A Case For The Primacy of People, Values-Driven Leadership, And Increased Profits

© Barry L. Linetsky, 2010. All Rights Reserved

Professor Henry Mintzberg of McGill University noted in a recent July 2009 Harvard Business Review article “Rebuilding Companies as Communities” that it is important for corporate executives to ensure that they create and maintain a sense of community within their organizations. A corporate culture that embraces the idea of community, he says, can mitigate dysfunctional corporate behaviour.

The essence of what Mintzberg means by community is caring. Caring is a reflection of values, and is an essential part of a humanistic, positive, corporate culture. To create such positive cultures, executives leading organizations must define and align to pro-human values to attract the best employees and motivate them to profitably create and retain customers.

The values that are espoused by corporate executives and form the basis for guiding individual behaviour must be integrated with the corporate mission and purpose. Achieving an alignment of values is what creates community. It is within the context of the business purpose and values that executives have the task of creating a workplace that both organizes the factors of production to create value for customers and creates and sustains a sense of community for employees – a sense of shared culture to guide cooperation in the achievement of the corporate purpose. To follow Mintzberg’s logic, the extent to which executives pay lip service to purpose and fail in their responsibility to create a humanistic and ‘caring’ community, reflects the degree to which they have failed in fulfilling their obligation as corporate executives.

Mintzberg comes to the problem of corporate dysfunction from the perspective of sociology rather than ethics, and by doing so neglects to address individual responsibility and personal accountability for dysfunctional executive management. He writes, “Decades of short-term management, in the United States especially, have inflated the importance of CEOs and reduced others in the corporation to fungible commodities – human resources to be ‘downsized’ at the drop of a share price. The result: mindless, reckless behavior that has brought the global economy to its knees.”

I would argue that cause and effect run in the opposite direction: that mindless, reckless, and intellectually lazy behaviour results in short-term management thereby creating organizational dysfunction and the myriad of economic and social failures pervasive in our culture today. As the late organizational development expert Elliott Jaques argues and demonstrates persuasively in Social Power and the CEO, CEOs and business leaders have it within their power to organize and effectively lead for the good of their organizations and the people they serve. “Employment organizations have the potential to become great and satisfying places in which to work, places in which people work together with mutual trust and collaboration, and pervaded withal by a strong sense of fairness and justice” (P. 7).

One could, I suppose, argue that if executives that agree to take on the responsibility to manage and lead companies are operating from ignorance of their need to create “companies as communities,” then their personal context excuses them from moral culpability. But if those same executives accept that creating a healthy corporate culture that promotes the alignment of personal and corporate values creates and sustains motivated and engaged employees, and that motivated and engaged employees are critical to the longer-term health and success of their organization, then their culpability is proportionate to the degree that they evade the issue and fail to take appropriate action.

Mintzberg points to the recent sub-prime mortgage problem as a representative example of the failure of executives to manage and lead within the full context of their responsibilities. “How could [the sub-prime mortgage problem] come about in the first place, and how could it have spread to so many blue-chip financial institutions? The answers seem readily apparent. Those who promoted these mortgages were intent on driving up sales as quickly as possible to maximize their own bonuses, the ultimate consequences be damned. And the financial institutions that bought these mortgages were not being managed. Many of their executives adopted what has become a pervasive style of ‘leadership’ in America: They sat in their offices and announced the goals they wanted others to attain, instead of getting on the ground and helping improve performance. Executives didn’t know what was going on, and employees didn’t care what went on. What a monumental failure of management. To varying degrees, the same failure has occurred throughout the private and public sectors.”

The problem Mintzberg sees is the failure of executives to create and sustain a strong social system that encourages and supports community, which he describes as “the social glue that binds us together for the greater good.” “Community,” he writes, “means caring about our work, our colleagues, and our place in the world, geographic and otherwise, and in turn being inspired by this caring.” The creation of a community of shared interests requires a robust and compelling culture: “A company without a compelling culture is like a person without a personality – flesh and bones but no life force, no soul. Organizations function best when committed people work in cooperative relationships based on respect. Destroy this and the whole institution of business collapses – as is now evident in so many companies.”

If and when organizational leaders pursue values that are antithetical to the values of those doing the work, minds will disengage, resulting in “mindless, reckless behavior” where executives don’t know what is really going on, and sadly, where employees just don’t care.

Consider that a recent 2009 Conference Board poll on employee job satisfaction indicated that employees are increasingly less satisfied with their jobs and the companies they work for. Only 45% of workers in the U.S. were satisfied with their jobs, the lowest level in the 23-year history of the poll. Clearly something is terribly wrong with the fundamental philosophy of how businesses are being managed and lead. Mintzberg would say that the systemic problem is a lack of caring, community, and respect by managers for the people they employ, and by implication, I would add, for the customers they serve.

Not all executives behave mindlessly, of course, and certainly not all of the time! Mintzberg’s sub-prime example reminded me of a recent interview of John Allison, who at the time was Chairman and CEO of financial services organization BB&T Corporation. Allison noted that when companies like WorldCom and Enron find themselves in deep trouble, it’s almost always due to an ethical violation, not esoteric strategy.

BB&T takes its responsibilities towards its employees seriously, and provides corporate guidance and direction in both their mission and purpose statements. The mission statement in part says that BB&T will create a place where employees can learn, grow and be fulfilled in their work. It is through the service of outstanding employees that BB&T expects to develop and maintain excellent client relationships that result in making the world a better place to live by “helping our Clients achieve economic success and financial security.” BB&T also recognizes “communities” in its mission and purpose statements, with a commitment to make them better places to be through the services the bank provides. Allison is convinced that living the vision, mission, purpose and values has been integral to BB&T’s long-term success.

In talking about the practical implications of BB&T’s corporate philosophy and value system, Mr. Allison stressed that BB&T is a purpose-driven company that focuses on a bigger picture, longer-term perspective through the creation of win-win relationships and not taking advantage of their clients, even when that means giving up near-term profitability by providing customers with something they want.

“Part of our mission,” says Allison, in a 2007 Econtalk interview with George Mason University professor of economics, Russ Roberts, “is to help our clients achieve economic success and financial security. We expect to make a profit doing that. We’re very explicit about it, but we also expect to earn it. We expect to provide them with better quality advice that helps them have a better quality of life…. We’re trying to earn a superior reward through superior service. We talk about being more knowledgeable – being able to provide them with more quality advice. Of being more responsive – giving them an answer quicker. Being more reliable – we help people through tough times to the degree that we can. Being more empathetic – which means treating people as individuals. So we try to provide differentiated value-based service and earn a profit doing it. So the conflict about profit is how to make it without taking advantage of people. That’s not how we want to get there…. We’re not going to figure out how to outsmart people.”

Allison understands that creating more highly satisfied customers than the competition is how you retain them and earn higher profits, and that doing so successfully must be embedded in the corporate culture. He also believes that doing what is right for customers coupled with living one’s corporate philosophy may lead to passing up opportunities that might be profitable in the short-term.

By coincidence, Allison provided an apropos counter-example to Mintzberg’s sub-prime example: “We did not get into the negative amortization business,” he says. “A negative amortization mortgage is where the interest cost is more than the person pays every month. It sounds good when real-estate values are going up really fast, but we’ve been in the business long enough to know that real estate values don’t always go up fast, so that when people are paying less than the interest on their loans, at the end of five years, in most real estate markets, you’re going to have a lot of very unhappy people because they’re going to owe a lot more on their mortgage than their house is worth. That’s not a good thing. That got to be the fad last year and the year before. There was a huge market in that. We could have made a lot of money doing that. We said no, we’re just not going to do it because it’s not good for our clients. Hopefully we talked some of out clients into getting a fixed rate mortgage and they’re much better off today. Some of them just went somewhere else and got that mortgage. They aren’t our clients any more and they made that choice. But we don’t think profit is earned by doing the wrong stuff. We think profit is earned by doing the right stuff. So those kinds of things are connected together.”

If other bank CEOs acted on the same principles and values, Americans who bought homes they couldn’t afford would not be defaulting on their mortgage obligations at record-breaking levels. Perhaps some of the negative effects of the Fannie Mae and Freddie Mac bailouts that started in 2008 due to government created moral hazard in favour of sub-prime mortgage lending could have been prevented.

Mr. Allison’s example demonstrates that a culture built around clear values linked to moral principles is a key element in pre-empting mindless and reckless management decisions and behaviours Mintzberg is concerned about, and in creating a motivated, high-performance workforce.

While it is difficult to prove a causal relationship between corporate culture and business success, the evidence is overwhelming that satisfied and engaged employees are more productive. According to Stanford University professor of Organizational Behavior, Jeffrey Pfeffer, “Companies that manage people right will outperform companies that don’t by 30% to 40%.” Why? Because what separates one company from another are “the skills, knowledge, commitment, and abilities of the people who work for you.” Companies that treat people right have high rates of productivity and lower rates of turnover. Those that treat their people poorly experience the opposite and wind up with “toxic workplaces” that drive people away. Not surprisingly, people feel a disinclination to work for companies that create working conditions that people deplore.

Research by Texas A&M University’s Distinguished Professor of Marketing Leonard Berry presented in his 1999 book Discovering The Soul Of Service, supports Pfeffer’s observations. The companies that are most likely to succeed in energizing people at work and to achieve sustained business success are those that have a defined set of core values and apply what Berry calls “values-driven leadership” in a conscious effort to sustain and reinforce those values in support of delivering the brand promise to customers. “Humane values sustain human excellence,” says Berry. “It is both that simple and that complex.”

CEOs have to make a commitment to detoxify their workplaces by seriously understanding the need for, and committing to, the primacy of people. Jeffery Pfeffer says it this way: when it comes to the link between people and profits, companies get exactly what they deserve.

Charles M. Schwab's Ten Commandments of Success

Charles M. Schwab's name is legendary in American business history. According to Wikipedia, he began his career as a stake driver working in Andrew Carnegie's steelworks, and in 1897, at age 35, became president of the Carnegie Steel Company. He headed up the Bethlehem Steel Company in 1903, leading it to become the largest independent steel producer in the world.

A major part of Bethlehem Steel's success was the development of the H-beam, which would revolutionize building construction and make possible the age of the skyscraper. Schwab's vision required him to take a major risk in raising capital to build a large new plant to make a product for which market demand was yet unproven. "I've thought the whole thing over," Schwab told his secretary, "and if we are going bust, we will go bust big."

In 1908, Bethlehem Steel began producing the beam, which was fantastically successful, helping to make Bethlehem Steel the second-largest steel company in the world.

In 1924, while at the Carnegie Steel Company, Schwab penned his Ten Commandments of Success.

Charles M. Schwab's Ten Commandments of Success

1. Work Hard: Hard work is the best investment a man can make.

2. Study Hard: Knowledge enables a man to work more intelligently and effectively.

3. Have Initiative: Ruts often deepen into graves.

4. Love Your Work: Then you will find pleasure in mastering it.

5. Be Exact: Slipshod methods bring slipshod results.

6. Have The Spirit Of Conquest: Thus you can successfully battle and overcome difficulties.

7. Cultivate Personality: Personality is to a man what perfume is to the flower.

8. Help And Share With Others: The real test of business greatness lies in giving opportunity to others.

9. Be Democratic: Unless you feel right toward your fellow men, you can never be a successful leader of men.

10. In All Things Do Your Best: The man who has done his best had done everything. The man who has done less than his best has done nothing.

Professor A.G.N. Flew. R.I.P.

eSkeptic, the newsletter of the Skeptic Society wrote an interesting piece following the recent passing of one of my favorite philosophy professors, Antony Flew. Prof. Flew was a prolific writer and educator of philosophy, but was perhaps best known for two things: 1. his expertise on David Hume, and 2. his lifelong public defense of atheism and the lack of evidence for God, or coherence about the concept of God.

The eSkeptic article is available here: http://www.skeptic.com/eskeptic/10-04-21/#comment-1716.

I contributed my recollection and comments, which I reproduce here.

Thanks for the article on Professor Flew. I took three courses with Professor Flew at York University in the early to mid 1980s, including two undergraduate courses and a graduate seminar on David Hume Second Treatise, and loved every minute of it. Flew was always smart, witty, engaging, and best of all, given he was a philosopher, rational and intelligent. He had a real passion for his work and loved to share, inquire, argue, and educate. He didn't tolerate fools lightly, and wasn't afraid to strongly argue his opinions.

He also had his own peculiar eccentricities and quirks, both in mannerisms and speech. He spoke the way he wrote, and when I read Flew, I read him in his voice at times. I carried out a brief correspondence with him following my graduation, and he would always respond promptly and kindly in his distinctive scrawl. In the few times I met him in social situations, he was always gracious and gentlemanly.

His detail to epistemological and logical thinking is what I gained most by being a student. Like others who knew him, it is hard for me to accept his statements that had abandoned atheism. In the few online interviews I have read, there seemed to always have been a bit of a wink to these statements, as if he was having one on with everyone. He had previously dealt with all of the arguments he himself had put forth to justify his conversion. It is impossible to reconcile his personal admission that he had flipped with his prior body of work. To do so was for him to abandon his earlier commitment to logic and sound epistemology, to disregard his own earlier arguments. Your article helped to explain how this may have happened - how a statement or confusion may have been manipulated into a political coup by those who were powerless to oppose the blinding light of Flew's reasoned arguments opposing irrationalism and mysticism.

The best we can do to preserve the memory and work of Antony G.N. Flew is to continue to invoke his own arguments against theism with the passion and certitude that he himself brought to the challenge.

The Ethics Of Customer Service Excellence

© 2010, Barry L. Linetsky, All Rights Reserved

In a free market society, a business exists to serve its customers through voluntary trade. That’s why customer service is an ethical issue.

When a company fails to provide reasonable service, it fails its customers. When its failure is an intentional act, it commits an ethical indiscretion, a customer betrayal, perhaps even fraud.

Sometimes we come across a business that actually takes its customer service responsibilities seriously, as they properly should. Such companies should be commended for their ethical behaviour as an act of encouragement.

Within the context of today’s cultural ethos of corporate entitlement and lack of personal responsibility and respect of the individual, those businesses that make it their policy and put in place the methodology and culture to provide “wow” service should be acknowledged as heroic. They are usually rewarded with repeat business through customer loyalty and exuberant word-of-mouth praise, the most effective marketing communication methodology known to mankind.

We’ve all heard legendary service stories that are truly heroic, where an employee has gone to extraordinary lengths to serve a customer by driving a briefcase out to the airport, or making a special delivery on Christmas Eve, etc. These are wonderful and commendable events that exemplify a commitment on the part of individuals to deliver great service. But what is truly heroic from a business perspective are the achievements of staff at companies where “wow” service doesn’t appear to be heroic because it’s what they do every day. These are the companies that have recognized that their business exists to serve customers, and so they develop a culture of customer service that is integrated across the organization and through all of its systems and processes, and reflected in its policies, management, leadership, and treatment of its staff. Such an achievement is no easy task. If it were so, everyone would be doing it.

The Walt Disney Corporation is a company that exemplifies customer service excellence, at least as it relates to the management of their theme parks. Great Disney stories about “wow” service are readily abundant. They happen all the time. People return to Disney parks year-after-year because Disney creates and delivers great experiences.

Yet more than half a century after Disneyland opened in 1955, it is remarkable is that so few companies have been able to aspire to and successfully follow the Disney lead. That’s because Walt Disney came to quality and service as a basic personal value. He understood that a commitment to providing customers what they want is the only ethical way to earning profits.

In today’s nihilistic age, few executives perceive business fundamentals as an ethical imperative. Most eschew ethics in favour of pragmatism. In doing so, they put profits ahead of an integrated pursuit of business fundamentals and philosophic world outlook.

It is for this reason that as consumers we so rarely experience great service from any company, and when we do we are shocked out of our complacency of nil to low expectations to become company evangelists.

BOSE Corporation: Service Heroes

These musings about service excellence were induced by a recent experience of great service from Bose Corporation, service that made me feel that this company is as passionate about ensuring that it takes care of its customers as is Disney; that for Bose, service excellence is a matter of ethical principle, not pragmatic expedience. Bose makes high quality sound and speaker systems.

About a dozen years ago I purchased one of their LifeStyle stereo systems that included a 6 CD changer, very small cube speakers, and a big sub-woofer. I listened to it every day in my office and received great enjoyment from its high quality sound and elegant design.

One day this past November I hit the remote control to start the CD player and just like that, it wasn’t working. So I called up Bose support to see if there was a reset button or some other easy solution to my problem. Unfortunately there was not. The fellow I spoke to at their call-centre said I could send it in for repair - they have a fixed price repair policy - which would cost me about $220. Or, as an alternative, which he offered without prompting on my behalf, I could purchase any Bose system to replace it at 50% off, or I could buy their top of the line 3-2-1 Home Theater system for a price that was about one-third of the retail selling price of $1,799.

Wow, I thought, that’s some offer. That’s great service. They anticipated my needs and quickly provided some options that were of real value to me to ensure my needs were satisfied.

I decided that it was better to pay a few hundred dollars more to have a new system than to repair an old system, so I ordered the system right then on the phone, paid by credit card, and received an email containing an order confirmation and mailing label with a bar code. I was required to package up my old system, attach the mailing label, and send it back to Bose at my expense before they would send out the new one. (Too bad, I was hoping to keep those little speakers). This was a bit of a problem because I had to find a box that the oversized elongated sub-woofer would fit into. It took me a couple of weeks to find an appropriate box to package up the system. I couldn't get the speaker stands into the box, so I taped them to the side and shipped it overnight to Bose.

Three business days later my new system arrived at my office, which means they had shipped it within 24 hours of receiving my system. The paper work had all been done before hand, so I guess that when they scanned the bar code of the incoming system they released the outgoing replacement and processed my payment. I received an e-mail from the courier company with the shipping info and a tracking number so I could track the delivery online.

Where my old system played CDs, the new system also plays DVDs and includes a hard drive to store 200 hours of music, so I decided I could make better use of it at home attached to my TV than at the office.

A couple of weeks before Christmas I finally got the new system home and went to set it up. I popped open the box, and realized that I shouldn't have sent back the speaker stands because they were bought separately. Duh – Homer Simpson moment.

Now I'm thinking that I’ll have to go out to buy new speaker stands to mount the speakers on. But hold on. I began to think about how impressed I’ve been with Bose and the outstanding level of service they have provided to me already. Maybe they realized that I had sent in the stands in error and are holding them for me! Could they be that good? So I get back on the phone and call Bose.

I tell my story to the service rep – he’s in Massachusetts and I’m in Canada – and he tells me it’s unlikely that the warehouse still has the speaker stands, but he asks me to hold. About 30 seconds later he’s back on the line telling me that he's shipping new stands out to me today, gratis.

Wow, I say. That's really great.

He says Bose should have told me not to send the speaker stands.

I say, we'll you couldn't have known I had speaker stands.

He tells me it's their job to know.

The very next day the stands arrive, shipped overnight by courier! How awesome is that?

So now I'm a raving fan of Bose not only for their great products, but also for their customer service.

All through this process, from the failure of their equipment after more than ten years, to dealing with my stupidity for sending back my speaker stands, they took control of the situation, treated me with dignity, and made it impossible for me to have any reason to even consider taking my business elsewhere. They were reliable, responsible, empathetic, prompt, courteous, friendly, generous, and handled everything beyond the level I would have expected as my standard for excellent service.

As I told this story to people it was interesting to see how cynical many were. Yes, it would have cost them more to track down the old stands in some warehouse and package them up and hold them for pick-up or shipping, than it was to ship me new ones.

But they didn’t have any obligation to replace them at their expense. I was pleasantly surprised that they didn’t try to recover some of the cost by, for example, asking me to pay half, or pay for the shipping because it was my fault I sent them back in the first place. There was none of that. The service rep comes back on the phone and inquires: you have black speakers in the box, right?

Me: Affirmative.

Bose: I'm sending new stands out to you and they'll ship today.

Me: Could you send them to my home instead of my office?

Bose: Could I have your postal code.

I provide my postal code. He affirms my address. Done. Thanks for calling Bose.

That’s great customer service as service should be. That's how you win raving fans and lifelong customers!

Another person indicated that the reason Bose is able to provide such great service is because they sell a premium priced product with a significant profit margin; that they choose to use their revenue to support service.

This appears to be true. And that’s how it should be if you want to be a great company rather than a flash-in-the-pan has-been brand struggling to win new customers while being abandoned by existing customers.

All purchases come with both explicit and implied customer promises – and as a customer, you expect to receive what the company promises. But you can’t test a promise until it is time for redemption. The real test of a company’s integrity is when something goes wrong. When that happens too many companies won't even stand up for their basic promises. Too many would rather spend a lot of time, money and effort wearing you down rather than winning you over.

Consider this typical example. I once tried to exchange a garden flower box I bought to a smaller size at a very popular chain of local garden stores a number of years ago. They refused. They pointed to their posted return/exchange policy of six days! Six days – not seven days. That means if you shop on Saturday and wait until the following Saturday to return or exchange it, you have to create a scene. That’s an explicit anti-customer service policy and I’m happy to say that the company has since gone out of business. I can’t even conceive how they could have considered that to be a policy that was anything but harmful to their business and destructive to their brand. They committed customer service suicide.

It is true that you often get better service or more respect when you pay a premium price, and you should get what you pay for. But we all know that too often you still get treated poorly. It doesn’t take a degree in rocket science (and a degree in business management may be detrimental here) to recognize that if as a business you are going to aspire to brand excellence, then it has to be reflected in every policy, and show at every point of customer contact.

I assume that Bose call-center employee in Massachusetts who took a call from some foreigner who was dumb enough to send back his speaker stands with his stereo handles these kinds of calls everyday. He didn't ask for proof of purchase or even check with the Canadian distribution centre to verify that I was telling him the truth. He didn't have to open a file, collect all kinds of information from me, and get approval from his managing supervisor. The company already had a process in place to guarantee customer satisfaction before the customer called. They had a process in place so that the customer would perceive their ubiquitous service delivery as heroic.

Too few businesses understand that at the centre of brand is the customer experience. To be a great brand takes great effort – heroic effort – but when done right it wins customer loyalty and if other aspects of the business are managed appropriately, results in long-term business success. Bose did it right and made me feel good. Know that if you choose to buy Bose, great service is part of the package that you pay for.

Air Canada: Service Villains

In contrast to great service, here's what's more typical: the creation of policies and procedures by retrograde and anti-social executives that will make themselves and their employees look and feel like morons and sociopaths. Many such executives apparently have an attraction for working in the airline industry. A long time ago now, in what was likely the good old days of airline service compared to today, Air Canada bumped my wife and I off our honeymoon flight because, they said, we didn't call the airline 24 hours in advance to confirm our booking. But I have non-refundable, non-transferable tickets, I said, so choosing another flight wasn't an option. The service attendant then made a big stink about it, citing the company policy and how they have the right to bump people with non-refundable, non-transferable tickets without notifying said people, all the while holding up the rest of the customers, now anxious to find out if they too have been bumped from the flight. Finally, after conferring with higher powers, we were moved up to business class seats, and made sure that we clearly understood that these service reps were going out of their way to make an exception for us only because we were on our honeymoon, and that we ought to be grateful that they had gone the extra mile to be helpful. It’s twenty years later and I still haven’t forgiven them, and continue to look forward to reading about their ongoing troubles, even though their service may not be any worse than anyone else's in the industry. Nonetheless, their friendly and pleasant anti-customer attitude remains the same.

It is against these kinds of experiences and the low level of expectations they endeavour that I come to judge Bose, and Bose Corporation knows it and thus uses service as a lever of differentiation. Praise be to Bose, for their entertainment components and their commitment to high ethical standards of service excellence.

Ethics, Taxpayer Massacre, And The Infinite Bailout

When it comes to ethics, economics and politics, most people rely on their feelings rather than an integrated philosophy to guide their thinking, values and action. But feelings and intuitions are not a valid means of gaining knowledge about the world.

To set upon a course of action while engaging in the willful evasion of reality and reason is always to court destruction and disaster. To move forward on a path to a goal while disparaging or ignoring the identification and guidance of valid principles to help to get you there is to act on the premise that anything goes. In all areas of life, including business and politics, such pragmatism ensures that whim and corruption will rule the day.

Unfortunately this mode of thinking and operating is endemic amongst today’s self-proclaimed elite, both in business and politics. Right now in Washington, D.C., for example, as far as I can tell, when it comes to ethics, economics and politics, principled thinking has been willfully abandoned and an atmosphere of damning the facts exists. This method of operation is creating a situation rife with epistemological and moral corruption, where anything goes.

One of the biggest recent stories of governmental moral malpractice is the ongoing bailout, management and oversight of the government owned entities Fanny Mae and Freddie Mac. The WSJ’s January 4, 2010 Opinion Piece “The Biggest Losers” reports on what they have dubbed “the Treasury’s Christmas Eve taxpayers massacre.” The massacre refers to “the Treasury’s Christmas Eve…lifting of the $400 billion cap on potential losses for Fannie Mae and Freddie Mac as well as the limits on what the failed companies can borrow.”

In essence, the U.S. Treasury Department has removed all limits on the U.S. government’s acquisition of private housing property through Fanny and Freddie. The WSJ writes:

The firms have made clear that they may only be able to pay the preferred dividends they owe taxpayers by borrowing still more money . . . from taxpayers. Said Fannie Mae in its most recent quarterly report: "We expect that, for the foreseeable future, the earnings of the company, if any, will not be sufficient to pay the dividends on the senior preferred stock. As a result, future dividend payments will be effectively funded from equity drawn from the Treasury."

The loss cap is being lifted because the government has directed both companies to pursue money-losing strategies by modifying mortgages to prevent foreclosures…. Fannie reported last quarter that loan modifications resulted in $7.7 billion in losses, up from $2.2 billion the previous quarter.

The government wants taxpayers to think that these are profit-seeking companies being nursed back to health, like AIG. But at least AIG is trying to make money. Fan and Fred are now designed to lose money, transferring wealth from renters and homeowners to overextended borrowers.

Even better for the political class, much of this is being done off the government books. The White House budget office still doesn't fully account for Fannie and Freddie's spending as federal outlays, though Washington controls the companies. Nor does it include as part of the national debt the $5 trillion in mortgages—half the market—that the companies either own or guarantee. The companies have become Washington's ultimate off-balance-sheet vehicles, the political equivalent of Citigroup's SIVs, that are being used to subsidize and nationalize mortgage finance.

While all of this looting by elected politicians of its nation’s citizens may be legal in today’s morally nihilistic world, I eagerly await an explanation by anyone - including those in the “business ethics” profession - to justify how such behaviour by some people against others is ethical. Ethical principles are ethical principles, so whatever those principles are, they must apply to all people – politicians included. Otherwise, it just isn’t ethics. The same goes for economic principles and political principles. Principles are, by their nature, objective and universal in scope.

One businessman and potential politician of note has come forward recently to proclaim his outrage – entrepreneur, author (Crash-Proof 2.0) and 2010 United States Senate candidate for Connecticut, Peter Schiff.

Mr. Schiff used the unlimited Treasury bailout commitment for Fanny and Freddie as the launching pad for a more principled economic/political argument as to why government bailouts are bad. Here is my transcription of his extemporaneous comments from his weekly webcast, Wall Street Unspun With Peter Schiff, December 30, 2009.

The way capitalism works is that when you are generating a profit, that means you are doing something right. You are combining resources in an effective way and you are generating a profit.

The profit is the market’s way of rewarding you for doing the right thing, and the companies that are making profits can expand and get bigger because they are doing the right thing. But the other way, if you do the wrong thing you lose money, you get a loss. And what happens then is that activity ceases. You can’t keep losing money forever. So that fact that you’re losing money is a sign that you’re doing something wrong.

Now obviously General Motors Acceptance - GMAC - is doing something horribly wrong because now they’ve had to be bailed out [by the U.S. Treasury Department] for a third time. But instead of letting the market put that company out of its misery, they keep perpetuating it so it can do even more damage to the US economy; they [the U.S. government] can squander even more resources. And in order to keep GMAC in business they have to take resources away from other companies that are doing it right, that would otherwise be growing and expanding and benefiting the economy. Instead they [successful companies] suffer so we can prop up these [failing] companies. The same thing is going on with Freddie and Fanny.

Every business that the government decides to bail out is a business that the economy would be better off without. It’s just enforcing all the wrong things. It’s the reverse of Darwinism and we’ve got to get our leaders to understand the capitalistic system. They’re not in the politburo there – this is the United Stated of America – and they need to understand what that means…

When [Fanny and Freddie] were initially in trouble and they bailed them out when they should have let them fail, the government said we stand behind these entities to the tune of 200 billion dollars each – we will cover the first $200 billion in losses of each company - which is a staggering amount of money. But now last week they said that isn’t even enough – we’re going to cover it all. Even if they lose $500 billion – even if they lose a trillion – the American taxpayers have got it covered. Unbelievable!

And the fact that they would even raise it shows that they know this is going to happen because there were obviously some problems in the bond market…people didn’t want to buy the Freddie and Fanny debt because they began to realize the guarantee only covered $200 billion and they could see the problem was bigger than that, so in order to get people to buy these bonds they had to guarantee everything. So despite the fact that the government is trying to tell us that the housing market is improving, the fact that they had to guarantee all their liabilities shows you that it’s not improving but that it’s getting worse.

Mr. Schiff’s ability to analyze and explain clearly and logically in economic fundamentals makes him a great teacher of economics for the educated layperson and I highly recommend you subscribe to his weekly investment podcast to gain a better understanding of economics.

The underlying causes and solution to all of these economic and political problems we face today has its roots philosophy, especially epistemology and ethics. If, as individuals, we are to promote and engage in civilized societal renewal, we must first embrace reason as our means to understanding, and then identify and define sound ethical principles to guide human action. Only then can we apply those principles to guide the other human sciences, the most important of which are economics and politics.

Abandon or neglect ethical principles and you will enable and create human misery and destruction. And it does seem that our politicians are hell-bent on creating destruction, their declarations of good intentions notwithstanding.

When it comes to politics, I’m always reminded of a line by singer/songwriter Bruce Cockburn: the trouble with normal is it always gets worse.

Copyright 2010, Barry L. Linetsky, All Rights Reserved

What Is A Stakeholder?

The word “stakeholder” has become ubiquitous in the world of business. People talk about it as if it has some definite meaning, but I’ve come to the opposite conclusion.

All legitimate concepts refer to some specific entity that can be identified in reality and can be fully integrated within the context of human knowledge. To be a legitimate concept, the thing referred to must have distinguishing characteristics of similarity and difference, with the fundamental characteristic(s) identified. If this can’t be done, then the concept is not (yet) legitimate.

Let’s try to answer the question: what is a stakeholder?

To start, businesses are funded by investors, run by employees, and organized to align resources in ways that create customers and operate at a profit. They operate in a market, which includes everybody that may be affected by the company. This latter group – everybody that may be affected by the company – is what is usually referred to as "stakeholders."

The term "stakeholder" is in practice meaningless because it pertains to everybody that has an interest in any aspect of the company including owners, lenders, employees and their families and spouses, and all people and organizations whom are affected by the activity or lack thereof of the business entity or anything associated with it. It also includes all citizens of a nation because the business pays taxes which support government redistribution and social spending. Thus, for all intents and purposes, everyone is a stakeholder of everything if they are in any way affected by the existence of that entity.

If this is true, then stakeholders are just people - members of society - the market. If you want to group them by interest, then there are stakeholder groups - a group that wants higher wages, a group that wants less noise, a group that wants lower profits, a group that wants union membership, a group that wants more recycling, a group that wants subsidized education, etc., subdivided into as many groups as there are wishes - rational or irrational, prudent or imprudent. moral or immoral, legal or illegal.

Business managers must always operate within the boundaries of opinions and laws of the society to remain in business. That's what it means to be a market-focused enterprise. To proclaim oneself to be a stakeholder in a free-market means that one is free to influence the thinking, decisions, and actions of business owners and management as one sees fit. It is to behave within the confines of freedom, respect for individual rights, and human decency. But it is a concept that isn’t necessary because there is nothing distinguishing about it. What, for example, distinguishes a stakeholder from a non-stakeholder?

In an interventionist market, the claim to be a stakeholder often means the attempt to leverage a moral claim - beyond what one is entitled to in a free-market - to influence the government to coerce businesses through legislation and regulation to act in ways contrary to the interests of the market - in ways that the market would not otherwise voluntarily support. If this is what stakeholder means, then it is a distinct concept, but I don’t think this is what those who use the term consider to be the essence of the concept.

The question therefore remains as to whether the notion of "stakeholder" has any validity as a concept at all if it refers to everybody that has an interest in the outcome of a business.

It seems to me that the designation of stakeholder is often used by some groups to presume moral entitlement to influence business management because they will be affected or impacted by the decisions made by a business, when no such entitlement exists. The self-referenced designation of stakeholder is often an attempt by some to assert or imply the status of victim of an injustice, and therefore redress is required, where no such injustice has occurred. Legitimate injustices can be dealt with through established courts of law with no need for references to stakeholders.

An astute manager should be taking into consideration all external influences to his business when making resource allocation decisions in pursuit of profit, but ultimately, if one believes in the principle of property rights, the ultimate decisions and responsibilities rest with the business owners.

Copyright, 2010, Barry L. Linetsky, All Rights Reserved

Ideology, Not Wages, Hurt Unionized Workers Most

I wrote the essay below in response to another titled “Unions are one of our key tumours in this cancerous economy,” written by Mark Borkowski, owner of Mercantile Mergers and Acquisitions Corp. of Toronto, Canada.

His essay, which was posted on the LinkedIn Rotman Alumni Network on Jan 3, 2010, is a general argument that unions, by driving up wages, are a major cause of business failures and plant closings in the current economy because “[t]he increased costs of labour in North America will make it more expensive to produce goods than almost anywhere else in the world.” It is for this reason, asserts Mr. Borkowski, that we should prepare ourselves for more plant closings.

I agree with Mr. Borkowski that unions often act contrary to their economic self-interests. And it is that observation that enticed me write my supportive response.

Ideology, Not Wages, Make Unionized Workplaces Uncompetitive

Posted by Barry Linetsky, January 6, 2010, on LinkedIn Rotman Alumni Network. © 2010, Barry L. Linetsky, All Rights Reserved.

Greed is a human condition. It applies as much to ill-informed unionists as it does ill-informed executives.

Many unions, but not all, and not unions per-se, are a major problem, not because they are unions, but because they attract and operate with an underlying philosophical commitment to a Marxist ideology of class struggle. To this extent they are at war with the process of wealth creation which is at the base of Capitalism, even though they want the benefits. Earning the benefits, though, requires a system of non-coercive cooperation, which is the social-political system of capitalism.

When I was a child, I recall union advertisements that unionized workers did better work due to training and pride. This may have been true about the union movement at one time. I don't claim to know if it was ever true about the union movement in general, having not studied it. But it makes some economic sense.

If you can gather like-minded people who join together voluntarily to engage in self-actualization and workplace excellence as a means to protect their jobs, then all the power to them. But at the base of this is an economic argument that workplace excellence and cooperation creates additional efficiencies and market competitiveness that justify higher wages. If a union can voluntarily organize and motivate employees to achieve and sustain excellence as defined by market competitiveness and customer perceived quality, then they serve their members and their families, the communities they work in, and themselves. But this requires a philosophical mindset and paradigm model of cooperation, not class warfare and envy.

The flip side to this from management's perspective is the general and erroneous - yet common - conclusion drawn by Mr. Borkowski that businesses move their locations because it's "cheaper to get it somewhere else with non-union labour." This is not a sound business reason for rejecting a union.

If the success of the business really rests on the costs of labour - which it might in a labour-intensive commodity business - then this is likely the result of management failure over a number of years to recognize and deal with a failed business model, which, if parts of the business are unionized, both the company and the union are likely to be the culprits. Where unions make it their mandate to prevent adaptations to market conditions, then clearly they must shoulder the blame for increasing uncompetitiveness that culminates in a crisis around wages.

The proper focus for both unions and management is economic value added by the labour relative to competitors, not wages per se. I may be accused of being naive, but there is no inherently necessary reason why management and workers can't cooperate to combine economic and human resources to build and sustain great businesses over time. At its root, any such constraints are primarily philosophical and ideological, not economic. That individuals think that their interests are best served by unions today given the antagonism of the underlying social philosophy of the movement to social benefits of voluntary cooperation, explains why they join unions. In many cases business owners and managers operating and struggling under unsustainable business models engage in poor employee business practices to try to meet their own financial obligations, thereby attracting ill-will and retaliation through union organizing. Yes, those people should seek other jobs rather than seek coercive retaliation through unionization, but the law allows otherwise, and humans don't always act wisely.

IMO, it is ideology, not wages, that is the primary cause of the clash between businesses and unions. Unions would better serve their members by aligning themselves with a market-driven, cooperative perspective to serving their members. The future success and social viability of unions will depend on it. Kudos to those 'progressive' unions that already do.

Barry Linetsky