THE BLOG

The Need to Build Virtuous Organizations

12/18/2013 11:06 am ET | Updated Feb 17, 2014

Over the past few years, various business publications and economists have cited the need for an economic virtuous cycle -- a condition in which positive results engender more positive results and help to grow the economy. As we approach the end of 2013, the economy should be moving strongly toward a virtuous cycle, because many large corporations have been, and are, reaping record profits.

Instead, we are stuck in a variable cycle. That's because many of those corporations are doing little to nothing to create new jobs, or to raise wages and reward line level employees appropriately for their increased productivity and contributions to stellar business performance. The rewards are flowing disproportionately to the top of the food chain, rather than being spread around.

As Lauren Rudd pointed out in a recent column, a survey of executive compensation done by GMI Ratings showed that the "median pay at a company in the Standard and Poor's 500-stock index rose nearly 20 percent from 2011 to 2012." In addition, in 2012, the "10 highest paid chief executives received more than $100 million in compensation, and two earned more than a billion dollars."

In our opinion, this imbalance in the sharing of wealth explains a lot. The virtuous cycle may be fine as an abstract economic principle or concept. But, for the virtuous cycle to come into play in the real world, you need "virtuous organizations."

What is a virtuous organization? Here's our definition: The virtuous organization is one that has a strong moral compass, and a compelling mission that creates values for customers, employees, shareholders and the community.

The virtuous organization does well, but also does good.

In order to jump-start the virtuous cycle here in the United States, we need to have leaders in companies of all sizes and types who are willing to commit to building and managing their businesses to make them virtuous organizations. To build the virtuous organization, those leaders will have to play three critical roles:

  • Navigator
  • Capital creator
  • Value generator

As a navigator, the business leader must chart the course and shape the way the business sails. This means not only making sure the company does things right, but that it does the right things as well.

It demands building both the company's core competence and its core consciousness. Core consciousness brings the organization's beliefs, such as integrity, quality and excellence, front and center, in the organization's psyche and mode of operations.

As a capital creator, the business leader needs to think beyond financial capital. Financial capital is a dependent variable. It requires the right business model and other forms of capital creation in order to yield the appropriate return on investment.

Two of the other forms of capital creation upon which the business leader should concentrate in order to build a virtuous organization are: intellectual capital and spiritual capital.

In terms of intellectual capital, every organization has what we call its organizational IQ. That is the combination of all of the IQ's of the employees in the company.

The challenge for the business leader is to ensure that the organization is structured and operated to allow the employees to use their individual brain power in order to achieve that minimum IQ. The opportunity for the leader is to create collaboration and teamwork that results in synergy, thus creating a level of intellectual capital that exceeds the total for all of the individuals in the business.

Spiritual capital is the invisible force that moves organizations and individuals. The challenge and opportunity for the leader building a virtuous organization is to create the positive motivational force field that causes all of the associates in the business to want to bring their "A" games into play in order achieve the company's mission.

Finally, there is the leader's role as a value generator. Michael Porter (Harvard) developed a business management concept called the value chain comprised of primary activities, such as inbound logistics, operations and outbound logistics and support activities such as human resource management and technology. Porter said that each element in the chain should add value, and that when they did it gave the business a competitive advantage.

An "added value" chain is definitely essential for business success. In the virtuous organization, there is a matching concept and that is "value circles". These are concentric circles that emanate outward from the business leader, through the top management team, to employees, to customers and ultimately the community.

The virtuous organization is built from the business leader, out. Her or his vision and values shape and define the company's culture. If those values include concern, caring, compassion and commitment to making a positive difference and contribution to society -- they are reflected in everything that the business does -- from the manner in which it operates, treats employees and customers, to its community involvement and philanthropic initiatives. Think of it this way, the business leader is the person who drops the rocks in the pond, and as the circles ripple out, they reflect his or her image and likeness.

We don't know how many virtuous organizations there are in the United States today. We do know that we need more -- many more. We most especially need them in the publicly traded sector, where an obsession with short term performance and quarterly earnings can be harmful in many ways.

As Bill George, former Medtronic CEO and currently Harvard Business School Professor, recently stated in a McKinsey & Company interview:

I don't subscribe to the notion that companies exist to create value strictly for their shareholders. I think they are there to create value for their customers, and that gets to the mission of the company. And ultimately, doing that, they create value for society.

If they forget abut that they have no legitimacy, they have no right to exist no matter how much short-term value they create. And the shareholder value is misunderstood. It comes as a result of great value for your customers that leads to growth, and that comes from engaged employees that innovative and provide superior customer service.

We are in the season of giving and forgiving. As Mr. George advises, it should also be a time for remembering, and not forgetting, the purpose of a business.

It should be a time for business leaders from all sectors to embrace the roles of navigator, capital creator and value generator. By doing so, they can close the "virtue gap," and take the actions required to build the virtuous organizations that will generate a virtuous cycle for the American economy and our citizens.

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