article is relevant and timely.  It presents compelling reasons why society should be brought into strategy.   In addition to the underlying reason that it is good for society, it helps long-term revenue.  I agree that with the article that the internet has afforded society with greater transparency in business and it is more difficult for business to conduct itself in a manner that is detrimental to society.  Society is also more informed of current and long-term societal issues and can make more informed decisions of the type of companies they want to patronize.   Companies that embrace this turning point and meet not only the need of stockholders but the needs of society will flourish while I believe those that do not will perish over the long-term.   The article goes beyond just justifying the need to incorporate society into strategy; it demonstrates how it can be done.  A methodology, “The 5 R Framework” is detailed to illustrate how societies needs can be identified and brought into corporate strategy.   The framework also provides methods to evaluate the success of the strategy.  This article provides a great beginning for any company that desires to bring society into their corporate strategy.

Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility, Michael E. Porter and Mark R. Kramer

“Organizations that make the right choices and build focused, proactive, and integrated social initiatives in concert with their core strategies will distance themselves from the pack.”

 

             Porter and Kramer make a very convincing argument that companies have two choices.  Either develop a CSR program that is integrated with the rest of your business, or watch as your competitors do.  Corporate Social Responsibility, they argue, has to be ingrained in your business for it to work best.  Random donations to local charities to get good press is nice, but the companies who take CSR further are creating business opportunities while improving society.  Building competitive advantages with those dollars not only helps your business more than good photos on page 4 of the local paper, but it helps society more as well. 

The examples the article cites are leaders in their respective industries.  Nestle, by introducing technology and training farmers, has brought prosperity to regions that otherwise wouldn’t have it.  The company has reaped huge profits by doing this, and everybody is better off.    Whole Foods buys directly from local small farms, serving almost as a broker for organic, healthy foods.  Their customers are better off, their suppliers are better off, and they are very, very profitable.  Toyota, now the world’s leading car company, was well out in front of the green revolution, introducing a hybrid car in the 90’s, refining the Prius to make it the 2004 Motor Trend Car of the Year, and it is the best selling hybrid in 2009.  According to the article, Ford and other car makers are actually licensing the technology to build their cars, adding to Toyota’s bottom line with every car they sell. 

These three examples are all very different.  Nestle targeted suppliers with its CSR, and then built those suppliers into customers.  Whole Foods brought together suppliers and customers in a way that no one else has quite been able to duplicate.  Toyota developed the Prius when oil prices were near historic lows, planning for a time when they wouldn’t be.  Where these examples are the same is that they reach beyond generic social issues and simple value chain impacts and address what the authors call social dimensions of competitive context.  These companies asked “What are the external social factors that will determine whether my business will succeed”, and then set out to shape those factors to benefit both society and the company’s bottom line.

            The authors also point out, and I would argue that these companies have realized, that society and business have to work together, or both will fail.  “…operating managers have developed an ingrained us vs. them mind set that responds defensively to the discussion of any social issue, just as many NGO’s view askance the pursuit of social value for profit.”  Non-profits can’t afford to innovate the way businesses do, and companies can’t always see around the dollar signs in their eyes to address bigger social issues.  When these groups create partnerships, they both stand to win, as does society.

Summary of "Thinking in Systems" by Donella Meadows

The Thinking in Systems book introduces a reader to a different way of thinking about everyday problems that are found in nature, business, society and life.  The book begins its narrative by introducing a concept of simple systems, as illustrated by a thermostat which controls the temperature in a room. This illustration introduced the notion of control and feedback loops. The simple system shows the effectiveness of the system, while illustrating how system failure can occur if the strength of control loops does not match the power of feedback or other loops that influence the behavior of the overall system.  The basic premise that is described is the notion that any force applied to the system has consequences. A well designed system can absorb these forces and still maintain system functionality. A poorly designed system cannot absorb external forces, causing the system to collapse.

The book further goes on to describe the concept of “System Zoo”. The take away from this chapter is that systems and models that are built to predict them cannot be treated in isolation, much like animals in real life do not exists in neat, isolated, environments, and systems operate among other systems. The danger of creating system that is too simplistic, and therefore not representative of real lie, or making systems too large, and therefore too complicated to be useful is described. The chapter introduces the notion of system oscillations and overshoots as examples of system instability. These instabilities are problematic for stability of the systems, since they represent feedbacks that cause the system to not work well. The cause of oscillations is described as being caused by systems that do not have appropriate feedback loops, or lack of information.  Lastly, the “Systems Zoo” describes the problem of system where nonrenewable resource is the input feed into the system. The author describes the affect of such system on the amount of production over time. The take away is that such system will inevitably run out or resources even if new resources are discovered as a result of higher investment in the means of production because the added profit from new discoveries cannot match the increased cost of production (e.g. extraction of oil from hard to reach places, etc.)

The book goes on to describe the characteristics of systems that work well.

1.   Resilience – ability for a system to adjust. The opposite of resilience – fragility, causes the system to be unresponsive to change, and exposes the system to potential of collapse. The argument the book makes is that many modern “innovation” such as monoculture crops and “just in time inventory” make the system vulnerable, to disease or supply chain interruption, respectfully.

 

2.   Self Organization – ability of system to adjust to new demands and circumstances. Ability of the system to orient itself and build complex structures from simple building blocks (snow flake from simple pattern, DNA & RNA as building blocks of life) is viewed as key characteristic.

 

3. Hierarchy – describe how complex system can be broken into smaller, simpler organization that can function autonomously. The opposite of hierarchy is a one complex organism that cannot be productive of parts of it is not performing at the level required for the smooth operation of the system.

 

While well behaved systems exhibit the characteristics above, system also surprise the observer. The book outlines some of the reason why the models for complex, real life system, sometimes don’t behave in intended ways.  The following concepts cause systems to “misbehave”:

 

1.  Beguiling Events - focusing too much on events, rather than system flows. This trap causes overreaction, and complacencies resulting in system oscillations and system failure. Focusing on events causes the observer to lose ability to predict the future. A classic example of focusing in GNP as a measure of nation’s wealth rather than the overall capital – physical plants, people, knowledge, is described.

 

2.   Liner Minds in a Nonlinear World - Many theorist envision a world where thing occur in liner fashion, Cause and effect, etc. However the world is too often non-linear. Small incremental changes, over time, can cause huge swings in the affected system. Sometime a notion that if a little of something is good, more of the same is much better.

 

3. Nonexistent Boundaries – making models with boundaries, for sake of simplicity, that do not reflect real life.

 

4.  Layers of Limits – notion that any individual layer might be limited by some other layer in the model. 

 

5.  Ubiquitous Delays – The notion that things “it takes what it takes”. System delays are inherent in the physical and social systems. A great example of this is described by Vaclav Havel whose description of why democracy can’t be imposed is illustrative of this concept.

 

6. Bounded Rationality – describes the fact that if a system is limited, people do thing in a rational self interest. These actions, while understandable at the low level, cause overall system failure. There are many examples of this in recent times (mortgage crisis, environmental damage, etc). This concept flies in the face of the notions of Adam Smith’s that invisible hand will guide the world to a better place.  

In the most profound and significant section of the book, the author describes the various system traps and opportunities how to fix them.

1.  Policy Resistance – THE inherent resistance of the establishment to allow changes to affect the system. People would rather live with a flawed system that is familiar then to allow changes that might cause uncertainty and instability. Such resistance can cause inevitable collapse to be more dramatic, sometime even catastrophic.

 

2.   The tragedy of commons – This is a classic economic theory, described in terms of system thinking. The common, defined as community space – such as a town common, is a shared resource. This resource can be governed by community standards, privatization or effective regulation. Each approach has tradeoffs and benefits. It’s the conclusion of the author that only regulation is affective since the community standards are usually not enough and privatization causes the property owner act in self interest and disregard the abutter’s welfare.

 

3.   Drift to low performance – the notion that prolonged failures causes acceptance of the new state of things, “New normal” – has become a popular term in recent times.

 

4.   Success to Successful – notion that success will give advantage to those that have already succeeded, thus limiting the “losers” ability to win in the future. “The rich get richer!”

 

5.   Shifting the burden – notion that risk is shifted to someone else, while success is reaped by the actor. 

 

6.   Rule beating – the notion that rules, or laws, are ignored, broken or skirted. The cause of rule breaking is usually related to the fact that these rules are perceived as unjust or not flexible or response enough to real life issues. Also, following the letter of the law and not it spirit is described.

 

 
7.   Seeking wrong goal – sometime goals change. Many systems suffer from the fact that original goal don’t make any sense in the current context, or never did. Pursuit of wrong goals will cause the system pursue these goals, capturing wrong or insignificant metrics, leaving the illusion of progress, while heading toward system collapse.

The book concludes with an approach of how to solve system problems.  The identification of leverage point in the system describes how to affect system behavior in most effective way.  The list of leverage point includes quantitive things such as numbers , creating of buffers in the system, as well as introduction of new feedback loops and general system flexibility. As one of the most affective leverage point, the book describes free flow of information and general transparency in the system. The most effective leverage point is defined as ability to transcend current thinking – thinking outside the box, because this, more than anything else, can allow change to the systems to best reflect new goals and realities.

The book concludes with a series of recommendation for how people can improve systems.

- Boris Tabenkin

“Dialogue: Toward Superior Stakeholder Theory” - D. Thistle

 “Dialogue: Toward Superior Stakeholder Theory”

 

This is a very interesting article that consists of 5 essays with different viewpoints on the current and future states of the “stakeholder perspective”.  The essays were requested of the authors who all spoke at the 2007 “All-Academy”, Academy of Management annual meeting in Philadelphia and were compiled to make the different perspectives represented at the symposium available to a larger audience.

 

The article begins with an introduction by its authors Bradley Angle and Ronald Mitchell.  After providing statistics on the apparent progress of the “stakeholder theory” The authors pose the question of whether stakeholder theory’s “arrival” means “continued dynamism, refinement, relevance or statis”.  Will the stakeholder theory continue to develop, and if so, how? (Agle and Mitchell, 2008).  This question seems to be the impasse that many companies are facing, especially now in our current economic environment.  At the company I work with we were off to a very good start with our “sustainability initiative” progress was measurable and being made.  When the economic downturn hit the construction industry, several of the “key players” with our initiative were let go.  Although our initiative got off to a great start, it now seems to be stagnant.  I have the same questions that Angle and Mitchell pose and find the following five perspectives very compelling and am very curious to see which theories will be followed.

 

The introduction continues with the authors explaining the three “strands” that they found in the essays.  The fist strand concerned the basic debate regarding stakeholder vs. stockholder.  The second strand of essays focused on the “instrumental development of stakeholder approaches” and the final strand encompassed “works that generated new questions in stakeholder theory research”.  The introduction then presents a table of articles written around stakeholder theory which the authors break into the “strands” explained above.  The third “stand” is further categorized into four subcategories that each represents different questions around the theory.  The third category investigates, where do we go next, and how do we get there?”

 

The first essay in the article is by Donna Wood, entitled “Corporate Responsibility and Stakeholder Theory: Challenging the Neoclassical Paradigm”.  Wood starts by pointing out some of the major problems in the world due to unrestricted multinational corporations and the “ascendancy of neoclassical economics into the Anglo-American public policy sphere (Wood, 2007).”  Wood quotes two sources that reinforce her point that we have created separation between the “haves and have nots” and that it is only going to get worse if we do not start to change the trends that we have been following since the 1970s.  Wood believes if we continue on this path our existence would become the “survival of the fittest”.  Wood goes on to list eight “untenable assumptions” derived from a statement by Jensen in 2002 to further her argument.  The assumptions are:

 

1. Rational actors try to maximize their self-interest, which is defined by narrow economic terms.
2. “Maximizing” necessarily involves limited resources that cannot be deployed in multiple directions with out loss.
3. Purposeful behavior is maximizing behavior.
4. Externalities are absent.
5. Monopoly is absent.
6. All goods are priced.
7. Social welfare equals efficiency.
8. A firm’s market value is its total value.

Wood addresses each of the points listed above and shows that this is not the case in any economy.  These 8 points are parameters that are used in neoclassical economics for mathematical modeling and do not prove useful as a whole when taken out of that context.  Wood points out institutions do not exist to “serve their own purposes, but to serve the needs of societies and their peoples”.  In the essay Wood addresses the development of the concept of “Corporate Social Responsibility” and how it was intended to “compliment government, not be a substitute for it”. 

 

In her concluding statement Woods captures all of the points she makes in her article with the following: “Stakeholder theory and corporate responsibility cannot offer a complete solution for addressing the problems of business in society.  They can, however, point to a need for social controls to encourage the beneficial effects of institutional behaviors and to regulate or prevent harmful effects”.   This essay seems to bring out some fundamental questions about stakeholder theory and corporate social responsibility.  By both pointing out that government is inefficient and that oversight is necessary, we are left with the question of who will enforce regulations and should an “ethical” responsibility have to be enforced?  Is the stakeholder theory able to govern itself?

 

The second essay in the article entitled “Ending the So-Called “Friedman-Freeman” Debate by R. Edwin Freeman was a much easier read for me as I like the way the Freeman got right to the point.  After showing his respect for Milton Friedman he gets right to his points and in doing so enlists Friedman as a stakeholder theorist (something I assume that he would disagree with). 

 

Freeman dismisses the popularly held “normative foundational justification” and starts with his four main ideas.  According to Freeman, the four main ideas that will get the stakeholder theory off the ground are: (1) the separation thesis – do not separate questions of business and questions of ethics (2) the integrations thesis -  put business and ethics together (3) the responsibility principle – all parties must act responsibly and (4) the open question argument.  The open question argument consists of three questions that should lead the asker to a more ethically responsible answer.  The questions posed by Freeman are (1) if this decision is made, for whom is value created and destroyed? (2) Who’s rights were enabled or not? (3) What kind of person would I be if I made this decision this particular way?  Freeman further states that “we need to find ideas and concepts that help to integrate ethics and business”. 

 

This “open questions argument” reminds me of the “Four Way Test” used by the civic organization The Rotary.  By asking themselves four basic questions in all that they think, say or do Rotarians are able to make better decisions.  The questions of the “Four Way Test” are; Is it the truth? Is it fair to all concerned? Will it build good will and better friendships? And finally, Will it be beneficial to all concerned?

 

As Freeman continues his straight forward case for stakeholder theory he boils down his argument by quoting some of Milton’s work and chalks a lot of the ongoing debate between their two theories is a “failure to communicate”.  Freeman states that he and Friedman are saying the same thing. 

 

The third essay in the article, “Non Rational Behavior, Value Conflicts, Stakeholder Theory, and Firm Behavior” by Michael Jensen he shares his vision of the future corporation and tells us that is should “ behave as to maximize the total long run value of the firm”.  One of the points in Jensen’s article that has me curious about his theory is after warning us to “take care to account for appropriate role of the government” he states that he would like to see the government have and use a “monopoly on the use of physical coercion and the use of violence in society”.  He states that this monopoly should be used to prevent society from using physical violence on each other.  I would definitely like to hear more about this theory, isn’t that how we are set up now?  Jensen confuses me with his theory a little further when he states that government should be the rule maker, as “calling on the corporation or individual to solve those problems would be a losing game.”  The point that he is making is clear and evident in the recent corporate scandals in the news over the past few years.

 

Jensen continues to paint a rather dark picture of the future of corporations but seems to finish all of his points with a slight ray of sunlight for what the corporate environment could become.  Jensen writes that the notion that managers left in the position to “do the right thing by society as a whole” is “naïve”.  He states that not only would managers not know how to benefit society as a whole when there was an idea it would lead to “widespread disagreement”.  Jensen also points out that the managers would be left alone with a lot of power and in his words would be a “disaster”.

 

Jensen addresses several other points in his essay to include that in the system he envisions that there is nothing that would require people to act rational, yet in the widely held  “stakeholder theory it is implicitly assumed that all human beings are rational.”  He suggests that the new system must be design to account for this irrationality and that if this is to be addressed everyone must address this “irrationality” that lies in the structure of all human brains.  Jensen points out several times that we (the people) must implement this system and to date have not gotten it perfect.  He points out several areas of the world where governments in both undeveloped and developed areas have committed “heinous” crimes against humanity.

 

Jensen concludes his essay by stating that he does not think we have come anywhere close to combining the necessary components to create “stakeholder value”.  He talks about how “the differences in normative values are enormously important, both in creating peace and cooperation and in creating conflicts and violence, and destroying value and living standards”.  He puts in a really good plug for his new company, its progress and its new work.  Jensen finishes up by “endorsing the efforts of those in the room” and points out that there are still several disagreements while at the same telling half of his audience that he thinks they are wasting his time. 

 

I am unfamiliar with the writings of Michael Jensen and although I enjoyed trying to follow this essay, for me there was too much crammed into these pages.  I had a very difficult time following Jensen and I get the feeling that is the way he likes it.  Obviously incredibly intelligent, there is a slight feeling that he is very argumentative and talking down to his audience.  It does seem that Jensen is taking a much wider view, attempting to capture “the whole system” which is probably the better way to approach this stakeholder vs. shareholder/stockholder issue in the long run.  This essay is very thought provoking and has inspired me to read more of Jensen.

 

The forth essay included in the article is by Thomas Donaldson.  The essay by telling two stories, the first begins a long time ago and explains how the “epicycles of the Ptolemaic system” were developed.  From here the essay takes us through the historic development of the solar system and the “Copernican” revolution.  The point of the story is to show that although the explanations of the solar system developed and evolved, all of it was not disregarded.  The basics remained the same.

 

The second story also takes place long ago but instead of looking to the sky the main character looks out onto the “marketplace wondered how to make sense of it and wondered how to make it work more efficiently of behalf of people in the community”.  From here the essay takes us through the development of modern economics from the early “mercantilism” through Adam Smith’s “vision of individuals in a free market… and a better world, a fairer world in which most people would be better off”.    Donaldson points out two “nagging problems (questions)” with Smith are this point of view.  The first question basically asks: Why should a company risk its existence for the not harming its customers?  The second question asks: Why should companies respect the rights of its employees if it did not help maximize wealth for its owners?  Slowly these questions led the market into the “Normative” revolution.  Donaldson’s essay takes us through the progression of the normative market development and points out “the excellence of a market system to the way it often promotes moral rights”.  Donaldson’s essay lays out a seemingly normal progression that is led the “Normative Revolution” directly into a “stakeholder” based system.  Posing the questions that many companies are asking at this time such as, “Why does the corporation exist?” and “What are these institutions for?” will lead us to explore the first of two “key insights” of the “Normative Revolution” which is that “institutions stand in need of normative justification”.

 

The second “key insight” that Donaldson points out is that “managers must ascribe some intrinsic worth to stakeholders” and goes on further to state that “human beings have value in themselves” and that their “rights stand on their own”.  Donaldson concludes his essay by reminding us all that “people matter more”.

 

The final essay was the most enjoyable for me to read, not because it was the last one, but because it was about something that I have thought about before.  The essay by Ronald Mitchell poses the questions of a future economic environment in which there are joint stakeholder companies.  I have tried to envision this concept several times in the construction field but can only go so far with it.  I think where I get stuck is the notion of the “balance free accounting”. 

 

I try to fit the definition that Mitchell put forth in his essay and cannot seem to get it to work with construction.  Mitchell tells us that “balance free accounting might be defined in terms that substitute in the place of the historically-developed dollar cost balances resident in general ledger accounts, information that accomplishes the comparison objective of financial reporting to past results, to present benchmarks and to future forecasts.”  Wow!  I have always envisioned this balance free environment to be based more on companies “trading” information, goods and services and somehow coming up with a “value” to the receiver that makes it worth while for them to trade but the “trade” would not be for money it would be for goods or services.  I could only get so far with this theory in construction until I finally get to the question of what is the owner contributing?  Construction companies build a college and the men are paid with their families educations?  I now realize that the economy that I was attempting to create was just one without money.  The future “joint stake companies” that Mitchell talks about seems to also to have a serious “accounting” issue when it is played out.  I guess we will see what happens.

 

Angle and Mitchell do a great do a great job in their article and conclusion in pointing out some of the key points made by each of the authors to show that there are many different ways to look at the “stakeholder” view.  They also seem to show that the authors do seem to have the same goal in mind and as Michael Jensen points out are “much closer to a concentrated attack on these (differing) value issues”.  The author’s pose several questions through the article such as “Why does the stakeholder idea continue to gain in popularity among both managers and academics?”  It seems obvious that the reason stakeholder idea is gaining so much in popularity is that it is the right thing to do.  No matter how it is looked at or what economic experts are saying and theorizing about this concept, the bottom line is that we are all stakeholders in the same system.  Sooner or later (hopefully sooner) everyone will come around to realize a new, conscious and mindful way of living.  We all have to live together, on the same planet, sharing the same limited resources.  We might as well figure it out as soon as possible and make it last as long as we can.

Critical review of “Infusing Purpose” by Richard Ellsworth

    The article  “Infusing Purpose”  serves as the conclusion for the Lessons for Leadership of the book “Leading with purpose” by Richard R. Ellsworth, a Professor of Management at the Peter F. Drucker Graduate School of Management at Claremont Graduate University. Richard calls for a transforming leadership to lead the company with a constructive and widely shared purpose, so that corporations can become a source of valued products that enriches lives, opportunities through work that yield individual self-realization and bring increased meaning to life, and economic performance that increases society’s wealth.

    The author stress that the leader is responsible for corporate performance, explicated by its responsibility for providing the direction for creating a certain harmony among the realities of the marketplace and the firm’s defining characteristics.  “Infusing strategy and operational goals with a customer-focused purpose helps to align individual motivations and aspirations with the firm’s strategic mission and objectives.” Richard points out that leader at all levels are able and responsible for the collective effort in their entire organizational units with a worthwhile purpose. 

       An essential step in the effort of building moral organization’s character is defining corporate purpose. It starts with the faith that in constructive environment individuals will strive to do what is right.  Without such faith along with the corporate purpose that of no real personal value to employees, rampant self-interest sows the seeds of politicized dissention, conflicting goals, and eventual apathy. Organization should not be treated as a tool, nor people be treated as a means to any other end.  When people are treated as an end, not as a means, they normally create more value for others as well. The end as defined is personally worth sacrificing their narrowly defined self-interest.

   Thinking transforms behavior. We need to increase our faith in that as long as leader acts to enable followers to move to higher levels of moral development, narrow self-interest is transformed into an interest that connects the individual more closely with other human beings.  As their work rises above a narrowly self-interested “career” or “job” to become a “calling”, they have taken a critical step toward the self-transcendence that the psychologists and theologians have linked to a fully developed, self-actualized adult life. 

    Richard provides six specific steps to define the purpose. Because he strongly believe that the leader must assume responsibility for developing and guiding the process by which the organization defines a common purpose that is valued by a broad cross section of the employees and that at the outset, CEO should encourage individuals to think for themselves and to challenge commonly accepted ideology, conventional wisdom, underlying assumptions, and what others might believe.

    The first step is to develop a complete list of alternate constructs of purpose that people have in their minds. The leader asks questions that” Why does our company exist? What is its primary purpose for being”?  Step two divides the constructs of purposes into two groups----those statements that describe that current reality within the company and those that define a desired normative state. Step three makes clear the assumption underlying the purposes and delineates purposes elaborately into sequential categories. Richard proposed an important issue that whether the purpose should call for balancing the interests of key constituents or whether it should express an explicit priority among these interests. He found the later provides useful directions for defining purpose.

Step four results in a clear, simple statement of the company’s ultimate priority that will provide that foundation for statements of vision, mission, strategy, and related objectives. Step five tests whether the draft statement of purpose can be a shared purpose in all organizational layers. The final step requires the leader to come up with the new purpose statement.

     Making the purpose live in the daily decisions of people throughout the company is essential part of the leadership challenge. Richard first emphasized the importance and effectiveness of using symbolism and metaphors to reinforce the purposes’ influence. He then pointed out that a meaningful purpose helps attract, motivate and retain high-caliber people, who once a part of the high-performance firm, help actualize the high purpose. Thirdly, an environment of mutual respect for individual at all organizational levels should be created.

    There are two important aspects for leaders to live the purpose. First is the ways to infuse the purpose---using symbolism and metaphors, which are effective in reinforcing the purpose’s influence on organizational character.  Second, attracting and retaining high-caliber personnel is crucial and fundamental in building a strong organization.

    In reality, Richard proposed one way to address the common frustration  that common sense and practice are so different ------ the courage to lead. The leader need courage to do the right thing for company in the long term, to be honest and candid both with themselves and with others, to deal constructively with uncertainty, and to stay the course when confronted with unjustified criticism.

    In conclusion the ideology of corporate purpose, capable of traveling well across cultures and national boundaries, will be one that has legitimacy and acceptance within society, unleashes latent human potential, generates greater total value, that is serving customer needs while placing a high priority on the employee’s development and satisfaction.

Peter Senge, “Sustainability: Not What You Think It Is”

    Sustainability: what it means to people and companies and what they are doing (or need to do) to go about it. The interview between Peter Senge and Michael S. Hopkins touches upon various issues and wake up calls companies have faced or soon need to face in order to survive. According to Peter Senge, sustainability is not one of his favourite words because he feels it dilutes the true essence of the phenomenon associated with sustainability. Sustainability, he feels does not capture the true sense of what needs to be done and the steps companies and we as consumers need to take to better the world. Sustainability is directly about survival, about “paying attention to fundamental needs” more than creating an environment which is improved, healthier and more oriented to the future of mankind. However, sustainability is really more about “living together well” as he puts it.

   Mankind has never faced the challenge it faces today, that of the world having shrunk. I do not mean this metaphorically, but literally, the world has shrunk! This shrinkage is mainly because we as a people have grown, seemingly out of proportion to our needs. We cannot simply “get up and move away” from our environmental problems because there is nowhere to move away to.  It is high time we realise how “things” are built and what it takes for “stuff” to be made available to us. We must become aware that the “garbage” we throw away does not simply disappear off the face of the earth. And therefore, we must understand that as part of the value chain, it is our responsibility to not only see, but understand all of it. The systems which we are so comfortably used to, to which we are usually blind; need to be viewed clinically and the value chain needs to be repaired or restructured if it is to survive.

    Sustainability does not necessarily mean losing our way of life, but bettering it, making it more efficient. A prime example of this is Portland, Oregon. This city has massively reduced its carbon footprint and overall waste, without compromising on the quality of life its citizens live. It is a widely accepted fact that America is a wasteful culture, because for some reason, it has been culturally ingrained that the ability to waste signifies affluence. This attitude is misguided at best and requires serious “looking at”. Affluence has no relation with how much one can waste, but how efficiently one can utilise what one has, and conserve what one doesn’t need at the time.

    Many large companies are waking up to world problems because these problems will eventually become hindrances to their businesses. For example, Coca-Cola and Nestle realised that the world’s water problem will eventually cause major issues in the way they do business and so, they created the CEO water mandate. Coca-Cola and Nestle and essentially based on fresh water and without its availability in abundance, they cannot survive. This effort to preserve water and be responsible comes from a more strategic view than conscious, but it does the job. Many other companies such as Alcoa—a major aluminium producer has reduced its water footprint by 25% and are working to reduce it further. DuPont has realised that being on the downstream of the petroleum industry just does not make great business sense.

    The view on sustainability is changing and people and organisations are waking up to the reality, but more than anything else, it is the fear of having to compromise on our “way of life” that paralyses us. Portland has tried to lead the way in this and has tried to set an example saying, “Being environmentally conscious does not necessarily mean compromising on your life style, but re-arranging it.” I think we need to view them as pioneers and use their knowledge, along with the plethora of knowledge available to us from older cultures and work towards a change, because being sustainable makes strategic sense for the entire planet, if nothing else!

Adityajit Tiwana

A Review of “Bad Management Theories Are Destroying Good Management Practices”

   In this article Sumantra Ghoshal takes an in-depth look at how some of the management theories that have developed over the years have had a negative effect on our business culture.  He states that business schools have been a major part of creating situations like Enron, simply because some of these destructive theories have gained a lot of their momentum in the classrooms.  Ghoshal believes that business schools have taught their students that managers cannot be trusted because their interests are directly in line with those of the shareholders, that monitoring and tightly controlling people is the best way to run an organization from a cost standpoint, and that companies must not only compete with their competitors but with their suppliers, customers, employees, and regulators as well.  Overall, Ghoshal believes that academic research related to the conduct of business and management has had some very significant and negative influences on the practice of management, and that business schools, specifically, have freed their students  from any sense of moral responsibility.  The article focuses on two major causes for this phenomenon: the pretense of knowledge and the ideology-based gloomy vision.

    The pretense of knowledge is the scientific approach of trying to discover patterns and laws that has replaced all notions of human intentions with a firm belief that past occurrences can explain all aspects of corporate performance.  Basically, what this means is that business is a science that is determined by the economic, social, and psychological laws that inevitably shape people’s actions.  Ghoshal argues that this trend takes away any ethical or moral debates that may arise when a decision has to be made.  This specifically relates decisions made by CEOs. They sometimes have to make decisions simply to satisfy the shareholders and do not care about the plight of the other stakeholders involved.  He believes that business should not be treated as a science and that we should use more common sense that combines information on “what is” with the imagination of  “what ought to be” to develop an understanding of what corporate governance and decision-making represents. 

    The ideology-based gloomy vision concept comes from the theory that there is a pessimistic view of human nature, on the roles of companies in society, and of the processes of corporate adaptation and change. Some of the most influential theories of business and management have these negative assumptions embedded in them and often times prevent managers from having a more positive role in society.  This pessimism, Ghoshal believes, has led directly to destructive management behavior. 

    In order to turn this situation around the author believes that collegiate leaders need to spearhead the operation.  Business schools have taught this way for years and it is now time for a change.  All classes need to be restructured and focus more on the business as a whole and the ethics behind it all.  One class in corporate responsibility will not make a change in the academic and business community; it has to be a complete refocus of the entirely curriculum. 

    This article was very difficult for me to follow mostly because some of the author’s ideas are brand new to me and are based on theory and science and I have never looked at the business world from that angle.  He raises some interesting points about employees and other stakeholders not being as valued as shareholders and that many leaders feel so much pressure to please the shareholders that lose their morality when making decisions. This piece would be much easier to understand if there was less science related jargon, and more information that can easily be read and absorbed by anyone.

   

 

Review: Orienting Corporate Conscience by Kenneth Goodpaster

            This chapter in Goodpaster’s book is about giving direction to what he refers to as a “Type 3” organization; that is, an organization that is focused more on the community at large rather than on profit-making as an end.  This type of organization has made a decision to focus its attentions on giving back to the community—that profit-making is a means to this end.  This chapter, “Orienting Corporate Conscience”, focuses on helping such organizations develop or redefine their mission, take inventory of their current location, and find out the motivations they have for reaching their end goals (as stated in their mission). 

            Goodpaster likens this process to a vector in mathematics, which is an arrow that shows both a current location, a direction the arrow is pointing to, and also the magnitude of the pull to the direction.  This is an apt metaphor for this process in that companies each have different starting points, different directions, and different levels of pull.  The point of this chapter is to help companies determine their own personal vector.

            He starts by examining the mission (direction) of an organization. Much of the chapter is devoted to this section, with good reason.  Without a mission, he argues, a company has no overarching purpose to look back to, with which to make decisions, and to serve to create community for the organization.  He quotes a former CEO of Medtronic, Inc., Bill George, “the most frequent reason companies get into trouble is trying to grow without a well-understood mission…internal decision makers have no framework for making decisions” (p 118, coursepack).  He goes on describe how some companies have a mission or direction that is expressed in terms of “value priorities” (p 119, coursepack) which take the form of a way of doing business (i.e. importance of the employees, a community culture, commitment to the members of the enterprise as well as customers) versus those companies whose mission is expressed more in terms of the actual product or service provided (i.e. organizations who provide health care or education).  Frequently, these “type 3” organizations have both.

            The mission or direction, whether developed at the creation of a company, or redesigned later to reflect changing values within an organization, can have an extremely valuable impact on a company as it goes through changes and faces conflicts.  If there is a clearly understood mission, the individuals within the company can simply look to the mission for direction.  Goodpaster gives several examples, including that of Cummins Engine.  Cummins Engine was a engine manufacturer that had since its onset devoted itself to the development of the local community.  When changes in the market forced the company to move a large portion of their operations outside of that community, they were faced with a serious question of how to stay true to their mission while still remaining profitable and sustainable as a business.  If, however, they had not had such a clearly defined mission, they probably would just have moved operations and felt bad about it…but not really known how or what to do about that.  The mission allowed them to know that it was of utmost importance that they use creativity and their resources to create new opportunities for the community that had supported them for so long.  Goodpaster sums this up nicely by saying, “a company without a shared sense of direction has no ‘compass’ when crucial decisions (strategic or otherwise) confront it” (p 123, coursepack). 

            The next issue he brings up is that of current location.  Specifically, he addresses the fact that inevitably, there is a disjoint between where a company currently is and where it is intending to go.  Often there is also a disjoint between where a company thinks it currently is and where it actually currently is.  In order to get a realistic view of where the company truly is, he suggests periodic surveying (both formally and informally) of employees, management, and possibly the customers, suppliers, and other external clients (if feasible given the nature of the business).  It is also important to share these views within the company (with management as well as lower-level employees) to be sure that an honest picture of the organization is reflected.  At this step the most important thing is to clearly and honestly describe “the dominant ethical values” (p 128, coursepack) of the company—without judgement.  It is essential that the organization not make the current picture look rosier than it actually is so that the task at hand (reaching in the new direction) does not seem smaller than it is. 

            The last section of this chapter is to look at just how passionately a company wants to get to its end goal.  Now that they know where they stand and where they are intending to go, and by virtue of that, just how far the road to travel is, the organization must examine their reasoning for doing so and how much they really want to get there.  An organization with a strong mission and a clear picture of the “here” but with only mild interest in reaching the goals laid out in the mission simply will not succeed in getting there.  This is not an easy task and sometimes can be a long and unpleasant one.  This motivation can come in the form of a push (something is wrong and reaching these goals will alleviate the problem) or a pull (something better is on the horizon and there is desire to reach it). 

            Goodpaster makes a point to specify that companies where the motivation for corporate conscience comes from within the company (rather than the board or other outside pressures) tend to have a stronger group passion for and dedication to achieving the mission.  This internal motivation has the effect of creating an “us” feeling and a connection between the employees that creates a community feeling that can be extremely effective in getting people to devote themselves to the mission of the company.  A last quote from Goodpaster gives us a nice summary of this section, “orienting an organization is not just a matter of clarity about where the organization is and where leaders want it to go—it is also a matter of how passionately they want it to go there” (p 134, coursepack).         

Reflection on Be the Solution: How Entrepreneurs & Conscious Capitalists Can Solve All the World’s Problems,

--Posted by Chris Iafolla

The first chapter of Michael Strong’s Be the Solution: How Entrepreneurs & Conscious Capitalists Can Solve All the World’s Problems, attempts to make the case that the world has taken great strides in recent history and that our perception may be clouded by the barrage of negative media.  This is the basis for the idea that context (the name of the chapter) is key to creating a world where companies that add value and bring social change are rewarded.  Interestingly, Strong uses the language of business to describe common problems plaguing humanity.  For example, he discusses the idea of a balance of global goodness where each human that is inspired and motivated for change adds to the positive side of the balance sheet while those that are empathetic to change hurt the balance sheet.  It is this language that he uses to describe the progress humanity has made in issues such as acid rain, reforestation and poverty. 

The idea that context is crucial jumped out in the description of the current state of relative peace in the world.  Because we are inundated with stories on the evening news of local violence and of wars abroad, it is commonly assumed that our world is in a state of violence that far exceeds levels of years past.  But according to this chapter, this is patently false and the world is actually in a period of piece that has never before witnessed.  Context is crucial and seeing the big picture is imperative. 

Of course the idea here is not that the world has reached perfection.  Instead, the idea is that the world has made progress.  Previously poor nations such as India and China are becomingly increasingly relevant on the world stage and have rapidly modernized their economies and society.  But the question is whether or not that progress was instigated by policy change or private enterprise?

The answer probably lies somewhere in between and again illustrates the importance of context.  A business operating in an economic climate where new ideas are stifled and new approaches to conducting business marginalized is surely fighting a losing battle.  Real social change has to happen in the context of a society where the public policy and the private enterprise are both aligned toward a common goal.  Unfortunately, that scenario is all too rare.

However, as Strong indicated, the world is starting to move toward a culture where companies are rewarded for standing for some sort of social good.  And social good can be determined in a broad sense.  When considering that term, most would immediately think that a company has to produce a product that helps in the green movement, or solves the problems of poverty and hunger.  These are the types of issues that illicit thoughts of social good.  However, in a broader sense, companies like Google and Apple are absolutely impacting the social good.  These two companies unquestionably have increased the level of happiness in this society and in the case of Google, made a swath of information available to the public that was never before accessible.  In a way, Google helped to level the knowledge deficit impoverished people, and indeed nations, face.  So while it is easy to dismiss companies like Google and Apple as not adding to the social good of the world it is again important to consider the context of what those companies have accomplished.

Strong also attempts to make the case that the feminization of this culture is working its way into the business environment and will be a driving force behind the successful company of tomorrow.  My question is: are we already inching in that direction?  Strong’s definition of this feminization boils down to placing a higher value on a full brain approach to business that emphasizes quality over quantity.  Things like superior design and simplicity are valued in this type of business landscape.  To go back to a previous example, do Google and Apple not fit this mold when you think about what has catapulted them to prominence?  Sure, Apple has been on the tech scene for decades but it was the iPod that vaulted the company from the status of fledgling technology company to culture icon.  What makes the iPod so endearing to its loyal cult of followers?  Is it the fact that it can play back music?  Is it the fact that songs are available to purchase online?  No.  I would venture to say that the most endearing aspect of an iPod is its design.  In the case of Google, there are search engines that have as much information archived as Google and can spit out very similar search results.  So why has Google dominated the search business?  Part of it has to do with the simplicity of the interface and the ease of interaction.  While both of these companies are led by men, I would argue that what makes them unique is something that appeals to the whole-brained consumer.

The challenge as we continue to make progress on the issues that plague the world will be to create a system where this type of thinking is encouraged.  It is easy to pass judgment from afar on the impact of social good on world progress but it is far more difficult to create an environment where this thinking is encouraged and sustainable.  I don’t think we are there yet.  Currently, we sit on the precipice of this change occurring.  We are coming off a systemic failure of our economic system that shook the value system of both Americans and the World to its core.  And while this predicament has caused many to rethink the value of capitalism, a more apt way to think might be how to adjust capitalism?  How can we create a society where the type of greed that led to this economic crisis is not only discouraged but rooted out?  How do we ensure that the business environment of the 21st century is more conducive to rewarding companies that bring positive change to the world?  The only way we can hope to achieve those lofty goals is if we “see the big picture”—understand the context.