CEBC IN THE NEWS

Ron James Talks Business 

A Conversation with the President of the Center for Ethical Business Cultures

Published Thursday, September 19, 2002 in the The Catholic Spirit 
~ Serving the Archdiocese of St. Paul and Minneapolis. 

Interview by Emilie Ast

 

What’s it like being an expert on such a hot topic right now? Meeting with President Bush and things like that? I’m humbled by the opportunity to be able to put to work some of the values that I believe so deeply in — the value that an organization, whether for-profit or not-for-profit, has a responsibility. That responsibility is about performance, delivering on its mission, but it’s also about creating a culture that cares about multiple stakeholders. Have we been getting calls? Yes. Is this a hot topic? Yes. If I had a worry, it's that it would be the hot topic for today, as opposed to a wake-up call. We need to be deeply concerned about how we got to this point, but more important, how do we put the right culture in place so that we can learn from the lessons that got us here and get better in the future? We're at a crossroads. We’ve got a unique opportunity to create the kind of culture that generations of leaders coming after us will learn from and build on. And how we handle it will have huge implications for us as a country and for corporate America, specifically.

Ron James President and CEO Center for Ethical Business Cultures

Tell me about your first significant, personal brush with the notion of business ethics. What helped shape your passion for this?

I grew up in the Deep South [Port Arthur, Texas] in the ’60s, a time when discrimination was widely practiced and accepted. I knew firsthand what it meant to be denied based on one’s colors or beliefs. And I know what it feels like to have a contribution to make but have that be denied. As I started the world of work, times were challenging. Even though I had gifts and talents and skills, I had to compete like everyone else but still find those might not be accepted because of my race. And so it became important to me to work to make sure that everybody has a chance to reach their full potential.

As I started to make progress in this area, it’s pretty easy to get integrated into the system and forget where one comes from and leave others. But that's a choice I made long ago — that it’s more important to be inclusive, to build a culture that embraces difference and to work to change the system so that it recognizes that difference. There have been times when that’s cost me because people would much prefer that you fit into the system.

I can recall early on in my career being recognized for outstanding achievements with racial slurs and having to work through that. It was painful. But I was determined to clearly express my views about what was inappropriate and unacceptable and the impact that has on people’s ability to perform and to contribute.

There’s a recent survey of chief financial officers, reported on the Web site CFO.com, in which “17 percent of all respondents report being pressured to misrepresent their results by their companies’ CEOs during the past five years.” Does that surprise you?

I think in the last couple of decades, but particularly the decade of the ’90s , we’ve been on a collision course with disaster. If you look back at the ’90s, there was rapid growth in the stock market, and that set expectations in the minds of the investors that great returns were going to be a foregone conclusion. What came out of that was expectations: quarter-to-quarter performance, very short term: “I want to be able to put my money into the market and see an immediate return on it.”

Now that’s fundamentally different from the way the investment community first started, and I can speak to this from my background in telecommunications. I worked at the Bell Systems. Over 85 percent of our stock was owned by individual investors, and they viewed that as a safe investment. If they got dividends and some stock price appreciation, they were more than happy. And that might add up to be 5 to 10 percent a year.

In the ’90s , you weren’t doing it if you weren’t getting 30 percent returns a year, and that was minimal. People wanted to see their money turn a lot faster. So that set up a lot of expectation on the part of the investor; and frankly, it set up an expectation on the part of companies in terms of how they should perform.

Now, once that happens, you can do certain things under performance to deliver the results, but pretty soon, those things run out. And then you start pushing the envelope, whether that’s using other techniques that aren’t necessarily operational in nature — accounting techniques, a la Enron — to try and generate higher earnings. You continue to push the envelope.

That’s where one’s ethical compass needs to go off. Frankly, in some companies, it didn’t go off, and we’re witnessing that today. They made choices to say it’s more important to deliver high, short-term earnings than to do what’s right. And we’re seeing the fall-out right now.

Did that shock me? Given what happened in the ’90s, no, we were headed for this disaster because we could not sustain that level of performance that occurred.

The bursting of the dot-com bubble in the ’90s was another sign. Here were companies that were very short-term in terms of life span, had not even generated earnings yet, but were commanding huge valuations. That also fueled this appetite for further growth.

The other thing that finally entered in was greed. I do think there were some leaders who put their own interests ahead of the stakeholders that they served, including shareholders.

Lastly, we also prioritized in the ’90s and put the shareholder substantially ahead of all the other stakeholders. It was more important to figure out how to get those returns up than to serve the other constituents. So if it meant companies had to merge and lay off people in order to ensure getting to a certain performance level, that’s what happened. If it meant companies had to scale back their costs in terms of how they were delivering great-quality products, that had an adverse impact on customers and employees. So people started to really reduce the emphasis on the other stakeholders while emphasizing the emphasis on the shareholder.

I think one of the keys to getting back on the right track is getting the right balance between long-term and short-term, and the right balance between the stakeholders.

What is your vision of corporate responsibility? Should a corporation be responsible first and foremost to its managers? To its shareholders? To the employees? To the community it in which it operates?

Here I’ll quote the (U.S.) secretary of commerce, Donald Evans, from the presidential economic forum I just returned from. He talked about the higher calling of the CEO. Yes, CEOs are obligated to deliver a return to their shareholders because they’ve made investments. But he also talked about the role of the CEOs as the stewards of capitalism. CEOs create companies that create wealth — not just for shareholders, but for employees — and serve communities. So I think the CEO has a broad responsibility to the broader community to be a good steward of the company.

They do have an obligation to the shareholders, those people who have invested in the company. Shareholders deserve a fair return on their investment. But I think the CEO also serves other key stakeholders, including customers and employees and suppliers and communities — and, frankly, even competitors. Because as we’re seeing with Enron and Qwest and Worldcom and Global Crossings, when they misbehaved, it not only hurts their companies, it casts a long shadow on the industries they were in. You affect your competitors based on how you conduct your own business, as well.

If you serve other stakeholders, aren’t you neglecting your responsibility to maximize shareholder value?

We don’t agree with that. We believe that as you serve all stakeholders, that actually helps the shareholder value. The difference is short-term versus long-term.

You can maximize shareholder value in the short-term: Scale back on quality and improvements to the product line so that customers don’t get quite as great a quality of product. Cut back on employees and get by with just a minimal number of employees and customer service and reduce employee expense. Fudge on suppliers; don’t pay them promptly, negotiate so you’re managing the cash a little longer. All that would optimize the short-term, but what you do is destroy the relationships that you have with those stakeholders.

When you work with the stakeholders, in the long term it pays off. Specifically, customers know they’re going to get a fair shake. They know when they pay for a product, it’s going to be quality, delivered on time, and it will meet their needs. As a result of that, they keep coming back. And they tell other customers about you, and all of a sudden, it lowers your marketing costs.

Employees tend to stick around longer, and then you don’t have recruiting, training, turnover kinds of costs that other businesses might incur. Suppliers tend to work with you. They know that if they deliver their product on time, they’ll get paid promptly, and as a result, they bend over backward to make sure they’re meeting your needs. Everybody likes to line up with a company that does business in an ethical way. And it pays over the long-term

Back in the early ’90s, there were several faculty members at Harvard that looked at companies over an 11-year period that practiced good corporate responsibility, serving multiple stakeholders, versus companies that didn’t. And the findings were pretty revealing. Companies that practiced good corporate responsibility saw their revenues increase eight times as fast as companies that did not. They saw their employee population grow four times as fast — meaning they were creating more jobs. They saw their stock price grow 12 times faster than companies that didn’t over this 11-year period.

What companies are doing it right?

The center recognizes annually companies with a Minnesota Business Ethics Award. We partner with the Society of Financial Service Professionals, and jointly, we have companies submit applications in the large, mid-sized and small categories. This past year, winners included HealthPartners, Reel Precision Manufacturing. The year before it was Medtronic, two companies in the small-company category, Windowlite Construction, and Karlsson Consulting.

These companies received the award because they were exhibiting good ethical behavior across a number of fronts.

One company, for example, elects to give 10 percent of its pre-tax profits to charitable not-for-profits.

Another, when faced with economic turndown, rather than lay off employees, chose to reduce salaries across the board. But they reduced more from upper management, then sort of went down. They stopped with people who made $11.50 or less because they felt they were less able to cope with an economic downturn than perhaps those who earned more.

What do you think about all the layoffs going on? Are they part of the ethics discussion, too? Are companies going overboard — cutting people to make their numbers? What are the moral implications?

I think there are both cases going on. Clearly, when the economy goes down, there’s less demand for products, there’s a buildup of inventory, and so there isn’t work available. So companies, yes, do make choices to reduce the workforce. That happens. But I also believe there are cases where companies reduce the workforce in order to reduce expenses to help meet financial targets. I think it’s important to recognize that when that happens, people’s lives are impacted. Their ability to care for their families and their lives are affected.

So I think leaders have got to be very thoughtful as we go through these periods of economic growth and economic downturn, to make sure the size of the workforce is right. And where they do have to take steps to reduce the workforce, it’s done in a very ethical and humane way. People are communicated to clearly, in person. There’s a transition package that allows people to at least try and adjust to the transition they’re going to have to go through. And there’s care for the individual. I do not support the notion of reducing the workforce just to meet financial objectives. And when that happens solely for that purpose, I think that’s wrong.

You’ve said that the best way to reinforce ethical values in the workplace is for leaders to “walk their talk” and “model ethical behavior.”

From a survey done by the Ethics Research Center in Washington, D.C., we saw that when leaders model ethical behavior, there are far fewer evidences of ethical breakdowns and violations. When leaders model ethical behaviors, ethical lapses are observed by 23 percent of the employees in the workforce. When they don’t, 74 percent of the employees in the workforce notice ethical breakdowns occur.

Did you see this ethical crisis coming? Did you ever expect it to come to this level, to a point when people couldn’t even trust the accounting documents?

No, I didn’t. I believe for the most part, business leaders make good choices. They want to do the right thing. And even when pressured by short-term performance expectations, they still try to do the right thing.

I was shocked at the willful falsification of information that appears to have been going on in certain companies. I say “appears to” because we haven’t gotten all the facts yet. Some of these haven’t been tried in a court of law. There are a lot of allegations out there. And if the allegations prove true, then I am really shocked and disappointed because these are people who not only have let themselves down and their companies, but they’ve let the system down. The system that we have is based on trust. … All of that was broken by the action of those few individuals. Trust needs to be rebuilt and restored. The actions of a few individuals are having a devastating effect on the economy.

Do you think it’s just a few bad apples?

I think the majority of business leaders try to do the right thing. And yes, I think the category of people who are doing the kinds of outrageous things we’ve seen in the press are a small segment of the total business community. I think, by and large, the business community leaders are trying to get the right things done.

Historically, has this level of corruption in business come in cycles?

I haven’t tracked it this far, but this is new. You go back to the ’70s, there were the scandals with the federal government and the defense contractors who were landing big contracts. In the ’80s, it was the financial scandals — remember the savings and loan debacle that occurred? You get to the ’90s , there were challenges in health care, companies submit- ting and getting overreimbursed for the services they were delivering because the government reimburses for a lot of services. There have been these cycles, so this is not new.

I guess what is different for me here, though, is the depth and size of some of the occurrences. When I hear about the size of the Enron scandal and how it quickly, within a matter of months, brought a company into bankruptcy. When I hear about Arthur Anderson, who a year ago was a thriving consulting firm and now is heading toward going out of business. When I hear about some of the larger telecom companies that have filed for bankruptcy — the size and the scope of the problem. That’s one thing that’s different.

The other thing is the absolute greed that came out with the gold rush of the ’90s. There were huge shifts of wealth, and individuals were walking away with hundreds of millions of dollars. This wasn’t new money that was being created. This was money that was being transferred from investors into the hands of a few. So it wasn’t like they were selling to a lot of new customers and that was generating a lot of new revenues, and that was generating a lot of new incomes. It was the stock price appreciating based on investors putting more money into the market. And that money was being transferred into the hands of a few.

So the absolute greed, in the cases of a few, along with the depth of misperception, the depth of the deception — those were different for me.

Do you think people are outraged at these latest scandals because they are really opposed to corruption — or because they’re losing a lot of money in the stock market? If they’d benefited, would it have been seen as a big deal?

It may be hard to separate the two. Clearly, I’m going to feel a lot of pain when I’ve been the victim. I think that’s what we’re feeling from a lot of people. Over 50 percent of adults invest in the market, and these investments represent their retirements, their dreams, their homes. And when that is literally taken away based on the misdeeds of some, the unethical behavior of some, yes, you clearly understand why people are outraged.

Now, would we be more forgiving if the market was growing and everybody was doing well? That’s an excellent question. To an extent, we do have to be cautious about our own greed. Each of us has this compass, this ethical dilemma that we can deal with in terms of how much is enough. We always have to look through the lens of what’s right or wrong. Even if the market is doing well, we’ve got to make those choices.

As investors, what is our individual responsibility for the sliding stock market and the demand for better profits? What role do the “little people” play in the market?

I think investors want three things: I think investors want to know that their money is going to be used prudently. . . . Second, they want to be communicated to, accurately and honestly, in terms of the health of the company that they’ve invested in. And third, the incentives for behavior, or an alignment so everyone’s on the same team — in other words, management isn’t going to get wealthy while I’m losing money. You won’t have CEOs walking away with $100 million and the company losing money.

I think investors can set realistic expectations on the returns. I don’t think we did that in the ’90s. I think we all got caught up in the 25 to 30 percent returns annually, and we were part of the problem. Now, that does not detract from the responsibility of CEOs who are at fault here because, ultimately, the leader’s got to step up and say, “Something’s wrong.” I know that’s a tall order, but that’s why CEOs are CEOs. But I think we were part of the problem in that we set high expectations.

To go one step further, I think that there’s been a pretty huge shift in terms of individuals influencing the markets versus large organizations influencing the markets. It used to be that 85 of us in the market invested individually. That’s shifted, and now we invest through pension plans, mutual funds, 401K plans, mutual plans — which means we pay someone to aggregate all that pool of money and represent our interests and choose where all that money ought to go. So the average investor today probably knows very little about the kinds of companies that are being invested in. So all of a sudden, the people who drive company performance aren’t the individual investors; they’re the people who run these funds. Now the problem is, those people who run the funds are going to put the press on the companies for short-term performance because that’s how they’re paid.

I think the individual investor can be thoughtful about the kinds of funds that they’re investing in. There are funds out there that think about corporate responsibility. . . . Investors can decide that if they don’t believe in how a firm is optimizing or trying to balance long- and short-term, they can decide not to invest on those particular funds.

I don’t know that, individually, we can change the way the market works. That’s why I think there’s going to have to be some leadership involved. And that leadership is going to have to come from the private sector — business — from the people who manage those funds, and from government. Resetting expectations about what is shareholder value — and it’s not just short-term, quarter-to-quarter performance. It’s performance for the long-term. And the individual investor can’t do that. That’s going to take leadership. And at this point, that’s not happening, and that’s one of the things that concerns me.

Should there be a moral component legislated into the free market? Or should the free market determine what the ethics should be? In other words, does the market regulate itself according to its own moral code? Or is the free market inherently amoral?

We have to be careful not to try and overregulate the market. We do have a good free-market system. Second, I don’t believe that you can legislate morality. I don’t believe that you can pass a law around integrity, as an example. As you pass laws, environments change, the rules change. We live in a dynamic society, and as the situation around us changes, we’ve got to change with it.

I think it gets back to two things: One, we need leaders who have high ethical standards, who will choose right from wrong, who will reach for higher standards of right. And we need to recognize and make sure that those are the leaders running our operations. And yes, they’ve got to deliver performance, but we’ve got to be careful that we don’t reward a leader for performance when they’re breaking all the ethical rules. We’ve got to set a culture where both have to be delivered.

Second, we do need to set the standards for what makes for a healthy company. And a healthy company is one that delivers over the long-term, not just over the short-term. It has to be able to create value for a wide variety of stakeholders, the ones I talked about before, and it’s got to be able to do that over a sustained period of time. . . . Those are the companies that should carry the high valuations.

In Europe, for example, they use something called triple-bottom-line reporting. They look at financial performance and operating performance, but also at your performance with the environment — are you doing things that extract natural resources out of the environment at a faster rate than you can restore them? Are you using products that have as little harm on the environment as possible, and recycling so that you renew the environment? And they look at your relationships with your stakeholders, particularly your employees and your communities. Are you doing things to improve their quality of life? And they examine the three of those to determine the value of the company.

One of the things about this country is our systems are much more financially driven. If you look at how companies are regulated, how they are observed, it’s around the financial performance. In other countries, they’re more broadly focused than just the financials.

Are business ethics about regulations, or are they about trying to bring out the inherent good in people?

Ethics is about integrity, and integrity is about truthfulness and honesty and transparency and trust. In addition to integrity, ethics is about choosing right from wrong, and it’s about reaching the higher standards of right.

Who defines what’s right?

Society does — the norms that we set out. In its deepest sense, it’s spiritual. It’s religious. We’re given clear examples of right and wrong in the Bible. I know different people have different religions that they believe in, but even in those religions, it’s spelled out. . . . Those values articulate what’s right or wrong.

There are rules in the business place, and they may clash with rules that one may grow up learning spiritually. And the trick is to go back to your deep, ethical compass and be guided by that.

Now, can you regulate that? My answer would be no. You can clearly put penalties in place where people suffer consequences when they don’t meet the letter of the law. . . . But it has to come from within. What I’m talking about here is a higher plane, going beyond “I won’t do it because I’m afraid I’ll get penalized.” Instead, it’s “I won’t do it because it’s the wrong thing to do.”

How should leaders be going about building this ethical culture?

I think that’s about being clear on your organization’s mission, or your purpose, and the values and behaviors that are necessary to help you achieve that purpose. Having a vision or compelling direction that you want to move the organization in. Then I think it’s up to the individuals. I think leaders have to have the vision and inspire people toward that vision, but I think people have to line with those values by themselves. . . . When that happens, that’s where greatness comes.

The job of a leader is not only to create that framework, but to then reward and recognize and link with the organization to make sure it comes alive.

What areas or verses in the Bible do you know of that particularly support the idea of a business ethic?

There’s a passage in the Old Testament [Micah] that says: “But what does the Lord require of you but to love mercy, to act justly and to walk humbly before your God?”

Psalm 15 talks about what a person of integrity looks like.

There are the classic ones — the Ten Commandments. And in the New Testament, they were really boiled down to two: Love God, and love your neighbor. And tied into the notion of love your neighbor is the idea of doing unto others as you would want them to do unto you.

So I guess there are themes: acting justly, integrity, loving a neighbor, doing to others as you want them to do unto you.

One might ask, how does that translate into a business environment? Because a lot of times, you’re competing. Does that mean I should love my competitor when, really, I’m out to drive him out of business? I would say, that’s the wrong goal. Your goal should not be to drive them out of business. The goal should be to be the very best that you can be in the marketplace. To lead in the marketplace, and whatever happens to the competitor happens. I do not believe you will reach your ultimate potential by just trying to be better than your competitor. It’s trying to be the best of who you are because there’s something better in that. And that will be very competitive.

Now, does that mean you don’t look at what your competitor’s doing, and study it, and know what their strengths and weaknesses are? No, it doesn’t mean you disregard them. But your sole aim in life isn’t to say, “How can I put my competitor out of business?” . . . Yes, you’ve got to be a great competitor, but there’s a way that you do that. There’s a reputation you can build in the marketplace as you compete. You can lead, you can be dominant in the market, by focusing on your customers, on your fundamentals, on the kind of company you’re trying to build.

How does your personal spirituality play a role in your professional life, both when you were an executive and now?

I’m guided by my own set of values that are spiritually centered, a belief in every individual and their capacity to achieve their destiny. A belief in what’s right and what’s wrong. A belief in our humanness, that we will fall short, but we have to figure out how to see the best in each other and build on that. And a belief that we can prosper and we can do the right things. We can prosper as we do the right things; and frankly, it’s because we do the right things that we prosper.

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