Four factors that create irresponsible businesses

An Article from Business Respect, Issue Number 163, dated 25 Jan 2010
By Mallen Baker

It's possible that people become leaders of major businesses with the full intention of earning money in the most unethical, disreputable way possible. But more likely, they don't. Companies end up doing the wrong things for a variety of reasons - none of which necessarily begin with evil intent.

The four factors that often create irresponsible businesses:

1. Believing that you are protected from consequences.

The phrase 'too big to fail' is the most recent illustration of this factor. It comes from an irrational belief that the status quo is more fixed and reliably stable than logic might suggest - and that therefore decisions are made that only make sense if that status quo persists.

It's ironic that businesses are, in theory, the types of human organisation that are most adaptable to change, and many of which have succeeded by exploiting or creating change in a way that helped them overtake slower moving competitors. And yet, the natural human state is to resist change - and it keeps getting in the way for all businesses.

It's the difference between seeing climate change as a logical basis why the business environment is going to radically change in coming years - with all the threats and opportunities that implies - or seeing it as a potential additional cost imposed by legislation, the solution to which is to lobby against that legislation.

When the dot com bubble was in full swing, there were plenty who were pointing out that market sentiment was drifting into irrational territory. The way some companies were being valued just did not make sense on any traditional measure. But people did not want to be left out because, on the way logic seemed to be working, all you had to do was climb aboard the gravy train in order to get fabulously rich.

Likewise, the application of this logic to the recent financial crisis was best summed up by the now-famous quote by Chuck Prince, former CEO of Citigroup, who said at that time: "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing".

The music stopped. He lost his job, and so did many, many others.

By the way, stakeholder engagement should be one of the routes you take to addressing this problem. Good quality stakeholder engagement is about putting you in touch with the potential consequences of your decisions. It's not always the way it's practiced, however.

2. Building a business model that depends on customer ignorance

Banks and insurance companies have made plenty of profit in recent decades on the principle that their customers don't understand the complex details behind some of the products that they buy. Therefore there is not so much downward pressure on price, and customers often don't choose optimal products for their circumstances.

In the UK, this has led the government and regulators on a never-ending quest to provide the right tools to force the companies to clean up. This has taken the form of the 'treating customers fairly' initiative. The trouble with this is that it is pretty much impossible to avoid the situation where a company can sell a sub-optimal product.

And the Chuck Prince logic applies here, too. On the rare occasions you can get a senior executive from one of these companies to talk frankly about the dilemma, they will admit that so long as the rest of the industry is benefiting from customer ignorance, there is no market logic for them to call time on the practice. It is genuinely one of those areas where the market fails to reward good behaviour. So they keep dancing until some outside agency pulls the plug.

Doing the wrong thing on the basis that it's difficult to see how you could be caught, and it's all deniable, plus the fact that everyone is doing the same so there's strength in numbers - that's the kind of logic that gives succour to companies that have slipped into an irresponsible business mindset.

3. Becoming so absorbed in the micro-reality of your business so you fail to see the bigger picture.

You've heard everyone complaining about how the bankers seem to be out of touch with reality with their addiction to eye-watering bonuses. Well, yes. They literally are. Most people at higher levels in business are as well - it's just that the micro-reality around their business sector isn't so far removed from what seems reasonable to the wider population.

People get caught in a world made up of their own beliefs, the things that they see, and the terms of reference that make sense to their own values. You don't have to be in business for this to happen.

But for senior business leaders, the impact is more powerful. Because they go to work in their chauffeur driven cars. Because correspondence is screened before being passed to them. Because they deal with macro-figures, and go to lots of networking events where they exclusively meet people like themselves working in the same industry.

So from the perspective of the senior banker, the rule that says you pay your senior people telephone-number bonuses in order to keep hold of the best talent - that rule has the unbreakable truth usually reserved for something like the laws of gravity. The realisation that this only works within a certain contextual setting - and that context has been severely impacted by the financial crisis - this is outside their terms of reference.

People that perform get well paid. People that fail get sacked. That seems to them to be self-evidently the right operation. If some people believe that this is changed by the fact that millions have lost their job, that financial institutions were held to blame for that, and that they only carried on because the government bailed them out - well, those people just don't understand.

Those people, of course, can storm the barricades of your gleaming marble edifice if they are motivated to do it. Governments are now starting to prove it across the world by taking a more direct route to punishing the banks than would have been thought possible only a couple of years ago. Actions and consequences. It's not always pretty.

4. Believing the reality that it is most comfortable to believe.

US Motor manufacturers over the last few decades believed that higher efficiency requirements for vehicles could and should be fended off, and they believed as well that the US consumer would always prefer the ultra big gas guzzling vehicles which would be OK because the price of gas would always be cheap.

It's not that any rational analysis of the likely future changes in the world energy market, or the environmental agenda, would support this. But it was the version of reality that suited the companies' business plans the best. So that is the version of reality they wanted to believe.

A bunch of businesses believing the comfortable, lazy lie is often the prompt for new, aggressive competitors to move in to use their greater clarity to steal market share - exactly what Toyota and Honda did, for instance. But if the reality you're ignoring is one where the act of ignoring it will have major social consequences - climate change comes to mind - then the stakes are higher. And believing the comfortable, lazy lie pushes you over the edge into irresponsible business practice.

The comfortable, lazy lie can also be something about how your product is made. You can assume that there is no child labour in your supply chain. You can assume that there are no negative health consequences of your product. You can assume that your product is greener than the competition. I have certainly had plenty of conversations with people who, in common with their competitors, swore with sincerity bordering on religious conviction that their company was far ahead of the competition in these points.

Just like, when polled, the majority of people testify to themselves being "above average" drivers.

No business benefits from seeing reality through a distorting lens.

You would be right to think these four points have a common element - all of them involve factors that seduce companies into making decisions with unintended negative consequences. And over time, they do so either so far removed from reality that they don't see those consequences - or they become so vested in the business model that is creating them that they believe they have no choice but to continue.

They can also all be addressed - with good leadership, with constant energy into opening out to see what's really happening, what the consequences might be, and how can things be improved.

The key point is that socially responsible business can not be a passive thing, you have to actively work to achieve it.

It's like being fit. Keeping fit - at least for anyone over the age of 25 - is not achieved by avoiding people with germs. It is achieved by choosing the right balance of foods and undertaking exercise. And having achieved fitness, you can't then stop.

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