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It is tough being a business. Everyone wants a piece of your profits and resources. Everyone has an opinion on how you should behave as a company. At one extreme you have employees and management, and at the other you have the shareholders. Customers want a great value equation, and politicians want political contributions. Everyone is pulling at the resources of the company – and many are sapping its strength and viability.
In recent years we have seen many examples of how companies management sacrificed shareholders for their own benefit (e.g., the “too big to fail” banks and brokers). We have also seen the eroding effect of noncompetitive labor agreements evidenced by how Michigan has lost thousands of jobs to other states. Now gone are the firms that risked their long-term stability to pump up their bonus pools, or said “yes” to self-defeating labor agreements because the short-term rewards were so extravagant that risking it all (and the future jobs of average workers) was “worth” it for the few. Some companies risk the stability of entire countries for the pursuit of growth – others will have two value systems: one for their domestic market and one for everyone else.Interdependence
Often, the stakeholders’ attitude toward virtue with regards to serving the other groups is “I must advocate for my group” – not realizing that there is an extreme interdependence among the groups. They all need one another. Ethical behavior toward one’s own group but not the others causes a diminishing value of the business. Companies’ and societies’ prescription for managing this tension are “rules.” They create a rules-driven paradigm that is “values-neutral.” For example, some well-meaning mortgage companies, investors and others created incentives to help everyone achieve the “American dream” of home ownership, and laws, rules, regulations and incentives/disincentives were created for this purpose. Because hindsight is 20/20, we see that this resulted in hyped property values fueled by property debts, more and more homes being built, and a completely false economy built on good intentions. Municipalities were certainly happy, because higher property prices meant higher taxes. Labor was happy because there were jobs. And adding to the fun, homeowners used their home equity like an ATM. As I like to tell my children, “A little ice cream is great – too much ice cream will make you sick.”
Laws and Practical Wisdom
There is no law that says, “You should live prudently.” There is no law that says, “Just say no to excess debt.” There is no law that says labor should ask for less or customers should willingly pay more. There is no law that caps prices on housing. We should not (and really can’t) have laws that force people to have common sense or Aristotle’s “practical wisdom.” Could we conceivably pass a law that makes it so that people won’t be silly, naïve, short-sighted or selfdefeating? How? Who would judge this? Last night, while researching “choice” on the Internet, I found a TED talk by Barry Schwartz about our loss of wisdom (www. ted.com/talks/barry_schwartz_on_our_loss_of_ wisdom.html). Barry discussed the need for Aristotle’s practical wisdom as an “antidote for a society gone mad with bureaucracy.” In the well-presented talk he elaborated on how rules often fail us and incentives can backfire (e.g., the U.S. housing fiasco), and how a return to practical virtues, common sense and “everyday wisdom” can help rebuild our world.
Values-Neutral
I often see this values-neutral “law” issue with investors, employees, management and other stakeholders. I believe “valuesneutral” is a practice. I also believe that companies and societies that thrive place a more balanced emphasis on realizing we are interdependent and in this together. The balanced attitude would place “doing the right thing” over “doing whatever it takes, as long as its legal” in the pursuit of success. Warren Buffett, CEO of Berkshire Hathaway, said, “I look for three things in hiring people: First, personal integrity; second, intelligence; and third, a high energy level.” He went on to say that if integrity is not there, then the other two don’t matter. I think that if you were to identify one core “value” that has affected FIM Group’s performance most, it is the fact that FIM Group is not “values-neutral.” We believe virtue matters, and I personally believe it has helped our performance. Through the economic panics and crises over the years we’ve had negative swings in our portfolios’ values, but we’ve also avoided complete loss caused by lack of ethics or virtue in the companies we invest in. As our clients are aware, we don’t invest in tobacco companies. Why? First, we don’t wish to profit from a product that kills people. There are plenty of investments that don’t kill people with their products. Second, integrity and virtue. Who works for companies that knowingly make products that kill people? People who say, “Yes my company has lied to the public for years about the [cancer] risks of our products, but you can trust us with your investment, because we are honest about our books and are virtuous in the way we treat our shareholders.”
Trust
I think that trust is part of the DNA of great companies. When you read about economic thought leaders like Adam Smith, Thomas Malthus, John Stuart Mill, John Maynard Keynes, Andrew Carnegie and even Milton Friedman, it is easy to wonder if the idea of trust as a basis of the “normal” business world’s landscape was just taken for granted like air, water, money, governance or marriage. I think that while trust has always been a “big deal” in the past, it might have been historically taken for granted as a normal assumption about business. Today more than ever we want to trust something. It seems like at every corner the behaviors of those we trusted – government, industry, business and even our sports heroes – have shaken the foundations. Going forward, I believe that companies that will thrive in the long-term will be driven by leaders, managers and employees who you can trust. A friend of mine is a leadership training consultant. She lives in Detroit, but when she’s in Traverse City we will usually have tea and discuss business topics. Our last conversation was about (as always) “leadership,” but specifically this time it was about leadership attributes and the characteristics of leadership. She outlined the 13 behaviors Steven M. R. Covey champions, and we added a few of our own based on our own values formed by our ethical, spiritual and religious influences. Trust, like “brand value,” is part of a company’s currency of success, especially in the new economy that is emerging due to the extreme transparency that exists today. Simply, companies that try to “hide” their lack of character will fail, because consumers will avoid their products. Companies earn people’s trust through demonstration, i.e., by “walking the walk.” And trustworthy companies will thrive.
Of course there are fools born every minute, and many will buy products and services from ignorant companies. Those companies will thrive for a short period. There will always be exceptions that can be pointed to prove that ethics and virtue don’t matter. At FIM Group, however, we are long-term investors and without a doubt believe that long-term ethics and virtue truly matter.
The More Things Change
Throughout history our religious leaders, philosophers and teachers have been consistent about the importance of ethics, virtue, and thoughtful, commonsense- infused action. Today’s world economy is moving at light speed compared to when Aristotle, Moses, Buddha and Jesus walked our planet, but the principals of moral behavior are as true and solid today as they were back when these folks walked barefoot on our earth. Of course, the natural tension between society, employers, owners and such is nothing new. Jesus threw the money changers and other unethical business people from the church steps, and Buddha spoke of the importance of right behavior and the noble characteristics toward purposeful choices. Today, consumers will choose companies they can trust. The best and the brightest will work for companies they can be proud of. Governments will want more, consumers will want a better deal and owners will want more profits. I guess some things will never change.
