In a globalized world, with companies innovating and competing across oceans and borders, it is more important now than ever for companies to move toward long-term strategic thinking. It strikes me that ethical behavior and long-termism have a considerable amount in common. Everyone readily agrees that both are important and aspirational, and consistent with well-run enterprises. Both are measured by actions, not company mission statements. We know what it means to be ethical, and we know what it means to think long term. So why are these traits not evidenced more by companies, and where do the two diverge?
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Higher education addresses ethical behavior by teaching courses on ethics. While this may be a well-reasoned approach, I’m fairly confident that if we fail as parents to illustrate what ethical behavior looks like at home, a class in school will be hard-pressed to change a young person’s trajectory. The traditional regulatory approach is to institute regulations like Sarbanes-Oxley, yet it remains fairly self-evident that the small majority of bad actors will continue to behave badly with or without new rules. The recalibration of their ethical compass is uncorrelated with enhanced regulation, and the community of good actors will behave ethically because no other approach ever occurred to them. Given these approaches, what’s next? Classes in long-termism and regulations governing how companies must implement longer term strategies?
The fact is that behaving ethically, while easier said than done, can be straightforward in easy cases, where laws, regulations, or industry norms have identified black and white rules, or where we witness companies making disastrous choices fraught with ethical lapses. In those circumstances, we recognize the ethical choice when we see it, and institutions such as Ethisphere celebrate those companies who go beyond words and principles and act ethically in measurable, high-impact ways. But still, major corporate ethical lapses make the news weekly. Why? The challenges to driving ethical conduct and long-term thinking may in fact be the same.
While many would assume that long-termism may be as easy, if not easier, to put into action than ethical conduct, the realities of running an enterprise today make it harder than we might think. For public companies, compensation metrics and business plans are often annually derived, financial results must be delivered quarterly, and the corporate calendar can unknowingly mandate a short-term focus, particularly in sales businesses. With regard to shareholders, many more purport to have a long-term focus than the facts bear out, but this seeming incongruity is better understood when one considers that all fund managers have investors who analyze their short-term results with considerable voracity. Even in the non-profit world, it is challenging for many to take a long view, as failure to meet shorter-term fundraising objectives can lead to dissolution or irrelevance.
These same challenges and pressures can create an environment ripe for ethical lapses—exceptions can be made, shortcuts can be taken, and ethical rules can be overridden in order to reach business targets. Tensions among competing interests make it too easy to justify questionable decisions that emphasize short-term results rather than the long-term health of the enterprise—for example, retaining an employee who generates above-average sales while consciously overlooking the unpleasant environment the employee creates, or doing business in a non-compliant way to help the company meet its near-term budget or its investors’ expectations.
This all begs an obvious question—what can we do better? For companies, use longer-term performance shares as a compensation tool, both for management and further down the company. Include an ethics component for employee performance reviews. For regulators, adopt the European approach to earnings cadence—semi-annual earnings calls, augmented with quarterly financial reporting. For non-profits, measure outcomes rather than administrative ratios, and merge with like-minded organizations to build sustainable scale. For us as individuals, be caring, generous citizens and challenge your companies to make decisions within an ethically robust framework, to stay long-term focused, and to be socially responsible.
About the Author:
Duncan Niederauer serves on the Board of Directors for Realogy
