Kinds of businesses and kinds of business(wo)men

Paul Kedrosky discusses some of the consequences coming down the pipe for the VC industry.  Paul draws much of his inspiration from his friend, Bill Stensrud, who's a VC investor himself.  Thinking about the current state of the VC industry, Bill observes that an overweening interest in getting to an exit (read: finding a buyer) has come to replace an interest in cash flow (read: making money).

What [all VC] firms have in common is that they exist to buy and sell equities.  They both buy from entrepreneurs and they both sell to acquirers or (very infrequently these days) to public shareholders.  They are, at their very core, traders.  Their job is to buy low and sell high.  This fundamental truth about the venture business informs every action they take whether mainstream of super-angel.  It also informs the culture of the businesses they create.  Everyone is looking for a pot of gold at the end of the rainbow - the life changing - all consuming - EXIT!!  The nature of their business model demands it.  These are close-end funds.  They have to return money - cash - to their investors.

In this blog over the next several months I am going to explore another - even more ancient - model for company creation.  This is art and practice of building and running a business for POSITIVE CASH FLOW.  Before there was venture capital and before there were EXITS, people built businesses to make money so they could pay their bills.  I will argue that re-discovering this model drives a corporate culture which is much healthier, more robust and more survivable than the EXIT-focused culture created by the venture capital model.  I will also argue that the cash flow model can engage the employees, the critical human capital asset of every business, to significantly greater efficacy than equity models.  Lastly, I will argue that we can modestly scale this model to the point that it can become a significant factor in new business creation.

One of the consequences of thinking about business environments as ecologies is that it makes it relatively easy to think the relationship between the people who run businesses and the generic conditions in which those businesses operate.  It becomes easy to see how VCs, in actively selecting with an eye toward the exit, might over time change the population of entrepreneurs they partner with.  It might be obvious that business ideas that make money, but have no clear exit strategies, do not fare well securing VC in today's market.  But business ideas are developed by and instantiated by businesspeople.

Today's VC climate actively selects against entrepreneurs who want to "build and hold" profitable businesses.  "Build and hold" doesn't just describe a business model--it describes a temperament:

• Thoughtful - concerned with long-term secular trends rather than high-velocity volatile fads
• Prudent - husbands scarce resources for the long haul--including and especially managerial stamina (contemporary VC expects managerial burnout, though it hopes to exit before it happens)
• Patient - satisfied to build a strong foundation for big success by stringing together a long series of small, cumulative successes

If we want businesses that are conceived and constructed as long-term money-making ventures, we need entrepreneurs with the right temperament.  If modern VC's intensive focus on the exit has changed the character of our pool of important and interesting business ideas, well, so what?  New ideas are easy to come by.  But I fear there may have been a more subtle and more fundamental change in the character of our entrepreneurs (as a group, not as individuals).  We now have one, maybe two generations of top-tier entrepreneurs (with the right experience and connections) who think of starting a business as aiming for an exit.

In order to make best use of our limited resources, we have created a streamlined system whereby everyone must exit at Easy Street.

Our current business culture of get-what-you-can-while-you-can follows directly from the preferences of the VC investors who hire people with that kind of temperament to build and run their businesses.  As go new businesses, so goes all business.  It's hard to see how we get sensible businesspeople to run our businesses until investors stop thinking like traders.

Social attitudes usually reflect social conditions (not moral preferences)

It turns out that personal finance isn't so "personal."  Much of it has to do with prevailing attitudes toward financial conditions.  Bank of America CEO Kenneth Lewis recently worried in public [WSJ; behind firewall] about people who might walk away from their mortgages now their homes are worth less than their loan balance.

Calculated Risk puts up some scary numbers, which indicate the potentially seismic consequences of large-scale shifts in social attitudes. How scary?  How does TWO TRILLION strike you?

If every upside down homeowner resorted to "jingle mail" (mailing the keys to the lender), the losses for the lenders could be staggering. Assuming a 15% total price decline, and a 50% average loss per mortgage, the losses for lenders and investors would be about $1 trillion. Assuming a 30% price decline, the losses would be over $2 trillion.

Not every upside down homeowner will use jingle mail, but if prices drop 30%, the losses for the lenders and investors might well be over $1 trillion (far in excess of the $70 to $80 billion in losses reported so far).

There's a huge social component to personal ethics--much larger than we usually suppose.  Is walking away from your mortgage bad behavior?  Well, what if not only makes financial sense, but many people are doing it?  What if it were recommended?  Shame depends on the visibility of certain personal behavior in the eyes of a public, and there seems to be much less shame associated with cutting one's mortgage losses.  The big lesson (apart from the shame I hope the banks are feeling) is that personal character is developed in symbiosis with social conditions, not in spite of them.

The economists have no clothes

Over at The Atlantic, Gregory Clark admits, rather refreshingly, that academic economists have no clothes.

The current recession has revealed the weaknesses in the structures of modern capitalism. But it also revealed as useless the mathematical contortions of academic economics. There is no totemic power.

As a discipline, economics proposes models, which are by definition incomplete. That is, they exclude some details and highlight others. To think that economic theories actually describe reality--as opposed to offer an image of reality that is useful for some purposes--is to mistake the map for the world.

Ceci n'est pas le monde.

Further, the dismal science has all too often provided models whose validity is impossible to ascertain, since it has often built its theories on the basis of premises that are false prima facie. The point here is that, logically speaking, false premises do not yield false conclusions; rather, false premises render the truth values of an argument's conclusions indeterminate. It isn't that economic models are false, but rather that the falseness of their premises means that can know nothing with certainty about their conclusions. We can't say whether economic models are true, false, or some determinate mix of the two. Logically speaking, they're mere speculation, with the same logical status as wishful thinking.

You mean we came all this way and we don't even know if we're wrong?

For example, the theories of classical economics generally accept as axioms (i.e., they accept as true without argument) the following:

1. All economic actors are rational.
2. All economic actors have perfect information about the markets in which they act.
3. All resources are scarce.

These are bad axioms, since they're obviously not true. As in, there's no doubt at all that these are false. Of course, not all branches of modern economics still accept these premises without qualification, but historically speaking these assumptions lie at the foundation of all economic thought. This is precisely the main reason I never studied economics in college. Who can take seriously a discipline that, wherever it ends up, begins with nonsense? While there's no doubt that the phenomena we think of as economic are intrinsically interesting, I remain skeptical that the formal discipline of economics has a great deal to offer beyond the obvious. As Clark notes:

The debate about the bank bailout, and the stimulus package, has all revolved around issues that are entirely at the level of Econ 1. What is the multiplier from government spending? Does government spending crowd out private spending? How quickly can you increase government spending? If you got a A in college in Econ 1 you are an expert in this debate: fully an equal of Summers and Geithner.

Common sense cloaked in jargon and equations. Even the economists' invisible clothes look rather shabby these days.

The value of inconvenience

By almost any meaningful performance measurement, the U.S. economy in the 20th century performed better under Democratic administrations than under Republican ones. Reflecting on this seeming paradox, Christopher Carroll suggests that

perhaps the best explanation has to do with attitudes, not doctrines: Maybe capitalism works better when its excesses are restrained by skeptics than when true-believers are writing, interpreting, judging, and executing the rules of the game. (The Democrats are surely the more skeptical of our two parties).

Most would agree that restraining the excesses of almost anything counts as good sense, but this is only a preliminary step toward a bigger and more interesting idea:

Capitalism works better when it is being held accountable to some external standard than when left to its own devices.

The whole system works better when "held accountable to some external standard," when it is, in a word, constrained. Optimal performance, in other words, is the fruit of struggle. Make things too easy and performance declines.

Relaxed external standards? Check. Highlight reel material? Not so much.

Consider how effective coaches pull outstanding athletic performance from their players. Good coaches don't let their players do whatever they want, without accountability or oversight; they create rules and systems of accountability. A good soccer coach makes you use your weak foot in order to develop it. A good swimming coach pushes you to hold your breath longer. Optimal athletic performance depends upon the measured application of psychological and physiological pressure. (Go watch Gavin O'Connor's Miracle to see a dramatization of great coaching.) Good coaches don't remove limitations--they use them.

Or consider architectural and industrial design. The famous designer Charles Eames (yet another famous St. Louisan) once remarked:

Design depends largely on constraints.

We tend to believe that creativity is best served by removing constraints. If we could just somehow make the process of invention easier for the inventor, we imagine that she would be more inventive. But the opposite is usually true. People get creative--truly creative--when challenged to negotiate constraints. Budgets (within reason) push architects to develop new strategies to solve old problems. (The story of how the design of Seattle's new public library building developed is a great example.) The particularities of manufacturing processes push industrial designers to find solutions which challenge convention. (The story of the how the first commercially viable computer mouse was designed is a textbook example.) Constraints drive creativity.

Artist Andy Goldsworthy creates astonishing ephemeral works using only the materials he finds on site during his wilderness hikes: creativity driven by constraint.

The same is true in business. Real innovation happens where someone discovers a new way to scratch an old itch, where someone thinks through a problem in a new way (even if it's simply a new application of an old technology). When we talk about innovation happening "at the edges" of a market or industry, what we mean is that innovation happens where business rubs up against constraints. (The "mainstream" of anything is where things flow smoothly, right?) We can't have innovation--and capitalism's greatest strength as an economic system is its powerful incentives for innovation--unless we have the right kind of rules and restrictions. (The question of "more" regulation versus "less" regulation is puerile. The kind of regulation matters more than the amount.) The free market, to put it pointedly, is only as free as its constraints force it to be.

Of course, constraints are damned inconvenient. And that's precisely the point. It's often--if not always--in response to inconveniences that people are most creative, most inventive, most innovative. And so we're led inevitably to the conclusion that inconveniences can be useful.

"Traffic lights are just the Man keeping us down! We will not be constrained!"

Some inconveniences, naturally, are more useful than others, but that hardly obviates the necessity of inconvenience for optimal performance. It's easy enough to see how inconveniencing others might be worthwhile, but it's one of the marks of emotional maturity to see the value of inconvenience for oneself. Politics--in the largest possible sense of the word--is only possible because we deliberately accept to be inconvenienced in certain ways (e.g., we don't simply use whichever car is closest, use guns to force our crushes to go out with us, or lynch elected officials from opposing parties). We recognize that our condition is collectively better when we all accept to be inconvenienced in certain ways. (Again, the kind of self-regulation matters more than the amount.)

Finding--and enforcing--the right kind of constraints is key to getting the most out of people, as innovators, as politicians, as artists, as designers, and even as citizens. We would all of us do well to remember that inconvenience--yes, even our own--often serves us much, much better than convenience.

The meaning of business

Lately, I've been mulling over a comment made by my uncle--who has the reputation in the family of being a super savvy investor--to the effect that it doesn't matter what a business does per se, so long as it turns a profit. I've argued before on this blog that my uncle's position unfairly impoverishes the concept of value. I've even gestured (crudely) in a few directions which might help us to enrich our concept of value.

Over at The Bastiat Society Blog, however, Ben Rast has a post entitled Business as Creative Act, which takes the first few steps down what I think is the brightest path toward a full and mature understanding of what business is (and why my uncle is mistaken). Simply put:

Business, as a creative act, draws on the very same strengths and suffers the same weaknesses as the creative act in art. They are more alike than dissimilar.

By "creative act," Rast means to emphasize entrepreneurship particularly:

We can illustrate just how much artistic creativity and business creativity have in common with the following paragraph of advice to writers, taken from an interview of William Faulkner published in the Paris Review in 1956:

"Let the writer take up surgery or bricklaying if he is interested in technique. There is no mechanical way to get the writing done, no shortcut. The young writer would be a fool to follow a theory. Teach yourself by your own mistakes; people learn only by error. The good artist believes that nobody is good enough to give him advice. He has supreme vanity. No matter how much he admires the old writer, he wants to beat him."

Now, notice how well it works as advice to entrepreneurs -- those troublesome dreamers and innovators in business -- with a few strategic substitutions.

"Let the entrepreneur take up surgery or bricklaying if he is interested in technique. There is no mechanical way to get business done, no shortcut. The young entrepreneur would be a fool to follow a theory. Teach yourself by your own mistakes; people learn only by error. The good entrepreneur believes that nobody is good enough to give him advice. He has supreme vanity. No matter how much he admires the old business, he wants to beat it."

Rast is astute to catch this similarity. People who launch new enterprises resemble artists in their drive to make something new, to add an original trope to the poem of humanity. But it's obvious, in a sense, that entrepreneurs are creators. What's not so obvious is that all productive activity (in the economic sense)--that is, all business activity--is creative as well.

To put it succinctly, human creativity is coextensive with human endeavor. Wherever people get stuff done, there people come up with new ways to think, do, and make. It doesn't matter what you call the end product--good, service, artwork--productive human activity demands creativity for the very simply reason that every object humans make with intention and every action humans do with intention bears the stamp, as it were, of the intention that brought it into being.

Aristotle identified four causes which obtain in the world: the material, the formal, the efficient, and the so-called final cause. It's the last one which concerns us here. The

final cause explains the cause of something in terms of its conceived end, or the purpose why it is made. According to Aristotle, [the] final cause is “the end (telos), that for the sake of which a thing is done.”

Every good is made and every service performed for the sake of something else--specifically, they're made and performed for the sake of the customer's good. That's why we call them "goods," right? Yes, yes, the producer produces goods in order to get paid, and the service provider serves in order to get paid, but they only get paid if someone recognizes the value of their goods and services. (And this objection is weak, since money is only and always a means to an end. "To get paid" can never be a final cause for making or doing something for the simple reason that money always points beyond itself to another end--one always exchanges the money on something else. It is not, simply put, final.)

Because goods and services are self-evidently intended to do someone some good (otherwise who would buy them?), we can say that economically productive activity is not only a functional activity, but is additionally an expressive activity--that is, it means something. In particular, it speaks to a vision of the good in general and the customer's good in particular. Even further, each good produced and each service provided changes the world; each good and each service brings into being a new state of affairs which must be presumed to be better than had the good been left unmade, the service undone (again, otherwise who would buy them?).

From this line of thinking two absurdly important conclusions follow:

1. Businesses really do change the world--so they'd better get it right. The presumption of "providing value," of making or doing something "good," is built into the very possibility of business. If a business doesn't add value--that is, if it doesn't make the world a better place--then it has no business being in business. It seems almost too obvious to need saying, but... businesses may be judged by the same standard as every other human endeavor, and that standard is whether or not the business's making and/or doing makes the world a better place.
2. Investors are to companies what patrons are to artists--so they'd better get it right. Warren Buffet famously advises investors to buy shares of a company only if they'd be willing to buy the whole company. I'll take Mr. Buffet one step further. You should buy shares of a company only if you'd be willing to be that company's sole customer--like an artist's patron, buying, owning, and enjoying responsibility for that company's entire output. Just as being a shareholder means being wholly and individually responsible for (and dependent upon) a company's entire financial performance, so being a shareholder means being wholly and individually responsible for (and dependent upon) a company's entire, world-changing making and doing. Just like a patron, you've put money down so that the companies you own can make what they make, do what they do. You enjoy the financial fruit of the shares you own for the single, simple reason that the companies you own get paid for changing the world, and the world they're making and enacting is the world we all live in--the world our children are growing up in.

Caging the innovation bird

So, 800-pound Microsoft has begun developing a network of Innovation Centers around the globe as part of strategy to "to foster innovation and growth in local software economies." Hmmm....

I think most people would be at least a little suspicious of Microsoft's intentions in spearheading such an effort. Innovation is inherently a collaborative and not a competitive process. Microsoft claims to be cooperating with governments, universities, and other software companies; while I see no reason to think that they're not doing so, I do believe there are grounds for thinking that Microsoft may understand "cooperation" differently than some of its Innovation Center partners. Microsoft Founder Mr. Gates may or may not have reconnected with his inner philanthropist; it remains the case that Microsoft's behavior and corporate culture during his tenure was profoundly combative and territorial.

Soon every innovation in this neighborhood... will be mine!
(Photo by oddthingies)

A key question private businesses are asking themselves these days is how to capture value generated by an innovation process--how keep the innovation bird happy in its cage, as it were. Innovation, however, doesn't just thrive in an open environment--it arguably cannot even survive unless it can roam freely, build doors in impenetrable walls, outgrow its origins. While people can own innovation processes and products in the looser sense of taking responsibility for them, it's hard to see how anyone can own them in the stricter legal sense. (And I seriously, seriously doubt that Microsoft will be the one to crack this nut; their outlook is too closed.)

And if you've been wondering whether or not the new fixation on innovation is just a passing fad, it isn't. My ex-boss David Smith of the Affordable Housing Institute recently blogged about an April 2007 PNAS paper by Luís M. A. Bettencourt, et al., entitled "Growth, innovation, scaling, and the pace of life in cities." According to Smith, Bettencourt et al. divide all the factors of urban life into three categories:

1. Factors that scale linearly with the city's size, such as number of jobs, water consumption, etc. (Smith calls these "personal matters");
2. Factors that scale sublinearly with the city's size--i.e., those factors that enjoy economies of scale--such as consumption of energy and transportation resources (Smith calls these "hardware");
3. those factors that scale superlinearly with the city's scale--i.e., those factors which enjoy network effects--such as disease rates, innovation rates, and wealth generation (Smith calls these "software," or "social interactions").
   

Wealth is, as Jane Jacobs has noted, an urban phenomenon. But wealth moves hand in hand with innovation--both are superlinear urban effects. Which means that big cities both demand and generate higher rates of innovation and wealth generation. Note that superlinear effects are not merely epiphenomena--that is, it's not just that bigger cities "happen to" generate exponentially more innovation, crime, wealth, and disease. The economies of bigger cities, when they grow (again, as Jacobs has noted), grow on the basis of wealth and innovation. An ever-growing economy producing ever more wealth--the holy grail of Protestant democratic capitalism--both requires and produces ever more innovation. As long as our cities keep getting bigger we will keep getting wealthier and smarter, and innovation will weave itself ever more inextricably into our economies and cultures.

As anyone who's tried to innovate knows, innovation relies upon creativity, and creativity thrives in open systems, open networks, and open minds. It's no wonder that the interests in innovation and social entrepreneurship have developed in parallel, since social entrepreneurs seem willing to perform all kinds of commercial functions without basing their organizations on the pathological greed and egomania which lie at the heart of corporate misbehavior. Greed and egomania are diametrically opposed to the values of generosity and humility which form the basis of every successful culture of innovation.

Corporations today--and Microsoft is no exception--want the wealth that follows on the heels of good innovation, but they can't bring themselves to believe that "proprietary innovation" makes about as much sense as "a happily caged falcon." At bottom, I think it's our whole notion of ownership which needs rethinking. In a sense, after all, wealth belongs to communities (or societies, if you prefer). We just entrust it to corporations and families and individuals in the belief that they will use it responsibly if their personal well-being depends upon its sound management. A pretty smart system, overall. But can we imagine (and design) a better one? Can we imagine (and design) a form of ownership which engenders and protects responsibility, but also resists the excesses of the miser and the tyrant?

Maybe building a better cage means not building a cage at all; maybe it means becoming falconers.
(Photo by wallyg)

Do values have value?

One of the most pernicious fallacies into which our business thinking is prone to fall--and this is especially true in disciplines like finance and engineering, where numbers are particularly preeminent--is the conflation of measured value and real value. It's an old truism that you cannot manage what you cannot (or do not) measure. But managers, driven by objective results, take it one step further: If we cannot (or do not) measure it, the thinking goes, then for all practical purposes we can act as if it were not real. Oh, the endless debaucheries which descend from this one, simple stupidity.

Who says you can't measure love?

If we reject this fallacy, however, we ipso facto assume the value of CSR ("Corporate Social Responsibility"), which is really just another way of saying that the bottom line isn't really the bottom line. (Although, then again, maybe it is.) There are plenty of us who believe that environmental concerns, labor issues, management practices, and other corporate habits of thought and action impact the bottom line. Many of us also see quite clearly that making lots of money in our stock portfolio isn't worth it if the costs show up elsewhere.

Where else? Well, we might, I don't know, run out of water or something. (Even soft drink company execs, who seem to view potable water as competition, must realize that water is the main ingredient in their product.) Or perhaps canned air will become the only kind of air worth breathing. (Los Angelians must love the smell of cancer in the morning.) Or we pave our "path to financial freedom" using the backs of children. Or maybe we'll get to that point where corporate boneheadocracy seems normal.

After all, who cares? We customers and shareholders don't have to pay to clean up everything up when corporate America poops in the nest. But then who does? We taxpayers do, that's who. But wait. Aren't "customers," shareholders," and "taxpayers" just different roles played by the same flesh and blood human beings? Not only that, but at the end of the fiscal year, there's really only one balance sheet. Costs that corporate America manages to externalize just end up on a different line item on our annual budget, that's all. If we don't pay them as customers or shareholders, we pay them as taxpayers or family members or landholders or what have you. Only the dense, the foolish, and the psychopathic truly believe that the corporate bottom line is their own bottom line.

Burning Beds, Inc. has posted outstanding earnings for the past three quarters, and... hey! That's my bed!

Once you assume that clean water, clean air, happy children, and sane work environments have value (anyone other than these guys want to argue that this stuff is without value?), there are two possible ways forward:

1. Get creative when it comes to measurement. Instead of whining about how some things are "unmeasurable," innovate new mensuration and valuation techniques. Two interesting actors in the field of valuation innovation are Innovest and Communications Consulting Worldwide (CCW). What's this all about? Consider the following example: Say Wal-Mart's got labor troubles (no, really, imagine it); how much does that dent in their reputation cost shareholders? According to CCW, "if Wal-Mart had a reputation like that of rival Target Corp., its stock would be worth 8.4% more, adding $16 billion in market capitalization." That's a game changing assertion, shifting the debate from "Can the effects of reputation be measured (i.e., is it possible)?" to "Can we improve the methodology used in this study (i.e., how well are we doing it)?"
   
2. Stop managing and start leading. Insanity, as AA has it, is doing the same thing over and over and expecting different results. While the methods of bureaucratic management can optimize a banal system defined by quantified data, they are poorly suited to effecting metamorphic leaps in consciousness and/or character. As a rule, our businesses don't need to "do better," they need to "do differently." Better data and better management practices cannot provide a fresh, holistic vision for the future of business--only inspired leadership can do that. Bill McDonough and the Regenesis Group are two interesting players in the field of consciousness shifting.
   

We did not manage our way to the moon.

While I believe that creative mensuration and valuation techniques are effective tools for advancing a CSR agenda, they are useless without the proper outlook. Only competent, inspired leadership--a coherent vision supported by capable entrepreneurship--can truly change things. The incremental approach is appropriate as a rhetorical approach (that is, as part of a strategy of persuasion), but only a true leap in consciousness and character can ever save us from ourselves.

What do you get when cross ethics and Wal*Mart?

Besides a bunch of lawsuits, I mean. Evidently, you get Global Ethics University (GEU), who really, really, really wants to be your

one-stop online ethics and compliance-training provider for both individuals and corporations. From easy, affordable online ethics courses to complete, ready-to-use ethics training curricula, look no further than Global Ethics University. Ethics is a serious problem and requires serious solutions. Of course you can do it yourself or reinvent the wheel, but Global Ethics University has everything you need in one convenient place with packages and prices that suit any size organization.

"Ethics is a serious problem?" Um, no it's not. Ethics means principally the study of habits, which means that it is at bottom a framework for understanding what the problem is and how to solve it. One kind of "serious problem" typically results when unscrupulous people and ineffective management systems get together and do the corruption mamba. Another kind of "serious problem," as I've noted before, occurs when people conflate ethics with compliance (again from the homepage):

You can do something significant and different TODAY to achieve high standards of ethical compliance. The best part is that you don't have to settle for either reflective professional/personal development course or hard-hitting compliance training. You can have BOTH in EVERY Global Ethics University course or training program.

Textbook conflation. This kind of thing just reeks of intellectual confusion.

But wait! There's more! From the glossy-pamphlet literature on their "flagship Ethics for a Modern Workforce program":

[The program] is the perfect balance between a no-nonsense compliance program and a personal/professional growth course. The easy, straight-forward program builds participants’ ethical skills and knowledge using practical teaching and real-life scenarios. What makes Ethics for a Modern Workforce unique is that it builds skills in incremental levels, or ethics Competencies.

"Perfect balance?" They mean that it's both and neither, right? Donkey before the cart and all that, right?

No one told us that the donkey was on a diet.

And the program "builds participants’ ethical skills and knowledge?" Maybe they mean working on participants' ethical reasoning, or something along those lines?

And the uniqueness of the program "is that it builds skills in incremental levels, or ethics Competencies?" The whole incremental education thing has been around since Johan Amos Comenius took the idea mainstream back in 1657 or so. And "ethics Competencies?" First off, the whole capitalization of random nouns thing died off in the early 19th century. And secondly, there are no such things as generalized competencies in ethics. Each person must develop techniques for his/her personal challenges.

If you want to learn pablums bordering on nonsense, it would seem that GEU is you one-stop shop. Otherwise, it's back to the books.

What is "Ethics Training?"

Mr. Norm Alster takes a look at some of corporate America's recent efforts at protecting themselves against Enron's fate. Central to most efforts, according to Alster, is ethics training; the piece essentially revolves around the question of whether or not ethics training works, and if so, to what extent. In a brief two sentences, Alster defines in what ethics training consists:

Typically, the programs involve training in ethical reasoning, along with mechanisms to encourage the reporting of misconduct. In some cases, employees act out scenarios that could land them in trouble in the workplace.

So, ethics training more or less boils down to "training in ethical reasoning" coupled with information on and incentives for snitching. Oh yes, and a bit of playacting. Ultimately, Alster concludes that

...ethical training may not be enough to discourage cheating in a competitive business world. Training must be coupled with new techniques — things like preemployment screening and revamped performance reviews — if future Enrons and WorldComs are to be averted.

Given his watered-down and indistinct definition of ethics training, it's hardly surprising that reinforcements should be necessary.

After reading the article, I have one burning question: What is "ethical reasoning" (and how does it differ from normal reasoning)? Reasoning in general means the inference of valid conclusions based on given premises. There is only one, universally valid, way to reason, though there are infinite chains of reasoning one might follow. Ethical reasoning must therefore simply mean reasoning about ethical issues. OK, so no special skills necessary. Any training given in ethical reasoning must be quite simply training in how to reason.

Different? Yes. Better? Well, um... at least we've got the technology in hand.

Besides, ethics means one's relationship to one's habits. Habits as in "automatic thought, feeling, or action undertaken without reflection." Reasoning about ethics consists almost entirely in first (1) becoming aware of one's habits of thought, feeling, and action; second, (2) in discerning the broader implications of the patterns one finds; and third, (3) in identifying appropriate steps to improve one's habits. Ethical problems, in other words, are not of the same order as the question, "Is this action, which I am considering doing, right or wrong?" Ethical problems are long-term considerations of personal character and its relationship to personal contentment.

The goodness or badness of a particular action, in ethical terms, depends upon its position within a larger pattern of behavior. Whether an action does or does not comply with some code of belief is not an ethical, but rather a moral consideration. (The curious should consult Alasdair MacIntyre's After Virtue: A Study in Moral Theory for more on this crucial distinction.) The moralistic and legalistic slant of the ethics training considered by Alster reveals itself through its reliance on the language of compliance, which has nothing really to do with ethics per se. Before corporate America can address its issues, it first needs to get clear on whether or not those problems are indeed ethical. If they are, then ethically effective--rather than morally hopeful--measures will be needed.

Investment guru does not understand what investment is

Mark Skousen, writing on socially responsible investing, writes that:

If you wish to maximize your profits, don’t limit your investment choices. If you choose to make value judgments on which stocks you are going to invest in (in today's example, "socially responsible investing" funds), you are probably going to hurt your return.

Mr. Skousen bases his conclusion by comparing the performance of a socially responsible mutual fund (the Sierra Club Stock Fund - SCFSX) against a mutual fund which focuses exclusively on investing in tobacco, alcohol, gambling and military stocks (the Vice Fund - VICEX). He claims that he didn't cherry-pick his funds, but his reasoning is baldly casuistic. It isn't valid to infer a general rule from a single example.Still, what I really want to focus on here is the elephant in the room when it comes to investing, which is the question of "value judgments."

Mr. Skousen quite reasonably assumes that investors generally desire to maximize their profits. How is it that profit doesn't qualify as a value? Profit is only one aspect of an investment. Warren Buffet advises that you treat the purchase of a portion of a company (essentially what a share of stock represents) exactly as you would treat the purchase of the entire company. We all need to make a living, so I find it difficult to resent profit--which is supposed to be the reward for competent work--per se. (I of course recognize that profit can be unfairly earned.) But am I the kind of business owner who's willing to accept the fruit of labor which results in the production of weapons or drugs? I presumably want to own the kinds of companies that I would found and operate.

Well of course I value profits over life on earth. I’m an investor.

Profit is only one reason among many that people work. Subsistence, personal satisfaction, a desire to contribute to one's community, and the desire to improve the world are others. Financial investment has never been a purely pecuniary consideration. Like all investors, socially responsible investors seek to maximize their return within such constraints as represent their values. Some people can tolerate high levels of risk; some people can tolerate larger demands on their time for research into investment opportunities; and some people can tolerate profiting from the production of nuclear weapons.

Mr. Skousen may be correct about socially responsible investments yielding lower returns (though I doubt it). His underlying assumptions, however, are both pernicious and foolish. Investment is nothing more than financing your values, and values are best understood as a system of mutually constrained desires. I want profit, but not at any price. I can only hope that Mr. Skousen and his readers agree.

Food ethics in Africa

Chris MacDonald writes a blog on business ethics, which is refreshingly thoughtful. Chris generally has a pretty good nose for finding news items related to hot-button issues in ethics related to corporate business. (I recommend taking a look.)

In yesterday's post (Monday 27 March 2006), Chris blogs about DuPont subsidiary Pioneer Hi-Bred Int'l. Pioneer aims to develop a nutritionally enhanced strain of sorghum (an important food crop in Africa), and then more or less to give it away. They need to give it away because many African nations have proved reluctant (at best) to use genetically modified (GM) crops. Pioneer hopes that Africans can be persuaded to accept this "gift," because Pioneer believes that the performance of the new and improved sorghum will lift African confidence is GM crops generally. Pioneer freely admits that they intend the GM sorghum to serve as a loss leader for the company, assuring nervous Africans that GM crops can be trusted.

Chris interprets the ethical situation thusly:

The claim is often made that biotechnology will bring huge benefits to the world's developing nations. In particular, it's often--too often, I would venture--claimed that genetically modified (GM) foods will do wonderful things for the starving millions in Africa. It seems to me that the question is not whether biotechnology could help the developing world, but rather whether it will.

The distinction between could and will is ultimately a consequential distinction, which means that you paradoxically can't decide until the outcome of the decision is known. Current information is always both incomplete and imperfect, which means that some level of risk will always persist. Granting that there's no sure way to predict the future, I assume that Chris must intend a slightly weaker position: Africans just need to undertake a cost-benefit analysis with some kind of risk constant factored in. But what if our analysis is flawed? It seems that we're back in the realm of could. The could/will distinction isn't much use ethically speaking since almost all present decisions of any importance involve non-trivial levels of uncertainty.

For if it could you will must understand the meaning of ethics.

Despite this, Chris wields his distinction with vigor, valorizing the will over the could. He confidently posits two possible techniques for squeezing uncertainty out of the equation:

For biotech actually to help developing nations, it seems that one of two things has to happen. Either governments and NGO's need to spend a lot of money to donate biotech products or know-how, or companies need to find business models that let them a) do good, while b) making a profit.

I don't see how either of these options (spending money or alternative business models) will mitigate the fallout, from the Africans' point of view, should GM crops turn out to be a hindrance rather than a help.

From the African side, the fundamental ethical question is whether embracing this particular GM crop can serve as good foundation for subsequent good decisions about similar and/or related issues. As I've pointed out in an earlier post, ethics concerns the cumulative power of habits. The questions that Africans should be (and apparently are) asking concern the long view. What happens if these GM crops don't behave as advertised? (The controlled conditions in experiments, after all, are quite unlike the relatively uncontrolled conditions of widespread agriculture.) What happens if GM crops cause problems with other key species in our ecosystems? Why are they just giving us this stuff for free?

No, no, no. We couldn’t possibly accept any payment. Let it be our gift to you.

As to this last question, Chris notes that "the company involved in this story (Pioneer Hi-Bred) is frank about its business model." He goes on to suggest that "the company's candour about its business model is pretty disarming." The company explains it's strategy thusly:

Pioneer will have no rights to revenues from the biotech sorghum once it is developed and commercialized, said Anderson. But the company, already locked into tight competition in the commercial seeds market, hopes that success with biotech sorghum might help open doors for other biotech crops in countries currently skeptical of genetically altered crops.

Pioneer admits (1) that the GM sorghum is a loss-leader, (2) that the stimulus for this behavior is "tight competition," and (3) that the overall goal is to "open other doors for other biotech crops." Candid? Yes. Mercenary? Also, yes. I would certainly question whether or not one ought to get into the habit of thinking that mercenaries make good company, no matter how candid they are. Far from finding this disarming, I find it disappointing that Pioneer does not (because it believes that it cannot?) speak sincerely about reasons other than competitive advantage for their actions.

Trust me! I sell GMOs for a living. I wouldn’t lie to you about food, would I?

On Pioneer's side, the principal ethical issue is whether or not this whole project is conducive to a fruitful, long-term business relationship. I would question whether or not Pioneer is really looking at this whole issue from its customers' point of view. Wanting to make a profit is only sensible. Wanting nothing else from an action or a relationship except to make a profit is so shallow, stupid, and autistic as to be criminal. Deliberately inculcating and reinforcing such a desire is the very definition of poor ethics.

Ethics goes sci-fi

Australia's St. James Ethics Centre (SJEC) proposes a bold vision:

we seek to bring about a world in which people feel free to include the ethical dimension in their daily lives

How many ways is this statement silly? Let me count the ways:

1) When they say that they're "seeking," don't they mean "acting?" Or maybe "struggling?" Doesn't sound like they know what they're doing, does it?

2) Someday someone's going to take me to visit the "ethical dimension," and I'm sure it'll be better than Doctor Who on party pills. Until then, I’m going to insist that SJEC's use of dimensionality as a metaphor for ethics is both misleading and revealing. Misleading because it implies that ethics, as its own dimension, is skew to the rest of life, intersecting it only at one point. But ethics saturates life; every action is ethically freighted. Further, the metaphor suggests that ethics reduces to a geometricized calculus—a vector equation. The metaphor is revealing because it shows that SJEC is insensitive to the absurd connotations insinuated by their language.

Extrapolating from the latest ethical probe data, top government artists offer tantalizing glimpses of what the ethical dimension might actually be like.

3) "To bring about a world" has such a lovely, dystopian ring to it. Seriously, I thought God already took care of the whole world-bringing-about business--first two chapters of Genesis and all that. Promethean pretensions like these are vapid to the point of being dangerous—and that’s on top of being irritating.

4) When they say they want "people [to] feel free to include the ethical dimension," it sounds like they're insisting that we make the most of the all-you-can-eat salad bar. "No, really. Go ahead and take all the ethical dimension you can stomach. There's plenty more in the kitchen." The sentiment is very sweet, but can we please find a less Donna Reed way to say this?

Our new ethics bar features virtues, moral principles, and fresh tomatoes. Satiate the saint in you for only $9.95!

5) I'm sure that the SJEC boasts a membership as erudite as it is pompous, but where do they get off suggesting to the rest of us that we “feel free” to get down with our ethical selves? First off, what’s with the nudge-nudge, wink-wink? If the rest of us are bad people, just come right out and say it. We’ll have a good clean argument and see who’s right, who’s bad, and who’s eye-rollingly self-righteous. Second, ethics is one of the foundations of human life whether we like it or not. (Tom DeLay, good postmodern that he is, probably convinced himself that that irksome ethical dimension was just a figment of the ol' imagination; but surprise, surprise--it turned out to be plenty real.) "Feeling free" has nothing to do with it. And third, ethics isn't patty-cake and crumpets. It’s not about comfort, but about excellence. We're already and always eyebrow deep in the sludge of questions concerning the best way to navigate life. Ethics concerns hard-won wisdom about the human good, hard-bitten advice given in the teeth of a dilemma, and hard-core you-break-it-you-bought-it consequentialism. (Anyone who thinks forgiveness is soft needs to think harder about what his parents did to him as a child.)

6) Somebody please tap me on the shoulder and let me know when our "daily lives" start happening. You know, as opposed to our other lives--the non-daily ones. This definitely isn't the first time I've heard of this "daily" life I'm supposed to be leading; I’m always the last one to the party. To the SJEC vision committee: adjectives—such as “daily”—are supposed to descriptive, not rhetorical. And as I said before, every action already and always carries ethical significance and imposes ethical consequences. Ethic significance is omnichronic; no deed to dilute it to "daily."

7) Last, but not least: the statement cited above isn't a vision statement; it's a mission statement. A vision statement describes what you'd like to see happen in future. (Hence the use of the word, "vision.") A mission statement describes what you plan to accomplish. (Hence the use of the word, "mission.")

Professionalizing ethics

As if we weren't confused enough about ethics these days. Today the Society of Corporate Compliance and Ethics (SCCE) will recognize 6 "Compliance Champions" for... well, for complying. And for making sure other people comply, too. "Comply with what?" you ask. Well, they explain:

Compliance professionals develop and oversee corporate compliance programs to ensure that their organizations comply with state and federal regulations.

Wait a minute. "Compliance professionals?" Professionals who ensures that organizations “comply with state and federal regulations?” Don’t you mean law enforcement officers? One might think that we already have enough people on top of the whole compliance issue (as in, nearly 800,000 as of 2000–-not counting federal regulators and officers). But cops, as we know, don’t—indeed can’t—force people to act ethically. No one can.

Hate to be the buzz-killer, SCCE, but at bottom, your “compliance professionals” are just security guards: privately employed rule-enforcers. So what’s with this language about ethics?

Highly competent compliance professionals are already active in your neighborhood.

On the surface, the SCCE looks like a bunch of quasi-academics trying to capitalize on corporate America’s rash of scandals. Dig a little bit deeper, though, and something stranger and more insidious pops up. The SCCE isn’t a group of concerned citizens banding together to fight corporate excesses; it’s a new professional advocacy group, with its sights set on introducing the process of certification into the arena of ethics.

Certified Smart Guys earn more than their uncertified (but equally Smart) counterparts.

Probably they’re just too foolish or greedy to stop and really think about this. The thing is, certification concerns technical know-how. Professions such as law, medicine, and engineering use certification precisely to enforce their monopolies, which we countenance only because we presume that no one else is competent to oversee them.

Only lawyers, for example, possess the technical knowledge necessary to spot the incompetence and/or clever malfeasance of other lawyers. But what sane, sound, adult (apart from these guys) isn’t competent to render ethical judgement? Ethical authority doesn’t derive from technical knowledge; it derives from wisdom. So either the SCCE thinks that there’s no difference between knowledge and wisdom (which is foolish), or they think that other people won’t care and will pay for their “certified” wisdom anyhow (which is greedy).

In any case, as any half-conscious American knows, compliance with the law and ethical action are two completely different things. It’s both confusing and dangerous to conflate the two. Being ethical does NOT mean complying with state and federal regulations. (“Civil Disobedience” anyone?) Like any sensible person, I think it’s obvious that corporations need competent oversight. I also think that corporations ought to act ethically no matter what the law is. Just because something is legal don’t make it right or good, and just because it’s illegal don’t make it wrong or bad. (“Letter from the Birmingham Jail” anyone?)