Introduction:

I’m going to make two assumptions about each of you today. First, I assume you do not want me to present you with an overview of my book. In fact, if you’ve not already done so, I’d really prefer that you buy a copy and read it for yourself!

My second assumption is that you all agree with the title of this panel – indeed, rules cannot substitute for character.

In the time I have, I’d like to make three points:

1. Character-based business is good business
2. A “character-based” business reflects the “world-view” of the leaders
3. Your “worldview” could keep you out of jail!

1. Character-based business is good business
As business school graduates, you all know better than I that success in business is the result of multiple factors – the quality of your product or service, the need in the market place, the acceptance of your product or service, your capital structure and competition, to mention just a few. Clearly these basics must be favorable or you will not have a successful business.

However, the “character” of your leadership is also a factor. What do I mean by “character”?

In the research we did for our book on the concept of “moral intelligence” we discovered the work of several contemporary cultural anthropologists. Years ago when I was an undergraduate, I was fascinated by cultural anthropology, but mostly because of its focus on the exotic differences between cultures and sub-groups of people around the globe. We found that in recent years – say the past couple of decades – cultural anthropologists have instead focused on our similarities. In fact, one scholar named Donald Brown has published a book entitled “Human Universals” where he listed all of the many behaviors and beliefs that are common to all cultures around the globe.

We settled on a set of four universal beliefs or moral principles, if you will, that seem to be universal – that is, they are honored in all cultures around the world.

If they are forgiving, they create the conditions for innovation, and finally, if they are compassionate, they tend to retain their best workers. So, in our model, we maintain that if you wish to have a workforce that trusts you as leaders, is inspired and innovative, and stays with you for the long haul, you can obtain these results by grounding your leadership in these four moral principles.

It is interesting to discover that quite a few studies have surfaced over the past decade that show that “character” is a significant positive factor in business success. I’d like to bring some of them to your attention.

Almost fifteen years ago, Kotter and Heskett in their 1992 book, Corporate Culture and Performance, analyzed over 200 companies and uncovered the relationship between organizational culture and business results. Revenue, stock prices and net income were found to be far greater for those companies with “adaptive” cultures vs. those with “unadaptive” cultures.

The differences are rather dramatic – revenue growth from 1977-1988 for the adaptive culture companies was 682% compared to 166% for the unadaptive culture companies. Stock price was 901% compared to 74% and the bottom line, net income, grew 756% for the adaptive culture companies compared to a paltry 1% growth for the unadaptive culture companies. (p. 78).

The unadaptive corporate cultures, they said, “…have managers who are often characterized by some arrogance, insularity, and bureaucratic centralization, all supported by a value system that cares more about self-interest than about customers, stockholders, employees, or good leadership…And they tend to turn people off—particularly those individuals whose personal values include an emphasis on integrity, trust, and caring for other human beings.”

The adaptive cultures, by contrast, are described by Kotter and Heskett as having managers who care deeply about customers, stockholders, and employees and who value people and processes that can create useful change. They observed that the managers of these cultures adhered to value systems that “…when expressed in written form, often sounds either hopelessly idealistic, or vague to the point of uselessness, or even inappropriately religious (e.g. “Treat others as you would have them treat you”). Yet that very value system is the key to excellent performance nowadays because it tends to energize managers and get them to do what is needed to help firms adapt to a changing competitive environment.”

Great Place to Work Institute
Some of you may be familiar with the Great Place to Work Institute. It publishes a list annually along with Fortune Magazine of the “100 Best Companies to work for in America”. They also have an international list, I believe.
The companies on this list share these features:

Credibility
“Managers set an example of integrity in business and follow their words with actions”

Respect
“Managers care about them as people”

Fairness
Financial rewards and recognition are fair

Pride
Their jobs make a difference

Camaraderie
People enjoy the work place and the people they work with.

Finally, most of you probably have heard of the big retailer, Costco Wholesale. They are a global competitor to Sam’s Club owned by Wal-Mart. Costco is widely known and respected as a people-centric organization. It is also widely admired for its outstanding business results. Certainly it has an excellent business model and it is a fierce competitor. But it also has a competitive advantage that is due in large part to “character”.

Constant turnover plagues most of the retail world, but for Costco, once an employee has been with them for two years, their retention rate is an astounding 96%.

Costco and Sam’s Club share almost identical business models – that is, member-based wholesale shopping – yet Costco generates nearly twice the sales per square foot in their warehouses as does Sam’s Club. Some would simply attribute this to market segment dynamics.

The average Costco member has a significantly higher income than that enjoyed by Sam’s Club. Yet, one must ask why Costco appeals to this particular high income consumer? They believe it is because of their adherence to rules for always telling the truth to their members, vendors and employees.

Members trust that Costco will always bring them only high quality merchandise and will never mark it up more than 15%. If this trust was ever violated, their business success would undoubtedly plummet immediately. Costco is truly a character-based company.
So, character-based business is good business! Failure to leverage this fact is tantamount to leaving money on the table. There are many, many leaders of impeccable character who do not capitalize on this and thereby fail to reap the benefits of an engaged, inspired, creative and loyal workforce.

2. A “character-based” business reflects the “worldview” of the leaders
Can you have a successful business when the “character” of the leadership is suspect? Certainly – we all know that corrupt practices flourish in all kind of businesses, but we also know that ethical and moral failures can be very hard on the bottom line. There should be no need to present you with hard data to support this claim. These days, even a hint that the leaders of large global businesses are coloring outside of the lines and illegally lining their own pockets will send the market cap dramatically downward. In the first few years of the 21st century market capitalization of US’s domestically traded stocks was hammered to the tune of more than $1trillion—and a good portion of this can be attributed to the loss of confidence and trust in the honesty and integrity of our free market system.

So, what does the “worldview” of a business leader have to do with this?

Let’s begin by defining what we mean by a “worldview”. By this, I mean your set of core convictions or beliefs about yourself and your world. One can think of these as being the contents of your moral compass.

Your worldview is the “filter” that determines what you focus on and pay attention to. It is your beliefs about human nature. It is also your beliefs about what you view as threatening to your safety – and I mean more of your psychological safety than your physical safety. Your worldview is this set of beliefs and accompanying automatic responses you carry around with you that informs your decision making.

These patterns of thinking and responding were developed early in life and have simply become automatic.

Let me show you some examples of typical beliefs that are common in organizational life and businesses.

As you look at this list, you will notice that some of these belief statements reflect a rather positive view of others while some of them reflect a “dark” view of human nature.
Some writers have recently assigned blame for this “dark view” among business leaders to the MBA programs in our business schools. This assertion has specifically been made by Sumantra Ghoshal in an article he wrote before his untimely death in 2004 and posthumously published by the journal of the Academy of Management Learning and Education. In it Ghoshal criticizes the management theories taught by business schools which assume people are primarily motivated only by money and that managers cannot be trusted to look out for the shareholder’s interests over their own even though this is their sole responsibility. He claims that this view of human nature has become a self-fulfilling prophecy – treat people as if they are selfish and untrustworthy and they behave in that way. Thus, business schools – you are to blame!

We think that this assertion is a bit simplistic and unfair. Surely Business Schools can’t be totally to blame for such a pervasive problem in our society. On the other hand, we don’t think they are doing their share to address the problem either.

If it was only this simple and the business schools were exclusively to blame, the fix would be relatively easy. Just change the curricula by adding a few courses on ethics. In fact, the business schools are doing just this. One wonders, however, if they know what it is they need to teach. Everyone hopes and expects that our young business leaders will enter the work world as honest and responsible people. But can integrity and responsibility be taught in business school? Ethics courses are an interesting exercise but do they really deliver the goods? Do people come into business school with little ethical knowledge and emerge two years later confidently able to face all the moral dilemmas they’ll encounter? We believe this is doubtful. Good window dressing, but do these courses really change behavior?

But here then is the rub. Neither we nor the well-intentioned professors in business schools know exactly what to teach about human nature. What view of human nature is the best? By what criteria? What are the core beliefs that drive moral behavior? Does it really matter if managers and leaders deeply believe in the universal principles of integrity, responsibility, compassion and forgiveness? We believe it matters a great deal what they believe about the world and human nature. And we think that there is a “right” view on this matter – even though it has yet to be proven with research. We suggest that these are empirical questions – ones that have yet to be adequately addressed.

What developmental learning experiences produce the ethical leader? What are their beliefs – their foundational core convictions? What do they believe about human nature? What do they believe about themselves? Why are some so driven to achieve sustained business results by following universal rules of human conduct?

If business schools knew the answers to these empirical questions, then we could hold them accountable to teach their students to think in these ways. Of course, they may have to create some rather new and innovative instructional methods, but we should expect no less from them. We must turn out business executives at the beginning of their careers who all have well thought out and carefully tuned moral compasses.

No amount of new rules about compliance or, in the United States, newer versions of the Sarbanes-Oxley bill will accomplish what we need. Instead, we need to develop self-monitoring moral individuals who then go on to create virtuous circles and become moral educators in their own right.

Point 3: Your “worldview” may help you stay out of jail!
Around the world, but especially in the United States, a significant number of senior executives of large, respectable businesses have been convicted of fraud and sent to jail. I have personally known one of them and he did not seem to me to be a bad person who was out to steal everything he could, yet he was stripped of all his assets and sent to jail for several years for insider trading.

So, I ask you, how is it that presumably well-meaning business people, people with respectable business degrees can end up in jail? I don’t know if any Wharton graduates are currently in jail but Harvard graduates certainly are!

My understanding of this phenomenon is that good people end up drifting into fraudulent behavior because they have not developed the necessary points on their moral compass to keep themselves sufficiently anchored to the four universal principles we previously discussed.

Some of us have the points on our moral compass firmly defined during our growing up years, but for others, this is work we must do as adults.

Second, most of our behavior is pre-programmed and regulated by one’s worldview – which we have already defined as the patterns of thought and emotional responding which were acquired by one’s early life experiences. These patterns are in fact, a sort of “software”. It is like the operating system in your PC – it’s there in the background operating unnoticed but it is very powerful because it both determines what kind of programs you can run and it also limits what you can do.

Do you know accurately what “software” you carry around inside your head and heart – the beliefs and emotional patterns you have which would either motivate you to behave ethically and the beliefs which would inoculate you against making poor ethical judgments?

I doubt if you can tell me what those are. Most people have not engaged in this degree of self-examination. One way to discover it is to see what happens when circumstances call for it to be used. But a smarter way is to engage in some self-examination so you know in advance what software to use when you are called upon to make a morally challenging decision.

So, I have a final appeal for you all. It echoes the words of the ancient Greek philosopher Socrates who said, “An unexamined life is not worth living.”

You all face threats daily in your business lives. But not all threats are real or if real, are worth dealing with. Knowing your own subtle fears and core beliefs gives you a “leg up” on others – it prepares you to sort your real threats from “fake” threats.

So, it is a huge advantage to be able to accurately assess real vs. the imagined threats because it make it much easier to keep your behavior aligned with the four universal principles. This, my friends, will keep you out of jail!

My final conclusion is this: morally intelligent people who have engaged in the necessary self-examination to know what kind of subconscious “software” they’re using have the real business advantage.

Thank you!