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Moral Business Cultures:
Organizational Dynamics, Vol. 36, No. 2, pp. 156–170, 2007 ß 2007 Elsevier Inc. All rights reserved. www.organizational-dynamics.com
ISSN 0090-2616/$ – see frontmatter doi:10.1016/j.orgdyn.2007.03.004
Moral Business Cultures:
The Keys to Creating and Maintaining Them STEVEN P. FELDMAN
INTRODUCTION From the insider trading scandals of the 1980s to the savings and loan scandals of the early 1990s to the more recent wide-spread fraud and manipulation of financial information, business organizations experience chronic breakdowns in ethical conduct. The fact that the problem is enduring despite considerable public outcry, governmental action, and business attempts to create new structures and programs, suggests underlying problems. Given the harm caused by recent failures to act ethically, it is well worth our effort to reflect on what the underlying problems might be and seek solutions to them. One way to investigate what went wrong while simultaneously developing ideas to correct it, is to focus on what companies are doing to address ethical issues; in particular, to examine how companies are attempting to integrate ethics into their corporate cultures. By using a cultural approach, the tacit, taken-for-granted ideas and sentiments that stimulate and guide decision and action can be brought to the surface and examined. In this article, I will carry out a cultural analysis of 17 companies that demonstrate moral cultures in their every day decisions and practices to develop an understanding of how these moral cultures were created and maintained over time. The analyzed companies were chosen by a two-step process. First, 15 professors of business ethics and 15 executives were asked
to name companies that had a history of using moral values in their decision-making. Second, data was collected on each company from public sources, primarily case studies, newspaper and magazine articles, books, and Web sites. The companies chosen to be analyzed for this article had to meet five criteria: one, they had clearly defined and actionable business ethics principles; two, the ethical principles were observable in company practices for at least ten years; three, the ethical principles permeated all aspects of company activities; four, company leaders acted as role models for these principles in their own actions and used the principles to manage and lead the company; five, processes were in place that socialized new employees into the ethical principles and practices. The list of companies that emerged explicitly cultivated a moral culture, particularly making efforts to define the relation between profit and ethics and integrating the two in action. See Table 1 for the list of companies identified as having moral cultures analyzed in this article. Given the history of ethical lapses in business, a cultural analysis of business ethics practices must start with the assumption that businesses in the competitive system are vulnerable to the splitting-off and isolation of business practices from moral responsibilities. In the next two sections, I examine companies in terms of how they integrate the profit motive with ethical standards. I argue that integration of the profit 156
TABLE 1 NAME Aveda
COMPANIES IDENTIFIED
INDUSTRY
AS
HAVING MORAL CULTURES
HEADQUARTERS
1978
200 M2,300 (est.)
Minneapolis, MN
Ben & Jerry’s Ice cream
1978
272 M841
Burlington, VT
Canon Electronic Esprit de CorpClothing
1937 1968
32 B 115,583 NA NA
Tokyo, Japan NA
Hewlett Packard Johnson & Johnson Levi Strauss Medtronic Merck Motorola Newman’s Own Patagonia S.C. Johnson
Electronic
1937
87 B 150,000
Palo Alto, CA
Healthcare
1887
50 B 115,600
New Brunswick, NJ
Clothing Medical Devices Pharma-ceutical Electronic Food
1853 1949 1891 1928 1982
4 B 9,635 11 B 36,000 22 B 61,500 36 B 69,000 250 M18 (est.) 241 M1,000 7 B 12,000
San Francisco, CA Minneapolis, MN Whitehouse Station, NJ Schaumburg, IL Westport, CT Ventura, CA Racine, WI
107 M622 2.1 B 3,500 63 B 158,500 50 M 200
Chicago, IL Orrville, OH Tokyo, Japan Kennebunk, ME
Shorebank Smucker Sony Tom’s of Maine
Personal care
SALES FOUNDING(USD)EMPLOYEES
Outdoor apparel 1975 Consumer 1886 chemical products Banking 1972 Food 1897 Electronic 1946 Personal care 1970
motive with ethical standards is the core cultural challenge that businesses face in a competitive system. I analyze the 17 companies to see what can be learned from them in this area. One conclusion that will emerge from this analysis is that companies concerned with ethics develop moral visions, usually at their founding or early in their history, that define the moral purpose of profit and the business context for how profit should (and should not) be pursued. These moral visions are maintained over time in organizational traditions. In the third section, I continue the analysis of companies identified as having enduring moral cultures in terms of how they relate to broader societal systems and values. It is clear that these companies do not isolate themselves from non-business issues by focusing only on profit maximization. Their moral values not only are integrated into all
ACQUISITION sTATUS Acquired by Estee Lauder in 1997 Acquired by Unilever in 2000 Acquired by Esprit Holdings Ltd in 2001
Acquired by Colgate in 2006
facets of their business activities, but also extend to broader community needs and environmental stewardship. Indeed, one fascinating fact that emerges in this section is the blurring of the line between for-profit and nonprofit orientations. Companies attempting to integrate profit and ethics have been led to develop cultures where for-profit values and nonprofit values have become integrated to a considerable extent. This last point signals the way forward from the vulnerability in business culture to separate the profit motive from ethical responsibility.
MORALITY AND PROFIT Capitalism, with its core value of competition, has never reached the level of moral integration found in the Christian and Greek moral systems from which it emerged. The result is a 157
split culture of business, where ethics and efficiency remain uneasy partners and, in many companies, downright antagonists. The idea of a business culture built around the value of competition seems innocent enough. After all, competition supposedly produces an efficient and fair outcome. But take the core beliefs of Philip Morris as described by Collins and Porras in their book Built to Last:
But the problem is broader than extreme illegality. The lack of cultural integration between competitive values and moral values plagues many companies. One telling characteristic of the split in business culture is the criticism of business from some of its most successful practitioners. Bill George, retired chief executive officer (CEO) and chairman of Medtronic Inc., recently stated,
the right to personal freedom of choice (to smoke, to buy whatever one wants) is worth defending; winning – being the best and beating others; encouraging individual initiative; opportunity to achieve based on merit, not gender, race, or class; hard work and continuous self-improvement.
I am appalled at the extent to which business leaders are caught up in the game of greed. We have idolized the wrong leaders, associating image with leadership and confusing stock price with corporate value.
Here personal freedom (and competition) is used to justify selling cigarettes, which are known to damage the human body. It is not that Philip Morris’ values are irrelevant, but they are one-sided, completely insensitive to other values such as care and community.
Moral Channels for the Competitive Drive At issue is the role of winning (competing) in the business culture. How are competitive values related to ethical values? Has Nike Inc.’s core value – ‘‘To experience the emotion of competition, winning, and crushing competitors’’ – contributed to its insensitivity to the abused laborers employed by its contractors? Both Philip Morris and Nike do good deeds, but does their understanding of themselves primarily as competitors lead them to make ethical mistakes, to justify actions that moral values would question? Has the value of competition been too isolated and dominant in some corporate cultures, so that in periods of great economic opportunity or threat, passions of self-interest and greed or fear overwhelm all moral boundaries? The ‘‘cowboy cultures’’ at Enron Corp. and WorldCom Inc. certainly provide graphic examples. 158 ORGANIZATIONAL DYNAMICS
Note that George refers to greed as a ‘‘game.’’ It implies that competition is seen by some as a game or sport, and greed a legitimate value in the game. This view is widely accepted as demonstrated by the fact that many have ‘‘idolized’’ the (greed) success stories. George points out the underlying problem: money, in the form of stock price, has been ripped out of its social context and worshipped as an end in itself. The negative and destructive results from the unconstrained pursuit of profit are ignored and even denied. This is the practical outcome of the cultural belief that business is a game.
Forms of Moral Integration in Business Many companies do try to balance the profit motive with moral concerns, some for business reasons, some for moral reasons, many for both. Jack Welch, retired CEO of General Electric Co., views the balance between profits and values this way: Numbers and values. We don’t have the final answer here - at least I don’t. People who make the numbers and share our values go onward and
upward. People who miss the numbers and share our values get a second chance. People with no values and no numbers – easy call. The problem is with those who make the numbers but don’t share the values. . .. We try to persuade them; we wrestle with them; we agonize over these people. Welch’s view clearly favors profit. If you ‘‘make the numbers’’ but do not share the values, he will go to great lengths to keep you; but if you have the right values and ‘‘miss the numbers,’’ you merely get a second chance. A somewhat more balanced view of profit and values is expressed by John Young, retired CEO of Hewlett-Packard Co. Maximizing shareholder wealth has always been way down on the list. Yes, profit is a cornerstone of what we do – it is a measure of our contribution and means of self-financed growth – but it has never been the point in and of itself. The point, in fact, is to win, and winning is judged in the eyes of the customer and by doing something you can be proud of. There is a symmetry of logic in this. If we provide real satisfaction to real customers - we will be profitable. Notice the ambiguous formulation; the competitive language of ‘‘winning’’ is given primary importance while profit is both designated to a secondary role and called a ‘‘cornerstone.’’ And ‘‘winning’’ is not only judged by customer purchases, but also by ‘‘doing something you can be proud of.’’ To be sure, this is not a pure profit orientation. Presumably customer ‘‘satisfaction’’ is based on receiving a fair product given the expenditure. ‘‘Doing something you can be proud of’’ presumably refers to contributing a socially useful product of good quality. In this formulation, ‘‘winning’’ means providing a useful product of good quality at a fair price that results in a profit. But Young also says there is ‘‘symmetry’’ of logic between
these values, and that profit is a ‘‘measure’’ of contribution and means of self-financed growth. Hence, Young’s formulation is a profit orientation guided by the values of customer satisfaction, product quality, and social usefulness. To be sure, business requires profit for survival. But Ryuzabura Kaku, retired president and chairman of Canon Inc., who pioneered Kyosei (‘‘spirit of cooperation’’) as a moral system for Japanese business, argues that ‘‘profit is only the beginning of a company’s obligations’’. Profit as a ‘‘beginning’’ of a company’s obligations is different from Young’s idea of profit as a ‘‘cornerstone.’’ For Kaku, profit leads to moral obligations; for Young it measures moral contribution already made in the act of making profit. There is circularity in Young’s ‘‘symmetry.’’ Kaku’s statement is morally stronger than Young’s, in that business success leads to increasing moral responsibility. The point is that the way a company understands the relation between profit and ethics powerfully determines how it defines the range of its moral responsibilities.
Take for example Esprit de Corp founder Susie Tompkins. She states that Esprit is not a bottom-line-driven company, but must make money to do good things. Tompkins sees her business primarily as a vehicle for pursuing moral goals, but balancing moral goals with profit-making is a, perhaps the, central challenge. Esprit spent $10 million to raise prochoice abortion rights in public consciousness, but after pro-life groups threatened to boycott Esprit products, Tompkins suspended the consciousness-raising campaign. She explained Esprit was too dependent on department stores to survive a boycott. Thus, she refocused the business on profit-making. Tompkins’ priorities are quite different from Young’s priorities, which emphasized HP as a vehicle to contribute to society by satisfying customers, which would in turn result in profit. Tompkins sees Esprit’s moral purpose beyond satisfying customers to increasing 159
society’s moral awareness and commitments. Both companies see profit as fundamental, but Esprit’s moral vision is not measured by profit success. A middle ground between HP and Esprit is Levi Strauss & Co. In its ethics statement, the company states it will be challenged to balance its core values – honesty, promisekeeping, fairness, respect, compassion, and integrity – with commercial success. By ‘‘balancing’’ competitive values (commercial success) with moral values, Levi Strauss is redefining the meaning of profit seeking. Whereas HP sees its mission in terms of providing technology to society, Levi Strauss sees its mission not in terms of the products it provides, but in terms of how it conducts business activities. Levi Strauss’ moral focus is on the process of seeking profit. In these three visions (Esprit, Levi Strauss, and HP) profit seeking is brought into relation to different values resulting in different perceptions of moral responsibility. A vision close to Young’s view of HP is that of Merck & Co., Inc. Merck believes its moral vision results in profits. In the 1920s, George W. Merck, son of the company founder, said, We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been. This statement is the cornerstone of Merck’s moral tradition. Indeed, in 1991, Merck’s CEO, Dr. P. Roy Vagelos, commented that Merck sold streptomycin in post-World War Two Japan at no profit because tuberculosis was killing many Japanese. He related this noble action to the fact that Merck is now the largest American pharmaceutical company in Japan. He said that the long-term consequences of noble action are not always clear, but they pay off. Similar thinking can be seen as part of Merck’s decisions in the 1980s to sell sophisticated vaccine-manufacturing 160 ORGANIZATIONAL DYNAMICS
technology to the Chinese at a fraction of its value; in the early 1990s to develop a cure for river blindness despite considerable risks and costs, and with no direct way to make a profit; and in the late 1990s to participate in nonprofit partnerships to address HIV/AIDS. Commenting on the river blindness case, business ethicists Bollier, Weiss, and Hanson argue that there is a limit to how often a business can spend so much of its resources on activities that do not produce profit. I would draw attention to the fact, however, that for Merck, moral action is strongly related to and perhaps primarily justified in terms of long-term profit. This is certainly different from Esprit, which uses profit to finance its moral vision, and different too from Levi Strauss, which uses moral values to channel profit seeking. The problem with Merck’s moral vision is the role of power, the scientific power to cure disease and the economic power to give away medicine. Power to be ethical needs to be exercised under the direction of moral ideals, but in Merck’s case it is under the direction of long-term profit. This undermines the development of virtue because virtue is based in community. Virtuous action develops moral character or the habit to do good because one acts as part of a whole. In Merck’s case, the virtue of generosity is motivated by corporate goals and thus is an act of power. The problem is the effect this motivation has on moral character: It creates pride in one’s power to do good, not the desire to do good in itself. Moral culture will not develop deep roots in this soil. A company that claims to have fully integrated the profit motive into its moral vision is the personal care and life-style company Aveda. In the words of company founder, Horst Rechelbacher, Our mission at Aveda is to care for the world we live in, from the products we make to the ways in which we give back to society. At Aveda, we strive to set an example for environmental
leadership and responsibility, not just in the world of beauty, but around the world. This is different from the companies reviewed so far, in that Esprit sought to make money to do good, whereas Aveda seeks to make money through doing good. This is different from Merck, which seeks to do more good to make more money. Aveda’s aim is different in that its philosophy of care and its philosophy of business are nearly the same vision. This is different from Levi Strauss, in that Levi Strauss seeks to conduct business responsibly. Aveda seeks to make responsibility a core part of its business. Aveda is of interest in this study because it attempts to integrate business action into moral action as much as possible. For example, John DelFausse, Aveda’s vice-president of package development, puts the environment first as he builds brand equity through attractive, cost-efficient packaging. Building brand equity is a means to make profit, but for Aveda it is also an effort to conduct business that protects the environment and sets a moral example for other businesses. This is why DelFausse happily shares Aveda’s highly environmentally friendly and award-winning packaging designs with competitors. In this way, Aveda both protects the environment and pursues profit. The Aveda example shows the primary contributions moral vision can make to business: defining priorities and directing (and prohibiting) action, especially in regard to the pursuit of profit. Surprisingly, given the widespread belief that the purpose of business is to make profit and the centrality of finance in the culture of business schools, some (successful) businesses give profit maximization a secondary priority. Indeed, Sony Corp., Johnson & Johnson, and Motorola Inc. all state that they seek ‘‘fair’’ profits, not maximum profits. In all three companies (and, as discussed above, HP), emphasis is given to service or product
quality before profit. To be sure, I was recently talking with a CEO of a large corporation and explaining to him Levi Strauss’ decision to withdraw from China because of human rights violations. His response was to discredit Levi Strauss’ moral actions because he had recently read Levi Strauss is losing money. The profit-first attitude is alive and widespread in business. But, as this essay shows, some companies go a long way toward integrating profits and ethics. Let’s take another look at HP. I discussed CEO Young’s comments about profit earlier and characterized them as signifying a profit orientation guided by customer satisfaction. HP co-founder David Packard also commented on the role of profit in business. His comments are similar to Young’s, yet a little different. Packard states, Why are we here? I think many people assume, wrongly, that a company exists simply to make money. While this is an important result of a company’s existence, we have to go deeper and find the real reasons for our being. This seems pretty clear. Profit is a result of ‘‘deeper’’ reasons for the existence of a business. HP’s deeper reasons are technical contribution to society, respect and opportunity for employees, support for the communities in which HP operates, and affordable quality for customers. But in another statement, Packard comes closer to Young’s view, ‘‘Anyone who cannot accept [profit] as one of the most important [objectives] of this company has no place either now or in the future on the management team of this company’’. This seems pretty clear too, but is it consistent with the previous Packard quote? I think not. Packard wants to have it both ways. Profit is a ‘‘result’’ of ‘‘deeper’’ reasons, but is also one of the ‘‘most important’’ objectives of the company. At the very least there is a tension here. But is there also a contradiction? What are more important—moral values or profit? If a manager is faced with a decision of whether to violate moral values or lose 161
money, do Packard’s statements give clear guidance? Perhaps Packard wants to keep a healthy ambiguity, so that managers must think through the dilemmas facing them and take responsibility for their decisions. In any case, I do not think this is a healthy ambiguity. For business to be ethical, it must have clear moral values and priorities.
MORAL TRADITION IN BUSINESS A company that does present a clear culture of moral priorities is Johnson & Johnson. James Burke, Johnson & Johnson CEO (1976–1989), states, All of our management is geared to profit on a day-to-day basis. That’s part of the business of being in business. But too often, in this and other businesses, people are inclined to think ‘‘we’d better do this because if we don’t, it’s going to show up on the figures over the short-term.’’ This document [the Credo] allows them to say, ‘‘Wait a minute. I don’t have to do that. The management has told me that they’re . . . interested in me operating under this set of principles, so I won’t.’’ Burke’s statement is impressive because he articulates a clear moral priority while simultaneously defining the daily work of business as the pursuit of profit. Note the contrast to the HP statements, which begin by denying the importance of profit, only to immediately tie moral vision to profit. HP’s statements idealize profit along with ethics, and thus are less useful than Johnson & Johnson’s because they do not acknowledge any tension between profit and ethics. Johnson & Johnson’s moral vision does acknowledge the tension, making it more realistic and practical. 162 ORGANIZATIONAL DYNAMICS
It is important to note that Johnson & Johnson’s moral clarity is the result of its moral traditions. This is no accident. Johnson & Johnson has maintained the same moral traditions since the 1930s. Burke makes it very clear he was socialized into this culture, specifically by working under higher-ranking managers. The moral traditions were handed down from one generation of managers to the next, each generation questioning, adapting, and refining the traditions to make them relevant to changing conditions. This is how moral clarity is achieved.
Tradition is the Spine of Moral Culture Despite the continuous changes in Johnson & Johnson’s tradition, it is still the same tradition. The essence of tradition is sequential pattern, a sequence of related meanings that are received and transmitted over time. This allows tradition to be a continuous chain of self-improvement and adaptation, a sort of continuous quality improvement for an organization’s ethics. Moral tradition is the highest level of moral accomplishment because it is constructed by multiple generations of managers, thus utilizing the socially broadest and historically deepest possible contributions to an enduring yet flexible moral framework. The result is a source of moral integrity partly separate from the personality of who happens to be the CEO or personalities of who happen to be the top executives at any particular point in time. The importance of moral traditions is that they sustain a sense of moral identity through time. Patagonia, a sports apparel manufacturer and retailer, for example, has a moral culture that has been developed under the leadership of Yvon Chouinard. It is not known how long this culture will survive or what changes will take place after Chouinard departs. The J.M. Smucker Co., a jams and preservatives manufacturer, on the
other hand, has a moral culture that has been maintained, cultivated, refined, and changed over time by multiple generations of leaders. Smucker has a moral tradition because parts of its culture – mutual respect among employees, for example – have been repeatedly transmitted to new generations of employees. The key point is that the CEO of Smucker might leave and a new one take his place, but there is a built-in tendency for the moral culture to continue independent of the CEO. Moral traditions are so important in business because they permeate the organization to some extent and thus decentralize moral motivation, giving the organization a moral stability and depth that moral leadership alone cannot provide. Clearly a new CEO can cripple a long-standing moral tradition, but the fact that it exists gives the moral leader a great advantage in supporting moral behavior.
Keys to Managing Moral Tradition Highlighting the importance of moral traditions does not mean we should downplay the accomplishments of younger organizations like Patagonia or Esprit. The point is to raise the bar of our moral thinking by extending the time horizon in which we think about moral culture. We are much too presentfocused in the United States, and this is detrimental to our understanding of ethics. By looking at our moral responsibilities in terms of learning from the past, meeting the challenges of the present, and maintaining an identity into the future, a continuous debate is created best able to conserve and develop the moral resources necessary to address a world in continuous change. Executives are well advised not only to think about what traditions exist in their
companies and how they are used, but to think about their responsibilities to maintain and improve and transmit moral traditions to future generations of managers. Most important, do they have a moral tradition that defines, directs, and restrains the pursuit of profit? If a company’s core identity is to make money, then it does not have much of a moral vision. Indeed, Ralph Larson, CEO of Johnson & Johnson in the 1990s, could still be heard speaking about the same tradition that Burke invoked in the 1970s: ‘‘We would hold them [core values] even if they became a competitive disadvantage in certain situations.’’ Burke and Larson are following the Johnson & Johnson moral tradition, which ranked shareholders fourth in the company’s hierarchy of responsibilities.
The Limits of Tradition It is instructive to revisit Merck in this context. Merck too has a moral tradition dating back decades. George Merck, son of the founder, wrote that Merck’s products are for people, to benefit humanity, not for profits. As long as the company remembered these key values George Merck said, profits would follow. I noted, however, that this formulation was internally contradictory, thus undermining the moral vision. In any case, Merck still had a long tradition of helping others, sometimes despite significant costs. So what happened in the case of Vioxx? (Vioxx was a big-selling painkiller used by over 20 million Americans until it was pulled off the market by Merck in September 2004 because tests linked it to heart attack and stroke risks. There is evidence that Merck knew of these risks years before recalling the medicine). Tradition does not determine action. Tradition exists around the field of action, defining ends, standards, rules, and even means. At the heart of deliberate action is rational, moral, cognitive, and, many times, above all, 163
passionate influences. Hence, a moral tradition, like all traditions or tacit influences, can be pushed out of the way if other influences gain in strength. Sometimes this is a good thing, as when traditions of racism and sexism in the United States were weakened by affirmative action laws and the subsequent access by women and minorities to higher-paying jobs. Sometimes the loss of tradition is a bad thing, as when long-established traditions, say of customer service, are contradicted or ignored. This happened to Sears, Roebuck & Co. in the early 1990s, when the retailer developed an incentive structure for their auto mechanics that not only undermined customer service, but also led to widespread unethical practices. At the time, Sears was trying to address a severe drop in revenue. The Vioxx situation is similar. In the late 1990’s Merck was facing the loss of patent protection on several money-making drugs and needed a new money-maker. In these situations, managers feel great pressure to protect or reestablish revenue levels. As the pressure increases, it comes into direct conflict with moral traditions. Passionate desires to accomplish goals, receive financial and organizational rewards, or fear of negative outcomes for one’s self or one’s organization can result in the loss of emotional attachment to moral traditions. In some cases, moral traditions can literally be forgotten (recall George W. Merck’s moral vision statement: ‘‘We try never to forget. . .’’). There is no moral framework, tradition, training, or system that can absolutely stop breakdowns in self-constraint. The key, through training and socialization, is to inculcate a chain of moral memory going back through the organization’s history, of which the individual either sees herself a part or, in the case of newcomers, takes to heart. This is the central moral challenge for profit seeking organizations, since self-interest is core to the organization of motivation. It is a question of culture and character: Is profit seeking an end in itself, or is it prac164 ORGANIZATIONAL DYNAMICS
ticed within an organization with a history of moral actions by individuals who are identified with this history? In the case of Vioxx, Merck had lost the balance between its moral ideals and profit goals. As noted earlier, this had happened because Merck’s moral traditions were part of its business goals; its business goals should have been part of its moral vision. Merck is a company that has done a lot of good, but when push came to shove its attachment to its moral traditions weakened. Merck’s experience is not atypical. It happens because of the self-interest lodged deep in human nature and is further stimulated by the ideology and reality of competition. These are the key challenges managers must take into account in building moral culture.
POSITIVE TRENDS IN THE ETHICS OF COMPETITION Business is a good thing. Profitable businesses employ people enabling them to support themselves and some times several others and allow them and the others they support to grow and develop and pursue an enjoyable and worthwhile life. Businesses pay taxes that support governments and the collective goods governments provide. Businesses provide products that people want and sometimes need. These products are sometimes highly creative and sometimes involve the use of advanced knowledge and the creation of new knowledge, stimulating the development of even further products that reduce suffering and increase the control humans have over their environment. A portion of the profits businesses retain and profits they pay out to shareholders often make their way to nonprofit organizations, thanks to incentives made possible by tax legislation. Donations to many nonprofits help the poor and needy. Business is also a great outlet for human selfexpression. These outcomes contribute to human flourishing and the good life. But do they tell the whole story? Several moral concerns can be raised.
First, businesses have a huge impact on our lives, much of it of debatable quality. Competition and self-interest many times lead business practitioners to over-step boundaries of ethics and even law. Competition seems to put a premium on manipulation and deceit. If this is not true, then why do we have so many laws against manipulation and deceit and so many institutions to enforce them? Second, most if not all businesses produce externalities, costs that parties uninvolved in the business transaction must bear. Laws have been passed that force some businesses to pay some of these costs. Many businesses do not assume responsibility for all their externalities. Business owes society for these externalities from which business benefits. Third, the profit motive puts a premium on ever-changing human wants, not on whether these wants are good or bad. Cigarettes, junk-food, gas-guzzling cars, and automatic weapons are examples of bad wants that the profit motive encourages. Does the free enterprise system question the moral quality of its products enough? Fourth, businesses do not just provide products and services, the competitive system is a major force in creating the values that define and motivate our personalities. This last point has immense cultural implications. The competitive ethic makes us competitive, which means we are materialistic and envious of what others have. We work hard to pursue objects that define us in a materialistic, competitive status order. In terms of business it means profit seeking is a sport for large segments of the upper and middle-income classes. Decisions that have huge effects on large numbers of lower-level employees, consumers, and citizens are being made by executives focused first and foremost on their own competitive battles for career advancement. This culture of competition on executive levels dominates if not controls the institutional structure of work life through its effect on managerial behavior in corporate hierarchies. As the HP CEO quoted above stated, competition is about winning. What he did not say is how an obsession with winning affects us as individuals.
When we compare the strengths of business with the cultural and ethical concerns, do the strengths alone provide ethical justification? Or, like the integration of profit and ethics at Esprit de Corp, does business need to meet high ethical standards—not just because of the material effect business has on people’s lives, but because of the cultural effect, the impact capitalism has on our internal character, the maturity of our values and the feelings and motivations that follow from them? Is business responsible for its influence on who we are and how we live, or can it limit its concerns solely to stimulating production and consumption?
Business Power and Moral Responsibility The alternative is what Ben & Jerry’s calls ‘‘caring capitalism’’ and Tom’s of Maine calls ‘‘capitalism practiced for the common good.’’ It assumes that successful companies should use some of the power, resources, and influence they accumulate to improve the communities of which they are a part. Levi Strauss developed its Global Sourcing Guidelines, Business Partner Terms of Engagement to be sure its commitment to community betterment applied even to the practices of its international suppliers. Because meeting Levi Strauss’ standards was costly, Levi Strauss offered margin relief, sometimes accepting higher prices or offering international suppliers generous timetables, loans, and volume guarantees. Levi Strauss also set up audit teams to determine whether international suppliers were meeting its standards. Ben & Jerry’s calls this ‘‘linked prosperity.’’ It recognizes that business is too central to the structure of society not to use its innovative capacities to improve quality of life, independent of but linked to making a profit. This has sometimes been called the ‘‘double bottom-line.’’ In the words of Esprit, ‘‘we don’t believe the world revolves around the fashion industry. . .. Education and understanding current affairs are an essential part of our jobs and lives.’’ 165
An interesting example of the type of company I am describing is S.C. Johnson & Son, Inc. From its founding in 1886, S.C. Johnson has been committed to the idea that business should put something back into the community in more ways than through its products. They do this in everything they do. Take, for example, their environmental record. The idea of creating a balance between industry and the environment was first promoted by H.F. Johnson, the founder’s son, in the 1920s. Sam Johnson, H.F. Johnson’s son, further developed the idea of running an environmentally sound business. He removed ozone-eating chlorofluorocarbons from company products before the government moved to ban them. In manufacturing, S.C. Johnson decreased combined waste and emissions as a ratio to production almost 50% from 1990 to 1995. These are not just ‘‘social’’ decisions, since these actions saved the company millions of dollars. But they represent a mindset that seeks to run a profitable business while improving the life of the community. This mindset (tradition) continues today with Fisk Johnson, Sam Johnson’s son, who has started a cradle-to-grave review of the company’s largest raw materials to reduce the amount of byproducts entering the waste stream.
N o n p r o fi t V a l u e s i n F o r - P r o fi t Cultures Another area where S.C. Johnson has maintained moral traditions over decades is philanthropy. Samuel Curtis Johnson, the company founder, saw philanthropy in a broader context than merely a nonprofit channel to pursue the company’s self-interest a la Milton Friedman. S.C. Johnson takes a business approach to philanthropy in that it seeks to maximize its investment, but the criteria for success is benefit to the community. Many large and small businesses have created nonprofit foundations, but S.C. Johnson’s use of its nonprofit foundations is important for understanding moral business 166 ORGANIZATIONAL DYNAMICS
culture because its nonprofit community focus is a direct continuation of its for-profit culture. There is no ‘‘Berlin Wall’’ between them. The nonprofit foundations merely intensify an already established for-profit commitment to community betterment. One finds a similar culture in Patagonia’s business operations. Patagonia has a ‘‘corporate tithing’’ program funded with 10% of pre-tax profits, or 1% of total sales when there are no pre-tax profits. These funds support nonprofit organizations from Planned Parenthood to the Outdoor Industry Conservation Alliance, which Patagonia helped form and which includes its chief competitors. From Patagonia’s uncommonly large donations to nonprofits to working with competitors for environmental conservation, here too we see a blurring of for-profit and nonprofit purposes. Indeed, Yvon Chouinard, Patagonia’s founder wants the company to become ‘‘a sort of nonprofit foundation when he leaves it.’’ In the mean time, demonstrating a nonprofit ethos, he seeks to be an example of moral leadership for other businesses. Hence, in companies like S.C. Johnson and Patagonia (Esprit is another example) the line between for-profit and nonprofit is blurred. Community betterment is integrated with profit seeking operations.
S h o r e b a n k s ’ s F o r - p r o fi t / N o n p r o fi t M o d e l Another area where the line between forprofit and nonprofit is blurred in businesses with moral cultures is in paid leave for employees to do volunteer work in the community. Patagonia offers employees two months per year paid leave to work at a nonprofit of their choice. Smucker offers employees unlimited paid time off to do volunteer work. But few companies exemplify the integration of for-profit purpose with nonprofit purpose as much as Shore-
bank, a bank holding company established in Chicago in 1973. Four individuals with banking and volunteering backgrounds – Mary Houghton, Milton Davis, Jim Fletcher, and Ron Grzywinski – purchased a bank in South Shore, a community whose economic and physical infrastructure was near total collapse. Their intention was to reinstall credit, rehabilitate self-confidence, and reestablish a functioning market economy. This last point is a reversal of our understanding of the market: The market is supposed to make itself through the initiative of individuals, not the centralized direction of a benefactor. But in this community, like many other urban areas, abandoned buildings, crime, and flight to the suburbs had taken over. Entrepreneurial risk-taking was completely overwhelmed by the limited, if any, potential for reward. The invisible hand needed help. Shorebank’s founders believed that the traditional government and nonprofit approaches to extreme urban decay did not work. They believed a for-profit approach with, in the words of Rothman and Scott, authors of Companies with a Conscience, a ‘‘social-worker orientation’’ was needed. At the start, they were barely able to raise money to buy the bank, and Grzywinski had to personally guarantee the loan. But from $41 million in deposits in 1973, they passed the $1 billion mark in 2003. They have had record profits every year since 1975. Their average loan rate loss of .37 is lower than the .46 rate of their national peer group.
A Strategy of Moral Innovation The strategy Shorebank used to address the condition of simultaneous economic and social decay involved developing a combination of for-profit and nonprofit subsidiaries. They had to create wholly new subsidiaries because the services they wanted to provide were not legally allowed a bank. Rothman and Scott describe the innovative organizational structure Shorebank created: a wholly owned residential and commercial real estate development sub-
sidiary . . .. [second] the Neighborhood Institute – the first tax exempt affiliate ever developed by a bank holding company – which was formed to tackle deep-seated housing and employment problems. A Minority Enterprise Small Business Investment Company . . .. [and] Shorebank Advisory Services [a consulting arm designed to assist community development institutions]. The subsidiaries worked on their own goals, but the goals of one were integrated with the goals of the others so that they helped each other succeed in rebuilding the community. A for-profit product with a nonprofit spirit called ‘‘Development Deposits’’ was key in raising the capital to make all the programs and activities possible. Development Deposits are deposit accounts that pay a competitive yield, but the capital raised through them was guaranteed for use to renovate unlivable apartments, start small businesses, and support education for young people. Development Deposits attracted depositors from all 50 states and foreign countries. This too reversed a typical banking trend that led banks in low-income areas to invest their capital in higher-income areas where higher yields could be obtained. Eventually Shorebank created ‘‘Eco-Deposits’’ to use the same concept to attract capital for environmental and sustainability initiatives. The important point is that Shorebank created an organizational culture that integrated for-profit economic rationality with nonprofit charity and compassion. Some down-and-out residents started with subsidized rentals, received part-time work in a Shorebank subsidized program, and ended up with college degrees, full-time jobs, and home ownership. Shorebank’s complex organizational structure, sophisticated strategy, innovative product development, and integration of for-profit and nonprofit cultures made these outcomes possible. On the inter-organizational level, Shorebank used an even broader network of pri167
vate, governmental, and nonprofit organizations to revitalize the market. As money came into the community for development and the prospects of individuals began improving through the nonprofit efforts of Shorebank and others, entrepreneurs started coming out of the woodwork to take advantage of the increasing perception of social and economic improvement. Shorebank made dozens of unsubsidized loans to entrepreneurs who wanted to buy and rehab their own apartment buildings. Individuals from down-and-out groups who had no history of entrepreneurial initiative were the main players in this wave of entrepreneurship. Some individuals went from one rehab to another and became wealthy. It is unlikely that a for-profit approach alone could have accomplished this turnaround. One of the morally important characteristics of the turnaround is that regentrification took place without displacing low-income groups with high-income groups. Shorebank accomplished this goal and the goal of helping minority and disadvantaged individuals by placing the good of the community over its own good. Shorebank executives certainly sought to make profit for their bank, but if that were their only goal they would have never entered this community. Without Shorebank’s commitment to pursuing the good of others before its own good, many of its moral innovations would not exist. Now, however, banks all over the United States use ‘‘Development Deposits’’ and other Shorebank innovations to do business in down-and-out communities. Shorebank, S.C. Johnson, Patagonia and others are business success stories competing in multiple markets with multiple product lines, yet their competitive superiority works hand in hand with a deep concern for and 168 ORGANIZATIONAL DYNAMICS
contribution to the communities in which they operate. These types of companies are models for changing the way businesses relate to society. Competitive success must be matched with moral leadership, not just in business practice but in community support, not just in competitive limits but in community leadership. The two cultures must become one.
CONCLUSION Business managers in the competitive economic system are vulnerable to developing a split personality. On one hand, they can develop a single-minded pursuit of profit that sometimes has difficulty even bridling itself at the boundaries of the law; on the other hand, business managers are socialized in communities where virtues of honesty, fairness, and trustworthiness are held in high regard. In this article, I examined companies attempting to resolve this cultural dilemma and achieve integrated business cultures that are both profitable and ethical. One thing that can be said about these companies is they are not all the same. They all work to develop moral cultures, but do so in different ways using different moral values, emphasizing different aspects of their business activities. Patagonia emphasizes the environment, Smucker emphasizes its employees, HP emphasizes product quality, for example. Yet all the companies examined had one thing in common: They all work to create cultures where profit seeking is hedged in by moral values. These efforts point the way to addressing the recurrent breakdowns in business behavior that result in such widespread harm to employees, stockholders, and other stakeholders. The cultural dimension is important because it addresses issues of motivation, knowledge, and emotion, the hard-to-get-at internal components of decision and action. These companies seek to develop cultures that integrate moral values with pure economic rationality, taking the hard (destructive) edge off pure instrumental action. Even if it is true that unethical beha-
vior is not rational in the long run, as some rationalists argue, not only can it be rational in the short-run (and easily concealed by managerial career movement), but human beings are not always rational. They are filled with a diversity of positive and negative emotions that need to be cultivated. The companies examined in this article attempt to do just that, they try to create cultural contexts that encourage moral constraint and eschew self-centeredness and one-sided self-interest. Here one comes to one of the most surprising conclusions in this study: Businesses working to integrate profit and ethics take on some central characteristics of nonprofit organizations. From strong support for employee volunteerism to a ‘‘social worker orientation’’ in for-profit activities to joint ventures with business competitors for public purposes to sincere (and sometimes costly) concerns for environmental stewardship, companies trying to integrate profit and ethics blur the line between for-profit and nonprofit orientations. This is one of the reasons these companies have been able to maintain moral cultures over long periods of time: Nonprofit cultural commitments question profit activities that disregard the wellbeing of others and undermine the good of the community. On the other hand, these businesses use nonprofit orientations for for-profit purposes, as when Shorebank used ‘‘Development Deposits’’ for profit. This reciprocal relation between for-profit and nonprofit orientations is both economically useful (and thus enduring) and culturally beneficial in providing for-profit organizations with enduring moral interests. It is important to realize that the reason ethics is profitable is because society is ethical. This fact is clearly demonstrated in the case of Newman’s Own, the commercial business that donates all its post-tax profits to charity. Newman’s philanthropic activities are a competitive advantage, because many consumers are attracted to products and companies pursuing moral goals. This fact also makes possible Patagonia’s strategy to regain profitability by downsizing to remain
consistent with its moral vision. The beauty of competing through moral action is that it simultaneously intensifies competition, promotes moral values, and generates (additional) benefits for societal problems, donations to charity in the case of Newman’s Own and environmental protection in the case of Patagonia. A forth level of moral benefit is that it educates consumers to be conscientious about their consumption. A fifth level of moral benefit is that conscientious consumers encourage companies to be ethical. Another key to minimizing destructive moral breakdowns identified in this study is the central importance of cultural endurance. It is of limited value if a moral culture developed under one CEO is tossed out or ignored under the next CEO—not uncommon, given the enormous authority of CEOs and weak corporate governance in the American business system. It is obviously not a good idea to leave the moral culture of a business organization dependent on a single individual. The solution to this problem is for organizations to develop moral traditions. A central requirement to develop moral traditions is memory. For traditions to be maintained and transmitted, they must be remembered; they need not be remembered by everyone since they can be passed on by a continuous chain of transmissions and receptions; but to be maintained they must be remembered by a cadre. Certainly the criterion used to hire the CEO is relevant here: Are her moral commitments consistent with organizational traditions? But more important is the board of directors. Does the board have its own moral traditions? Do they have processes in place to review and update these traditions? Do the board traditions support moral traditions in the organization? Do they evaluate themselves and the CEO in terms of these moral traditions? Ultimately the board must make moral memory one of its central fiduciary responsibilities.
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SELECTED BIBLIOGRAPHY Two recent books that examine how moral cultures develop over time are Steven P. Feldman, Memory as a Moral Decision: The Role of Ethics in Organizational Culture (Transaction Publishers, 2004) and Edgar Schein, DEC is Dead, Long Live DEC (Brett-Kohler Publishers, 2003). Several important philosophical texts on the ethics of memory and tradition are Alasdair MacIntyre, Whose Justice? Whose Rationality? (University of Notre Dame Press, 1988) and Avishai Margalit, The Ethics of Memory (Harvard University Press, 2002). A second book by MacIntyre, After Virtue (University of Notre Dame Press, 1984), applies his philosophical framework to organizations. Two books that provide detailed accounts of moral business cultures are Howard Rothman and Mary Scott’s, Companies with a Conscience (The Publishing Cooperative, 2003; and
an earlier version published by Carol Publishing, 1994) and James C. Collins and Jerry I. Porras’s, Built to Last (Harper Publishing, 2002). Although Built to Last does not focus on the moral aspect of business cultures, it provides a wealth of data on how moral values are integrated into business practices and maintained over time. For particular articles and cases used in this article see David Bollier, Stephanie Weiss, and Kirk Hanson, Merck & Co., Inc. (Business Enterprise Trust, 1991), Bill George, ‘‘Five Questions about ‘The Call for Authentic Leadership,’’’ Harvard Business Review, 2003; Ryuzaburo Kaku, ‘‘The Path of Kyosei,’’ Harvard Business Review, 1997; Jane Katz and Lynn Paine, Levi Strauss& Co.: Global Sourcing (Harvard Business School Publishing, 1994), and Sara Mason’s article on Aveda, ‘‘Packaged with Purpose’’ (www.thecosmeticsite.com).
Steven P. Feldman is Associate Professor of Management Policy at the Weatherhead School of Management, Case Western Reserve University, Cleveland, Ohio 44106, United States. He is currently Fulbright Distinguished Lecturer in Business Ethics at Shanghai International Studies University. Dr. Feldman’s primary research focus is on the role of moral tradition and moral memory in establishing and maintaining moral culture in organizations. His book, Memory as a Moral Decision: The Role of Ethics in Organizational Culture (2004), addresses how the past has been used in the literature on organizational culture. Currently Steve is carrying out a study of ethics and culture in Chinese-American business relations (Tel: +1 216 368 5102; e-mail: [email protected]).
170 ORGANIZATIONAL DYNAMICS
ISSN 0090-2616/$ – see frontmatter doi:10.1016/j.orgdyn.2007.03.004
Moral Business Cultures:
The Keys to Creating and Maintaining Them STEVEN P. FELDMAN
INTRODUCTION From the insider trading scandals of the 1980s to the savings and loan scandals of the early 1990s to the more recent wide-spread fraud and manipulation of financial information, business organizations experience chronic breakdowns in ethical conduct. The fact that the problem is enduring despite considerable public outcry, governmental action, and business attempts to create new structures and programs, suggests underlying problems. Given the harm caused by recent failures to act ethically, it is well worth our effort to reflect on what the underlying problems might be and seek solutions to them. One way to investigate what went wrong while simultaneously developing ideas to correct it, is to focus on what companies are doing to address ethical issues; in particular, to examine how companies are attempting to integrate ethics into their corporate cultures. By using a cultural approach, the tacit, taken-for-granted ideas and sentiments that stimulate and guide decision and action can be brought to the surface and examined. In this article, I will carry out a cultural analysis of 17 companies that demonstrate moral cultures in their every day decisions and practices to develop an understanding of how these moral cultures were created and maintained over time. The analyzed companies were chosen by a two-step process. First, 15 professors of business ethics and 15 executives were asked
to name companies that had a history of using moral values in their decision-making. Second, data was collected on each company from public sources, primarily case studies, newspaper and magazine articles, books, and Web sites. The companies chosen to be analyzed for this article had to meet five criteria: one, they had clearly defined and actionable business ethics principles; two, the ethical principles were observable in company practices for at least ten years; three, the ethical principles permeated all aspects of company activities; four, company leaders acted as role models for these principles in their own actions and used the principles to manage and lead the company; five, processes were in place that socialized new employees into the ethical principles and practices. The list of companies that emerged explicitly cultivated a moral culture, particularly making efforts to define the relation between profit and ethics and integrating the two in action. See Table 1 for the list of companies identified as having moral cultures analyzed in this article. Given the history of ethical lapses in business, a cultural analysis of business ethics practices must start with the assumption that businesses in the competitive system are vulnerable to the splitting-off and isolation of business practices from moral responsibilities. In the next two sections, I examine companies in terms of how they integrate the profit motive with ethical standards. I argue that integration of the profit 156
TABLE 1 NAME Aveda
COMPANIES IDENTIFIED
INDUSTRY
AS
HAVING MORAL CULTURES
HEADQUARTERS
1978
200 M2,300 (est.)
Minneapolis, MN
Ben & Jerry’s Ice cream
1978
272 M841
Burlington, VT
Canon Electronic Esprit de CorpClothing
1937 1968
32 B 115,583 NA NA
Tokyo, Japan NA
Hewlett Packard Johnson & Johnson Levi Strauss Medtronic Merck Motorola Newman’s Own Patagonia S.C. Johnson
Electronic
1937
87 B 150,000
Palo Alto, CA
Healthcare
1887
50 B 115,600
New Brunswick, NJ
Clothing Medical Devices Pharma-ceutical Electronic Food
1853 1949 1891 1928 1982
4 B 9,635 11 B 36,000 22 B 61,500 36 B 69,000 250 M18 (est.) 241 M1,000 7 B 12,000
San Francisco, CA Minneapolis, MN Whitehouse Station, NJ Schaumburg, IL Westport, CT Ventura, CA Racine, WI
107 M622 2.1 B 3,500 63 B 158,500 50 M 200
Chicago, IL Orrville, OH Tokyo, Japan Kennebunk, ME
Shorebank Smucker Sony Tom’s of Maine
Personal care
SALES FOUNDING(USD)EMPLOYEES
Outdoor apparel 1975 Consumer 1886 chemical products Banking 1972 Food 1897 Electronic 1946 Personal care 1970
motive with ethical standards is the core cultural challenge that businesses face in a competitive system. I analyze the 17 companies to see what can be learned from them in this area. One conclusion that will emerge from this analysis is that companies concerned with ethics develop moral visions, usually at their founding or early in their history, that define the moral purpose of profit and the business context for how profit should (and should not) be pursued. These moral visions are maintained over time in organizational traditions. In the third section, I continue the analysis of companies identified as having enduring moral cultures in terms of how they relate to broader societal systems and values. It is clear that these companies do not isolate themselves from non-business issues by focusing only on profit maximization. Their moral values not only are integrated into all
ACQUISITION sTATUS Acquired by Estee Lauder in 1997 Acquired by Unilever in 2000 Acquired by Esprit Holdings Ltd in 2001
Acquired by Colgate in 2006
facets of their business activities, but also extend to broader community needs and environmental stewardship. Indeed, one fascinating fact that emerges in this section is the blurring of the line between for-profit and nonprofit orientations. Companies attempting to integrate profit and ethics have been led to develop cultures where for-profit values and nonprofit values have become integrated to a considerable extent. This last point signals the way forward from the vulnerability in business culture to separate the profit motive from ethical responsibility.
MORALITY AND PROFIT Capitalism, with its core value of competition, has never reached the level of moral integration found in the Christian and Greek moral systems from which it emerged. The result is a 157
split culture of business, where ethics and efficiency remain uneasy partners and, in many companies, downright antagonists. The idea of a business culture built around the value of competition seems innocent enough. After all, competition supposedly produces an efficient and fair outcome. But take the core beliefs of Philip Morris as described by Collins and Porras in their book Built to Last:
But the problem is broader than extreme illegality. The lack of cultural integration between competitive values and moral values plagues many companies. One telling characteristic of the split in business culture is the criticism of business from some of its most successful practitioners. Bill George, retired chief executive officer (CEO) and chairman of Medtronic Inc., recently stated,
the right to personal freedom of choice (to smoke, to buy whatever one wants) is worth defending; winning – being the best and beating others; encouraging individual initiative; opportunity to achieve based on merit, not gender, race, or class; hard work and continuous self-improvement.
I am appalled at the extent to which business leaders are caught up in the game of greed. We have idolized the wrong leaders, associating image with leadership and confusing stock price with corporate value.
Here personal freedom (and competition) is used to justify selling cigarettes, which are known to damage the human body. It is not that Philip Morris’ values are irrelevant, but they are one-sided, completely insensitive to other values such as care and community.
Moral Channels for the Competitive Drive At issue is the role of winning (competing) in the business culture. How are competitive values related to ethical values? Has Nike Inc.’s core value – ‘‘To experience the emotion of competition, winning, and crushing competitors’’ – contributed to its insensitivity to the abused laborers employed by its contractors? Both Philip Morris and Nike do good deeds, but does their understanding of themselves primarily as competitors lead them to make ethical mistakes, to justify actions that moral values would question? Has the value of competition been too isolated and dominant in some corporate cultures, so that in periods of great economic opportunity or threat, passions of self-interest and greed or fear overwhelm all moral boundaries? The ‘‘cowboy cultures’’ at Enron Corp. and WorldCom Inc. certainly provide graphic examples. 158 ORGANIZATIONAL DYNAMICS
Note that George refers to greed as a ‘‘game.’’ It implies that competition is seen by some as a game or sport, and greed a legitimate value in the game. This view is widely accepted as demonstrated by the fact that many have ‘‘idolized’’ the (greed) success stories. George points out the underlying problem: money, in the form of stock price, has been ripped out of its social context and worshipped as an end in itself. The negative and destructive results from the unconstrained pursuit of profit are ignored and even denied. This is the practical outcome of the cultural belief that business is a game.
Forms of Moral Integration in Business Many companies do try to balance the profit motive with moral concerns, some for business reasons, some for moral reasons, many for both. Jack Welch, retired CEO of General Electric Co., views the balance between profits and values this way: Numbers and values. We don’t have the final answer here - at least I don’t. People who make the numbers and share our values go onward and
upward. People who miss the numbers and share our values get a second chance. People with no values and no numbers – easy call. The problem is with those who make the numbers but don’t share the values. . .. We try to persuade them; we wrestle with them; we agonize over these people. Welch’s view clearly favors profit. If you ‘‘make the numbers’’ but do not share the values, he will go to great lengths to keep you; but if you have the right values and ‘‘miss the numbers,’’ you merely get a second chance. A somewhat more balanced view of profit and values is expressed by John Young, retired CEO of Hewlett-Packard Co. Maximizing shareholder wealth has always been way down on the list. Yes, profit is a cornerstone of what we do – it is a measure of our contribution and means of self-financed growth – but it has never been the point in and of itself. The point, in fact, is to win, and winning is judged in the eyes of the customer and by doing something you can be proud of. There is a symmetry of logic in this. If we provide real satisfaction to real customers - we will be profitable. Notice the ambiguous formulation; the competitive language of ‘‘winning’’ is given primary importance while profit is both designated to a secondary role and called a ‘‘cornerstone.’’ And ‘‘winning’’ is not only judged by customer purchases, but also by ‘‘doing something you can be proud of.’’ To be sure, this is not a pure profit orientation. Presumably customer ‘‘satisfaction’’ is based on receiving a fair product given the expenditure. ‘‘Doing something you can be proud of’’ presumably refers to contributing a socially useful product of good quality. In this formulation, ‘‘winning’’ means providing a useful product of good quality at a fair price that results in a profit. But Young also says there is ‘‘symmetry’’ of logic between
these values, and that profit is a ‘‘measure’’ of contribution and means of self-financed growth. Hence, Young’s formulation is a profit orientation guided by the values of customer satisfaction, product quality, and social usefulness. To be sure, business requires profit for survival. But Ryuzabura Kaku, retired president and chairman of Canon Inc., who pioneered Kyosei (‘‘spirit of cooperation’’) as a moral system for Japanese business, argues that ‘‘profit is only the beginning of a company’s obligations’’. Profit as a ‘‘beginning’’ of a company’s obligations is different from Young’s idea of profit as a ‘‘cornerstone.’’ For Kaku, profit leads to moral obligations; for Young it measures moral contribution already made in the act of making profit. There is circularity in Young’s ‘‘symmetry.’’ Kaku’s statement is morally stronger than Young’s, in that business success leads to increasing moral responsibility. The point is that the way a company understands the relation between profit and ethics powerfully determines how it defines the range of its moral responsibilities.
Take for example Esprit de Corp founder Susie Tompkins. She states that Esprit is not a bottom-line-driven company, but must make money to do good things. Tompkins sees her business primarily as a vehicle for pursuing moral goals, but balancing moral goals with profit-making is a, perhaps the, central challenge. Esprit spent $10 million to raise prochoice abortion rights in public consciousness, but after pro-life groups threatened to boycott Esprit products, Tompkins suspended the consciousness-raising campaign. She explained Esprit was too dependent on department stores to survive a boycott. Thus, she refocused the business on profit-making. Tompkins’ priorities are quite different from Young’s priorities, which emphasized HP as a vehicle to contribute to society by satisfying customers, which would in turn result in profit. Tompkins sees Esprit’s moral purpose beyond satisfying customers to increasing 159
society’s moral awareness and commitments. Both companies see profit as fundamental, but Esprit’s moral vision is not measured by profit success. A middle ground between HP and Esprit is Levi Strauss & Co. In its ethics statement, the company states it will be challenged to balance its core values – honesty, promisekeeping, fairness, respect, compassion, and integrity – with commercial success. By ‘‘balancing’’ competitive values (commercial success) with moral values, Levi Strauss is redefining the meaning of profit seeking. Whereas HP sees its mission in terms of providing technology to society, Levi Strauss sees its mission not in terms of the products it provides, but in terms of how it conducts business activities. Levi Strauss’ moral focus is on the process of seeking profit. In these three visions (Esprit, Levi Strauss, and HP) profit seeking is brought into relation to different values resulting in different perceptions of moral responsibility. A vision close to Young’s view of HP is that of Merck & Co., Inc. Merck believes its moral vision results in profits. In the 1920s, George W. Merck, son of the company founder, said, We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been. This statement is the cornerstone of Merck’s moral tradition. Indeed, in 1991, Merck’s CEO, Dr. P. Roy Vagelos, commented that Merck sold streptomycin in post-World War Two Japan at no profit because tuberculosis was killing many Japanese. He related this noble action to the fact that Merck is now the largest American pharmaceutical company in Japan. He said that the long-term consequences of noble action are not always clear, but they pay off. Similar thinking can be seen as part of Merck’s decisions in the 1980s to sell sophisticated vaccine-manufacturing 160 ORGANIZATIONAL DYNAMICS
technology to the Chinese at a fraction of its value; in the early 1990s to develop a cure for river blindness despite considerable risks and costs, and with no direct way to make a profit; and in the late 1990s to participate in nonprofit partnerships to address HIV/AIDS. Commenting on the river blindness case, business ethicists Bollier, Weiss, and Hanson argue that there is a limit to how often a business can spend so much of its resources on activities that do not produce profit. I would draw attention to the fact, however, that for Merck, moral action is strongly related to and perhaps primarily justified in terms of long-term profit. This is certainly different from Esprit, which uses profit to finance its moral vision, and different too from Levi Strauss, which uses moral values to channel profit seeking. The problem with Merck’s moral vision is the role of power, the scientific power to cure disease and the economic power to give away medicine. Power to be ethical needs to be exercised under the direction of moral ideals, but in Merck’s case it is under the direction of long-term profit. This undermines the development of virtue because virtue is based in community. Virtuous action develops moral character or the habit to do good because one acts as part of a whole. In Merck’s case, the virtue of generosity is motivated by corporate goals and thus is an act of power. The problem is the effect this motivation has on moral character: It creates pride in one’s power to do good, not the desire to do good in itself. Moral culture will not develop deep roots in this soil. A company that claims to have fully integrated the profit motive into its moral vision is the personal care and life-style company Aveda. In the words of company founder, Horst Rechelbacher, Our mission at Aveda is to care for the world we live in, from the products we make to the ways in which we give back to society. At Aveda, we strive to set an example for environmental
leadership and responsibility, not just in the world of beauty, but around the world. This is different from the companies reviewed so far, in that Esprit sought to make money to do good, whereas Aveda seeks to make money through doing good. This is different from Merck, which seeks to do more good to make more money. Aveda’s aim is different in that its philosophy of care and its philosophy of business are nearly the same vision. This is different from Levi Strauss, in that Levi Strauss seeks to conduct business responsibly. Aveda seeks to make responsibility a core part of its business. Aveda is of interest in this study because it attempts to integrate business action into moral action as much as possible. For example, John DelFausse, Aveda’s vice-president of package development, puts the environment first as he builds brand equity through attractive, cost-efficient packaging. Building brand equity is a means to make profit, but for Aveda it is also an effort to conduct business that protects the environment and sets a moral example for other businesses. This is why DelFausse happily shares Aveda’s highly environmentally friendly and award-winning packaging designs with competitors. In this way, Aveda both protects the environment and pursues profit. The Aveda example shows the primary contributions moral vision can make to business: defining priorities and directing (and prohibiting) action, especially in regard to the pursuit of profit. Surprisingly, given the widespread belief that the purpose of business is to make profit and the centrality of finance in the culture of business schools, some (successful) businesses give profit maximization a secondary priority. Indeed, Sony Corp., Johnson & Johnson, and Motorola Inc. all state that they seek ‘‘fair’’ profits, not maximum profits. In all three companies (and, as discussed above, HP), emphasis is given to service or product
quality before profit. To be sure, I was recently talking with a CEO of a large corporation and explaining to him Levi Strauss’ decision to withdraw from China because of human rights violations. His response was to discredit Levi Strauss’ moral actions because he had recently read Levi Strauss is losing money. The profit-first attitude is alive and widespread in business. But, as this essay shows, some companies go a long way toward integrating profits and ethics. Let’s take another look at HP. I discussed CEO Young’s comments about profit earlier and characterized them as signifying a profit orientation guided by customer satisfaction. HP co-founder David Packard also commented on the role of profit in business. His comments are similar to Young’s, yet a little different. Packard states, Why are we here? I think many people assume, wrongly, that a company exists simply to make money. While this is an important result of a company’s existence, we have to go deeper and find the real reasons for our being. This seems pretty clear. Profit is a result of ‘‘deeper’’ reasons for the existence of a business. HP’s deeper reasons are technical contribution to society, respect and opportunity for employees, support for the communities in which HP operates, and affordable quality for customers. But in another statement, Packard comes closer to Young’s view, ‘‘Anyone who cannot accept [profit] as one of the most important [objectives] of this company has no place either now or in the future on the management team of this company’’. This seems pretty clear too, but is it consistent with the previous Packard quote? I think not. Packard wants to have it both ways. Profit is a ‘‘result’’ of ‘‘deeper’’ reasons, but is also one of the ‘‘most important’’ objectives of the company. At the very least there is a tension here. But is there also a contradiction? What are more important—moral values or profit? If a manager is faced with a decision of whether to violate moral values or lose 161
money, do Packard’s statements give clear guidance? Perhaps Packard wants to keep a healthy ambiguity, so that managers must think through the dilemmas facing them and take responsibility for their decisions. In any case, I do not think this is a healthy ambiguity. For business to be ethical, it must have clear moral values and priorities.
MORAL TRADITION IN BUSINESS A company that does present a clear culture of moral priorities is Johnson & Johnson. James Burke, Johnson & Johnson CEO (1976–1989), states, All of our management is geared to profit on a day-to-day basis. That’s part of the business of being in business. But too often, in this and other businesses, people are inclined to think ‘‘we’d better do this because if we don’t, it’s going to show up on the figures over the short-term.’’ This document [the Credo] allows them to say, ‘‘Wait a minute. I don’t have to do that. The management has told me that they’re . . . interested in me operating under this set of principles, so I won’t.’’ Burke’s statement is impressive because he articulates a clear moral priority while simultaneously defining the daily work of business as the pursuit of profit. Note the contrast to the HP statements, which begin by denying the importance of profit, only to immediately tie moral vision to profit. HP’s statements idealize profit along with ethics, and thus are less useful than Johnson & Johnson’s because they do not acknowledge any tension between profit and ethics. Johnson & Johnson’s moral vision does acknowledge the tension, making it more realistic and practical. 162 ORGANIZATIONAL DYNAMICS
It is important to note that Johnson & Johnson’s moral clarity is the result of its moral traditions. This is no accident. Johnson & Johnson has maintained the same moral traditions since the 1930s. Burke makes it very clear he was socialized into this culture, specifically by working under higher-ranking managers. The moral traditions were handed down from one generation of managers to the next, each generation questioning, adapting, and refining the traditions to make them relevant to changing conditions. This is how moral clarity is achieved.
Tradition is the Spine of Moral Culture Despite the continuous changes in Johnson & Johnson’s tradition, it is still the same tradition. The essence of tradition is sequential pattern, a sequence of related meanings that are received and transmitted over time. This allows tradition to be a continuous chain of self-improvement and adaptation, a sort of continuous quality improvement for an organization’s ethics. Moral tradition is the highest level of moral accomplishment because it is constructed by multiple generations of managers, thus utilizing the socially broadest and historically deepest possible contributions to an enduring yet flexible moral framework. The result is a source of moral integrity partly separate from the personality of who happens to be the CEO or personalities of who happen to be the top executives at any particular point in time. The importance of moral traditions is that they sustain a sense of moral identity through time. Patagonia, a sports apparel manufacturer and retailer, for example, has a moral culture that has been developed under the leadership of Yvon Chouinard. It is not known how long this culture will survive or what changes will take place after Chouinard departs. The J.M. Smucker Co., a jams and preservatives manufacturer, on the
other hand, has a moral culture that has been maintained, cultivated, refined, and changed over time by multiple generations of leaders. Smucker has a moral tradition because parts of its culture – mutual respect among employees, for example – have been repeatedly transmitted to new generations of employees. The key point is that the CEO of Smucker might leave and a new one take his place, but there is a built-in tendency for the moral culture to continue independent of the CEO. Moral traditions are so important in business because they permeate the organization to some extent and thus decentralize moral motivation, giving the organization a moral stability and depth that moral leadership alone cannot provide. Clearly a new CEO can cripple a long-standing moral tradition, but the fact that it exists gives the moral leader a great advantage in supporting moral behavior.
Keys to Managing Moral Tradition Highlighting the importance of moral traditions does not mean we should downplay the accomplishments of younger organizations like Patagonia or Esprit. The point is to raise the bar of our moral thinking by extending the time horizon in which we think about moral culture. We are much too presentfocused in the United States, and this is detrimental to our understanding of ethics. By looking at our moral responsibilities in terms of learning from the past, meeting the challenges of the present, and maintaining an identity into the future, a continuous debate is created best able to conserve and develop the moral resources necessary to address a world in continuous change. Executives are well advised not only to think about what traditions exist in their
companies and how they are used, but to think about their responsibilities to maintain and improve and transmit moral traditions to future generations of managers. Most important, do they have a moral tradition that defines, directs, and restrains the pursuit of profit? If a company’s core identity is to make money, then it does not have much of a moral vision. Indeed, Ralph Larson, CEO of Johnson & Johnson in the 1990s, could still be heard speaking about the same tradition that Burke invoked in the 1970s: ‘‘We would hold them [core values] even if they became a competitive disadvantage in certain situations.’’ Burke and Larson are following the Johnson & Johnson moral tradition, which ranked shareholders fourth in the company’s hierarchy of responsibilities.
The Limits of Tradition It is instructive to revisit Merck in this context. Merck too has a moral tradition dating back decades. George Merck, son of the founder, wrote that Merck’s products are for people, to benefit humanity, not for profits. As long as the company remembered these key values George Merck said, profits would follow. I noted, however, that this formulation was internally contradictory, thus undermining the moral vision. In any case, Merck still had a long tradition of helping others, sometimes despite significant costs. So what happened in the case of Vioxx? (Vioxx was a big-selling painkiller used by over 20 million Americans until it was pulled off the market by Merck in September 2004 because tests linked it to heart attack and stroke risks. There is evidence that Merck knew of these risks years before recalling the medicine). Tradition does not determine action. Tradition exists around the field of action, defining ends, standards, rules, and even means. At the heart of deliberate action is rational, moral, cognitive, and, many times, above all, 163
passionate influences. Hence, a moral tradition, like all traditions or tacit influences, can be pushed out of the way if other influences gain in strength. Sometimes this is a good thing, as when traditions of racism and sexism in the United States were weakened by affirmative action laws and the subsequent access by women and minorities to higher-paying jobs. Sometimes the loss of tradition is a bad thing, as when long-established traditions, say of customer service, are contradicted or ignored. This happened to Sears, Roebuck & Co. in the early 1990s, when the retailer developed an incentive structure for their auto mechanics that not only undermined customer service, but also led to widespread unethical practices. At the time, Sears was trying to address a severe drop in revenue. The Vioxx situation is similar. In the late 1990’s Merck was facing the loss of patent protection on several money-making drugs and needed a new money-maker. In these situations, managers feel great pressure to protect or reestablish revenue levels. As the pressure increases, it comes into direct conflict with moral traditions. Passionate desires to accomplish goals, receive financial and organizational rewards, or fear of negative outcomes for one’s self or one’s organization can result in the loss of emotional attachment to moral traditions. In some cases, moral traditions can literally be forgotten (recall George W. Merck’s moral vision statement: ‘‘We try never to forget. . .’’). There is no moral framework, tradition, training, or system that can absolutely stop breakdowns in self-constraint. The key, through training and socialization, is to inculcate a chain of moral memory going back through the organization’s history, of which the individual either sees herself a part or, in the case of newcomers, takes to heart. This is the central moral challenge for profit seeking organizations, since self-interest is core to the organization of motivation. It is a question of culture and character: Is profit seeking an end in itself, or is it prac164 ORGANIZATIONAL DYNAMICS
ticed within an organization with a history of moral actions by individuals who are identified with this history? In the case of Vioxx, Merck had lost the balance between its moral ideals and profit goals. As noted earlier, this had happened because Merck’s moral traditions were part of its business goals; its business goals should have been part of its moral vision. Merck is a company that has done a lot of good, but when push came to shove its attachment to its moral traditions weakened. Merck’s experience is not atypical. It happens because of the self-interest lodged deep in human nature and is further stimulated by the ideology and reality of competition. These are the key challenges managers must take into account in building moral culture.
POSITIVE TRENDS IN THE ETHICS OF COMPETITION Business is a good thing. Profitable businesses employ people enabling them to support themselves and some times several others and allow them and the others they support to grow and develop and pursue an enjoyable and worthwhile life. Businesses pay taxes that support governments and the collective goods governments provide. Businesses provide products that people want and sometimes need. These products are sometimes highly creative and sometimes involve the use of advanced knowledge and the creation of new knowledge, stimulating the development of even further products that reduce suffering and increase the control humans have over their environment. A portion of the profits businesses retain and profits they pay out to shareholders often make their way to nonprofit organizations, thanks to incentives made possible by tax legislation. Donations to many nonprofits help the poor and needy. Business is also a great outlet for human selfexpression. These outcomes contribute to human flourishing and the good life. But do they tell the whole story? Several moral concerns can be raised.
First, businesses have a huge impact on our lives, much of it of debatable quality. Competition and self-interest many times lead business practitioners to over-step boundaries of ethics and even law. Competition seems to put a premium on manipulation and deceit. If this is not true, then why do we have so many laws against manipulation and deceit and so many institutions to enforce them? Second, most if not all businesses produce externalities, costs that parties uninvolved in the business transaction must bear. Laws have been passed that force some businesses to pay some of these costs. Many businesses do not assume responsibility for all their externalities. Business owes society for these externalities from which business benefits. Third, the profit motive puts a premium on ever-changing human wants, not on whether these wants are good or bad. Cigarettes, junk-food, gas-guzzling cars, and automatic weapons are examples of bad wants that the profit motive encourages. Does the free enterprise system question the moral quality of its products enough? Fourth, businesses do not just provide products and services, the competitive system is a major force in creating the values that define and motivate our personalities. This last point has immense cultural implications. The competitive ethic makes us competitive, which means we are materialistic and envious of what others have. We work hard to pursue objects that define us in a materialistic, competitive status order. In terms of business it means profit seeking is a sport for large segments of the upper and middle-income classes. Decisions that have huge effects on large numbers of lower-level employees, consumers, and citizens are being made by executives focused first and foremost on their own competitive battles for career advancement. This culture of competition on executive levels dominates if not controls the institutional structure of work life through its effect on managerial behavior in corporate hierarchies. As the HP CEO quoted above stated, competition is about winning. What he did not say is how an obsession with winning affects us as individuals.
When we compare the strengths of business with the cultural and ethical concerns, do the strengths alone provide ethical justification? Or, like the integration of profit and ethics at Esprit de Corp, does business need to meet high ethical standards—not just because of the material effect business has on people’s lives, but because of the cultural effect, the impact capitalism has on our internal character, the maturity of our values and the feelings and motivations that follow from them? Is business responsible for its influence on who we are and how we live, or can it limit its concerns solely to stimulating production and consumption?
Business Power and Moral Responsibility The alternative is what Ben & Jerry’s calls ‘‘caring capitalism’’ and Tom’s of Maine calls ‘‘capitalism practiced for the common good.’’ It assumes that successful companies should use some of the power, resources, and influence they accumulate to improve the communities of which they are a part. Levi Strauss developed its Global Sourcing Guidelines, Business Partner Terms of Engagement to be sure its commitment to community betterment applied even to the practices of its international suppliers. Because meeting Levi Strauss’ standards was costly, Levi Strauss offered margin relief, sometimes accepting higher prices or offering international suppliers generous timetables, loans, and volume guarantees. Levi Strauss also set up audit teams to determine whether international suppliers were meeting its standards. Ben & Jerry’s calls this ‘‘linked prosperity.’’ It recognizes that business is too central to the structure of society not to use its innovative capacities to improve quality of life, independent of but linked to making a profit. This has sometimes been called the ‘‘double bottom-line.’’ In the words of Esprit, ‘‘we don’t believe the world revolves around the fashion industry. . .. Education and understanding current affairs are an essential part of our jobs and lives.’’ 165
An interesting example of the type of company I am describing is S.C. Johnson & Son, Inc. From its founding in 1886, S.C. Johnson has been committed to the idea that business should put something back into the community in more ways than through its products. They do this in everything they do. Take, for example, their environmental record. The idea of creating a balance between industry and the environment was first promoted by H.F. Johnson, the founder’s son, in the 1920s. Sam Johnson, H.F. Johnson’s son, further developed the idea of running an environmentally sound business. He removed ozone-eating chlorofluorocarbons from company products before the government moved to ban them. In manufacturing, S.C. Johnson decreased combined waste and emissions as a ratio to production almost 50% from 1990 to 1995. These are not just ‘‘social’’ decisions, since these actions saved the company millions of dollars. But they represent a mindset that seeks to run a profitable business while improving the life of the community. This mindset (tradition) continues today with Fisk Johnson, Sam Johnson’s son, who has started a cradle-to-grave review of the company’s largest raw materials to reduce the amount of byproducts entering the waste stream.
N o n p r o fi t V a l u e s i n F o r - P r o fi t Cultures Another area where S.C. Johnson has maintained moral traditions over decades is philanthropy. Samuel Curtis Johnson, the company founder, saw philanthropy in a broader context than merely a nonprofit channel to pursue the company’s self-interest a la Milton Friedman. S.C. Johnson takes a business approach to philanthropy in that it seeks to maximize its investment, but the criteria for success is benefit to the community. Many large and small businesses have created nonprofit foundations, but S.C. Johnson’s use of its nonprofit foundations is important for understanding moral business 166 ORGANIZATIONAL DYNAMICS
culture because its nonprofit community focus is a direct continuation of its for-profit culture. There is no ‘‘Berlin Wall’’ between them. The nonprofit foundations merely intensify an already established for-profit commitment to community betterment. One finds a similar culture in Patagonia’s business operations. Patagonia has a ‘‘corporate tithing’’ program funded with 10% of pre-tax profits, or 1% of total sales when there are no pre-tax profits. These funds support nonprofit organizations from Planned Parenthood to the Outdoor Industry Conservation Alliance, which Patagonia helped form and which includes its chief competitors. From Patagonia’s uncommonly large donations to nonprofits to working with competitors for environmental conservation, here too we see a blurring of for-profit and nonprofit purposes. Indeed, Yvon Chouinard, Patagonia’s founder wants the company to become ‘‘a sort of nonprofit foundation when he leaves it.’’ In the mean time, demonstrating a nonprofit ethos, he seeks to be an example of moral leadership for other businesses. Hence, in companies like S.C. Johnson and Patagonia (Esprit is another example) the line between for-profit and nonprofit is blurred. Community betterment is integrated with profit seeking operations.
S h o r e b a n k s ’ s F o r - p r o fi t / N o n p r o fi t M o d e l Another area where the line between forprofit and nonprofit is blurred in businesses with moral cultures is in paid leave for employees to do volunteer work in the community. Patagonia offers employees two months per year paid leave to work at a nonprofit of their choice. Smucker offers employees unlimited paid time off to do volunteer work. But few companies exemplify the integration of for-profit purpose with nonprofit purpose as much as Shore-
bank, a bank holding company established in Chicago in 1973. Four individuals with banking and volunteering backgrounds – Mary Houghton, Milton Davis, Jim Fletcher, and Ron Grzywinski – purchased a bank in South Shore, a community whose economic and physical infrastructure was near total collapse. Their intention was to reinstall credit, rehabilitate self-confidence, and reestablish a functioning market economy. This last point is a reversal of our understanding of the market: The market is supposed to make itself through the initiative of individuals, not the centralized direction of a benefactor. But in this community, like many other urban areas, abandoned buildings, crime, and flight to the suburbs had taken over. Entrepreneurial risk-taking was completely overwhelmed by the limited, if any, potential for reward. The invisible hand needed help. Shorebank’s founders believed that the traditional government and nonprofit approaches to extreme urban decay did not work. They believed a for-profit approach with, in the words of Rothman and Scott, authors of Companies with a Conscience, a ‘‘social-worker orientation’’ was needed. At the start, they were barely able to raise money to buy the bank, and Grzywinski had to personally guarantee the loan. But from $41 million in deposits in 1973, they passed the $1 billion mark in 2003. They have had record profits every year since 1975. Their average loan rate loss of .37 is lower than the .46 rate of their national peer group.
A Strategy of Moral Innovation The strategy Shorebank used to address the condition of simultaneous economic and social decay involved developing a combination of for-profit and nonprofit subsidiaries. They had to create wholly new subsidiaries because the services they wanted to provide were not legally allowed a bank. Rothman and Scott describe the innovative organizational structure Shorebank created: a wholly owned residential and commercial real estate development sub-
sidiary . . .. [second] the Neighborhood Institute – the first tax exempt affiliate ever developed by a bank holding company – which was formed to tackle deep-seated housing and employment problems. A Minority Enterprise Small Business Investment Company . . .. [and] Shorebank Advisory Services [a consulting arm designed to assist community development institutions]. The subsidiaries worked on their own goals, but the goals of one were integrated with the goals of the others so that they helped each other succeed in rebuilding the community. A for-profit product with a nonprofit spirit called ‘‘Development Deposits’’ was key in raising the capital to make all the programs and activities possible. Development Deposits are deposit accounts that pay a competitive yield, but the capital raised through them was guaranteed for use to renovate unlivable apartments, start small businesses, and support education for young people. Development Deposits attracted depositors from all 50 states and foreign countries. This too reversed a typical banking trend that led banks in low-income areas to invest their capital in higher-income areas where higher yields could be obtained. Eventually Shorebank created ‘‘Eco-Deposits’’ to use the same concept to attract capital for environmental and sustainability initiatives. The important point is that Shorebank created an organizational culture that integrated for-profit economic rationality with nonprofit charity and compassion. Some down-and-out residents started with subsidized rentals, received part-time work in a Shorebank subsidized program, and ended up with college degrees, full-time jobs, and home ownership. Shorebank’s complex organizational structure, sophisticated strategy, innovative product development, and integration of for-profit and nonprofit cultures made these outcomes possible. On the inter-organizational level, Shorebank used an even broader network of pri167
vate, governmental, and nonprofit organizations to revitalize the market. As money came into the community for development and the prospects of individuals began improving through the nonprofit efforts of Shorebank and others, entrepreneurs started coming out of the woodwork to take advantage of the increasing perception of social and economic improvement. Shorebank made dozens of unsubsidized loans to entrepreneurs who wanted to buy and rehab their own apartment buildings. Individuals from down-and-out groups who had no history of entrepreneurial initiative were the main players in this wave of entrepreneurship. Some individuals went from one rehab to another and became wealthy. It is unlikely that a for-profit approach alone could have accomplished this turnaround. One of the morally important characteristics of the turnaround is that regentrification took place without displacing low-income groups with high-income groups. Shorebank accomplished this goal and the goal of helping minority and disadvantaged individuals by placing the good of the community over its own good. Shorebank executives certainly sought to make profit for their bank, but if that were their only goal they would have never entered this community. Without Shorebank’s commitment to pursuing the good of others before its own good, many of its moral innovations would not exist. Now, however, banks all over the United States use ‘‘Development Deposits’’ and other Shorebank innovations to do business in down-and-out communities. Shorebank, S.C. Johnson, Patagonia and others are business success stories competing in multiple markets with multiple product lines, yet their competitive superiority works hand in hand with a deep concern for and 168 ORGANIZATIONAL DYNAMICS
contribution to the communities in which they operate. These types of companies are models for changing the way businesses relate to society. Competitive success must be matched with moral leadership, not just in business practice but in community support, not just in competitive limits but in community leadership. The two cultures must become one.
CONCLUSION Business managers in the competitive economic system are vulnerable to developing a split personality. On one hand, they can develop a single-minded pursuit of profit that sometimes has difficulty even bridling itself at the boundaries of the law; on the other hand, business managers are socialized in communities where virtues of honesty, fairness, and trustworthiness are held in high regard. In this article, I examined companies attempting to resolve this cultural dilemma and achieve integrated business cultures that are both profitable and ethical. One thing that can be said about these companies is they are not all the same. They all work to develop moral cultures, but do so in different ways using different moral values, emphasizing different aspects of their business activities. Patagonia emphasizes the environment, Smucker emphasizes its employees, HP emphasizes product quality, for example. Yet all the companies examined had one thing in common: They all work to create cultures where profit seeking is hedged in by moral values. These efforts point the way to addressing the recurrent breakdowns in business behavior that result in such widespread harm to employees, stockholders, and other stakeholders. The cultural dimension is important because it addresses issues of motivation, knowledge, and emotion, the hard-to-get-at internal components of decision and action. These companies seek to develop cultures that integrate moral values with pure economic rationality, taking the hard (destructive) edge off pure instrumental action. Even if it is true that unethical beha-
vior is not rational in the long run, as some rationalists argue, not only can it be rational in the short-run (and easily concealed by managerial career movement), but human beings are not always rational. They are filled with a diversity of positive and negative emotions that need to be cultivated. The companies examined in this article attempt to do just that, they try to create cultural contexts that encourage moral constraint and eschew self-centeredness and one-sided self-interest. Here one comes to one of the most surprising conclusions in this study: Businesses working to integrate profit and ethics take on some central characteristics of nonprofit organizations. From strong support for employee volunteerism to a ‘‘social worker orientation’’ in for-profit activities to joint ventures with business competitors for public purposes to sincere (and sometimes costly) concerns for environmental stewardship, companies trying to integrate profit and ethics blur the line between for-profit and nonprofit orientations. This is one of the reasons these companies have been able to maintain moral cultures over long periods of time: Nonprofit cultural commitments question profit activities that disregard the wellbeing of others and undermine the good of the community. On the other hand, these businesses use nonprofit orientations for for-profit purposes, as when Shorebank used ‘‘Development Deposits’’ for profit. This reciprocal relation between for-profit and nonprofit orientations is both economically useful (and thus enduring) and culturally beneficial in providing for-profit organizations with enduring moral interests. It is important to realize that the reason ethics is profitable is because society is ethical. This fact is clearly demonstrated in the case of Newman’s Own, the commercial business that donates all its post-tax profits to charity. Newman’s philanthropic activities are a competitive advantage, because many consumers are attracted to products and companies pursuing moral goals. This fact also makes possible Patagonia’s strategy to regain profitability by downsizing to remain
consistent with its moral vision. The beauty of competing through moral action is that it simultaneously intensifies competition, promotes moral values, and generates (additional) benefits for societal problems, donations to charity in the case of Newman’s Own and environmental protection in the case of Patagonia. A forth level of moral benefit is that it educates consumers to be conscientious about their consumption. A fifth level of moral benefit is that conscientious consumers encourage companies to be ethical. Another key to minimizing destructive moral breakdowns identified in this study is the central importance of cultural endurance. It is of limited value if a moral culture developed under one CEO is tossed out or ignored under the next CEO—not uncommon, given the enormous authority of CEOs and weak corporate governance in the American business system. It is obviously not a good idea to leave the moral culture of a business organization dependent on a single individual. The solution to this problem is for organizations to develop moral traditions. A central requirement to develop moral traditions is memory. For traditions to be maintained and transmitted, they must be remembered; they need not be remembered by everyone since they can be passed on by a continuous chain of transmissions and receptions; but to be maintained they must be remembered by a cadre. Certainly the criterion used to hire the CEO is relevant here: Are her moral commitments consistent with organizational traditions? But more important is the board of directors. Does the board have its own moral traditions? Do they have processes in place to review and update these traditions? Do the board traditions support moral traditions in the organization? Do they evaluate themselves and the CEO in terms of these moral traditions? Ultimately the board must make moral memory one of its central fiduciary responsibilities.
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SELECTED BIBLIOGRAPHY Two recent books that examine how moral cultures develop over time are Steven P. Feldman, Memory as a Moral Decision: The Role of Ethics in Organizational Culture (Transaction Publishers, 2004) and Edgar Schein, DEC is Dead, Long Live DEC (Brett-Kohler Publishers, 2003). Several important philosophical texts on the ethics of memory and tradition are Alasdair MacIntyre, Whose Justice? Whose Rationality? (University of Notre Dame Press, 1988) and Avishai Margalit, The Ethics of Memory (Harvard University Press, 2002). A second book by MacIntyre, After Virtue (University of Notre Dame Press, 1984), applies his philosophical framework to organizations. Two books that provide detailed accounts of moral business cultures are Howard Rothman and Mary Scott’s, Companies with a Conscience (The Publishing Cooperative, 2003; and
an earlier version published by Carol Publishing, 1994) and James C. Collins and Jerry I. Porras’s, Built to Last (Harper Publishing, 2002). Although Built to Last does not focus on the moral aspect of business cultures, it provides a wealth of data on how moral values are integrated into business practices and maintained over time. For particular articles and cases used in this article see David Bollier, Stephanie Weiss, and Kirk Hanson, Merck & Co., Inc. (Business Enterprise Trust, 1991), Bill George, ‘‘Five Questions about ‘The Call for Authentic Leadership,’’’ Harvard Business Review, 2003; Ryuzaburo Kaku, ‘‘The Path of Kyosei,’’ Harvard Business Review, 1997; Jane Katz and Lynn Paine, Levi Strauss& Co.: Global Sourcing (Harvard Business School Publishing, 1994), and Sara Mason’s article on Aveda, ‘‘Packaged with Purpose’’ (www.thecosmeticsite.com).
Steven P. Feldman is Associate Professor of Management Policy at the Weatherhead School of Management, Case Western Reserve University, Cleveland, Ohio 44106, United States. He is currently Fulbright Distinguished Lecturer in Business Ethics at Shanghai International Studies University. Dr. Feldman’s primary research focus is on the role of moral tradition and moral memory in establishing and maintaining moral culture in organizations. His book, Memory as a Moral Decision: The Role of Ethics in Organizational Culture (2004), addresses how the past has been used in the literature on organizational culture. Currently Steve is carrying out a study of ethics and culture in Chinese-American business relations (Tel: +1 216 368 5102; e-mail: [email protected]).
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