Management and morality

Intro

It is generally assumed that management and morality do not mix well. In my opinion this is an unfortunate misapprehension. The moral aspect emerges at every juncture of managerial life. The basic moral imperative is to play a plus-sum game, to create value together within and without the enterprise. Honesty and openness are the core values which support the trustful relations, essential for good cooperation. The accumulated moral capital is the prime asset of any organization, commercial or otherwise.

Morality and the law

Depression and financial crashes are a plague of the market economy and always elicit calls for tighter control. Laws and regulations are indeed important especially in the financial sector. The rules define punishable actions, but they should also discourage irresponsible business decisions that are at the root of economic depressions. Basically the aim should be to set the scene for equitable and fruitful plus-sum play. In the ideal case the profitability of a company should be proportional to its contribution to the common weal.

Yet no amount of laws and regulations, however astute, can approach this goal without access to sufficient moral capital among the principal agents. If the rules are right, the individual and public interest will converge. Our limited funds of morality can then keep short-sighted self-interest at bay, providing prosperity as well as stability. Fools cannot be legislated against, but we still have a lot to learn in minimizing the lure of foul play; fraudsters, free-riders and wanglers of any hue must not prosper at the expense of honest players.

A candid plus-sum strategy cannot be pursued in a foul moral environment. It would work like a dream if the rules of the game were perfectly attuned to the public interest. But I maintain that our present democracies are close enough to the ideal for good morals to pay off handsomely.

Business morality

Morality is often perceived as a superficial element in management, an add-on which covers the hard core of real managerial competence. In this “realistic” view, the lack of morality is a sign of strength and affecting a moral stance is hypocrisy, plain and simple. This attitude is slowly receding and nowadays professorships in business ethics abound at the leading academic institutions. The mainstream view is that morality, after all, may have something to do with good management. Whether this is based on enlightened self-interest is a moot question. Anyhow I maintain that morals are not merely helpful but at the core of successful management in the modern world. Yet business morality must be rightly understood.

Let me first state what business morality is not. It is not:
*Giving money to charities or other good causes
*Appeasing stakeholders
*Bowing to national interest or political pressure
*Caving in to pressure groups (gender, racial, environment etc.)
*Pandering to political correctness

Those activities may make good business sense and polish the image of the company but they can indeed be deemed hypocritical window-dressing. In the worst case they amount to a kind of corruption by making unwarranted side payments to selected stakeholders who resort to extortion, political or otherwise.

This skepticism does not mean that basic humanity should be abrogated. Nobody, not even top managers, should be called upon to go against his or her conscience. To draw the line between human concerns and fiduciary responsibility can be an agonizing moral dilemma. The rationale for the core of business morality stems, however, from other sources. The categorical imperative is to play a plus-sum game, to manage the creation of value. This has profound implications.

Well-known zero-sum games, like poker, do not create value; the amount of money around the table is only changing hands but does not grow. In a zero-sum game, the main competitive weapon is deception or, at the very least, withholding information – ergo the proverbial poker face. In contrast, the decisive success factors for plus-sum play are honesty and openness, which creates and maintains the requisite trust between the parties. Thus the insidious temptation of the Prisoners Dilemma can be overcome. Business life has undeniable and unavoidable zero-sum aspects but it is, or at least it should be, mainly a plus-sum game, producing value for customers, employees, shareholders and the taxman. Consequently integrity and dependability become key elements of success.

Morality is the crucial minimum success factor in any organization. Everything else – capital, know-how, adequately trained people, even good managers – can be acquired but the morale must be certified by top executives, though it is free of charge. In short, the moral capital is the core resource of a viable business enterprise.

The perils of centralization

Very small organizations have few internal problems. They are essentially one-man shows, and the chief is wholly dependent on his own business acumen. When the company expands, responsibility and power should be delegated and the internal plus-sum game must be supported by honesty and openness. Thus the demand for moral capital grows with the size of the organization. This basic relationship holds for all human organizations and communities but its strength depends on the challenges. Managing complex problems in a turbulent environment requires voluntary morality. Creative team work cannot be tightly administered, it can only be permitted.

When the company expands, the lines of communication are extended and bureaucratic control must be strengthened. Flexibility is diminished while motivation and innovation suffer. Staffs are mushrooming and responsibilities obscured while internal power games distort decision making. A morally responsible manager will try to improve the rules of the game and nudge human effort into more constructive channels but the odds are stacked against the well-meaning reformer. I have examined this problem in a short treatise, Cynics and Progress Motors, originally published in 1974 in Swedish.

In a politicized organization you have to run with the pack or lose out, which provides ample room for scheming cynics and self-indulgent free-riders but makes life hard for self-motivated progress motors. Typically, top management relies mainly on figures and often lacks a real understanding of the business issues. The precious moral capital is slowly evaporating while the headquarters turns into a scene for destructive political infighting. This syndrome is all too familiar to anyone with experience of large organizations.

The bureaucratic instinct is to control everything and to avoid mistakes at all cost. The dangers of excessive centralization should be obvious but the temptation seems to be well nigh irresistible. For egomaniac executives, personal ambition and thirst for power gets the better of fair play and good judgment. Hierarchy trumps factual insight, self-importance and vain conceit prevail. In successful companies, arrogance can engulf the whole organization with dire consequences.

Large, profitable companies are the preferred hunting ground for psychopathic managers. These cynics, as I call them, are utterly devoid of loyalty to friends, associates or the company. They are great manipulators, winding their way through the organizational structure with a minimum of effort. Verbally gifted they can be extremely convincing, nimbly shifting merit and blame to their advantage. They leave a trail of betrayal, parasitizing on the good will of their team mates. Corporate cancer spreads in their wake.

Quick fixes

As in cancer, a prompt diagnosis improves the odds for curing the disease. The flamboyant lifestyle of top management can be an early warning signal. Bad personal conduct – drinking, divorces or extra-marital affairs – also correlate, albeit with some delay, with downturns in business fortunes. The same holds for an excessively high public profile. If a culpable top executive can relay on a good management team, the situation may still be in hand. But if the rot has become part of company culture the end is near.

Self-deception is the most insidious kind of dishonesty, breeding a false sense of security. Complacency at the top is often coupled to an indulgent managerial style and lack of innovation. It bodes ill for the company, as does the departure of good managers. High turnover of personnel is generally a sign of bad management. The way people speak about their company can also divulge bad morale.

Ultimately, the profit-and-loss account provides the final proof. The usual remedy is to install a new managing director, often from the outside. He is in a better position to cut out the deadwood and the cynics, who at that point usually have revealed themselves and anyhow are looking for greener pastures. Most successful turnarounds are accompanied by a sweeping change at the top.

Even if the old management could change their ways, their credibility would be gone. People would refuse to follow the leaders who brought on the crises in the first hand by bad decisions or indecision. And personal probity is of no avail if a string of bad luck taints a top executive. We live in an unjust world.

Sustainable growth

Top management is pivotal, and moral stamina should weigh heavily in the recruitment and promotions of key managers. Even so, the nomination of a top executive is always a gamble. The main challenge is to facilitate plus-sum play, but many successful managers are exceedingly self-assertive, exert meticulous control and leave little for their underlings to decide. They behave like executives of small companies and the attendant virtues – goal orientation, industry and perseverance – can carry them a long way by inducing fierce loyalty. But corporate growth will hit a ceiling, at the very latest when the top executive retires.

Whether the need to micromanage is rooted in some deep personal insecurity is another moot question. Worrying is part and parcel of managerial life but good management also calls for the courage to trust other people while carrying the responsibility for their mistakes. Without such risk-taking, you cannot attract or rear and keep capable leaders.

A symbiotic two-man team at the top can generate sufficient moral self-discipline and open the way for spectacular growth. Executive self-restraint calls for curtailment of the ego, which makes genuine teamwork possible. Relinquishing power voluntarily is a hard act to follow. No corporation can accept a personal empire within its bounds, but more often than not tolerance produces a handsome payoff.

Decentralization depends on trust but, most importantly, it fosters trust and enhances the funds of moral capital. In contrast, centralization weakens personal responsibility and initiative. Inexorably it drains the organization of crucial moral resources. Decisions should always be made at the lowest feasible level. Excessive decentralization is easily remedied while centralization is often irreversible.

Integrity at the top

Moral leadership is a key if not the key responsibility of top management. Integrity at the top provides a powerful example and creates the right atmosphere for a fruitful plus-sum game. Honest leaders attract honest people, fostering adherence to company values at all levels. Control, supervision and reporting can be slimmed down to the minimum. Hierarchical shackles are eliminated and self-organization is encouraged, ensuring high flexibility and motivation. At best, the virtuous circle of decentralization produces the necessary conditions for its implementation.

Every creative plus-sum game carries a risk. A dispersal of responsibility can beget disorder, confusion and sundry inefficiencies. Cynics have ample room for their evil designs and free riders may just enjoy themselves. Lack of recognition might sap the self-motivation of the progress motors. Morality alone can not be relied upon to solve all problems. Old-fashioned discipline and organizational structure are still required. “Economize on love” says the Nobel laureate James Buchanan, meaning that the management of self-interest is still the mainstay of an organization.

Performance pay economizes on love, for sure, but is no substitute for morale. It can be a poison, particularly in a downturn, and must be handled with exquisite care. Morality is in any case an indispensable support, keeping our egocentricity in check and imparting sense, purpose and cohesion. The higher the morale the better; the moral capital correlates with efficiency, profitability and competitiveness.

A lot can be done to facilitate the growth of moral capital. Relevant information should be easily accessible and actively dispersed – openness is after all a requisite condition for plus-sum play. An in-house management training program provides opportunity for top executives to indoctrinate the staff and meet managers in an informal setting. And, most importantly, personnel policies must be focused on promoting the real contributors to company success while weeding out pernicious cynics.

This is no mean task and the difficulties increase with company size. In general, the superior has the least knowledge of the true character and performance of an employee. The team-mates know much more but only the subordinates are truly informed. In small and middle-size companies, the grapevine provides much important information which gets lost in a big organization. One way or another, promotions (and demotions) as well as hiring and firing must come out right. They carry the true message of company values, overriding any amount of executive rhetoric or written policies.

Executive pay has caused much moral outcry and can be perceived as the ultimate moral challenge for management, but it is unequivocally the business of the company board. In any case, the interests of top management must be aligned to the long term prosperity of the company and its shareholders. This principal-agent problem is as old as the hills and must be resolved by the negotiating parties. Overpayment can be an affront to the public but to hire or to retain a second-rate executive is a much graver breach of good governance.

Strategic plus-sum play

Everyday operations are by necessity immersed in zero-sum play. For instance price and salary negotiations are essentially zero-sum games. Survival and short-term profitability dominate the goal-setting. But in the longer term, an obsession with the zero-sum perspective becomes destructive. The strategic aim of every company must be to minimize competitive pressure, securing a good return on capital. Strong brands, for example, are a common strategic goal, because they maintain a certain degree of uniqueness and avoid commoditization which implies strict comparability with competing products or services.

This overtly selfish aspect unexpectedly coincides with strategic plus-sum play. The governing principle should be that an enterprise must be different, representing a unique business idea within its market area. Otherwise it does not participate constructively in the division of labour and the plus-sum game of the market. Thus it will not provide any added value and cannot be successful in the long term.7 Learning from competitors is commendable but all-out copying is futile in the absence of a clear-cut cost advantage. The daily grind is dominated by zero-sum play but strategic competition requires a more creative approach in order to achieve sustainable profitability.

Evolutionary biology provides an illuminating analogy. If two or more species are confined to the same niche and pursue identical survival strategies, only one of them will survive. This causality is called Gause’s Law after the Soviet biologist G.F. Gause (1910-86) and applies equally to business economics. Diversity in nature and the economy spring from the same logic. Companies pursuing identical business strategies cannot coexist in the same market; only one of them can survive, barring artificial restrictions on competition. Cut-throat competition is the outcome of zero-sum based strategic thinking. Economic depressions can be traced back to similar shortcomings.

An innovative strategic approach always carries a certain risk but exaggerated risk-avoidance eventually buries a company for good. An enterprise must contribute by defining, developing and implementing a unique business idea with the potential to create added value for existing and presumptive customers. In marketing, morality is at least as important as in internal company relations. The trust of the customer can only be built over time but it can be lost in one, short moment. Contemporary corporations can be as particular about their reputation as medieval knights.

A favourable image is also an important asset in attracting gifted people to the company. Besides earning money and getting ahead, young men and women of the right calibre want to participate constructively. For them, self-realization implies a measure of altruism. A most important task of top management is to make work meaningful for the troops. A genuine heart-felt company mission raises the game beyond trivial zero-sum play, and makes wonders for company morale. For good people, real satisfaction can be achieved only by playing a plus-sum game. And in business, good people is all.

Business networks

Networking represents the ultimate logic of plus-sum play. It has, of course, been around for ages; trade and industry has always depended on a network of more or less trustful connections. But customarily, business relations are contaminated by a sizable zero-sum component, which entails considerable costs and inefficiencies. Modern networking strategies aim at reducing this burden by cutting transaction costs all around. Additional long-term gains can be made by blurring the organizational barriers between the business partners and encouraging the open exchange of information.

Accordingly, formal and informal networking has become popular but a close collaboration must be preceded by the build-up of sufficient trust capital. This is best secured in a stepwise fashion. Subcontractors can for instance be brought deeper into production planning while customers are enticed to become partners in product development. Outsourcing of vital company functions, such as information processing, calls for a lot of trust but, given good morals on all sides, there are no limits to the scope of networking.

A joint venture is a very intimate relationship between two companies, albeit in a clearly circumscribed area. The partners assume joint responsibility for a well-defined project. Usually all important decisions require unanimity which opens the door for a stalemate or something worse. The joint venture approach utilizes the complementary strengths of the partners and diminishes the risks, but calls for substantial moral capital to maintain trustful relations between the partners. Otherwise the project will collapse.

In an open ended cooperative effort you cannot apply administrative power and you have to rely solely on good will and fair play. A man as good as his word then becomes an essential asset for the project, regardless of his position or localization in the collaborating organizations. Trust slowly begets trust while distrust spreads like wildfire. Among lower level managers the temptation to pull a fast one is hard to resist. The involvement of the top executives is therefore essential; without backing from the highest level, joint projects will founder.

In a broader perspective, business enterprises carry out vital tasks in a wide, politically coordinated network. The success of this overarching plus-sum game depends on the proper interaction of all key participants on the appropriate level – local, national or global as the case may be. Democratic societies sorely need moral capital to lubricate the wheels of this super-ordinate, self-organizing mechanism. The lack thereof causes destructive friction which seriously impedes our welfare and future prospects.

Conclusion and outlook

Like truth and love, morality as well as moral capital belongs to a group of notions which cannot be closely circumscribed. These so called prospective concepts are linguistically indefinable but for that very reason they are all the more important. Honesty and openness, respect for the truth and for our fellow human beings are anyhow the basic values which maintain human plus-sum play and assure long term profitability in business. High intelligence, industry, frugality, fortitude and self-discipline are of course desirable qualities in a leader, but without personal integrity and a dose of humility they are worthless or may even serve self-destructive delusions.

Morality is the often overlooked ultimate source of sustainable success for an enterprise. But a caveat must be introduced. A candid plus-sum strategy cannot be pursued in a foul moral environment. As a young enterprising executive I was counseled by an Italian friend (from Milan): “Never do business south of Rome!” I suspect this is still good advice if you do not want to run with the pack.

A business enterprise fulfils its moral obligations by making money, respecting the overt and covert rules of the game. This home truth has been repeated many times over but the intellectual underpinnings are wanting. Company culture and company values have been emphasized but the central position of moral capital has rarely been spelled out in so many words. The reduction of sustainable business success to a single factor – simple morality – is indeed a bold hypothesis. I hasten to add that it can hold strictly only in the ideal case where the rules of the game are perfectly tuned to the common weal. But I maintain that our present democracies are close enough to the ideal for good morals to pay off handsomely.

Primarily, my conviction concerning the supremacy of morality rests on deductive reasoning. The market economy is evidently a plus-sum game and elementary game theory tells us that honesty and openness are the necessary and sufficient success factors. This conclusion is supported by a lot of anecdotal evidence, but thorough empirical investigations are few and far between. There are good reasons for this lack of verification (or falsification). Moral capital is very hard to measure but empirical research in this area could eventually yield applicable results. Otherwise we must resort to circular argumentation. Long-term success is the only dependable measure of morality!

What then can be done? Teaching morality is a futile exercise. Stamping out immorality might be more practicable. Competent psychiatrists can profile psychopathic personalities although they have been duped even by serially convicted jailbirds. If psychopathic managers could be exposed at an early stage, it would be a great boon. I have in passing touched upon a few other expedients which can be helpful in business organizations. While every company must look out for itself, our joint responsibility is to work for the improvement of the politically determined framework, the rules of the market game. This is part and parcel of the challenge of democracy, mapped out in my eponymous book.

Wealth is thus the fruit of morality, signified by postponement of material gratification. This bourgeois mindset has had many detractors but recently the virtues of money making have also received accolades. The long-term preservation and expansion of wealth is above all a moral challenge. It has been an exacting problem for most families, companies, countries and even civilizations. Success leads to self-indulgence which degrades morality. The subsequent tribulations provide a chance to restore it but in the last instance we can only fall back on our remaining moral capital.