From Values to Value: The Only Sustainable Business Model and the Foundation of Lasting Reputations
Recently I have been reading a lot about reputation. I was not surprised to learn that reputational risk is one of the top issues on the minds of most boards and their CEOs, according to almost every survey about their concerns. There are also a lot of consultants and advisers in the business of helping them mitigate or manage those risks, or in dealing with a crisis when one strikes — as they seem to all too frequently. There are also plenty of books on the subject. On the flip side, there are also plenty of books about the value of reputation management. They focus on the economic benefits associated with customer loyalty, the value of the brand, and the impact on share price.
Unfortunately, the more I read the more I can’t help thinking that most reputation management advice is akin to medicine that only focuses on treating the illness rather than prevention. And it seems even less interested in how to establish what I will call reputational health and maintain reputational well-being. You won’t be surprised to learn that I think the emphasis is wrong.
This situation is, I suggest, the result of management’s obsession with performance optimisation: Total Quality Management (TQM), Just-In-Time (JIT), Business Process Reengineering (BPR) and Lean Manufacturing, for example. Such obsessions seem to come with the risks that we might associate with over-enthusiastic body builders on the one hand or illnesses such as bulimia or anorexia on the other. The artificially induced and the unbalanced approach cause problems sooner or later.
I recently referred to Beyond Performance by Scott Keller and Colin Price of McKinsey. In the opening paragraph of the foreword to the book the authors note that “what matters is not just an organisation’s competitive advantage at a point in time, but its evolutionary advantage over time. Trouble is, most of us know a lot more about how an organisation can execute in the short-run than we do about how to build one that has the health and vitality to thrive over the long-term”.
Let me put to you that the answer is staring us in the face. If we look at all companies which last, they all have strong reputations that are rooted in strong values focused on developing healthy and balanced organisations. They don’t focus on trying to achieve quick short-term results by cutting corners which would damage their health; they focus on achieving a level of performance that is sustainable.
There is another dimension to this point. It is that organisations are collections of people — they don’t exist on their own. Based on this realisation, it is clear that the performance of the organisation is only ever going to be as good as the sum of the performance of all the people in that organisation, and of those outside the organisation on whom they might depend (external stakeholders). One company that clearly understand this is the oldest company in Korea (118yeears old). Their strategy says, “Doosan’s strategy is based on the principle of “2G” — Growth of Business by Growth of People. 2G is a virtuous circle where people drive the business growth, which in turn provides our people the opportunity for advancement. Doosan believes that sustained success can only come through people”.
True, a business is also impacted by the environment in which the organisation exists (the economy, the industry, the political and social arena, or the natural environment), but that applies to all companies.
Some businesses that fail may simply not have had the strength to withstand changes in the external environment. But I believe more fail because they lost sight of the truth in what I have just said. Look at long-established businesses the world over and I think you will find that their actions bear witness to this truth: the John Lewis Partnership (UK), Johnson & Johnson (USA), Natura (Brazil), Doosan (Korea) and Tata (India). I mentioned Doosan above, and I wrote about Tata recently.
Such companies have strong values that they live by. They are not vision statements that are nothing more than meaningless rhetoric. They are often articulated in a code of ethics, a credo, or a company oath, rather than a values statement, but what matters is not the name of the document. It is the fact that they are the guiding principles that the organisation lives by, and acts by — they are embedded. They govern decisions, and they are almost always the foundation of good stewardship principles and practices. The companies that I refer to above have probably all made mistakes. But they rarely make the mistake of focusing on short-term and other mistakes can be corrected.
The credos and codes are all based on values. Whilst they may be amended over time, this is never done lightly, and in most cases the timelessness of the values is evidence of their strength. When they are changed, or not reinforced by company lore and stories, things can go wrong — as Steven Mandis suggests in What Happened at Goldman Sachs.
Change is perhaps the biggest threat to any business. It threatens to make any advantage that has been earned weaker or irrelevant. And we all know that there are several forces (the digital era, globalisation, etc.) that are causing bigger and more frequent disruptions. Any advantage is increasingly transient, as Rita McGrath explained in The End of Sustainable Competitive Advantage.
If all else changes, as it frequently will, the importance of a guiding set of values will only increase. Business histories are likely to include many ‘chapters’, or indeed several ‘volumes’, but they should be written by the same ‘author’. And, those who follow the author, and appreciate his style, will remain loyal. This is the stuff of Reputation Building, not Reputation Management.
The use of the analogy of the author is deliberately chosen, because like the author’s writings, a business can evolve, and needs to. Not every chapter or book will be as good as the other. Some will be a mistake. But mistakes will be forgiven if they are not too big, or too frequent.
The above article was first published in May 2014. It was the most popular article I had written up to that point and provoked quite a discussion. I later went on the develop the concept of Valueism after reading the McKinsey & Company research findings, that the vast majority of directors do not believe their colleagues on the board have a good understanding of how the firm creates value, or the dynamics of the industry the firm operates in. A related concept I have also been developing is Social Contract Accounting. For an introduction to both read my article for the London School of Economics Business Review.