Ethics and Online Reputation Management
Filed under: accountability, brands, consumers, social media, trust |
Leave a Comment In a recent interview with Reputation.com, I talked about the effect the internet has had on reputation management, and the connection between that and ethics.
The risk, of course, in having an ethics professor like me talk about reputation management is that it’s all too easy to give the impression that the two topics are the same. In fact, I’m pretty sure there are people out there who assume they are the same thing.
And certainly there are those in the field of ethics who contribute to that way of thinking. Sometimes that takes the form of what is often referred to as “the business” case for ethics (or for CSR or for sustainability). “The business case” takes many forms, but all of them boil down to an assertion that acting ethically (or being socially responsible or being sustainable, whatever) is good for your business. The specific mechanisms mentioned are varied. Treating your workers well improves retention. Going green reduces energy costs. And, yes, that being ethical is good for that all-important corporation reputation.
The worry is that businesses exposed to such arguments will come to think of ethics from a purely instrumental point of view: we’ll act ethically only because, and only to the extent, that it’s good for profits. Thinking of ethics that way implies an incredibly low level of commitment. You won’t always in every situation be able to draw a straight line between this bit of ethical behaviour and that bit of profitability. And so the ethics of a company under the sway of “the business case,” it seems, would be liable to have its ethical behaviour ebb and flow on a pretty regular basis.
The key, though, isn’t to avoid talking about the business case for ethics. Because it is simply true that, on the whole, acting ethically is good for business. Sure, you can make a quick buck by being a cheat. But smart managers have known forever that the route to sustainable profits lies in paying your bills on time, treating your employees well, cleaning up your own messes, and dealing honestly with your customers. Having a reputation for doing those things is truly good for business.
Clearly, having a reputation for doing those things isn’t precisely the same thing as actually doing them. In theory, it’s possible to act badly but to keep the facts quiet. Or at least, that was the case once upon a time. Then along came consumer blogs and Twitter and Facebook and Tumblr and so on; now, accusations of bad corporate behaviour has a way of getting out and spreading like wildfire. Today, certainly, it seems like the easiest way to get and keep a reputation for honesty and integrity is actually to behave with honesty and integrity. It’s always better to avoid fires than to have to put them out. That’s why the best reputation management method is to build a good reputation in the first place.
But of course, sometimes even an honest company, trying its best to treat people right, can hit a rough patch. Sometimes something goes wrong, and sometimes — in an era in which all of your customers have access to a 7 billion-person conversation called the Internet — that fact that something went wrong gets aired in a very public way. Hence the need for online reputation management, to control the damage. But even here, the key is to make your participation in those online conversations genuine, or if you prefer “authentic.” You need to be sincere about your commitment to doing the right thing, and to making things right when mistakes are made. This is the irony of the business case for ethics. The best way to reap the benefits of a reputation for being ethical is not to pay much attention to those benefits, but to focus on the importance of doing the right thing — for its own sake.
Regulating Book Prices? Bad Idea.
The Quebec government’s proposal to regulate the price of books is wrong-headed in all sorts of ways. The proposal — or rather the range of proposals, currently being considered by a parliamentary commission — would likely involve fixed prices and/or a limit on big bookstores’ ability to offer steep discounts on best-sellers.
The move would amount to taking sides in the marketplace: not surprisingly, the owners of small bookstores (ones that can’t buy and sell in bulk) are in favour of the proposed regulations, as are their allies in the union of Quebec writers (UNEQ). And while it is sometimes reasonable for governments to take sides in this way, the reasons need to be carefully examined on a case-by-case basis, and clear analysis requires transparency about the fact that sides are in fact being taken, and that there will be winners and losers as a result.
Of course, it matters that this story is about Quebec, a jurisdiction that for years has seen its politics dominated by the perceived need to protect the French language. According to the UNEQ, small bookstores are “guardians of diversity,” which basically means they’re a source of French-language books. But then, I would wager that Amazon sells, or soon will sell, more French-language books than all the wee bookshops in La Belle Province put together.
In fact, it’s a bit weird that reports about this bit of news don’t mention Amazon. I’m no expert on book-selling industry, but it seems to me that the real battle is between Amazon and the big-to-medium-sized bricks-and-mortar stores. There will always be a niche market for cute, idiosyncratic little bookstores. What’s less clear to me is that there’s a future for bigger stores that merely try but fail to replicate in bricks-and-mortar what Amazon does online.
The most general reason why this proposed policy is a bad idea is basic economics: when governments choose sides in the marketplace, they are opting against the type of efficiency at which markets excel, namely the kind that brings consumers things they want at low prices, and that rewards producers for finding effective methods of production and management in pursuit of such consumer satisfaction.
It’s worth considering what the public reaction would be if the product in question were something other than books. What if the government of Quebec proposed keeping the price of children’s clothing high, in order to limit the impact of Walmart and to defend the little boutiques selling hand-made clothing. Would anyone seriously want to promote a policy making kids’ clothes more expensive this way?
But beyond basic arguments about economic efficiency, it has to matter here that the products in question are books. Isn’t literacy and reading more generally a good thing, socially? So isn’t it a good thing when books are cheap? The complaint of the small bookstores is that big stores making books too cheap. But any attempt to keep prices high is necessarily an attempt to keep some people from buying books. There will always be ‘marginal’ readers who will buy a given book at a reduced, big-box price, but not at list price. Of course, we can’t (alas) ensure that everyone has access to everything they want, but do we really want to exclude such people from buying those books, as a matter of government policy?
The Ethics of Shrinking Newspaper Distribution
The Globe and Mail, Canada’s highest-distribution national newspaper and often regarded as the country’s “newspaper of record,” has announced that it will cease daily delivery to the entire province of Newfoundland and Labrador, as well as to a handful of isolated towns in British Columbia. Shipping costs have apparently meant that the paper has been losing money for years on its distribution to those places, and so the publisher has finally decided that enough is enough.
This is, of course, a bad thing for the small number of dedicated readers that the G&M has in Newfoundland and Labrador. And questions will surely arise about whether the paper is being fair to them. Shouldn’t the “paper of record” be available to all Canadians, “from sea to shining sea?”
On the other hand, it’s not like those parts of the country are being abandoned entirely. The Globe and Mail website is of course still available to anyone, anywhere, with an internet connection. And, the paper suggests, more and more people are enjoying their content on iPads and other tablets anyway. Of course, that’s great for people who can afford tablets and reliable internet connections. Pointing to electronic options still has a classist ring to it. A huge majority of Canadians do have home internet, but not everyone. We are still subject to that notorious ‘digital divide.’ But then again, it’s not like Newfoundland and Labrador is being cut off from communications — or even just print media — entirely; there will still be other sources of news.
Still, it’s hard not to feel a loss, here. Citizens of Newfoundland and Labrador may have access to other sources of news, but in a world of concentrated media, having access to a range of options is no small matter. And the Globe and Mail is a high-quality publication that offers a particular editorial voice, a voice that — whatever your political views — we ought not to dismiss lightly.
So this shrinkage in the G&M’s distribution is a sad thing; but is there anything blameworthy in it?
In the end, access to news, and to a diversity of editorial views, is a social matter, a question of the public good. Indeed, it is a question of access more important than, say, the question of access to a diversity of coffee shop options or footwear options. But do companies like The Globe and Mail Inc. (the private, for-profit company that owns the paper) have any obligation to contribute to solving such problems?
While we want private, for-profit firms to be “good corporate citizens,” it’s not clear that they have an obligation to lose money in pursuit of social aims. Newspapers are often thought of as being in a special category, here, as many of them have aims — missions, if you will — other than profit seeking. But even newspapers with a commitment to the public interest have to keep an eye on the bottom line.
Business, the Sochi Olympics, and gay rights
In light of Russia’s appalling stance on gay rights, the Sochi Olympics represent a true ethical dilemma for the organizations involved.
On one hand, Russia’s recent anti-gay law is truly ethically abhorrent, and should be denounced in the strongest possible terms. If Vladimir Putin’s government is willing to jail people, or worse, simply for expressing a desire to be treated equally, it certainly doesn’t deserve the warm fuzzy spotlight of the quadrennial Olympic love-in.
On the other hand, liberal democratic ideals don’t spread through a policy of isolation. Boycotting (or moving) the Olympics might teach the Russians a quick lesson about what is and is not acceptable to the international community, but it will be a rather terse and ineloquent lesson. The kind of interaction that the Olympics make possible, indeed inevitable, opens up a lot more space for dialogue.
It’s worth noting that the dilemma faced by the International Olympic Committee (IOC) and Olympic sponsors is in some ways similar to the dilemma faced by many Western multinational corporations when doing business in places that do not live up to the kinds of standards Westerners are used to. Doing business in a developing nation can mean being subject, for example, to very different workplace health and safety standards and significantly lower—or even absent—environmental regulations. And even if companies were to decide to adhere voluntarily to higher standards, they have to realize that their local suppliers and indeed local governments are liable to act in ways that would be considered unacceptable “back home.” Such companies have to decide: should we do business here or not?
Some will argue that, with regard to such dilemmas of international commerce, human rights violations represent a line in the sand. It’s one thing to have workers work slightly longer hours than would be permissible in Canada or the U.S., but it’s another thing entirely to make use of forced labour, or to engage in discrimination based on race or sex. But then, even with regard to human rights, a distinction can be made between engaging in human rights violations, on one hand, and merely doing business in a place where others do so on the other. It’s not necessarily wrong to do business in a place where human rights violations occur, especially if a company does what it can, whenever it can, to make things better.
So the IOC and Olympic sponsors might similarly argue that, yes, Russia’s treatment of homosexuals is a human rights violation and ethically unacceptable, but as long as such violations don’t happen at the Olympics, they themselves are doing no wrong.
But one issue that none of the organizations involved can easily shrug off is the safety of the athletes. There is at least some risk that Russian authorities will detain or deport any Olympic athlete who violates the legal prohibition on “homosexual propaganda.” Deportation would merely be an embarrassing hassle. But detention could be truly dangerous. If some brave athlete should speak out, be taken into custody, and—it’s not unimaginable—something bad happen to that athlete, then the organizations that made such a chain of events possible would bear at least some of the blame.
But things are complicated somewhat by the fact that at least some Russian gay-advocacy groups have asked the international community not to boycott Sochi. A boycott, they point out, would leave them to struggle in the dark. They prefer the light, however muted, that the Sochi Olympics promises to shed on their plight. And while such groups don’t hold a moral trump card, their voices certainly deserve considerable attention.
So maybe the IOC and other organizations involved truly are in a no-win situation. Or, at least, a situation in which all of the options on the table are fraught with ethical peril. In such situations, the meaningful ethical discussions must happen around the edges. Has the IOC gone far enough to denounce Russia’s anti-gay stance? Can and should it go farther? Will broadcasters and sponsors do anything (perhaps something not directly tied to the Olympics) to advance the cause of equality? What can governments in Canada, the U.S. and Western Europe do to lobby Moscow for meaningful change, and what in turn should Western companies do to encourage their governments to put such pressure on Moscow? In the end, the IOC and the other organizations involved should perhaps be judged not by what they choose to do, but by how they choose to do it.
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Related reading:
Canada’s Big 3 Telecoms’ Opposition to Verizon? Unseemly!
The Big 3’s opposition to Verizon’s entry into the Canadian market is unseemly, like a baseball manager kicking dirt at an umpire. It may not literally be against the rules of the game, but it undermines that game’s implicit values.
Canada’s telecom giants are actively opposing the entry of American communications giant Verizon into the Canadian market. In a series of interviews and full-page ads, Bell, Rogers, and Telus have been arguing that regulators should move to prevent Verizon’s entry into the Canadian market, a move the company aims to make via its acquisition of Canadian upstart Wind Mobile. The move will give Verizon access to Canadian spectrum at preferential rates that were established to encourage small companies to enter the field. And the Big 3 don’t like it one bit.
(Interesting timing: coincidental with the announcement that Verizon, an American firm, was seeking to entry to Canada, HBC, a Canadian firm, announced that it had bought American retail icon Saks and thereby gain a foothold in the US retail market. I’m not sure Americans even noticed, let alone did they complain.)
Such opposition is, of course, understandable. Managers at Bell, Rogers, and Telus have turf to protect, and they understand their role as being to maximize return for their respective shareholders. And to be sure, advocacy — including lobbying — is a proper part of that role. But there are limits. Even those of us who understand the essential role of the profit motive in making our markets work will recognize the need to put limits on profit-seeking behaviours. Less obvious is just where to draw the line, ethically.
One important strain of thought on the topic, grounded in the work of University of Toronto philosopher Joseph Heath and others, says that managers should use as their ethical touchstone their implicit commitment to the values that underpin market efficiency. Key among those values is a commitment to encouraging competition. A true capitalist, this line of reasoning goes, wants to make a profit by beating the competition — by providing better service at a better price — rather than by reducing competition.
It’s worth pointing out that the debate here is already being framed in terms of ethics: the Big 3 claim it is unfair to allow Verizon in on what it considers favoured terms. Their critics, of course, will say that the preferential treatment that Verizon will gain at an upcoming auction of spectrum, through its acquisition of Wind, is being offered precisely on fairness grounds: barriers to entry are huge in mobile telecom, and making spectrum more affordable helps level the playing field. There are decent arguments on both sides, both rooted in an appeal to the ethical value of fairness.
The ‘market values’ argument cuts through the apparent ethical impasse, here. Managers at Bell, Rogers, and Telus are not just anyone: they are participants in a socially-important game called “the market.” In the market, we allow a certain amount of rough play, including behaviours what would generally be thought improper in polite society. Corporate managers can (indeed, should) fire under-performing employees, even if that dashes employees’ dreams. And they should innovate and strive for efficiency, even if that puts competitors out of business. But one of the things they can’t do, ethically, is seek to limit market competition.
To be sure, it’s a rule that is more honoured in the breach than in the observance. Much of modern management practice is aimed at finding niches where companies can operate with minimal competition. So it’s not surprising that managers at the Big 3 are desperate to keep Verizon out of the pool. But they need to recognize that, in doing so, they don’t have an ethical leg to stand on.
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Related reading:
- “Moving Beyond Market Failure: When the Failure is Government’s” by Peter Jaworski
- “Market Failure or Government Failure? A Response to Jaworski” by Joseph Heath
Top Retailers Sign New Bangladesh Safety Initiative
Filed under: accountability, brands, corporate citizenship, disaster, employees, human rights, international, retail, rights, safety, standards, supply chain, workplace safety |
Comments (2) Workers in Bangladesh will be the beneficiaries of yet another massive effort to improve their lot. Will it work? And will it mean anything for workers in countries other than Bangladesh? It’s a welcome move, but it also raises questions.
According to a press release, an alliance of leading North American retailers has committed to a new plan, The Bangladesh Worker Safety Initiative, intended to “dramatically improving factory safety conditions in Bangladesh.” The coalition includes Walmart, Target, Canadian Tire, Gap, Hudson’s Bay Company, and a dozen other major retailers. That means, according to the press release, that the Initiative covers the “overwhelming majority of North American apparel imports.”
This new Initiative should not be confused with the Accord on Fire and Building Safety in Bangladesh, a labour-led agreement that was announced in May, less than a month after the collapsed the collapse of Bangladesh’s 8-story Rana Plaza collapse, a tragedy that eventually claimed 1,129 victims. Signatories to that Accord included Europe’s two biggest clothing retailers, as well as Tommy Hilfiger, H&M, and Canada’s Loblaw, but there were notable abstentions. Walmart, for instance, was criticized for declining to sign on.
The new Initiative “sets aggressive timelines and accountability for inspections, training and worker empowerment.” Of particular note: “Within one year, 100 percent of all factories that conduct work with an alliance member will be inspected,” and members of the alliance have committed to refusing to do business with any factory deemed unsafe. And, in a worthy commitment to transparency, the alliance will make semi-annual progress reports public.
There is, of course, plenty of room for skepticism. Some will see this new Initiative as a PR move, albeit a rather expensive one. Members of the alliance have already committed $42 million, though of course that number has to be put into context by comparing it to the vast profit the alliance members derive from doing business in Bangladesh. The Bangladeshi garment industry is a $19 billion-a-year industry. (Quick math: that means the size of the Alliance budget amounts to roughtly 0.2% of the size of the industry. That’s not necessarily the most relevant comparison, but it gives you a sense of scale.)
Another source of skepticism, for some, is that this is an entirely business-driven initiative, unlike the May Accord, which was driven by labour and which will be guided by a Board that includes representatives of both corporate and labour interests. The Board of the new Initiative is perhaps less clearly unbiased: the 9-member board will consist of “four retailers, four stakeholders who provide specific expertise, and an independent board chair.” Interestingly, however, the Initiative does include specific provisions not just to look after workers, in the paternalistic sense, but to empower them: it calls for members to support the election of Worker Participation Committees at all factories, along with the provision of anonymous worker hotlines to be administered by a third party.
I continue to wonder and worry that both the new The Bangladesh Worker Safety Initiative and May’s Accord on Fire and Building Safety in Bangladesh represent a kind of Bangladeshi exceptionalism. Why are major retailers joining together in now two big agreements to improve conditions in Bangladesh, but in Bangladesh alone? Admittedly, Bangladesh is important — as far as the garment industry goes, it is second only to China among countries exporting Western brands. But still: it worries me that a factory collapse that could have happened in an number of developing nations has apparently drawn attention only to the fate of garment workers in one, admittedly needy, nation.
Transparency and Corruption, 2013
Transparency International has just released its latest, the “2013 Global Corruption Barometer.” It’s a fascinating read (and the website is brought to life by a bunch of great infographics). And it’s an important topic for anyone with a serious interest in what makes business work, or fail. Corruption after all is corrosive to markets. It’s not just a political problem, but a business problem. Corruption of all kinds drains money from more productive uses, and makes the ‘playing field’ of business uneven and muddy. The GCB is a measure of just how muddy and uneven the playing field is perceived to be in each of 107 countries.
The GCB includes lots of interesting findings, such as the following:
- In Sierra Leone, 84% of people said they had paid a bribe to someone in a position of authority in the last twelve months, compared to just 3% in Canada and 7% in the U.S. (Not coincidentally, Sierra Leone is one of the poorest countries on the planet.)
- In Afghanistan, about the same number of respondents felt that NGOs are extremely corrupt (34%) as thought that business is corrupt (34%).
- In the U.S., 60% of respondents thought that corruption had increased there over the previous year (compared to only 10% who thought corruption had decreased.)
- In Canada, the most mistrusted institution is political parties (62% of Canadians think those are either corrupt or very corrupt), followed by business (48%), parliament (47%), and the media (39%).
It is worth emphasizing that the GCB is a measure of opinion. To generate this report, TI surveyed 1,000 people in each country (or 500 people in small countries) to ask them about whether they feel, for example, that corruption has gotten better or worse in their country in the last 12 months. So the report doesn’t (and of course couldn’t) measure actual corruption. Still, the report is meaningful. It is of course possible that the people in a given country are systematically mistaken about levels of corruption. But even if that were the case, it would say something interesting about that country. And in the end, when it comes to corruption, perception matters: even perceived corruption is enough to corrode trust, and without trust meaningful commerce simply cannot happen.
Witnessing (but not reporting) Unethical Workplace Behaviour
A new study of ethics in Canadian workplaces suggests that 42% of workers have witnessed ethical breaches in the workplace, and nearly half of them failed to report such misconduct.
The survey was conducted by Ipsos Reid for ClearView Strategic Partners Inc., a Toronto-based ethics whistleblowing advisory firm.
The survey also drilled down to ask respondents what kinds of questionable behaviour they had witnessed. According to Clearview,
…28% of respondents witnessed the misuse of company property at their current employer, 25% saw harm to employees, 17% observed privacy violations, 17% were aware of fraud, 13% witnessed conflicts of interest, 9% knew about bribery or corruption, 12% observed environmental violations, and 11% had knowledge of the misrepresentation of financial results.
It’s a provocative study, but one that raises more questions than it answers. For starters, as is often the case in such surveys, the proportion of respondents saying they had witnessed unethical behaviour is implausibly low. Only 42%? Presumably that means people were thinking only of a narrow range of fairly serious infractions, and ignoring commonplace wrongs such as petty lies, employees shirking their responsibilities, and minor thefts from the company’s supply closet. My guess is that there is some serious under-reporting going on here. The interesting question: just which kinds of ‘minor’ wrongdoings are likely to be most under-reported in a survey like this?
Another question: do the people surveyed understand well the definitions of the forms of wrongdoing they say they witnessed? For example, when they say they witnessed conflicts of interest, just what do they mean? A study I co-authored a decade ago found that many people in the organization we studied could not provide a clear definition of the term “conflict of interest,” even though they had a clear understanding that such conflicts posed ethical problems. If respondents to Clearview’s survey are equally confused about the definition of (for example) conflict of interest, are they more liable to be over- or under-reporting having witnessed it?
Finally, there are interesting questions to ask about what the study says is the widespread failure to report misconduct (i.e., presumably to report them to someone in a position of authority). According to Clearview, 69% of respondents indicated a “lack of faith that investigations will be conducted properly,” 66% said they didn’t believe that disciplinary measures would be applied consistently, and 23% said that they feared “retaliation or negative consequences.”
There’s nothing surprising about those answers, but Clearview’s press release doesn’t make clear whether those answers were the ones given spontaneously by respondents, or whether they were on a menu of options provided for respondents to select from. Notoriously absent among them are other, seemingly likely factors, such as misguided loyalty or apathy, or the sort of tunnel vision that makes many of us focus on our ‘missions’ at all cost. Of course, most people are unlikely to give such answers, since they reflect as poorly on the respondent as they do on the wrongdoer. It is probably far easier to get people to admit to having seen wrongdoing, and indeed to having failed to report it, than it is to get them to admit having failed for truly blameworthy reasons.
No, Blacklisting Corrupt Construction Firms is Not Unfair
Under Quebec’s new Integrity in Public Contracts Act (Bill 1), companies that want to bid on government contracts must pass a fairly stringent legal and ethical sniff test. In the wake of the ongoing Charbonneau Commission (the Commission of Inquiry on the Awarding and Management of Public Contracts in the Construction Industry, in Quebec) the government of Quebec has begun using Bill 1 to blacklist construction companies.
First on the chopping block was engineering firm Dessau. The company was blacklisted recently and so it won’t be able to bid on public-sector contracts in Quebec for the next five years.
Some say this is unfair. Dessau employs thousands of people, some of whom will surely be put out of work if their employer is unable to bid on big public contracts. And since the vast majority of those employees presumably have nothing to do with the company’s shady dealings, they are in effect being punished for someone else’s crimes.
There is undoubtedly some injustice, here. It is, on the face of it, a bad thing to suffer for someone else’s wrongdoing. But the question, really, is whether the loss that will be suffered by some Dessau employees is an intolerable injustice. And whether an injustice is intolerable or not very much depends on the qualities of the overall system under examination.
One of the key features of the legal status of modern corporations is that the liability of employees is limited. If the company you work for goes bankrupt, all you lose is your job. For most people, that’s not trivial, but it’s a far cry from having someone from the court show up to repossess your car or foreclose on your mortgage to help pay your employer’s debts. One of the things that makes large corporations — and hence, our entire economic system — viable is that in seeking employment with a corporation you are not thereby putting everything you own at risk. This makes the the legal situation of an employee quite different from that, say, of a partner in a firm. Partners are in principle personally liable for the financial effects of each other’s wrongdoing or mismanagement.
Second, it is worth considering that if injustice is being done to the employees of companies like Dessau, such injustice must be placed into perspective by comparing it to the prior injustice done by such companies to employees of other companies. When companies succeed through bribery and illegal political donations, they do so at the expense of honest companies and their employees. In order to understand the Quebec government’s penalties, you need to look not just to the interests of identifiable individuals like Dessau’s employees, but to the interests of the hard-to-identify individuals who are harmed by the corruption that penalties like this are intended to remedy.
Third, it is worth noting that the Quebec government’s decision here is not beyond appeal. There is a process for reinstatement, which includes things like a requirement stop (and presumably to show evidence of stopping) fraudulent practices, to dump executives implicated in wrongdoing, and to “implement sound management practices, good governance and an ethical framework.” So if jobs are in jeopardy, they are not in jeopardy forever. It depends on whether managers at Dessau can clean house, and do it quickly.
Ultimately, if the employees of companies like Dessau are being wronged, the blame lies at the feet of executives who mismanaged the company. And make no mistake: engaging in corruption is a form of mismanagement. It counts as mismanagement not just because it can result in legal penalties or because it can result in significant financial losses. Engaging in corruption counts as mismanagement because it amounts to an admission that managers were unable — insufficiently smart or talented — to win while sticking to the rules of the game.
Why Do Family Firms Thrive?
Family firms (or family-controlled corporations) are a bit of an outlier in the modern business world. Modern corporations are typically characterized by a “separation of ownership and control” — that is, companies are generally run by professional managers, who manage on behalf of a very large number of mostly-anonymous shareholders. Most people who own shares own them only indirectly through pension funds mutual funds, and so they have little direct input into the way the company is managed. This pattern is directly responsible for the modern focus on governance standards: when managers are given the task of managing on behalf of anonymous, disempowered shareholders, they have an ethical obligation to take seriously the obligations such an arrangement implies. The CEO has to remember that it’s not her company: she’s a guardian, managing on behalf of others. Modern governance standards take some of the relevant ethical obligations and enshrine them in laws, regulations, and ‘best practices.’
“Family” firms (or family-controlled corporations) are somewhat different. The sort of family firms I’m talking about here are not ‘mom-and-pop’ organizations, but rather large, publicly-traded companies in which a family owns a controlling interest (i.e., 30% or more of stock). So while such firms are typical, publicly-traded companies in some regards, they are unusual in important ways. The family in question may have not just a strong position in terms of the stock it holds; they may also bear the name that’s emblazoned on the company letterhead. And the company’s origins and evolution may be intimately bound up with the family’s own history. This adds up to considerable influence. Is that influence a good or a bad thing? In principle, at least, there’s a worry that the family’s influence might not always work in the interests of other shareholders. And this worry is exacerbated by the fact that family-controlled companies often don’t stick to widely-acknowledged best practices in terms of corporate governance.
To shed some light on this topic, my friends* at the Clarkson Centre for Business Ethics and Board Effectiveness have just released a new study Family Firm Performance Study. Their central finding?
“Canadian family-controlled issuers have outperformed their peers between 1998 and 2012. Moreover, family firms often appear best able to create value for their shareholders when they choose not to adhere to typical best practices in share structure and independence.”
It’s an intriguing finding. The study as a whole is worth reading. I want to comment on just a couple of issues, here.
First, a study like this casts doubt on the one-size-fits all approach to corporate governance. Best practices (such as standards for the number of independent directors on your board) and legal standards (such as the requirement to have an audit committee) typically prescribe how a corporation’s board should be composed and conduct itself, irrespective of the corporation’s history, industry, and so on. And, importantly, such standards don’t draw a distinction between family and non-family companies. And while such standards generally evolve (or are imposed) in response to emerging challenges and scandals, they are liable to be based on the average or typical company. But, of course, the average or typical company is a fiction. Every company is unique, and so one-size-fits-all may mean one-size-fits-none. At very least, it is worth acknowledging that a compromise is being made: uniformity in exchange for mediocrity. Best practices may not be best.
When I asked Matt Fullbrook, Manager of the Clarkson Centre, about this, he was cautious. There will be no immediate change in the way the Clarkson Centre itself ranks companies. He agreed, however, that it’s an open question: “we are actively asking ourselves about whether or not good governance might mean something different to family firms, and that’s the next place we hope to take our research.”
Second, a result like this immediately raises questions and generates hypotheses about why family-controlled firms work so well, despite their frequent violation of governance norms. One theory (alluded to in the Clarkson report) has to do with managing for the long run: a company rooted in a family’s history and tradition and reputation may well be less susceptible to the short-termism that is so notoriously a factor at most corporations today. Alternatively, does success come about precisely because family-controlled companies aren’t subject to the kinds of agency problems that other firms are subject to. Maybe having family members deeply involved keeps the company’s management honest. Or is it a matter of the way family firms cleave to a set of ethical values, in an attempt to safeguard the family name? It’s a question that bears more study.
Finally, it’s worth asking what ethical lessons can be learned by other sorts of companies — that is, by ones that are not family-controlled. If family-controlled companies do so well, should the be imitated? Lots of companies already use the rhetoric of family, encouraging employees to think of themselves as kin, as descendants of a proud lineage, and bound together by corporate “DNA.” To some, that’s a way of improving morale, and perhaps thereby improving performance. But if family control is itself a strength, that suggests another reason to think this way.
In sum, research like this is essential. Family-controlled corporations are already the subject of some ambivalence. On one hand, they evoke the traditional affection most of us feel for a family-run business. On the other hand, many of us mistrust dynasties in general, and the mismanagement and indeed malfeasance that nepotism can bring. But our attitudes toward them are more properly guided by research on whether (and how) they get the job done, than it is by emotion.
*Disclosure: I was a Visiting Scholar at the Clarkson Centre during the 2011-2012 academic year.
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