Managing With Soul: Combining Corporate Integrity With the Bottom LinePublished: November 19, 2003 in Knowledge@Wharton
This story, which David Batstone, a founding editor of Business 2.0, tells in his recent book, Saving the Corporate Soul & (Who Knows?) Maybe Your Own, rings especially true this week. U.S. prosecutors have just announced their decision to re-try former Credit Suisse First Boston investment banker Frank Quattrone and also indicted HealthSouth's former chairman, Richard Scrushy, on 87 counts for a $2.7 billion fraud. At such times, the idea of a corporate soul might almost seem to be a contradiction in terms.
While most corporations don’t go so far as to cook their books, are they not dedicated to making money above all else? Doesn’t this overarching goal allow them to falsify their accounts, lay off workers, pollute the environment, and ignore their local communities with impunity? Doesn’t it enshrine the stock price as the ultimate index of the company’s value, on whose altar all other considerations of corporate worth are sacrificed?
Not necessarily, according to Batstone, who argues that corporations not only have a moral duty to be good citizens but can also improve their own commercial prospects in the process of doing business in an ethical way. Drawing on his experiences as a journalist, entrepreneur and professor at the University of San Francisco, Batstone says that policies such as supporting community groups, treating workers well, and minimizing environmental damage are no longer the preserve of liberal do-gooders. Public demand for responsible corporate behavior is now such that those who ignore it do so at their peril, he claims. Doing well is not only compatible with doing good; a successful business is increasingly reliant on an ethical code that permeates a company’s external and internal life.
Batstone presents persuasive and voluminous evidence that obsession with the bottom line is a myopic and ultimately damaging approach to running a business. He cites the case of the owner of a Chevron gas station in San Francisco who established a successful business by providing good service to his community over 25 years. Despite the business regularly achieving or exceeding its gasoline-sales targets, Chevron announced in 1989 that it would not renew the station lease because the gas storage tanks were in need of replacement at a cost of $150,000, and the station had an old-fashioned appearance that didn’t match the latest corporate image.
Chevron’s accountants figured the company could make a lot more money from the location by closing the business, demolishing the gas station and putting up a commercial building. As for the owner, Tom Higa, Chevron suggested he could consider retraining as a computer operator, but this failed to match his experience or his interests, Batstone reports.
The oil company backed down and the business survived because of a wave of protest from local people and because the then Mayor of San Francisco, Art Agnos, implemented an environmental impact procedure on Chevron’s redevelopment plans in a move designed to delay the project and increase the company’s costs. Higa’s business went on to make a healthy profit for the next decade.
The story shows that a corporate fixation on the bottom line at the expense of its other responsibilities can be bad for business, Batstone argues. The number crunchers ignored the financial impact of a tarnished corporate reputation once the case was reported in the media. They failed to consider the impact on other franchises once word got out that meeting targets was not enough to shield them from closure. And they didn’t take into account the effect on company morale of Chevron’s apparently callous attitude toward an employee. “In short, a strong business case can be made that Chevron’s decision to close down Tom Higa’s service station was costly indeed,” Batstone writes.
Batstone’s use of Tom Higa’s story is representative of his practical, specific approach to his case. While acknowledging that it’s not easy to quantify the benefits of corporate policies such as community involvement or environmental protection, he presents his argument in the form of eight principles that set clear goals for a more principled approach to business.
The principles urge directors and executives to align their personal interests with those of stakeholders; to adopt a policy of transparency towards shareholders, employees and the public, and to think of the company as part of a community as well as a market.
Team Members vs. Hired Hands
Companies should also represent their products and services honestly to customers, and treat their workers as valuable team members, not just hired hands, Batstone says. They should treat the environment as a “silent stakeholder”; strive for balance and diversity in their relationships with workers, customers and suppliers, and respect the rights of workers in overseas nations with which they trade or produce goods.
Each of the eight principles is elucidated by a series of questions at the head of each chapter. In the chapter on Transparency and Integrity, for example, Batstone urges executives to consider whether their financial reports are verified by auditors who are free of conflicts of interest; whether directors diligently monitor and verify management reports, and whether off –balance-sheet transactions are reported.
Companies who ignore the principles can be expected to be punished by shareholders as well as their customers, Batstone says. He cites a study by University of Pittsburgh business professor Jeff Frooman of 27 incidents in which corporations were hit with punitive measures such as regulatory fines, environmental lawsuits and product recalls. Most suffered significant losses in shareholder value that they never recovered.
But those who maintain high ethical standards can expect to reap long-term financial rewards, Batstone says. He cites the well-known case of the healthcare products maker Johnson & Johnson which in 1982 recalled 31 million bottles of Tylenol after eight people died from ingesting cyanide-laced capsules of the drug. Although the action cost the company $240 million and cut its profits in half that year, the recall succeeded in saving the Tylenol brand and generating a wave of goodwill among customers.
To bolster his case, Batstone cites a survey by the management consulting firm Towers Perrin of 25 companies that enjoy a strong reputation for integrity and are consistently rated as good places to work. Their shareholder returns over 15 years totaled 43%, more than twice that of the average 19% return from Standard & Poor’s 500 companies.
As an example of a company that embodies sustainable financial management and ethical business practices, Batstone lauds Clif Bar, a maker of high-energy snack bars for sports people and outdoors enthusiasts. Its founder, Gary Erickson, has expanded the business on the basis of demonstrable product demand rather than shareholders’ goals for annual returns. That way, he has avoided the need to search for expensive outside capital in an effort to meet his stakeholders’ demands. Building the company on outside money is likely to turn the CEO into a professional fundraiser, diverting his or her attention from actually running the business, Batstone writes. “If the CEO is spending 50% of his time looking for money, what the hell is he doing with his vision?” Erickson is quoted as saying.
Erickson not only decided to keep the company private but rejected a takeover offer from a major food company that would have brought him “an insane amount of money” because he didn’t want to give up on the dream that had spawned the company in the first place, Batstone writes. He then bought out his partner’s stake and became the sole owner. “By keeping the company private, I can ensure the quality of our work environment, follow our own social agenda and share the profits with those who come along for the ride,” Erickson said.
Clif Bar’s sustainable model is complemented by enlightened management in which workers are treated as partners and bonuses are paid annually based on an uncapped percentage of net profit. Erickson, a former competitive cyclist, pays his employees for two and a half hours of physical exercise each week, supports research into breast cancer, and has an in-house program on how the company can reduce its environmental impact.
While he is clearly impressed by Erickson’s approach to business, Batstone’s analysis is weakened by a lack of financial data to bolster his case. It would have helped, for instance, to know what it really meant when he says the company “hit pay dirt”, or has been “on a roll ever since.”
Batstone's occasional lack of specifics may be a little surprising given his journalistic background. In addition to his role in founding Business 2.0, he is executive editor of Sojourners magazine and a contributor to numerous publications. He is also an executive for an investment bank serving the entertainment and technology industries, and in the 1980s founded a non-governmental agency dedicated to improving human rights in Latin America.
But Batstone's knowledge of the companies he writes about is generally detailed. In the chapter on equality and diversity, for example, he uses the British home-improvement retailer B&Q as a case of how to successfully hire older workers. In the late 1980s, the company was having trouble recruiting enough people to keep pace with its rapid expansion and so decided to experiment by staffing a new store entirely with workers over 50.
Concerns that the older hires wouldn’t be able to lift heavy boxes or learn the computer system were unfounded, and their store soon outperformed others in staff turnover, absenteeism, average sales per worker, and customer satisfaction. The company extended the policy throughout its operations.
Phones for Poor Villages
In a chapter on Globalization, Batstone argues that companies should pursue international trade and production based on respect for the citizens of developing countries. One of the most inspiring stories he tells is about Iqbal Quadir, founder of Grameen Phone, a leading cellphone carrier in Bangladesh. Inspired by his Wharton professor Russell Ackhoff - who would say in his lectures that "profits is a means, not an end," Quadir worked for years to overcome hurdles to build a telephone company that now has the largest subscriber base on the Indian subcontinent.
Quadir tied up with Grameen Bank, a Bangladesh bank founded by micro-lending pioneer Mohammed Yunus, so that grassroots entrepreneurs in village after village could set up cellular phone booths, thus connecting remote areas of a poor country that earlier had no phone service at all. According to Quadir, "Globalization is not just about opening up another Pizza Hut. It means distributing opportunity and the good life to all the world's population."
After more than 200 pages of preaching the gospel of sustainability, responsibility and integrity, Batstone puts his money where his mouth. He tells the story of his own decision to resign from the position of CEO in a startup technology company in the late 1990s because he realizes at the last moment before the launch that his heart – or as he puts it, his soul - is not in it.
“I was forced to confront my motivation … for being in this business,” he writes. “Deep down, I knew the reason: I was hawking widgets, pieces of technology. I had no passion, none at all, to help corporations solve their operational dilemmas and become more efficient. To be completely honest, I was in it for the money.”
No amount of material success will compensate for a life lived without “significance,” Batstone writes, and he could only find that by leaving the company he had worked hard to set up. While other corporate leaders may not go to those lengths, their efforts to run their companies in accordance with the principles in this book, he writes, would fill an urgent need in the corporate world and perhaps in their own spiritual lives.