Why Businesses Need to Prepare for the Gathering Storm

“It is always more easy to discover and proclaim general principles than to apply them.” ― Winston Churchill, The Gathering Storm

There's a backlash coming.

We've all seen talk about the tech backlash, with firms like Amazon, Google, and Facebook in the cross-hairs of pundits and government officials. That's centered around their consolidated power and use of data. And it's a topic that deserves consideration.

The backlash I'm predicting is a different one. It's rooted less in operations and more in culture.

The origins of this backlash are many, and I'll outline some of them below.

This Time, It's Personal

The era of social and digital media was supposed to draw us all together. We were tired of being treated like just another number or a cog in the system—we were told w'd be able to talk directly with brands and get our voices heard!

What's happened in the interim is that brands have continued down a well-worn path and have simply rolled out all of the old advertising styles on new platforms. What are we left with? Feeds that are choked with ads.

Meanwhile, misinformation is growing and we don't know where to turn. We use the buffer of a screen between us and other netizens to unleash caustic and vitriolic attacks. We experience many emotions online, but anger seems to be the one that gets the most traction.

Then, perhaps we pause and look out the window, wistfully and hazily recalling the dayswhen the bank vice president knew your parents' first names and would greet them at the local branch. When a firm handshake and eye contact could tell someone a great deal about your character. And when your word was your bond.

But we're far removed from that world now. And we'd do anything to reclaim it.

Trust Buster

Trust (or lack of it) is a significant issue with many people, all around the world. There's a wide difference in the level of trust that the general public and the informed public have in business, NGOs, government, and the media, according to the 2019 Edelman Trust Barometer.

There are fears related to job loss (both general anxiety over the economy as well as over automation and A.I.), people don't believe the system is working for them, and they see opportunities for certain classes of people that aren't available to them.

Mike Isaac's Super Pumped: The Battle for Uber makes it clear that venture capitalists are playing a very different investing game than the rest of us. All of the early investors are seeing massive returns, even though Uber isn't profitable. Anyone who invested in the I.P.O. on the first day of trading won't see the same kind of return, however.

So V.C.s have a very different goal than other investors: they hope to successfully bring a company to market. There's less concern with ensuring a company is profitable than there is about the process of taking a company public. Their fiduciary duty is focused on their shareholders (those who invest in their funds) rather than on the future shareholders of the public company's stock.

With this kind of arrangement, it's easy to see why the average person would feel that the system not working for them.

Business Roundtable Turns the Tables

Last week, Business Roundtable, a business association made up of CEOs, dropped a bombshell on the industry with a change in their Statement on the Purpose of a Corporation.

For decades—really, since 1970, when Milton Friedman penned a commentary in The New York Times Magazine that the social responsibility of a business is to increase profits—businesses have placed their focus on the benefit to shareholders.

It should be no surprise to anyone who follows the path of CMOs, who now have the shortest tenure and are constantly under scrutiny for short-term growth. Nor anyone who follows the market following the reporting of quarterly numbers. Wall Street hammers companies that don't perform well quarter to quarter. When in reality, companies need time to absorb the massive changes that customers are demanding, thanks to the expectation of cheap and fast services and goods that non-competitors like Uber and Amazon have created.

Now Business Roundtable says that businesses need to reexamine their priorities. Their new Statement on the Purpose of a Corporation says that shareholders are now part of a collective that also includes employees, suppliers, and customers.

It would seem to be common sense: if you treat your employees, suppliers, and customers well, it's good for business and the bottom line.

This assumption was already embedded within Friedman's work; it's just that greed and the prioritization of short-term growth overtook things, and in interviews, he focused on the profitability.

Friedman wrote that the responsibility of a corporate executive

"is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom." [Emphasis mine.]

We've seen bursts of this in the last two decades, with corporate social responsibility efforts, and with recent forays of brands taking social stands on societal and political issues. And B Corporations have proved that businesses can do well while doing good.

However, some of these efforts have felt too transactional—riding a wave of popularity rather than being embedded in a company's culture. Perhaps it's time to hire someone to help examine the corporate conscience.

It's something that as a former Classics major and someone who has devoted time to studying history, literature, and philosophy, I have come to embrace in my consulting work. It has given me the ability to understand the consistency of human nature and the cyclical nature of society and culture.

Regulate This

Regulations exist for a reason. They're meant to allow the government to put in place restrictions that curb what would otherwise be immoral, illegal or unethical behavior by companies.

Why can't we trust companies to do the right thing on their own, you might ask? Simply put, because human nature, which is prone to the temptations of greed and expediency, takes hold. The larger a company gets, the easier it is for individuals to think they might flaunt customary behavior and get away with things.

Case in point: between 1947 and 1977, General Electric polluted the Hudson River by discharging PCBs into it and devastating the environment. In 1972, Congress passed the Clean Water Act and GE has since cleaned up the river. GE's argument was that the practice was perfectly legal at the time. But ask the average person if littering was acceptable, and they might have a different answer. Because it was a large entity, there was less moral responsibility.

Today, as the government is rolling back regulations to make business practices easier—from allowing more methane emissions by energy companies to lowering fuel emissions standards for vehicles—we're seeing companies taking a stand and adhering to the cleaner level of previous regulations rather than accepting the newer, lower standards.

Imagine that! Large organizations, whom many might otherwise look at cynically, are respecting the environment, not because they have to, but because it's the right thing to do.

But there have been certain activities that companies have taken in the last few decades that were legal and unregulated, yet were done in such a way that they might be opaque at best or deceptive at worst. Example: as margins got squeezed in the CPG industry in the 'Nineties and early 'Aughts, they were forced to find profits in crafty ways. So rather than raise the price of orange juice, they slyly changed the half gallon container (64 ounces) to 59 ounces.

Playing Clean-Up

In some ways, this phenomenon is nothing new. What we're witnessing from the last 50 years, with a shareholder-first (or -only) mentality, is simply the natural evolution of business practices, given the conditions they existed in.

In Physics, Book IV, Chapter 8, Aristotle wrote of horror vacui, or as we commonly know it, "Nature abhors a vacuum." And that's exactly how business behaved: it filled a vacuum.

We've seen this happen before. When Ida Tarbell wrote her nineteen-part series The History of the Standard Oil Company for McClure's Magazine, which was published in book form in 1904, she was exposing the activities of John D. Rockefeller's convoluted empire. Rockefeller was one of the smartest industrialists of his time, and he managed to do everything within the bounds of the law at the time.

But exposing Standard Oil's business practices made it clear that antitrust laws needed to be passed and that the company needed to be broken up.

Similarly, Upton Sinclair's The Jungle exposed the operations of the meatpacking industry, to the horror of Americans. The unsanitary and unsafe conditions, health violations, and other poor working conditions he described gave rise to public concern and the eventual reforms, such as the Meat Inspection Act.

It seems like it would have been common sense to operate the above businesses in an ethical manner, but absent the proper laws and thanks to public backlash, changes were made under Theodore Roosevelt's presidency.

Roosevelt was particularly concerned with the greed of sheer profit-chasing, and white-washing by philanthropy.

"Too much cannot be said against the men of wealth who sacrifice everything to getting wealth. There is not in the world a more ignoble character than the mere money-getting American, insensible to every duty, regardless of every principle, bent only on amassing a fortune, and putting his fortune only to the basest uses ... Such a man is only the more dangerous if he occasionally does some deed like founding a college or endowing a church, which makes those good people who are also foolish forget his real iniquity. These men are equally careless of the working men, whom they oppress, and of the State, whose existence they imperil. There are not very many of them, but there is a very great number of men who approach more or less closely to the type, and, just in so far as they do so approach, they are curses to the country." – "True American Ideals," Forum, 1895

While Teddy Roosevelt is remembered for his trust-busting, he was also fair-minded in his approach and he appreciated capitalism. But he wasn't a pushover. In his State of the Union Address in 1902, he issued a warning that is one not unlike Business Roundtable's statement last week:

"Our aim is not to do away with corporations; on the contrary, these big aggregations are an inevitable development of modern industrialism. ... We are not hostile to them; we are merely determined that they shall be so handled as to subserve the public good. We draw the line against misconduct, not against wealth."

And therein lies the core of what I believe the public is clamoring for: drawing a line against misconduct.

We want ethical companies.

We want leaders with a moral compass.

We want to feel like we're on a level playing field.

We want to be able to trust again.

The new direction from Business Roundtable is nod toward the past. We'd like to think that businesses will do their part in this effort in the future.

But it's going to take time and trust.

I'll have other thoughts on this topic in the weeks ahead. I hope you'll subscribe to get updates.

*The Tennis Court Oath, shown at the top, was a foundational event of the French Revolution. David captured the gathering of the middle class, who had sworn an oath for national unity regarding individual freedoms.

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