Stewardship Paper

If you are a leader at any level in any organization, you are a steward— of careers, capabilities, resources, the environment, and organizational values. Unfortunately, not every manager is a wise steward. Some behave like mercenaries—by mortgaging the future to inflate short-term earnings, by putting career ahead of company, by exploiting vulnerable employees, by preying on customer ignorance, or by manipulating the political system in ways that reduce competition. What matters now, more than ever, is that managers embrace the responsibilities of stewardship.

To my mind, stewardship implies five things:

1. Fealty: A propensity to view the talents and treasure at one’s command as a trust rather than as the means for personal gain.

3. Prudence: A commitment to safeguard the future even as one takes advantage of the present.

4. Accountability: A sense of responsibility for the systemic consequences of one’s actions.

5. Equity: A desire to ensure that rewards are distributed in a way that corresponds to contribution rather than power.

These virtues seem to have been particularly scarce in recent years, as we’ve careened from Enron’s devious accounting to the financial chicanery at Parmalat, from Shell’s overstated reserves to BP’s derelict safety standards, from Bernie Madoff’s epic scam to Hewlett-Packard’s spying scandal, from the predatory loan practices at Countrywide Financial to the disastrous excesses at Lehman Brothers, and from India’s corruption- marred sale of wireless spectrum to the firestorm ignited by News Corp’s phone hacking. Despite these and other dirty deeds, I doubt that today’s tycoons are any less principled than their counterparts in earlier decades. The German word raubritter, or ‘‘robber baron,’’ dates back to the Middle Ages, and was first applied to grasping toll collectors along the Rhine River. In the nineteenth century, the term was revived as a fitting epithet for America’s buccaneering and occasionally rapacious industrialists.

If twenty-first-century leaders seem especially amoral, it’s because a globally matrixed economy magnifies the effects of executive malfeasance. Consider the sovereign debt crisis that engulfed Europe in 2011. In a world of nationally constrained institutions, the credit problems of a country like Greece would be a small-scale catastrophe. Not so in an interconnected world where avaricious strategies are quickly aped and imprudent risks spread like a virus. It was these dynamics that led French and German banks to dump more than $900 billion into the barely solvent economies of the ‘‘PIGS’’—Portugal, Ireland, Greece, and Spain. Turns out American bankers aren’t the only ones who are susceptible to moral hazard. But it’s not just bankers we need to worry about. In a networked world, lax security standards can imperil the confidential information of a hundred million consumers or more. A failure to exercise due diligence over a vendor can result in a worldwide food contamination scare. And a decision that puts quality at risk can provoke a global recall.

If the global economy amplifies the impact of ethical choices, so, too, does the Web. Word-of-mouse can quickly turn a local misdemeanor into a global cause célèbre. Nike, Apple, and Dell are just a few of the companies that have been castigated for turning a blind eye to the subpar employment practices of their Asian suppliers. There are no dark corners on the Web—miscreants will be outed.

The Web is also producing a new sort of global consciousness, a heightened sense of our interconnectedness. Increasingly we understand that we live on the same planet, breathe the same air, and share the same oceans. In civic and commercial life, we expect the same high standards of equity and fair play to apply everywhere, and are offended when they don’t. And thanks to the Web, that displeasure can quickly congeal into a global chorus of indignation. Around the world, ethical expectations, if not behaviors, are leveling up.

The intermeshing of big business and big government is another force bringing values to the fore. As citizens and consumers, we’re smart enough to know that when lobbyists and legislators sit down to a lavish meal, our interests won’t be on the menu. Instinctively, we know that democracy and the economy do better when power isn’t concentrated, but since it often is, we must do whatever we can to ensure that those occupying positions of trust are, in fact, trustworthy.

For all these reasons, we need a values revolution in business—and it can’t come soon enough. In a 2010 Gallup study, only 15% of respondents rated the ethical standards of executives as ‘‘high’’ or ‘‘very high.’’ (Nurses came in first at 81%, corporate lobbyists last at 7%.)1 This lack of trust poses an existential threat to capitalism. Companies do not have inalienable rights granted to them by a Creator; their rights are socially constructed, and can be reconstructed any time society feels so inclined. (A fact made abundantly clear with the passage of the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010—two U.S. statutes designed to dramatically curtail corporate prerogatives.)

Given all that, the question for you and your organization is simple: Are you going to be a values leader or a values laggard? It’s easy to excoriate fraudster CEOs and greedy bankers, but what about you? (And what about me?) We can’t expect others to be good stewards if we’re not. Though some executives cast a bigger moral shadow than others, we must all shoulder the responsibility for protecting capitalism from ethical vandals.

From Adam Smith to Ayn Rand, the defenders of capitalism have argued that the common good is maximized when every individual is free to pursue his or her own self-interest. I believe this to be true, with one essential caveat. Like nuclear fission, self-interest works only as long as there’s a containment vessel—a set of ethical principles that ensures enlightened self-interest doesn’t melt down into unbridled selfishness. Unfortunately, the groundwater of business is now heavily contaminated with the runoff from morally blinkered egomania.

As parents, we expend enormous energy in socializing our children. While a rebellious teenage son might believe his interests are best served by dropping out of school and moving in with his girlfriend, his parents are likely to have a different view. That’s what parents do—they teach their children to become stewards of their own lives.

So before you go any further in this book, ask yourself, am I really a steward?

1. What about fealty? Like the executor of an estate, do I see myself as a fiduciary?

2. What about charity? Like a self-sacrificing parent, am I willing to put the needs of others first?

3. What about prudence? Like a committed conservationist, do I feel responsible for protecting and improving the legacy I have inherited?

4. What about accountability? Like the captain of a vessel, do I understand I am responsible for my wake—for the distant ripples created by my decisions?

5. What about equity? Like a conscientious mediator, am I truly committed to finding the most equitable outcome for all?

If you’re struggling to think through what this means in practice, here’s something that might help. For years I taught a second-year MBA course at the London Business School. In the final session, I typically offered my students some parting advice.

When you take your first post-MBA job, I’d tell them, assume that the following things are true:

First, your widowed mother has invested her life’s savings in your company. She’s the only shareholder and that investment is her only asset. Obviously, you’ll do everything you can to make sure she has a secure and happy retirement. That’s why the idea of sacrificing the long-term for a quick payout will never occur to you.

Second, your boss is an older sibling. You’ll always be respectful, but you won’t hesitate to offer frank advice when you think it’s warranted— and you’ll never suck up.

Fourth, your children are the company’s primary customers. You want to please and delight them. That means you’ll go to the mat with anyone who suggests you should deceive or take advantage of them. You’ll never exploit a customer.

Fifth, you’re independently wealthy. You work because you want to, not because you have to—so you will never sacrifice your integrity for a promotion or a glowing performance review. You’ll quit before you compromise.

These assumptions, if acted upon, will help nourish the seeds of stewardship in your business life and, by example, in the lives of others.

As we struggle with the uniquely complex challenges of the twenty- first century, it is good to remind ourselves that what matters most now is what’s always mattered: our bedrock values.

1.2: Learning From The Crucible Of Crisis

As I write this, the U.S. economy is sputtering. Though the Great Recession technically ended two years ago, unemployment remains stubbornly high and economic growth is distressingly feeble. The percentage of the U.S. population working is at a 25-year low and with 125,000 new job seekers entering the workforce each month, it may take a decade for the United States to get back to prerecession employment levels. A number of European states are in similar straits: property prices have tumbled, unemployment has soared, and growth has stalled.

What we are witnessing is the mother of all hangovers—the inevitable and entirely predictable outcome of an epically irresponsible borrowing binge. Unfortunately, in this case, the boozers weren’t hard-drinking college kids on a Fort Lauderdale beach. They were the captains of capitalism. Federal Reserve policymakers were the distillers, congressional legislators the rumrunners, and big bank CEOs the bartenders. Sure, a lot of ordinary folks bellied up to the bar of cheap debt, but they were egged on by the ‘‘adults.’’ If you’re looking for an analogy, picture a high school dance where parents and teachers are pouring shots at an open bar.

The worst economic downturn since the 1930s wasn’t a banking crisis, a credit crisis, or a mortgage crisis—it was a moral crisis, willful negligence in extremis. Few of us are surprised when we witness base behaviors in lofty places (like a ‘‘sexting’’ congressman), but the implosion of America’s investment banking industry revealed Biblical scale transgressions. One is reminded of the Exodus account in which the entire Jewish nation abandons Yahweh to bow before a golden calf.

Every institution rests on moral footings, and there is no force that can erode those foundations more rapidly than a cataract of self- interest. In The Radicalism of the American Revolution, Gordon Wood notes repeatedly that the country’s founders regarded ‘‘disinterest’’ as a noble virtue. As they set about inventing the United States of America, that first crop of patriots endeavored to detach themselves from selfish concerns over personal gain and loss. One would struggle in vain, I think, to find evidence of ‘‘disinterest’’ in the behavior of Lehman Brothers’ Dick Fuld, Merrill Lynch’s Stan O’Neal, or any of the other banking chieftains who pillaged the U.S. economy for personal gain.

While much has been written about the antecedents of the banking debacle (much of it opaque and tedious), it is worth taking a few moments to perform a quick moral autopsy. This will necessitate a brief rehearsal of the facts. The goal here is not to heap more blame on the bankers (well, it’s not the only goal), but rather to understand what happens when self-interest slips the knot of its ethical moorings. It is easy to be contemptuous of the bankers and regulators who precipitated the crisis, but I am not so sure that you and I would have behaved much differently if we had been faced with the same temptations. By all means let’s hold the bankers responsible (Someone? Please?), but let’s also use their calamitous misadventure to do a little moral reflection of our own.

After the dotcom bust in 2000, the U.S. Federal Reserve, under the leadership of first Alan Greenspan and then Ben Bernanke, drove borrowing costs down to disastrously low levels. Dirt-cheap money encouraged U.S. consumers to gorge on debt, dramatically increasing the risk of widespread mortgage defaults.

Asian savings also played a role. By pegging the yuan to the U.S. dollar, Chinese authorities kept exports high and internal consumption low, thus building up huge reserves. These had to be recycled, and a lot of that money went into buying mortgage-backed securities.

By bundling mortgages into ‘‘collateralized debt obligations’’ and selling those CDOs to third parties, bankers were able to move dodgy loans off their books. Between 2005 and 2007, more than 85% of all U.S. mortgages were securitized.

Historically, lending had been tied to deposit taking. By taking the brakes off fund-raising, securitization led to an unprecedented boom in mortgage lending. The net result: a serious decline in lending standards. As banks competed their way to the bottom, they handed out loans to just about anyone with a pulse.

As it turned out, securitization didn’t inoculate banks from the risks of subprime lending, since many banks built up large CDO holdings via off-balance sheet ‘‘Special Investment Vehicles.’’ Commercial banks also lent billions of dollars to the biggest buyers of CDOs, investment banks and hedge funds.

Credit default swaps (CDS) made it possible for CDO investors to protect themselves from a housing collapse—in theory. As with all insurance products, underwriting prudence requires a rich seam of historical data, but given the unprecedented growth of the subprime market, and the concomitant decline in lending standards, past default rates had no predictive value. As a result, CDO insurers like AIG severely underpriced the risks of a default debacle. This error was multiplied when speculators dramatically upped the demand for CDS contracts. Amazingly, the world ended up with $62 trillion of credit default swaps and no organized trading exchange.

The new financial instruments cooked up by the banks were mind- bendingly complex. Mortgages were packaged together, partitioned into tranches, and then sold. Many CDOs were bundles of other CDOs. These convolutions made it hard for investors and ratings agencies to decipher the real risks.

It should be noted that all this complexity didn’t happen by accident. Bankers love complexity, as it creates the illusion of value-added and provides a veil behind which they can hide their porcine fees. It’s even better when a financial product isn’t publicly traded, as that makes it harder for a buyer to discern its real value. Unfortunately, as the world came to realize, complexity can also obscure risk.

In a bull market, the greater the leverage, the better the returns. That’s why the biggest buyers of mortgage-backed securities borrowed heavily to bulk up their portfolios. With leverage ratios of 30-to-1 and higher, most of the major investment banks made massive bets on a continued rise in U.S. home prices. While this unprecedented leverage amped their returns on the upside, it obscenely compounded risks on the downside. In their rush to profit from the subprime bonanza, many bankers seemed to forget that leverage is always a double-edged sword—sooner or later it cuts both ways.

Because of their complexity and novelty, there was no real secondary market for many CDOs, so when things started to go south, it was hard for cash-strapped institutions to reduce their exposures.

Without a well-functioning secondary market, buyers had no way of discovering the true value of the exotic instruments they held, nor was it easy for investors and regulators to gauge the real threat to bank balance sheets. In the absence of reliable pricing data, bankers had no choice but to take punishing write-downs on their mortgage-backed securities.

Many senior bankers claimed that the subprime crisis could not have been anticipated—that it was, as the chairman of the Financial Crisis Inquiry Commission scathingly put it, an ‘‘immaculate calamity.’’1 I disagree. Anyone who was watching the unprecedented run up in U.S. house prices (see Figure 1.2.1) had to know that a crisis was looming. Indeed, in 2005 I bought a financial derivative from my broker that was, in effect, a bet against the housing market. The instrument was linked to a stock index that tracked the performance of America’s largest home builders. For every 1 percent decline in the value of the index, the value of my investment rose by 3 percent. The instrument expired in 2008 and paid off handsomely. My only regret is that I didn’t bet bigger.

As I watched the crisis unfold, my initial reaction was disbelief. How could so many super-smart people be so wrong? Once the poop hit the fan, pundits of every stripe came forward with their preferred remedy (turn the Fed into a super-regulator, create living wills for the biggest banks, dramatically raise capital reserves, limit banker bonuses, and so on). At the time, I wondered if the solution might not be simpler. What about tattooing a few carefully chosen lines onto the forehead of every banker who had received bailout money:

Alchemy doesn’t work. What was true for Isaac Newton all those centuries ago is still true: you can’t turn dross (garbage loans) into gold (triple A–rated securities) no matter how clever you are.

Things that can’t go on forever usually don’t. If an extrapolated trend produces ludicrous results (like million-dollar starter homes), it will soon reverse itself—so don’t bet it won’t.

Risks and returns are always correlated. Maybe there’s someone out there who can produce a positive ‘‘alpha’’ year after year, but it probably isn’t you or anyone you know.

The tattoos would have to be inscribed in reverse, so that every time a self-admiring banker glanced at a mirror, a teaching moment would occur.

Tats or no, bankers do understand these simple truths, so why did Wall Street’s finest fail to heed them? Or more pointedly, why did they so completely abandon their responsibilities as the guardians of capitalism’s most important citadels?

As it unfolded, the subprime banking crisis revealed a Shakespearian catalog of moral turpitude. It was a perfect storm of human delinquency. Deceit, hubris, myopia, greed, and denial were all luridly displayed.

We now know that a good many mortgage bankers, the folks who made those subprime loans, conspired with first-time borrowers to overstate incomes and understate debts. In addition, deceptive sales tactics and a lack of disclosure encouraged many borrowers to take on loans they’d never be able to pay off. In 2009, the FBI investigated 2,794 cases of suspected mortgage fraud, up from 721 cases in 2005.2 The simple lesson: any financial instrument that is built atop lies and misrepresentations will be flimsy at its core.

The Wall Street rocket scientists who were charged with packaging subprime offal into marketable securities dramatically overestimated their ability to parse and partition risk. They would learn to their sorrow that distributing risk is not the same thing as eliminating it, particularly when that risk is compounded by nose-bleed leverage. Convinced of their own genius, they failed to distinguish between genuine sophistication and mere sophistry.

In creating and pricing all those brave, new ‘‘structured products,’’ Wall Street’s whiz kids relied on complicated financial models to estimate potential risks. Because the models were based on recent trend data, covering a time frame when asset values had arced ever higher, they failed to anticipate the possibility of a major slump in asset values. Lenders and investment bankers could argue that the U.S. housing market had never been through a steep and prolonged nationwide slump, but then again, neither had there ever been a run-up in house values like the one that occurred between 2000 and 2007. Again, there’s a lesson here: just because you can’t remember the last hundred-year storm doesn’t mean one isn’t headed your way.

It goes without saying that everyone on the subprime ship of folly was earning big fees: the mortgage originators who approved all those ‘‘ninja’’ loans (no income, no job, no assets), the Wall Street bankers who bundled them into securities, the hedge funds who bought the new-fangled instruments and charged their clients big bucks for delivering above- average returns, and the rating agencies whose thirst for new business compromised their once-hallowed objectivity. The lure of multimillion dollar bonuses turned sober-suited bankers into frenzied speculators. As ever, greed proved to be a tireless cheerleader of human folly.

Organizations are occasionally overtaken by truly unpredictable events. This was the case for the U.S. airline industry in the aftermath of the 9/11 terrorist attacks. Usually, however, stupefaction is the product of denial. Companies get caught out by the future not because it’s unpredictable, but because it’s unpalatable. Unwilling to face facts, just about everyone who was financially vested in the housing boom chose to ignore the inevitable. To a degree, the future is always opaque, but it’s a lot more so when you shut your eyes.

This lack of accountability is baffling until one realizes that many of the watchdogs who were supposed to guard the economy from bankerly excesses—individuals like former SEC Chairman Christopher Cox and U.S. Representative Barney Frank, chair of the House Financial Services Committee from 2007 to 2011—were ardent coconspirators.

Here, too, one witnesses Faustian sell-outs and a feckless dereliction of duty.

As taxpayers and citizens, we expected the government to protect the economy from unsustainable booms and busts. Instead, it provided the monetary fuel for an unprecedented housing boom.

As taxpayers and citizens, we expected the government to avoid creating economically perverse incentives. Instead, it aggressively subsidized subprime mortgages. In the years leading up to the bust, Fannie Mae and Freddie Mac, government-sponsored entities that answered to congressional masters, bought billions of dollars of subprime mortgage loans from originators like New Century Financial Corp. and First Franklin Financial Corp. With the implicit backing of the U.S. government, Fannie and Freddie were able to borrow at preferential rates and ultimately assembled a $1.4 trillion portfolio of mortgage-backed securities.

We expected the government to enforce prudent banking practices. Instead, it allowed investment banks to dangerously overextend themselves. In 2004, with the housing boom well under way, America’s big investment banks were chafing under SEC restrictions that limited their debt levels. Eager to boost their returns by taking on more debt, Wall Street’s leading banks joined forces to lobby for regulatory relief. Up against the united front of the nation’s biggest investment banks, the SEC caved. Neutered by a belief in the omniscience of billionaire bankers, and blinded by their faith in industry self-regulation, the regulators failed to exercise the due diligence that would have prevented a financial Katrina.

As taxpayers and citizens, we expected the government to indemnify taxpayers against bank failures. Instead, it stood idly by while a merger boom created banks that were ‘‘too big to fail.’’ In the 1990s, the banking industry led all others in terms of merger activity, and by 2004, 74% of U.S. bank deposits were controlled by just 1% of America’s banks.

The truth is, America’s regulators had all the powers they needed to curb the ‘‘irrational exuberance’’ that precipitated the banking crisis— but they didn’t. Again, this was a moral washout. Some of the most egregious lapses included these:

Blind indifference to the human costs of ideological zeal. In the years leading up to the crisis, there was a naive belief among many regulators that banks could be trusted to police themselves. These free market zealots failed to distinguish between the freedom to trade (generally a good thing) and freedom from oversight (generally a bad thing). In October 2008, Christopher Cox ruefully remarked that ‘‘The last six months have made it abundantly clear that voluntary regulation does not work.’’ Duh. With the exception of Nazism and communism, it’s hard to think of another ideological infatuation that has cost the world so dearly.

Public responsibilities abandoned for political gain. Wall Street used its colossal profits to buy heavyweight political leverage, and few legislators had the guts stand up to their Wall Street benefactors. Consider this: between 1990 and 2008, AIG provided more than $9.3 million in campaign contributions and spent more than $70 million in lobbying efforts designed to batter down regulatory obstacles, according to Time magazine.4 Virtually all of the game wardens on Capitol Hill were taking the poachers’ money.

Fact is, America’s legislators and regulators were just as culpable as its bankers. The bomb that blew up the U.S. economy may have been detonated on Wall Street, but it was manufactured in Washington, DC.

As with the bankers, we are still waiting for a mea culpa from the regulators. None is likely to be forthcoming. (Among the powerful, blame deflection is a core competence.) What we have gotten instead is a barrage of proposals for increasing the powers of those who were either too cowardly or too compromised to exercise the authority they already had.

We need to be clear: in the banking crisis it wasn’t capitalism that failed us, but capitalism’s custodians. Those who should have been fighting to protect the moral high ground laid down their arms and auctioned off their integrity to the barbarian bankers.

We are left, then, with two critical questions: What is it that produces such a disastrous lapse in collective moral judgment? And what lessons are there for those of us who aren’t bankers or policymakers? Let’s take each question each in turn.

It seems to me that moral corrosion has its roots in the low-grade egomania that afflicts us all. For each of us, on any particular day, the battle between shameless self-interest and principled disinterest can be a close-run thing. Our better angels don’t always win. If it were otherwise, the notion of ‘‘sin’’ would have never gained currency.

Finally, there is a social dynamic which, if not challenged, levels standards down. As human beings, we often look to others for our moral benchmarks. When we’re presented with a choice between self-serving expediency and self-denying duty, we are typically relieved to find that someone else has already lowered the bar for us. In other words, we are inclined to look for, and overweight, precedents that help us to normalize our own ethical concessions. We’re scavengers for excuses; that’s why moral equivocation is infectious.

An example: In July 2007, just weeks before the debt bomb exploded, Chuck Price, Citigroup’s chief executive, defended his bank’s gung-ho risk-taking in an interview with the Financial Times: ‘‘When the music stops, in terms of liquidity, it will get complicated. But as long as the music is playing, you have got to get up and dance. We’re still dancing.’’ The last time I heard an excuse that lame it came from a 13-year-old: ‘‘But Dad, everyone’s doing it.’’

The freedom of every human being to pursue his or her self-interest is an essential prerequisite for an open economy, but it is not an adequate moral foundation for capitalism. In The Wealth of Nations, Adam Smith, the patron saint of capitalism, made a compelling, if slightly depressing, case for self-interest:

It is not from the benevolence of the butcher, the brewer, orthe baker that we expect our dinner, but from their regardto their own interest. We address ourselves, not to theirhumanity, but to their self-love, and never talk to them of ourown necessities, but of their advantages.

Though his acolytes seldom acknowledge it, Adam Smith’s philosophy was more nuanced than the previous quotation suggests. In The Theory of Moral Sentiments, Smith begins thusly:

How selfish soever man may be supposed, there are evidentlysome principles in his nature which interest him in the fortunes of others, and render their happiness necessary to him,though he derives nothing from it, except the pleasure ofseeing it.

Thankfully, there is benevolence in each of us. Compassion, though, can shrivel. For leaders, this happens in two ways. First, compassion gets lost in the pursuit of success. In our strivings, we start to see colleagues, employees, shareholders, and customers as accessories to personal ambition, as instruments to be used and abused as necessary. Second, we lose our compassion in the achievement of success. A position of power, once attained, insulates us from the human consequences of our actions. As a twenty-first-century leader, you must be alert to these risks and consciously cultivate your compassion.

I don’t have a grand plan for a moral renewal of capitalism, though I will offer a few medium-scale ideas in later chapters. Because renewal happens one soul at a time, a grand plan is, in any case, beside the point.

Nevertheless, we must face up squarely to capitalism’s shortcomings. To free market zealots I would say the following: One doesn’t have to disown an economic philosophy to recognize its shortcomings. So stop being so defensive! There are things about capitalism as currently practiced that are by any standards indefensible. As a champion of capitalism, I’m worried when I see:

· Companies spending millions of dollars to tilt the regulatory playing field in their favor.

· Three-hundred-to-one pay differentials between CEOs and first-level employees.

· Governance structures that are expressly designed to deflect shareholder concerns.

· Companies that treat employees as mere factors of production.

· Executives who reap outsized rewards for mediocre performance.

· Companies that award 90% of their share options to a handful of senior executives.

· Companies that resist calls for greater transparency and consumer protection.

· Corporations that compromise their values to do business with repressive regimes.

· Corporate PR campaigns that fudge the facts and demonize critics.

· Executives who feel that society’s interests are somehow distinct from their own.

If you can’t find within yourself a little righteous anger about the way your company fulfills its responsibilities, then you’re not going to be very effective in helping to repair the moral fabric of capitalism.

All of us who have a stake in the future of capitalism have a non- delegable responsibility to make it better—and we must start by raising our own ethical standards and by challenging others to do the same.

The rehabilitation of capitalism won’t come from top-down programs of ‘‘corporate social responsibility.’’ While welcome, clever new strategies for producing private and social gains in tandem are not enough. It’s great, for example, that in 2008, Coca-Cola’s then CEO, Neville Isdell, committed his company to becoming ‘‘water neutral’’ by 2020—this after activists challenged the company to improve its steward- ship of scarce water supplies. But a grand top-down initiative, however admirable or even profitable, will never be a substitute for a bottom-up sense of moral responsibility that informs every decision. Corporate morality needs to be proactive and pervasive—too often it is neither.

Does the betterment of capitalism warrant the same sort of moral courage? Perhaps not, but with the exception of democracy, there’s no other ideology that has done so much for so many. The ability to buy and sell freely, to raise capital, to take a risk and get a return, to start a new company, to invest where one wills, to expand or contract your business, to import or export, to innovate or cut costs, to buy another company or sell your own—these are extraordinary economic privileges—and when they’re abridged, everyone loses.

But what, you ask, can one person do? Perhaps you’ve been told that a company’s values have to emanate from the top. That’s tosh. Just as turpitude compounds, so does virtue. E-mail, blogs and Twitter—these are powerful amplifiers of moral conscience, as Egypt’s former president Hosni Mubarak learned to his sorrow. In a networked world, when one brave soul speaks up, it emboldens others. Yes, moral backsliding is contagious, but so is moral courage—so exercise yours!

There are risks, of course. You might piss off a few people, be labeled a malcontent, or get passed over for a promotion, but no one’s going to put you under house arrest. So ask yourself, within my sphere of leadership, what standards do I regard as inviolable? Where am I unwilling to sacrifice my own integrity? What is my ‘‘moral signature’’? What values do I want others to infer from my actions? And, conversely, where have I fallen victim to greed, hubris, or power lust? When have I shut up when I should have spoken up? Moral failings on a grand scale, of the sort observed in the banking scandal, are impossible without an epidemic of moral dereliction—so if you’re incensed by what Wall Street did to Main Street, and you should be, stand tall for the moral standards you believe in.

My friend John Ortberg, a pastor, psychologist, and author, argues that if we’re going to have a world worth inhabiting, each one of us must have the courage to do a ‘‘fearless moral inventory.’’ If you’re a leader of any sort, in any organization, now would be a good time to start.

1.3: Rediscovering Farmer Values

In the midst of the banking crisis, my mother-in-law passed away. She had spent most of her 85 years working with her husband on their family farm. Starting with a single, leased tractor and a rented parcel of land, the pair ultimately grew their ranch into a 1,000-acre spread of debt-free farmland in California’s fertile San Joaquin Valley. How did they accomplish this feat? By working 14-hour days, six days out of seven. By taking few vacations and forgoing most luxuries. By building up cash reserves in good years so they could survive bad ones. By diversifying their crops to reduce their exposure to fluctuating prices. And by paying themselves modestly while investing everything they could in land and equipment.

Like many of their generation, Ferne and Eldon Findley hated being in hock. To them, being in debt was being indentured. While working capital loans were unavoidable given farming’s lumpy cash flow, the couple worked tirelessly to reduce their long-term debt and gain title to their land. A goal they achieved after 30 years of marriage.

I believe a man’s greatest possession is his dignity and that nocalling bestows this more abundantly than farming. I believehard work and honest sweat are the building blocks of a person’s character. I believe that farming, despite its hardshipsand disappointments, is the most honest and honorable waya man can spend his days on this earth . . .

The Findleys’ pay-as-you-go approach to life enabled them to buy a starter house for my wife and me, to fund church-building projects around the world, and to pass on a thriving business to their son.

More leverage might have allowed them to grow their business faster, or live higher on the hog, but the lessons learned in Depression- era childhoods inoculated them, and millions more of their generation, against those temptations.

The virtues that built the Findley farm—prudence, thrift, self- discipline, and sacrifice—are the same virtues that built America, and Britain, and Germany, and Japan. But in recent decades, these virtues have been conspicuously absent, as millions of consumers abandoned frugality for extravagance. As a marketing proposition, cake-on-the- plate-while-you-wait is a lot more enticing than pie-in-the-sky-byeand-bye. So the bankers encouraged us to gorge on debt and we did.

Although I’ve searched for it, I can find no documentary evidence of a ‘‘Banker’s Creed,’’ no pithy celebration of bankerly virtues. Yet recent events suggest that many bankers (though not a majority, I’m sure) did in fact subscribe to a few common tenets:

I will buy out my competitors and build a ‘‘systemically important’’ bank, thus enabling me to privatize gains and socialize losses.

I will prey on customers at every opportunity and defend my right to profit from their misplaced trust.

I will blame the consequences of my recklessness on defects in the ‘‘global financial system’’ and thereby absolve myself of any responsibility for having duped investors, customers, and regulators.

I will continue to demand the compensation to which I’ve become accustomed, even after a public bailout.

I will band together with my banking compatriots to ensure that any attempts at real reform get defanged.

Today’s bankers are not the first of their breed to embrace this mercenary creed. Nearly seventy years ago, in the depths of the Great Depression, President Roosevelt used his first inaugural address1 to proclaim:

. . . Practices of the unscrupulous money changers standindicted in the court of public opinion, rejected by the heartsand minds of men....

The money changers have fled from their high seats in thetemple of our civilization. We may now restore that temple tothe ancient truths. The measure of the restoration lies in theextent to which we apply social values more noble than meremonetary prot.

Happiness lies not in the mere possession of money; it lies inthe joy of achievement, in the thrill of creative effort. The joyand moral stimulation of work must no longer be forgotten inthe mad chase of evanescent prots. . . .. . .there must be an end to conduct in banking and in businesswhich too often has given to a sacred trust the likeness ofcallous and selsh wrongdoing. Small wonder that condencelanguishes, for it thrives only on honesty, on honor, on thesacredness of obligations, on faithful protection, and unselshperformance; without them it cannot live.

Today, as in 1933, bankers are easy targets. But it wasn’t just bankers who greedily overreached. Consider this: in the early 1950s, when the Baby Boomers were still toddlers (and their parents were working hard to pay down their mortgages), the ratio of debt-to-income for the average American household was less than .4. From the mid-1960s to the mid-1980s the ratio hovered around .7. Yet by 2008, this crucial barometer had zoomed up to 1.4. Over this time span, the income- adjusted indebtedness of the average American household ballooned by more than 350%. Indeed, it increased more in the years between 2001 and 2008 than in the previous 39 years. Before being forced by the recession to scrimp and save, the typical American family was spending more money servicing its debt than buying food.

Over the past few years, policymakers around the world have been working feverishly to reflate the global economy—with little to show for their efforts. Deleveraging always hurts. Millions of us were addicted to debt and have now been sent off to rehab, not the celebrity sort with organic salads, comfy pillows, and cooing counselors, but the court-ordered sort, with institutional food, cold showers, and surly staff.

Can any good come of this? Sure. The first benefit should be a renewed appreciation for the timeless virtues that engender real wealth creation and spawn lasting prosperity. As farmer values wax and banker values wane, we’ll all be better off—and so will the economy.

A second plus: our kids may avoid becoming debtoholics. Having watched their parents overextend themselves and pay the price, one can only hope that they’ll resolve to live financially prudent lives. (My son’s suggestion: require every high school senior to take a course in personal financial management.) If the Millennials learn some essential lessons about thrift, hard work, and fiscal discipline, then this seemingly interminable crisis will not have been in vain. And all the hard-working Grandma Fernes who’ve left this world for the next will be able to look down and smile.

1.4: Renouncing Capitalism’s Dangerous Conceits

As you can probably tell, I’m a capitalist by conviction and profession. I believe the best economic system is one that rewards entrepreneurship and risk taking, maximizes customer choice, relies on markets to allocate scarce resources, and minimizes the regulatory burden on business. If there’s a better recipe for creating prosperity I haven’t seen it.

So why do fewer than four out of ten consumers in the developed world believe that large corporations make a ‘‘somewhat’’ or ‘‘generally’’ positive contribution to society? (This according to a 2007 study by McKinsey & Company.1) Why is it, in a 2010 Gallup survey, that only 19% of Americans told pollsters that they had ‘‘quite a lot’’ or a ‘‘great deal’’ of confidence in big business? (Only Congress scored worse.)2 It seems that a majority of us expect big companies to behave badly—to ravish the environment, mistreat employees, and mislead customers. As ethical truants, big business seems to rank alongside Charlie Sheen and Lindsay Lohan.

While one should never underestimate the ability of risk-besotted financiers to booby-trap the global economy, the real threat to capitalism isn’t unfettered financial cunning. Indeed, in the Gallup survey mentioned earlier, banks scored higher than big business. Yes, greedy bankers are a menace, but there is a bigger hazard: imperious CEOs who are unwilling to confront the changing expectations of their stakeholders. In recent years, consumers and citizens have become increasingly disgruntled with the implicit contract that governs the rights and obligations of society’s most powerful economic actors—large corporations. To many, the bargain has seemed one-sided—it works really well for CEOs, pretty well for shareholders, and not so well for everyone else.

You don’t have to read Adbusters to wonder whose interests big business really serves. When it comes to ‘‘free markets,’’ there’s plenty to be cynical about: the food industry’s long and illicit love affair with trans fats, Merck’s dissembling about the risks of Vioxx, Facebook’s occasionally cavalier attitude toward consumer privacy, the seldom-kept promises of airline executives to improve customer service, and the everyday reality of hidden banking fees, overinflated product claims, and buck-passing customer service agents.

If individuals around the world have lost faith in business, it’s because business has misused that faith. In this sense, the threat to capitalism is both more prosaic and more profound than that posed by marauding bankers—more prosaic in that the danger comes not from predatory Wall Street financiers, but from the minor corporate misdemeanors that every day fuel the frustrations of ‘‘ordinary’’ folk; and more profound in that the problem is expansive—it threatens to burden every large company with the sort of regulatory constraints that were once reserved for nuclear power plants.

This is not an outcome most of us would welcome. While cinching the regulatory straitjacket even tighter would protect us from capitalism’s worst excesses, it would also rob us of its bounties. So we must hope that managers everywhere will face up to the fact that an irreversible revolution in expectations has occurred.

Millions of consumers and citizens are already convinced of a fact that many corporate chieftains are still reluctant to admit: the legacy model of economic production that has driven the ‘‘modern’’ economy over the last hundred years is on its last legs. Like a clapped-out engine, it’s held together with bailing wire and duct tape, belches out noxious fumes, and regularly breaks down.

Though we’re grateful someone invented this clattering, savage machine a century ago, we’ll also be happy when it’s finally carted off to the scrap yard and replaced with something a bit less menacing.

In our hearts, we know the future cannot be an extrapolation of the past. As the great-grandchildren of the industrial revolution, we have learned, at long last, that the heedless pursuit of more is unsustainable and ultimately unfulfilling. Our planet, our security, our sense of equanimity, and our very souls demand something better, something different.

We long for a kinder, gentler sort of capitalism—one that views us as more than mere ‘‘consumers,’’ one that understands the distinction between maximizing consumption and maximizing happiness, one that doesn’t sacrifice the future for the present, and one that doesn’t regard the earth as an inexhaustible source of natural resources.

So what stands in the way of creating a conscientious, accountable, and sustainable sort of capitalism—a system that in the long term is actually habitable?

1. The paramount objective of a business is to make money (rather than to enhance human well-being in economically efficient ways).

2. Corporate leaders should only be held accountable for the immediate effects of their actions (and not for the second- and third- order consequences of their single-minded pursuit of growth and profits).

3. Executives should be evaluated and compensated on the basis of short-term earnings (rather than on the basis of long-term value creation, both financial and social).

4. The way to establish a business’ social credentials is through high- minded mission statements, green-tinged products, and a fat CSR budget (rather than through an unshakeable and sacrificial commitment to doing the right thing in every circumstance).

5. The primary justification for ‘‘doing good’’ is that it helps a company to ‘‘do well.’’ (The implication: do good only when there’s an upside.)

6. Customers care a lot more about value for money than they do about the values that were honored or defiled in the making and selling of a product.

7. A firm’s customers are the folks who buy its services (rather than all those whose lives are affected by its actions).

8. It’s legitimate for a company to make money by exploiting customer lock-in, exaggerating product benefits, or restricting customer choice. (I mean, jeez, should it really take an act of Congress to force airlines to treat tarmac-bound passengers humanely?)

9. Market power and political leverage are acceptable ways of countering a disruptive technology or thwarting an unconventional competitor.

10. A company’s ‘‘brand’’ is a marketing concoction built with ad dollars (rather than a socially constructed portrait of its real values).

Of course, as consumers and citizens, we must acknowledge that companies can’t remedy every social ill or deliver every social benefit. We must face up to our own schizophrenia. We can’t expect companies to behave responsibly if we blithely abandon our own principles to save a buck.

As for executives: if you feel your industry is still too lightly regulated, then just keep on doing what you’re doing. If, on the other hand, you’ve had your fill of sanctimonious politicians and meddling bureaucrats, then you must face up to a simple fact: in the years to come, a company will be able to preserve its freedoms only if it embraces a new and more enlightened view of its responsibilities. Google’s executive chairman Eric Schmidt is one of a handful of executives who seem to get this.

In 2010, Google formed a new social innovation unit that it describes as a think/do tank. Housed in the company’s operational core rather than in its philanthropic foundation, Google Ideas is aimed at harnessing the company’s innovation prowess and convening power in order to tackle some of society’s most pressing problems—such as nuclear proliferation and failed states. One of the first efforts launched by Google Ideas was the Summit Against Violent Extremism (SAVE), held in the Dublin Convention Centre in June 2011. The event brought together a cross-section of former jihadists, white supremacists, and gang leaders, as well as some of their victims and a slew of academic experts. A representative participant, T. J. Leyden, was once a skinhead leader and is now executive director of Hate2Hope. Google hopes that forums such as this one will help to surface radical new approaches to seemingly intractable problems. Though it’s too early to assess the success of the program, it is worth noting the principles upon which Google Ideas seems to be based:

2. A company’s social legitimacy can never be taken for granted—it can and will be challenged, so live with it.

3. Citizens and consumers expect companies to be not only socially accountable, but socially entrepreneurial.

4. Systemic problems can’t be solved by a single institution or by people sitting around conference tables. Businesses are uniquely equipped to help mobilize the relevant parties and get ‘‘boots on the ground.’’ They need to be energetic partners of public institutions and NGOs.

5. ‘‘Don’t be evil’’ (Google’s famous mantra) is a de minimis standard. Today, a company needs a proactive strategy for buttressing its social balance sheet. Here, as everywhere else, the only option is to lead!

Visit the website of just about any company and you’ll find lots of platitudinous statements about ‘‘doing good,’’ and a long list of dogooder commitments. Maybe it will be the same with Google Ideas; maybe it will turn out to be more PR ploy than paradigm shift. In any case, there are still plenty of companies where the old conceits still hold sway. What matters now is that we change that.

1.5: Reclaiming The Noble

I’m a big fan of New Yorker cartoons. There’s usually at least one in every issue that provokes a wry smile or a wince of self-recognition. While I’ve never actually participated in the magazine’s weekly caption competition, I occasionally gin up a prospective entry. Last week, the contest featured a drawing of a couple lounging in a living room. The husband (perhaps?) was perusing a newspaper on the sofa while his wife lounged in a nearby armchair. She was a mermaid—naked from the waist up, her large flipper tucked demurely beneath her. With her head angled toward her companion and her mouth open in mid-sentence, I imagined her to be saying: ‘‘After ten years, I think you could have learned to scuba dive,’’ or ‘‘Hiking in the Alps again? I thought we’d take a beach holiday this year.’’

These sardonic portraits of the human condition resonate with us because they capture something deep and true. The mermaid-out-of- water speaks to the challenges of mutual accommodation that confronts any couple in a long-term relationship, while the temporarily (and implausibly) fervent employee reminds us that the typical corporate office is an emotional vacuum. I can’t offer you any insights if you’re trying to get in sync with your partner, but I do have a few observations about the paucity of purpose in the average, porridge-gray cubicle.

In a later chapter, we’ll dig into some survey data on employee engagement. For now, it’s enough to note that a recent global survey found that only 1 in 5 employees is truly engaged, heart and soul, in their work. As a student of management, I’m depressed by the fact that so many people find the workplace depressing.

In the study, respondents laid much of the blame for their lassitude on uncommunicative and egocentric managers, but I wonder if there’s not some deeper organizational reality that bleeds the vitality and enthusiasm out of people at work.

Here’s an experiment for you. Pull together your company’s latest annual report, its mission statement, or the transcript of a recent CEO speech. Read these documents and make a list of oft-repeated words or phrases. Now do a little content analysis. What are the ideas that get a lot of airtime in your company? They’re probably captured in words like superiority, advantage, leadership, differentiation, value, focus, discipline, accountability, and efficiency. Nothing wrong with this, but do these goals quicken your pulse? Do they speak to your heart? Are they ‘‘good’’ in any cosmic sense?

Now think about Michelangelo, Galileo, Jefferson, Gandhi, William Wilberforce, Martin Luther King Jr., Mother Theresa, and Sir Edmund Hillary. What were the ideals that inspired these individuals to acts of greatness? Was it anything on your list of commercial values? Probably not. Remarkable contributions are spawned by a passionate commitment to timeless human values, such as beauty, truth, wisdom, justice, charity, fidelity, joy, courage, and honor.

A noble purpose inspires sacrifice, stimulates innovation, and encourages perseverance. In so doing, it transforms great talent into exceptional accomplishment. That’s a fact, and it leaves me wondering: Why are words like ‘‘love,’’ ‘‘devotion,’’ and ‘‘honor’’ so seldom heard within the halls of corporate-dom? Why are the ideals that matter most to human beings the ones most notably absent in managerial discourse?

John Mackey, the cofounder of Whole Foods Markets, once remarked that his goal was to build a company based on love instead of fear. Mackey’s not a utopian idealist, and his unflinching libertarian views are off-putting to some. Yet few would argue with the goal of creating an organization that embodies the values of trust, generosity, and forbearance. Yet a gut-level commitment to building an organization infused with the spirit of charity is far more radical and weird than it might appear.

If you doubt that, here’s an experiment to try. The next time you’re stuck in a staff meeting, wait until everyone’s eyes have glazed over from PowerPoint fatigue and then announce that what your company really needs is a lot more luuuuuv. When addressing a large group of managers, I often challenge them to stand up for love (or beauty or justice or truth) in just that way. ‘‘When you get back to work, tell your boss you think the company has a love deficit.’’ This suggestion invariably provokes a spasm of nervous laughter, which has always struck me as strange.

Why is it that as managers we are perfectly willing to accept the idea of a company dedicated to timeless human values, but are, in general, unwilling to become practical advocates for those values within our own organizations? I have a hunch. I think corporate life is so manifestly profane, so mechanical, mundane, and materialistic, that any attempt to inject a spiritual note feels wildly out of place—the workplace equivalent of reading the Bible in a brothel.

There was a time when Disney was in the joy business. Animators, theme park employees, and executives were united in their quest to create enchanting experiences for children of all ages. Apple, I believe, is in the beauty business. It uses its prodigious talents to produce products and services that are aesthetic stand-outs. There are many within Google who believe their company is in the wisdom business, who believe their job is to raise the world’s IQ, democratize knowledge, and empower people with information. Sadly, though, this kind of dedication to big-hearted goals and high-minded ideals is all too rare in business. Nevertheless, I believe that long-lasting success, both personal and corporate, stems from an allegiance to the sublime and the majestic.

Viktor Frankl, the Austrian neurologist and psychologist, held a similar view, which he expressed forcefully in Man’s Search for Meaning: ‘‘For success, like happiness, cannot be pursued; it must ensue, and it only does so as the unintended consequence of one’s personal dedication to a cause greater than oneself.’’

Which brings me back to my worry. Given all this, why is the language of business so sterile, so uninspiring, and so relentlessly banal? Is it because business is the province of engineers and economists rather than artists and theologians? Is it because the emphasis on rationality and pragmatism squashes idealism? I’m not sure. But I do know this—customers, investors, taxpayers, and policymakers believe there’s a hole in the soul of business, and the only way for managers to change this fact, and regain the moral high ground, is to embrace what Socrates called the good, the just, and the beautiful.