And yet there is an ethical question that arises “How anyone can justify economic advancement (and personal wealth creation) at the expense of the larger economy, environment and society?” This question is being asked today because we have seen actions taken by few powerful corporations resulting in an almost total collapse of the financial system. The foundation of ethical leadership is ensuring the right balance between doing well for those whose capital has been invested and doing good for all of us.

A New Paradigm

A new paradigm is emerging among informed people everywhere with the opinion that sees the sustainability of economy, environment and society as something that must be given consideration in the purpose of all organizations – government, not-for-profit and commercial businesses. For at least the last hundred years, people have assumed that profits and sustainability are mutually exclusive. This deeply ingrained assumption is that considerations about the functioning of the larger economy, health of the environment and society will somehow have a negative impact on any organization’s goal to maximize shareholder value.

This assumption is built on two major flaws in our thinking. The first is that profit is the ultimate objective and overrides all other considerations. If something doesn’t generate the profit being sought, it won’t get attention. The second is that values – the principles that govern how we act – and profit are not compatible. This is why many organizations see values as a cost, taking away profits. Is it any wonder why so few show the courage and conviction to make values the primary mechanism by which they steer their firms?

Is sustainability really going to cost you?

There are many business leaders are seeking ways to make values, or a higher purpose part of their company’s ethos – their way of being and doing business. In fact, people are doing some amazing things to prove that achieving sustainability in your operations does not mean less profits, it means more! These people and companies provide the evidence that shows there are strong reasons to believe that business may be more profitable when it pursues a mission that seeks to do no harm.

It is vitally important that we begin changing these assumptions in all our leaders, including business. This change is in their interest (makes their organizations more effective, productive) and in the interest of their stakeholders. And most importantly, our collective interest.

Profit, from values

A strong competitive market position lies ahead for organizations that can successfully align their strategy so that the sustainability of economy, environment and society – the whole. When this is achieved and in the process, realizes sustainability for the organization. A leading example of this is Interface Global, a carpet company that has been adapting itself to do business in a more sustainable way since 1994. The strategy has resulted in several new large markets, and -take note – very large profits!

In this video, Interface Global’s CEO and founder Ray Anderson talks about how his firm has increased sales and doubled profits while turning the traditional “take / make / waste” industrial system on its head. In a gentle, understated way, he shares a powerful vision for sustainable commerce.

For some years now, business leaders and advisors have all been calling for change. The main message is we can’t continue to ‘do business’ the same old way, that we’re failing ourselves and our descendants, not just our shareholders if we don’t start to question the key assumptions we use to guide our decisions. One of the worlds first industrialists, Henry Ford said “[Profit] like happiness, is never attained when sought after directly. It comes as a by-product of providing a useful service.” If we as leaders are really serious about positive change, then the choice is clear: decide to focus our strategy on creating value in a way that is responsible to all then profits will follow.

There are still too many businesses with strategies that focus on unsustainable profits. They spend millions in an effort to persuade markets about low-value offerings and end up eroding the value of their business, the economy, environment and society. They use the two assumptions to generate policies that descend into unsafe practices that do little to deliver real lasting value. The strategies that result are simply not sustainable in today’s rapidly changing and complex world. Their architects, by virtue of the strategies pursued, prevent themselves from playing a constructive part in the real markets and society of tomorrow. Companies that aren’t constructive, risk becoming irrelevant. And perhaps this is as it should be. Just like all the markets and societies of the past, those in the future will be created by ones that identify and deliver real value. Any business that creates this kind of value doesn’t need nearly as much money and effort to sell, as it is often very evident to Customers when they see it.

Profit maximization is simply no vision at all. It is empty of any real strategy and leaves the organization susceptible to the whims of changing leaders and worst of all, inspires no one at the operating level. A great majority of business leaders today accept that to “lead” an organization, requires a cohesive vision that drives the strategy and direction of their organization. This vision must capture the imagination and passion of all stakeholders: investors, staff, suppliers and customers. While there are few leaders today that disagree with these requirements, in practice they are very difficult to achieve. Ray Anderson of Interface and his vision of “zero impact” is a great example and inspiration that it can be done. This is their ‘higher purpose.’

The key to competitive advantage for successful companies in the future is to base strategy on value creation for all stakeholders. Future generations will view today’s way of doing business as misguided just as we view feudalism and the divine right of kings as incompatible today. The creation of real value that is in touch with universal values is the height of achievement and performance excellence.

We’ve had recessions before and will have them again. In his book, “Managing in Turbulent Times,” Peter Drucker wrote that after every boom there’s a bust, and in the bust period are new opportunities for growth.

“During the 1950s and 1960s, it was believed that everything has to grow and that there are no limits to growth. In the 1970s, it became popular to believe that growth is over forever. Both beliefs are fallacious.
Nothing can grow forever, let alone at an exponential rate. Yet every fifty years or so, since the early eighteenth century, the developed countries of the world economy have experienced a “go-go decade,” during which growth was everything and everything was supposed to be growing forever.
Every one of these “go-go” periods was followed by a massive hangover, during which everybody believed that growth had stopped for good. It never did and there is no reason to believe it has stopped now.
But in every such period, growth shifts to new foundations. It then becomes important for a business to think through where the growth areas are for its specific strengths, and to shift its resources out of areas of in which results can no longer be achieved into those areas where the new opportunities can be found.”

The main (and, in many cases, perhaps the only) source of information managers use to make decisions about the future is from accounting; a five hundred year old system that doesn’t tell us anything about the growth opportunities that exist for the organization. This system presents costs only, and in a recession reducing total cost of labour becomes an irresistible temptation.

Doing this is commonly viewed as a necessary step to restoring profitability – an understandable but dangerous illusion built on the assumption that all our products, services and programs will uniformly continue to produce the same (or better) results – only now will less staff.

While they can be forgiven for making cuts this way in the short term, the long-term effects will do more harm than good if managers continue to avoid the unpleasant task of selectively sloughing off products, services and programs that no longer produce results. Every enterprise whether for profit business, government and social has products and services and programs that no longer contribute.

And so, where to cut staff, is the wrong question. The question managers must ask is “What do we need to do differently today to achieve our purpose tomorrow?”

A policy of systematic abandonment – putting every product and service, every service, process and activity on trial by asking “Would we get into this product/service/program/activity, based on what we now know about it?” And if the answer is no, then “How do we get out of it?” Or, at least, stop putting more resources into it.

It is the concentration of resources on opportunities that creates growth. The best time to do this is during the boom years. A recession reveals the things are slowing us down, the activities that only consume resources but fail to produce results that achieve our organization’s mission.

Recessions are a fact of developed societies; they are the economic equivalent of a hurricane. We can’t control them any more than we can control the weather. And, as any good sailor knows, there’s no escape from the weather. As Peter Drucker tells us, the best we can do is keep our organizations “lean and muscular, capable of taking strain but capable also of moving fast and availing itself of opportunity.”

With all the carnage created by the downturn in the last few months, you’d think more companies would be keen to look at what they’re doing like this one is doing. In spite of overwhelming evidence that things have changed, very few firms are really doing anything fundamental to improve their economic performance. A lot of good organizations are missing out on tremendous opportunities created by the downturn. Not only is it an opportunity to prepare our businesses by making rapid and extensive structural changes to our business model – even better, it’s an opportunity to get closer to our Customers who, for a long time now, have expected it and are now beginning to demand it.

I’ve always been interested in why some companies can make this transition more easily than others. Large or small, an organization’s reluctance/resistance to change is in large part due to the management attitudes and thinking people use to run their business. Some managers are overly concerned about keeping the status quo. They operate with the implicit “we don’t want to make too many changes too quickly.” Workers get the message and simply make do with what they’re given.

Even if managers face up to the reality of the situation, we can’t do it by ourselves. We need help, everyone inside the business, must embrace change by questioning how and why things are done. In a world where nothing is stable, this is simply the best way to do business.

After some discussion about specific challenges, I asked him to tell me in his own words what his company wants to be in the market. “What do you mean?” he asked. “At the end of the day, what do you want to be known for?” He then proceeded with a 10-minute explanation about his company’s products, his people, their distribution network and financial performance. I pressed him to tell me why any of this matters to Customers. He sat back in his chair, and said “Well, it doesn’t. I’ve got a whole marketing department and sales organization to figure that out.” Translation: Customers aren’t my concern.

I told him that if I was working for him I would get the distinct impression that he doesn’t think Customers were very important. Ditto, if I was a Customer. He shot back, “But they are important! I’ve made huge investments in people and technology over the years. At any rate, my VP of Sales is responsible for individual Customers. Besides, what’s any of this got to do with our ability to adapt to change?” I explained that, as a senior leader, he and his colleagues set the tone for the kind of values and attitudes practiced throughout the company; so by extension, he was the company’s cultural guide.

As lunch arrived, I asked him to tell me how his company defines its Customers. He gave me the standard answer: they do business with such and such industry, this vertical, that demographic. “You have some pretty tough competition don’t you?” “We do okay,” he said. Again I pressed him to tell me if they measure how much profit his firm makes from each Customer. “No, our profit metrics are by product line and business unit.” “What about how much profit you make over the life-time of the Customer relationship?” “No, we don’t do that.” “Do you measure how much of the Customer’s total ’spend’ accounts for the profits you make?” “No we don’t. But I fail to see how that would help us.”

I explained that what matters is what gets measured. If he wants to get everyone on the same page, then he would have to start by focusing on Customer profitability. Without that, very little real change was going to take place inside his firm. I made it clear that I wasn’t talking about Customer satisfaction metrics (which his company had implemented twice before with limited success). These play a very minor role relative to product and unit measures. If he truly wanted to improve his ability to adapt to change, then measuring total profit by Customer was the place to start.

On our way back to his office, he told me “You know, I’ve always prided myself on making the hard decisions in building this company. Until today, I believed we were doing things right. I would never have made the connection how our management systems affect our decisions. We have a long way to go to achieve Customer focus, but I know that once our team sees things the way you’ve explained them, that they’ll respond.”

This clip is from the movie, “Thunderbolt and Lightfoot” starring Clint Eastwood and Jeff Bridges. In it, the gas station attendand (beautifully played by character actor Dub Taylor) foreshadows the madness that has ensued these last few weeks. I urge you to view it the first chance you get.

- Lao Tsu, The Art of War

The recent spate of corporate failures has put leadership under the microscope – again.

Here’s a great video featuring Jon Huntsman, CEO of Huntsman Corporation discussing ethical leadership.

Courtesy of Wharton School of Business (link opens new window).

I’ve worked in a variety of industries and sizes of companies and learned is that it’s not enough for just a few individuals to care, a healthy organization is one where the attitude of caring extends from the board to the person who sweeps the floors.

In this video, Traci Fenton, Founder and CEO of WorldBlu, Inc., explains the concept of organizational democracy.

“You no longer have the classic carrot-and-stick approach to leadership. We have 90,000 people who work with us and I as a leader can’t do a performance appraisal on them, can’t offer them a bonus, can’t demote and fire them. So how do you induce them to do things they might not do otherwise? By being more open than you’ve ever been. In this new world, the most transparent leader is the most attractive leader. The leader who figures out a way for everybody to win is going to be the leader who wins. The leader who comes with a zero-sum mentality gets zero.”

Darren Carroll, CEO of InnoCentive

From the book “Mavericks At Work,” Bill Taylor and Polly LaBarge, HarperCollins, 2006.