It has become routine since the financial crisis for business to affirm that public trust in capitalism and its institutions has been shaken. Most commentators assert that the cause of this is the very public evidence -- played out in the world's media -- that clients and consumers have been sidelined or actively deceived in the pursuit of ever-greater profits. The mis-selling of Payment Protection Insurance, asymmetric reward systems, and bribery in foreign countries are cited, amongst other unfortunate developments, as evidence of the growing moral decay of the entire capitalist system. A debate then ensues about how better to control or restrain the impulses of bankers and corporate CEOs to prevent capitalism's excesses.
This is a debate that typically rests at a "systems" level: The question posed is how to shape the very complex organization of commercial actors to guarantee more ethical or at least lawful outcomes. What has been lacking from this debate is the more important and fundamental question of the purpose of business and the people at the heart of it. As the author Michael Novak has written:
First, business is a morally serious enterprise, in which it is possible to act either immorally or morally. Second, by its own internal logic and inherent moral drive, business requires moral conduct; and, not always, but with high probability, violations of this logic lead to personal and business disgrace.
It was this same moral logic -- captured by the idea of the "impartial spectator" -- that dominated Adam Smith's view of the market economy. Smith understood that the human urge for praise and recognition was a significant motivator and could be used as the basis for self-discipline: In a system of free exchange, an individual's success would be determined by the esteem and trust in which he was held. Virtues such as prudence, hard work, honesty and reliability therefore become commercial strengths as well as moral attributes.
However, beyond this doctrine of self-interest lies a deeper purpose. It is vital for business people to reclaim this in order to improve professional standards, inspire a generation of employees and restore public trust. In a speech to HP managers in 1980, David Packard summarized this purpose:
I want to discuss why a company exists in the first place. In other words, why are we here? I think many people assume, wrongly, that a company exists simply to make money. While this is an important result of a company's existence, we have to go deeper and find the real reasons for our being. As we investigate this, we inevitably come to the conclusion that a group of people get together and exist as an institution that we call a company so they are able to accomplish something collectively which they could not accomplish separately. They are able to do something worthwhile -- they make a contribution to society (a phrase which sounds trite but is fundamental).
In all the debates that have raged on the subject of corporate misconduct, very little has been written about the moral dimensions of business and the purpose of pursuing a career in business. This understanding is essential if the behaviors of individuals are to improve, enabling them to transcend the influence of the market (where this is a corrupting force) and demonstrate to society that business can be part of the moral solution for capitalism, not the cause of its moral ills.
In Pursuit of Purpose
The problem we confront today is that the "probity and punctuality" of Smith's merchants has been replaced by a system in which the value-destroying pursuit of short-term success is encouraged by performance management systems and organizational cultures. If we are to reverse these trends, we must invest significantly in the culture of our companies and in the creation of a community of businesspeople who are able to voice mutual concerns about the complex moral dilemmas they face daily, and to support one another to navigate them successfully.
The Culture of Our Companies
Culture is essential because it is what -- in the absence of clear legal rules or differing personal value systems -- unites individuals of a company and informs their conscious and subconscious decision making. Culture begins at the top. It is affirmed through the definition of success and performance that senior leadership lays down, and through the promotion of key managers whose decision making dictates the behavior of employees. It is fundamentally a product of the extent to which senior management is committed to -- and seen to be committed to -- fostering certain values within the firm. Important work has taken place in this area since the financial crisis: Leaders have begun to speak up in a way they did not formerly, and executives at some of the largest banks -- including Goldman Sachs and UBS -- have made culture change a core part of their strategy.
In March 2014, Jürgen Fitschen and Anshu Jain, Co-Chairmen of Deutsche Bank's Management Board, commented on how "restoring the bond of trust with society is a top priority -- for the banking industry and for Deutsche Bank":
We are under no illusions. We recognize that deep cultural change is a process of years, not months. During 2013, we laid important foundations for sustainable, long-term change. We defined a new set of Values and Beliefs, which define the type of institution Deutsche Bank aspires to be. Together with our colleagues in the Group Executive Committee, we personally presented and discussed the new Values and Beliefs with more than 11,000 of our people. Our priority now is to embed these Values and Beliefs in everyday behaviors. To achieve this, we have changed the way we measure and manage performance. For example: Adherence to our Values and Beliefs now plays a significant role in determining the pay and prospects of Deutsche Bank staff.
It is understandable that many are deeply cynical about the banking industry's ability to become shining exemplars of culture change, in the wake of the financial crisis. Yet these institutions' emphasis on, and financial investment in, values and improved behaviors -- at the level of individual personal responsibility -- is a significant shift.
What is important is their realization that it will require more than an improvement in internal controls or greater external regulation to deliver the outcomes that society demands of them. The words of Fitschen and Jain demonstrate how important it is to embed values and behavior into performance management systems to reinforce the message that management takes culture seriously. This ensures that in their daily work employees reflect on how to do the "right" thing. Such assessments must be followed up with formal processes -- rewards, promotions and sanctions -- that demonstrate the significance of these values within the governance and structure of the business. There must be a general culture in which employees are able to voice concerns, to speak out in support of others, and to maintain the right to dissent.
Perhaps the greatest litmus test for any organization is whether the actions it actively encourages or passively allows its employees to take are actions that these people would be comfortable for their friends and family to witness.
The Community of Businesspeople
While there are valid arguments as to why efforts to make changes in this area have been kept private by companies -- the potential for negative publicity should another scandal undermine their efforts, and fear that their endeavors may be portrayed as a form of corporate PR -- it would be very helpful if more business leaders felt able to talk about what is happening inside their companies, and to share their insights. This would not only inspire other leaders to pursue similar efforts and thus improve the standards of the business world overall but would also trigger greater debate about the moral role that business plays in society, and about the corporation as a social institution. This is, as those involved in recruitment report, a conversation that young people are demanding. It would be a huge shame and a contravention of the notion of pursuing a better corporate culture if companies viewed their efforts as a form of competitive advantage and therefore refused to share what they have learned with others. Not only would this prevent the public debate necessary to restore trust in business and avert the kind of populist politics that significantly threaten business' survival, but it would also seriously impact the pace of change. Business needs to move forward now to achieve a lasting, more ethical form of capitalism.
It should be emphasized that this is not a trivial task. We live in an age in which the social institutions and mores of the past -- the values that guided individuals in their day-to-day decision making -- have given way but it is not yet clear what will replace them. This presents a significant challenge for individuals, companies and society at large. We have a choice. We can commit to a collective and coordinated effort on the question of culture, behavior and the moral dimensions of business, or we can allow the current situation to persist. If we choose the latter option, we will find ourselves regulated out of the ability to freely choose and to freely participate. Properly understood, the case for capitalism is not a case for laissez faire: It is a case for embracing the moderate virtues -- self-command and self-discipline -- that make freedom possible. We business leaders have to understand that the responsibility and discipline begins with us. We must demonstrate to a hostile world that we are worthy of our calling.
Stuart Roden is Senior Partner at Lansdowne Partners.
Find out more at inc-cap.com.