Monday, January 12, 2009

Trust Recovery Path: The Leadership Challenge (Jarvis Cromwell)

Back in 2007 we quoted renowned free-marketeer Milton Friedman on the pages of this blog as follows:

“There is one and only one social responsibility of business," Friedman wrote back in 1970, and that is to “engage in activities designed to increase profits.”

Friedman’s viewpoint ultimately became the guiding principal of an era: profitable self-interest would be viewed as the only reliable endgame by most businesses. 

And the Friedman playbook worked for a time. The rise of the activist shareholder movement, deregulation, the tearing down of the Berlin Wall, the creation of the Jack Welch rules of management, financial engineering and an expanded investor tool set as applied by the hedge fund industry were all celebrated as triumphs of the free-market. 

Unfortunately, as we all now know things haven't ended so well.  Along the way Friedman's proscription morphed (somewhat hideously) from its original intent of pursuing activities to increase profits to the idea that profits must be pursued at all cost. 

The costs were higher than anyone imagined. We read today that there is increasing consensus that there will be a 15-25% drop in the standard of living around the world  (more in some especially beleaguered regions)  as a result of the current crisis. Wow.  And some corners are now arguing that 2008 was to capitalism what 1989 was to communism. Is this the demise of free market capitalism as we know it?  Or is there a way out of this place?

The optimistic view is that our current sorry state of affairs will herald a new era of free market capitalism that fellow trustmiester Dr. Sri Raghavan has termed "True Metric" capitalism. In other words, we will begin to measure what truly matters for the health of the system.  To achieve that, organizations will need to look towards metrics beyond short-term profit to measure the health of our markets and businesses. 

The pessimistic view is that business leaders won't lead us in this direction.  Over a year ago the futurist Andrew Zolli wrote a piece in Fast Company where he declared that the oblivious capitalist’s days are numbered. In this case Zolli cast his eye to the future and concluded that a host of global forces will force a remake of the playbook for business success.   Business will profit by driving a wider social agenda and “the clinical, value-neutral capitalism of old” will fall by the wayside. 

Let's face it, whichever way you slice it companies have much work to do.  That work includes reducing costs and preparing financially for a long winter. But beyond the very real financial contstaints, this is a time of customer scarcity and increasing fear.  Building  trust must now become a central means through which companies will drive customer sales, loyalty and retention, employee engagement, productivity and, ultimately, long-term shareholder value.  It is an essential metric to the survival of capitalism as we know it.  Warren Buffett compared trust and confidence to the air we breath.  We take it for granted until it's gone.  Hopefully management teams around the world are realizing just how essential it is to our survival.

What do you think?  Are the days numbered for the oblivious capitalist -- or will leadership rise to the challenge and institute a new set of performance measures to bring us back from the brink?  Which companies will get it, which won't?  We would like to know your views.

Copyright 2009 by The Reputation Garage

2 comments:

  1. The notion of "true metric" capitalism may be right. But it might be even more useful to redefine "profit" from its traditional monetary (and often short term) meaning. If we think of profit - even the results for a single company - as a broader good, the pure profit motive can work. And, ultimately, short-term financial returns will emerge as a byproduct.

    So, what's in a broadened view of "profit?" Approaches to business that include good labor relations that preserve jobs (the onus in on the workers/unions as well as management); quality and attendent customer satisfaction; sustainability embodied in both products and company operations; ethical, trustworthy financial practices. There's more.

    One spin required a sweeping understanding and internalization of the "tragedy of the commons." This economic/game theory axiom is often explained by two sheep herders with access to grazing land that can't support both flocks. If both herders insist on putting their entire flock out to pasture, both flocks will suffer or die. They and their flocks would profit by taking a more responsible, long-term, cooperative view.

    http://tomwitkin.wordpress.com/

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  2. This is a very thoughtful -- and timely -- post. You've raised some difficult questions for free market capitalists (like me) to grapple with. But, having outed myself as such, please spare me a moment to defend Professor Friedman. It would be a mistake to read into his argument on social responsibility that he was actually defending short-term, quarter-by-quarter thinking in his defense of profit maximization. Friedman believed in maximizing long-term shareholder value and respected the right of companies to address of their various stakeholders in order to do so. What he didn't believe in was private corporations as charities or social welfare organizations. He simply didn't believe that is what they were designed to do. Nor would he have favored the government agencies (Freddie Mae, Fannie Mae), regulations ( Community Reinvestment Act) or easy money policies that have corrupted markets and set the stage for moral hazard in our time. You can't call this an "ownership society" when individuals are taking possession of homes they clearly cannot afford. Failure of free markets? What free markets? What we've just witnessed is the failure of the mixed economy.

    All that said, I agree with Jarvis
    (and Whole Foods CEO John Mackey: http://www.reason.com/news/show/32239.html ) that it's time to ask ourselves how we have allowed trust and confidence to erode. While I don't blame Friedman, I tend to agree that short-termism is a real-world problem and enterprises have much to gain by more aggressively accounting for the full range of stakeholders they are connected to. Mackey is correct when he states that "the enlightened corporation should try to create value for all of its constituencies." And I emphatically agree with one other statement Mackey makes: "If we are truly interested in spreading capitalism throughout the world (I certainly am), we need to do a better job marketing it." Jarvis does a great job here of picking up this argument and raising the right questions. Let's hope we can satisfactorily address them. And let's hope the economic dynamism we have experienced for the better part of our lifetimes is not about to be extinguished.

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