The challenge of the social value agenda is not to reframe the business practices of the past decades in a new, more cuddly narrative. It is to scrutinise the values and practices which have led to perverted outcomes and to recalibrate behaviour to produce more socially relevant ones.

Read the full post at Valoro VGW.

Obsessive about focus

My latest piece for Arts Professional discusses what prevents organisations concentrating on their purpose.

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Few organisations know how to focus on their core purpose. The technology company, Apple, is one. Its chief executive, Steve Jobs, is famously obsessive about focus. Apple infuriates as many people as it delights by stripping away that which it considers inessential. But it is now worth more than a number of its close competitors combined. “People think focus means saying yes to the thing you’ve got to focus on,” said Jobs in 2008. “But that’s not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully.”

How many arts organisations would see their purpose in these terms? My guess is that focus would be an underrated virtue in many. This may be the case for two reasons: either the organisation is not very clear about its purpose and therefore finds it hard to know what should be the object of its focus, or the leadership has clarity about the corporate purpose, but does not know how to align the organisation’s activities behind the mission.

Losing sight of one’s purpose is understandable in arts companies given the shifts and turns in cultural policy over the long-term. Any arts organisation that has been in business more than a few years may well have won a variety of funding lines, each of which has different policy objectives attached. Imperceptibly, activities get bolted on and then integrated to bring objectives like regeneration, social inclusion or education alongside the core purpose of artistic enterprise.

But even if the leadership is able to define the corporate purpose clearly, there remains the challenge of getting all sections of the enterprise focused on the same thing. This is harder than it appears. The board is often disconnected from what’s really going on in the organisation. The people operating the business and who are close to audiences and ticket payers probably have a very different idea of what the company is about. It is almost impossible for an organisation to focus if it is operating to multiple versions of its corporate purpose at once.

The best way to avoid this risk is to keep the organisation’s purpose under regular review to ensure that its activities stay fresh and relevant to changing conditions. Part of this is about reading the external environment well – anticipating changes in policy, the economy and society in general and working out what these will mean for the organisation. But the bigger task is for senior leaders to learn to hear from people at all levels and all areas of the organisation. This is important not only because it involves everyone in dialogue and deeper understanding about what the organisation exists to do, but also because it ensures that the leaders expose themselves to the diversity of perspective and breadth of insight that are critical to making good decisions.

Many arts organisations tend to prioritise the perspective of the artistic director and the head of development. The person who delivers the artistic mission and the person who brings in funding are critical to the enterprise, but they don’t hold a duopoly of knowledge. Other areas of the business – for example, those responsible for brand and marketing, those who run the box office and answer the phones, those who engage with the audience on social networks – have unique perspectives which can be closer to the audience interest and may challenge the prevailing orthodoxy. Challenging views are the ones that are especially worth hearing when you’re trying to keep your purpose fresh. They may well alert you to emerging trends which need to be at the centre of your focus and provide clues to cherished commitments that it may be time to let go.

Computer programmers use the term ‘cruft’ to describe bits of code which are left in place when a program is rewritten but which have become irrelevant to the functioning of the program. By analogy, companies carry organisational cruft in the form of activities which survive because they have momentum but no longer contribute anything relevant to the corporate purpose. They may have opened access to funding in the past, but might actually have become a drain on resources or a distraction from focusing on what is important.

It is especially relevant to tackle these when money is tight, and to think critically about what changing conditions mean for what you should be focusing on. Stripping out the cruft and focusing on the value are key steps to ensuring that the activities people undertake are in support of a consistent sense of purpose throughout the organisation.

In the case of News International, quite apart from the responsibility the executives bear for fostering a culture which led to criminal activity, one can reasonably ask of the volte face “Why now?” The evidence of News International’s industrial-scale espionage, intrusion of privacy and accumulation of dossiers on public figures has been in their hands for years. The executives have had every opportunity to acknowledge their failings and make amends. But they have done so only when faced with the possibility of the collapse of the whole empire that is News Corporation.

Let’s leave aside, for the moment, the negative social value caused for the victims of News International’s criminality and for the British public whose democracy News International subverted and whose police they corrupted. How much pain could News Corporation’s executives have saved themselves and their shareholders had they taken care to ensure all along that their UK business lived up to the founding idea that a free and open press should be a positive force in society?

Read the full post on the Valoro VGW blog.

The final edition of the News of the World

For some months I’ve had occasional thoughts of writing a blog post about the phone hacking scandal at News International. The reason I never got round to doing so until now is instructive. At some level, I doubted the point of deconstructing News International’s venality as this has appeared so self-evident to me since I was a schoolboy delivering newspapers that it seemed unremarkable.

In recent days, the pace of events has been so fast and the volume of commentary so large, that I doubted that I had anything distinctive to contribute. However, the affair prompts me to pull together some thoughts on the social purpose of business and why I’m convinced this is an increasingly important focus of leadership.

At the level of pure self-interest, the rapid meltdown of News International demonstrates that even the most powerful and commercially successful of institutions cannot last indefinitely without some form of reckoning with society. Like a fallen Arab dictator, Rupert Murdoch did very nicely, thank you, for decades. But when the public turned against him, the tide was unstoppable. Such allies as he had gathered around him over the years had befriended him out of fear. When the fear factor fell away, Rupert and his lieutenants discovered that they had no friends.

As Steve Richards wrote in The Independent, of the moment political leaders lost their fear of obstructing News International’s take-over of BSkyB:

The potential significance of what has happened is bigger than one deal, and can be conveyed in a single question: If there were an election tomorrow which party leaders would want the endorsement of Rebekah Brooks? A week ago they would have died for it.

More fundamentally, the question of social value goes to the heart of the responsibility of executives such as Rebekah Brooks, James Murdoch and even Rupert Murdoch. One does not need to doubt the word of Rebekah Brooks, that she was unaware of the criminality that occurred under her watch, to recognise that she and her bosses have presided over serious errors of leadership. They created a culture that lacked a morally-grounded sense of social purpose and that was guided instead by cut-throat competition and attention to its own most instrumental interests.

The statement given to The Guardian by the private investigator, Glenn Mulcaire, who was jailed for his activities, gives a sense of the moral confusion that News International’s leaders created for their staff:

Working for the News of the World was never easy. There was relentless pressure. There was a constant demand for results. I knew what we did pushed the limits ethically. But, at the time, I didn’t understand that I had broken the law at all. A lot of information I obtained was simply tittle-tattle, of no great importance to anyone, but sometimes what I did was for what I thought was the greater good, to carry out investigative journalism.

I’m reminded of the famous Milgram experiment and Zimbardo’s Stanford prison experiment which established the scarcely believable extent to which people would do unconscionable things when authority and the prevailing culture normalised them.

The culture normalised at News International was and is the reflection of its founder, Rupert Murdoch, encapsulated a tad generously by – of all people – the disgraced newspaper magnate, Conrad Black, in the FT today:

Although his personality is generally quite agreeable, Mr Murdoch has no loyalty to anyone or anything except his company. He has difficulty keeping friendships; rarely keeps his word for long; is an exploiter of the discomfort of others; and has betrayed every political leader who ever helped him in any country, except Ronald Reagan and perhaps Tony Blair. All his instincts are downmarket; he is not only a tabloid sensationalist; he is a malicious myth-maker, an assassin of the dignity of others and of respected institutions, all in the guise of anti-elitism. He masquerades as a pillar of contemporary, enlightened populism in Britain and sensible conservatism in the US, though he has been assiduously kissing the undercarriage of the rulers of Beijing for years. His notions of public entertainment and civic values are enshrined in the cartoon television series The Simpsons: all public officials are crooks and the public is an ignorant lumpenproletariat.

It’s not that Rupert Murdoch and this followers lack a sense of the public interest in their business. It’s just that their vision so underestimates the public that their net contribution to the public domain is more harmful than beneficial. This is so, even after taking into account the public value created by the massive risks taken to build BSkyB which not only created a market for multi-channel, digital television but also popularised technological innovations such as digital video recorders and high definition TV.

In the end, negative social value created a business that was unsustainable. At the time of writing, it’s hard to tell where the contagion in Murdoch’s empire will end, with News Corp’s operations in the United States beginning to look vulnerable.

Which brings me to the broader point that all businesses, but particularly consumer-facing ones, now operate in an environment that is hyper-sensitised to social value. As News International’s plight demonstrates, they are liable to be held to account in quite unpredictable ways.

The roots of this are quite complex. There has been a long-term trend in Britain of declining deference towards authority – fuelled in part, ironically, by the Murdoch papers. People are more sceptical and questioning of institutions and have less of a sense of affiliation to parties, communities and the like. So their values are more likely to surface through direct expression around a smörgåsbord of isolated issues than through subcontracting them to professional representatives such as politicians, union leaders or campaigners.  A seemingly transient issue can connect with people’s sense of identity, fire their imagination and then rise up the public agenda.

A more recent phenomenon has been the collapse in trust of business in the wake of the financial crisis. The phone hacking story played into this context. There is evident impatience with the idea that the profit motive trumps all else. You can see this not just in the anger felt by the public to the banks, but also towards MPs over their expenses scandal and in the seeming inability of the government to set the wider public interest against more narrow financial considerations in decisions such as the procurement of rolling stock for the railways.

Into this mix has come the maturing of social media as a vehicle for public accountability. The turning point for News International came not just because it became apparent that the News of the World had profaned the public’s moral sensibility in hacking the phone of the murdered schoolgirl, Milly Dowler. It was because – as Rory Cellan-Jones has described – a loose group of people were able to use tools like Twitter, Facebook and their own site-making skills, to enable masses of people quickly to put pressure on advertisers. The social media became a conduit for many of Britain’s biggest companies to grasp just how seriously their brands were being tainted by association with Murdoch.

The News International saga is as good an example as one could find of the negative case for paying attention to social value. The contribution an organisation makes to the society of which it is a part may seem like a frivolous distraction compared with the hard-nosed business of making money. But the creation of social value is the more likely route to long-term commercial success in the current climate. To be focussed too narrowly on one’s own sectional, corporate interest creates contradictions which put your organisation at odds with the wider interests of society. These tensions can explode into the open at any time and ultimately risk the sustainability of the whole enterprise.

As my former colleague Penny Young puts it, “The public has a basic right to be able to trust the nation’s institutions.” She argues that public service values should pervade every institution: public, private or charitable. I would go further in that I believe the public expect and demand this. The organisations that will flourish will be those that grasp this and figure out how to drive a social value sensibility through their cultures.

Image courtesy Gene Hunt.

Carnegie Library, Teddington

I’m a bit late in cross-posting my latest blog post for Valoro VGW.

The Economist draws on the centenaries of two major institutions – the technology company IBM and the philanthropic Carnegie Corporation – to assess whether the commercial organisation or the charity has contributed more to society.

IBM wins. But only over the long run.

The Carnegie Corporation had exponentially more impact in its first 50 years when its power “in some respects equalled or exceeded that of the state”. One of Andrew Carnegie’s objectives was to create a model of social responsibility in antithesis to the European model of intervention by the state.  He funded a wide range of interventions to nurture the public realm:

With its benefactor as its head for the first eight years, the Carnegie Corporation operated largely as a treasury and headquarters for a host of other institutions and philanthropic initiatives that he had started earlier—including his most famous programme, which ended up building some 2,509 libraries, most in America.

After Carnegie’s death in 1919 the foundation continued his strategy. It seeded or supported a broad range of strong private institutions, many of which carry his name. Institutions that benefited from his money range from the Carnegie Institute of Technology (now part of Carnegie-Mellon university) and the Brookings Institution to the National Academy of Sciences and the pension fund for university teachers now known as TIAA-Cref. The foundation and sister organisations commissioned research that would help shape entire professions. The Flexner Report of 1910 led to the overhaul of medical education, inspiring similar efforts focused on the law and on teaching.

Among the Carnegie Corporation’s other achievements were its funding of social research which helped paved the way for civil rights for African-Americans and of medical research which led to the treatment of diabetes with

The founder of IBM, Thomas Watson, also pursued philanthropic objectives, but The Economist locates IBM’s social impact primarily in its commercial performance: a stockmarket value today of about $200 billion and a source of employment for 427,000, many of them in the developing world:

Jobs, as well as profits are in themselves a measure of IBM’s achievement. Because firms sell something that people want, they make the world a better place in ways charities do not. In particular, companies create what is known as “consumer surplus”—the difference between the market price and what a consumer would be willing to pay. This surplus benefits society, not shareholders.

The Economist reckons the impact of IBM has been considerably greater than of the Carnegie Corporation in the second half of their centuries:

It has sponsored—and ultimately benefited from—a continuous series of innovations, from the mainframe to the personal computer, services and cloud computing. Its corporate philanthropy has grown steadily, so that its annual grants now exceed those of the Carnegie Corporation. It has also tackled policy challenges in a head-on, Carnegie-esque way. In 1996 it became the first company to convene a summit meeting on American education. Out of that came a commitment to find ways to measure school performance, which IBM helped to develop.

Judged on the past 50 years, there is a strong case for saying IBM has had more impact than Carnegie—especially if you count its accidental contribution to philanthropy by incompetently failing to stop Mr Gates from creating Microsoft. In part this is because its business, the management of information, has unusually large social benefits, and causes relatively few social or environmental costs.

In future, IBM expects to play an even greater role in profitably solving social problems by working with governments. “Everybody says they’re unsolvable—safe borders, clean water, energy. But the application of technology can solve a lot of these things we wrestle with,” points out Mr Palmisano [IBM's Chairman and Chief Executive]. Firms in other, dirtier industries may not compare against philanthropy so well.

In this period, the Carnegie Corporation has been eclipsed both by the much larger role of government and by larger and more innovative philanthropic organisations.

The qualification that IBM operates with relatively few social or environmental costs is significant but does not, I think, invalidate the overall verdict The Economist reaches that IBM has had the greater social impact.

The experience of the Carnegie Corporation raises the question of whether charities do their best work in their early years.  The longer they stick around, the more they risk sheer institutional momentum rather than intrinsic purpose being the guiding force.

IBM’s intention to make profits by playing a strong role in solving social problems is a good example of how private enterprise can establish competitive advantage by contributing to society.

Image courtesy Wikimedia.

About to become a mainstream subject?

Cross-posted from the Valoro VGW blog.

Two different articles highlight the importance of ethics and integrity as corporate considerations.

Anthony D’Angelo, writing in Business Week, analyses the curious lack of attention paid to reputation management in business schools:

An analysis of highly ranked MBA programs by the Public Relations Society of America showed that only 16 percent offer a single course in crisis and conflict management, strategic communications, public relations, or whatever label one chooses to describe management of a precious organizational asset: reputation. Even that course is likely to be an elective. So glaring is this omission that it’s typical for MBA-holding executives to assume “reputation management” or “public relations” is the black art of spinning an alternative version of reality, as though that works in today’s wide-open, relentlessly scrutinized, electron-speed information environment.

One can’t blame organizational leaders for not understanding that the way they operate the business is inseparable from the way they communicate about the business, inside and outside the organization. They’re not educated sufficiently to know these are inextricably linked leadership requirements: You can’t have effective leadership without an effective communications strategy. The latter is based on authenticity and transparency because nothing else works.

The delusional separation that exists between what companies do and what they say is not examined in most MBA programs. Yet we wonder why so many company stakeholders – customers, shareowners, government officials, activist groups, community residents, employees, the news media, and so forth – don’t trust businesses.

Trust in companies and their leaders has never been lower. Peter Peterson, co-founder of the Blackstone Group, noted: “What matters is what the public thinks and the public trust is what’s really crashed.” Yet the course content that would directly address building trust, including ethics and communications strategies, is commonly absent or marginalized in MBA programs.

D’Angelo blames this situation on the academic silos which don’t easily allow multi-disciplinary consideration of “the related topics of ethics, social responsibility, reputation management, public affairs, interpersonal dynamics and organizational behavior”.  But I’m not sure this is right.  In my experience, an MBA is notable precisely for its multi-disciplinary character.  It brings a breadth of perspectives to a single object of focus, running a business, whereas most academic disciplines apply a depth of perspective to a variety of topics.

So if reputation management is not making it onto the academic syllabus, this is more likely to be by design than by systemic failure.  It is not offered because there is little demand.  To reach for a famous aphorism of Donald Rumsfeld: MBAs don’t know what they don’t know.  So they don’t think to ask for it.  One could argue that business schools are flunking their educational purpose by not putting reputation on the agenda.  But the failing is unlikely to be caused by the challenges of surmounting the barriers between disciplines.

Unfortunately, this Rumsfeldian ignorance of reputation management may well persist once MBAs continue their careers into corporate leadership.  As D’Angelo points out, executives are much more likely to heed the advice of corporate lawyers who counsel to say nothing than to weigh this against the equally pressing demand for honest communication.

The delusional separation between what companies do and what they say is an increasingly pressing concern of compliance officers.  Alicia Clegg reports in the FT how compliance jobs are broadening in scope.  Where once they were the domain of audit and legal specialists, they are now as likely to be occupied by ethics champions who possess both commercial credibility and the persuasion skills to change company cultures.

In the UK, at least, this is given an urgency by the Bribery Act, which comes into force next month.

The article gives some interesting examples of how different companies are facing up to the challenge of getting beyond a box-ticking approach to compliance and actually investigating whether practice on the ground is consistent with company policy and the law.  A particularly important requirement, the article notes, is a desire to hear the truth:

The skills required to isolate rotten apples are not necessarily those used in corporate audits. According to Louis Freeh, a former director of the FBI and founder of Freeh Group International Solutions, a compliance consultancy, many businesses follow scripts too rigidly rather than probing and picking up on unguarded remarks as investigators do. “A lot of companies are so process-driven that they forget the basic questions,” he says.

This encapsulates the challenge of ethical leadership and is what links the two articles.  Asking the right questions internally is the pre-condition both for understanding the compliance risks in an organisation and for effective, honest and authentic communication (about the company’s strengths and failings).

The bit in the middle is the hard stuff about aligning an organisation’s internal behaviour with the story it wants to present externally.  Creating a sound ethical compass for every employee is not the whole story, but it is a big part of it.

Image courtesy Jaap Stronks.

A healthy emotional climate is a competitive advantage

Cross-posted from the Valoro VGW blog.

Some organisations have a knack for creating great places to work which get the best out of their people.

John Timpson, the chairman of the Timpson chain of shoe repair shops, swears by his system of “upside-down management”.  He believes the people in his shops have the best knowledge about the business and that it is his job is to get management out of their way.  He insists on as few rules as possible and gives staff the freedom to set prices, deal with complaints and decide their own training needs.

The John Lewis Partnership makes everyone in the company an owner, conferring on each of them a responsibility not just to do their jobs but to contribute to the leadership of the firm.  One John Lewis employee – quoted in The Guardian – speaks of:

The “passion and commitment” that come from “being engaged, because you have a vested interest in making sure it works, for you and for the people you work with.”

These companies – both doing well in difficult economic circumstances – are successful examples of what the writer, Bob Garratt, calls the emotional climate of an organisation.  They make the emotional climate a source of competitive advantage, by ensuring that employee behaviours deliver excellent customer experience.

In The Fish Rots from the Head, Garratt emphasises that it is the responsibility of the board to set an emotional climate that helps an organisation succeed.  The emotional climate covers many things: sharing a clear sense of what the organisation exists to achieve, beyond making money for shareholders; alignment behind the values that shape behaviour – such as excellence, creativity and risk-taking; and the ethical base of the enterprise – how you determine what is right and wrong.

One of the most important functions of a healthy emotional climate is to enable the organisation to learn from its experience.  Garratt concurs with Timpson that the most important knowledge is held by people who are low in the hierarchy but responsible every day for the customer interactions by which a company makes its name.  The insight they hold cannot reach the leaders of the organisation unless there is a mature emotional climate which allows people to have honest conversations about their experiences.

It’s 15 years since emotional intelligence entered the lexicon of corporate life, popularised by the writing of Daniel Goleman.  Yet few organisations give serious consideration to the emotional factors that shape their success.  Corporate culture operates in a rational, logical paradigm that is driven by numeric data and a quasi-scientific model of management.  This has its place.  But it is only part of the story.  In Western culture at least, organisations operate in a context in which the emotional dimension is increasingly important.

Given that most people’s basic material needs are well-met, people bring to their jobs and to their choices as consumers a higher-level need to express their sense of self.  The way they respond to situations at work is in large measure emotional.  But the instrumental nature of organisations – their focus on the task and the bottom line – makes them ill-equipped to to accommodate this aspect of human existence.  Workplaces on the whole are directive, command-and-control environments, in which people are expected to know their place and keep their heads down.

The influential psychologist, Carl Rogers, was one of the great advocates of the view of people as essentially self-directing, able to form their own standards and values on the basis of their own experience.  He insisted that people were inherently resourceful.  Timpson and John Lewis seem to understand this psychology.  They have high expectations of their people, inviting them to focus their imagination and initiative on the big picture not just their immediate job roles.

If work fails to find a way to draw out employees’ potential, they are likely to develop negative emotions towards their organisation and disengage their commitment.  The result is the opposite of an organisation that learns; it is one where insight stays where it is and the organisation hampers its own potential.

This is how organisations can preside over disasters even though the knowledge of something awry may have been widely grasped but never quite articulated.  The rational-logical paradigm is impervious to intuitively known truths that find scant expression in management data.  Neuroscience is demonstrating that the greater part of what we process of experience is unconscious.  If we are aware of it at all, it is as emotional reaction, gut instinct, possibly a sense of ease or unease about something.

Leaders of organisations need to find ways to tap into this kind of knowledge.  To access it is more of an art than a science.  It resides in the unofficial organisation: the subversive or irreverent stories that people tell each other; the informal sources of leadership to whom people listen.  Stories are vital to understanding what’s going on.  As the management theorist, Yiannis Gabriel, writes,  “Stories open valuable windows into the emotional, political and symbolic lives of organisations.”

For stories to be heard, there needs to be a safe environment for them to be disclosed.  It often takes people with specialist skills, such as journalists, coaches or academic researchers, to encourage people to share what is normally tacit knowledge.  But it is incumbent upon boards to ensure that – in the long term – emotionally honest conversations can flow without the intervention of specialists.

An organisation’s reputation is a direct function of the emotions it stirs up, good or ill.  The board needs a 360-degree understanding of what is happening if it is to apprehend hidden vulnerabilities and opportunities in the organisation.  If it can’t create a culture in which emotionally-laden messages can be communicated and understood, it may shut itself off from some of the most important information it needs to hear.

Image courtesy Seattle Municipal Archives.

I’m pleased to announce the launch of Valoro VGW, a company I’ve formed with two of my colleagues from the BBC: Michele Grant and Mark Wakefield.

From our website:

Valoro VGW are experts in reputation: what defines it, where it’s at risk, and what action boards should take to strengthen and protect it.

With our roots in analytical journalism, we dig deep to uncover what needs to be fixed rather than applying a PR spin. We understand how to pinpoint what has the propensity to provoke emotions – the spark that can ignite a crisis.

Regular readers of this blog may have noticed that recent posts have been reflecting my interest in this subject area.  I’ll be directing my thoughts on reputation issues in future to the Valoro VGW blog and my main focus here will be on more general coaching matters.

We have a Twitter feed @ValoroVGW.  If you’re a Twitter user, please give us some follow love.

Googleplex, Mountain View, California

Amazon tops the Reputation Institute’s 2011 survey of the most reputable American companies. Google leads the global survey.

In relation to the US study, the RI found that the excellent companies were:

• 2.5 times more likely to have the CEO set the strategy for their enterprise positioning
• 1.5 times more likely to include reputation metrics as part of their senior management “dashboard”
• 15 times more likely to manage corporate reputation across company functions
• 1.7 times more likely to use an outside partner to assist with corporate reputation management

There’s some interesting detail on how reputation affects consumers’buying decisions. The RI found that people take into account their whole impression of a company, not just their view of its products or services, when deciding whether to buy:

Reputation Institute’s analysis of the seven dimensions of corporate reputation shows that perceptions of the enterprise (Workplace, Governance, Citizenship, Financial Performance and Leadership) trump product perceptions (Products & Services plus Innovation) when it comes to driving behaviors. The five enterprise dimensions drive 61% of purchase consideration and 58% of recommendation/advocacy behavior with consumers. This provides further proof of what Reputation Institute calls the “reputation economy” – a place where people increasingly choose among competing products and services based on their impressions of how the companies behind them behave.

Apparently, Amazon’s success marks the first time an online company has come top of the US survey. Forbes provides a useful summary of the foundations of its reputation:

Amazon earned its No. 1 rank by providing value to users, staying ahead of the curve in technology and innovation and responding quickly and ethically to scandals. The Seattle-based company flourishes on transparency and trust. It offers customers a dependable online shopping experience with trustworthy third-party vendors. Users trust and value its product recommendation system, which suggests products based on one’s purchasing history.

The online retailer also capitalized on the success of its Kindle e-reader last year as e-book sales soared. That, combined with developments in cloud computing, an Android app store and digital movie streaming helped Amazon do especially well in the products and services and innovation dimensions.

Consumers also got a glimpse of the company’s values in November when it responded to thousands of outraged users by quickly removing a pedophilia book from its digital shelves.

While Amazon’s lead seems intuitively correct, Google’s position at the top of the global poll is more puzzling. The analysis seems to be that Google has won trust for the way it responded to revelations that elicited criticism of its business practices. Forbes again:

When the Mountain View, Calif., company pulled out of China to avoid showing censored search results to users there in late March, Google sent a message to the rest of the world that its values would be placed ahead of its profits. The decision resonated strongly in Central and Northern Europe, Central and South America and in North America, where consumers rated the company within the top five most-reputable businesses.

When privacy issues arise around its business, Google usually responds quickly: Recently the search giant said it would keep its Street View cars from picking up wireless networking data after Google revealed that these vehicles had collected content of users’Internet communications on open Wi-Fi networks.

My take is that these kind of incidents are more damaging than the RI’s survey is picking up. Google was widely criticised when it went into China and it pulled out only when it found that the profitability was not sufficient to justify the reputational flak, which extended to the compromising of its security when the Gmail accounts of Chinese dissidents were hacked. (See this analysis at the time by John Naughton.)

In the recent ruling on Google Books, Judge Denny Chin was highly critical of the way Google had gone about digitising books without the permission of copyright owners:

The ASA [Google's proposed agreement with publishers] would grant Google control over the digital commercialization of millions of books, including orphan books and other unclaimed works. And it would do so even though Google engaged in wholesale, blatant copying, without first obtaining copyright permissions. While its competitors went through the “painstaking” and “costly” process of obtaining permissions before scanning copyrighted books, “Google by comparison took a shortcut by copying anything and everything regardless of copyright status.” As one objector put it: “Google pursued its copyright project in calculated disregard of authors’rights. Its business plan was: ‘So, sue me.’”

Similarly, the US Federal Trade Commission found recently that Google violated its own privacy policy in the launch of Google Buzz and it identified other shortcomings in Google’s practices:

The FTC said “deceptive tactics” were used to populate the network with personal data gained from use of Gmail, and that when users were given the change to opt-out of Buzz, they were still enrolled in some of its features. For those that did decide to opt-in, the FTC says the implications of that were not made clear. “Google also offered a ‘Turn off Buzz’option that did not fully remove the user from the social network,” it said.

The remedies put in place in both these cases will go some way to assuring consumers and other stakeholders about the ethics and trustworthiness of Google’s business practices in future. With respect to Google books, it is likely that Google and publishers will agree a system whereby authors and copyright owners will opt-in to the digitisation of their work rather than having to opt out of it. And the outcome of the Google Buzz case is that the company will be subject to an annual privacy audit for 20 years.

However, the impression is created of a company that pushes the ethical boundaries until it is successfully held to account. Google makes fantastic products which offer innovation and ease of use at apparently negligible prices. These products are the foundation of Google’s positive reputation. But Google’s enterprise-wide story contains narratives which are problematic. In other words, it presents the inverse of the RI’s model for excellence and this can’t be encouraging for Google’s reputation in the long term.

Image courtesy Marcin Wichary.

Cadbury's packing room at Bournville

Since the start of 2011, I’ve been noticing increasingly common references to the social purpose of business – an idea which, until recently, many would have regarded as an oxymoron.

The first sighting was a Harvard Business Review cover article by Michael Porter and Mark Kramer called Creating Social Value.  This argues that capitalism is facing a crisis of legitimacy which can be overcome only if businesses put aside the notion that there is an inherent trade-off between profitability and attention to social needs.

After that, references came grouped together like buses.  Matthew Taylor referred to Porter and Kramer in a blog post he wrote on the contribution businesses could make to David Cameron’s Big Society (they have potential to deploy their brands and their product development on encouraging socially desirable behavioural change).

Last month, the Governor of the Bank of England, Mervyn King, contrasted the behaviour of banks with the moral purpose of manufacturing firms:

Such firms pay far lower rewards than financial services but have “an incredibly successful record. They care deeply about their workforce, about their customers and, above all, are proud of their products”. With the banks, it’s different: “There isn’t that sense of longer-term relationships…”  Since the Big Bang in the late 1980s, Mr King goes on, too many in financial services have thought “if it’s possible to make money out of gullible or unsuspecting customers, particularly institutional customers, that is perfectly acceptable”. Good businesses “keep a clear vision of who their customers are, and are run by people who don’t think they should simply maximise profits next week”. But in the past 25 years, banks have increasingly “taken bets with other people’s money”.

The Chief Executive of GlaxoSmithKline, Andrew Witty, has also spoken of the importance of companies being rooted in their societies:

I don’t buy that you can be this mid-Atlantic floating entity with no allegiance to anybody except the lowest tax rate… We have given a lot to Britain, but Britain has given a lot to this company. The company wouldn’t exist without the work of British people, without the contribution of British universities, without the support of the British government.

The core of Porter and Kramer’s idea of shared value is that contributing to society can be a source of competitive advantage and profitability for corporations.  I was struck as much by the provenance of the argument as the fact of it, since Michael Porter is one of the most renowned of strategy gurus – the propagator of concepts such as the value chain and the five forces model of competitiveness.  As you might expect, then, he and Kramer emphatically distance themselves from approaches to social impact which bolt on “doing good” to a firm’s activities:

A good example of this difference in perspective is the fair trade movement in purchasing. Fair trade aims to increase the proportion of revenue that goes to poor farmers by paying them higher prices for the same crops. Though this may be a noble sentiment, fair trade is mostly about redistribution rather than expanding the overall amount of value created. A shared value perspective, instead, focuses on improving growing techniques and strengthening the local cluster of supporting suppliers and other institutions in order to increase farmers’ efficiency, yields, product quality, and sustainability. This leads to a bigger pie of revenue and profits that benefits both farmers and the companies that buy from them. Early studies of cocoa farmers in the Côte d’Ivoire, for instance, suggest that while fair trade can increase farmers’ incomes by 10% to 20%, shared value investments can raise their incomes by more than 300%.

Porter and Kramer outline three broad approaches to shared value: developing businesses around products and services that meet society’s needs; tackling the value chain to reduce the environmental impact of operations and optimise the welfare of employees; and developing the social and infrastructural fabric around firms to encourage the emergence of economic clusters like the IT industry in Silicon Valley.

Only the first of these strikes me as a new contribution.  There has always been a social dimension to business.  As a 2002 article from The Economist points out, not only do companies operate under the state-granted priviliege of limited liability, they also tend to recognise their long-term interest in supporting the welfare of their employees.  The firm of Cadbury’s, which was founded by Quakers and created the model town of Bournville, is typical says The Economist of an Anglo-Saxon tradition of capitalism which has “often willingly taken on social obligations without the prompting of government.” Substantiating this claim, The Economist goes on:

Nor has corporate social responsibility been the preserve only of a few do-gooders inspired by religion. The notorious “robber barons” built much of America’s educational and health infrastructure. Company towns, such as Pullman, were constructed, the argument being that well-housed, well-educated workers would be more productive than their feckless, slum-dwelling contemporaries.

Companies introduced pensions and health-care benefits long before governments told them to do so. Procter & Gamble pioneered disability and retirement pensions (in 1915), the eight-hour day (in 1918) and, most important of all, guaranteed work for at least 48 weeks a year (in the 1920s). Henry Ford became a cult figure by paying his workers $5 an hour—twice the market rate. Henry Heinz paid for education in citizenship for his employees, and Tom Watson’s IBM gave its workers everything from subsidised education to country-club membership.

Critics tend to dismiss all this as window-dressing. But Richard Tedlow, an historian at Harvard Business School, argues that they confuse the habits of capital markets with those of companies. Capital markets may be ruthless in pursuing short-term results. Corporations, he says, have always tended to be more long-termist.

It was the free-market era ushered in by Margaret Thatcher and Ronald Reagan in the 1980s that put more of a focus on the shareholder interest pure and simple.  But recent crises – stretching from the Enron scandal to the banking collapses – have brought to the fore again the mutual interdependence between shareholders’interests and those of wider society.

It was an article by Geoff Mulgan at the weekend which crystallised for me why it is the first part of Porter and Kramer’s thesis – the potential to create economic value by meeting social needs – that is most timely and relevant.  Mulgan describes how the Victorian tradition of technical innovation by lone pioneers was industrialised through the 20th century by companies who created markets for mass-produced goods.  He believes we are now reaching the end of this long era in which capitalism flourished through meeting material needs:

Wealth remains preferable to poverty and the queues for the iPad2 show the continuing appeal of new things, as do the forecasts that by mid-century the roads of India and China will, between them, be making room for 800 million cars.

Yet for all the impact of technology on everything from cutting carbon emissions (through the use of smart grids or hybrid cars) to organising demonstrations (like UK Uncut) it is no longer so obvious that the innovations that matter most are innovations in things.

Mulgan argues that there is a need and an opportunity for enterprises to apply their capacity for innovation to meeting social needs:

If you ask which sectors will dominate the economy of 10 or 20 years’time the answer is not cars or steel or ships, let alone agriculture. Instead, the industries of “wellness” look most likely to prosper. Health is already a dominant sector in most societies and the one most guaranteed to grow.

Business has been slow to grasp this shift but there are some good examples of business engagement in social innovation. One such is M-Pesa, which uses mobile phones in east Africa to provide an entirely new banking system for poor people, without the costs of a branch network. This is a classic social innovation that meets needs and promotes happiness, but is being run as a commercial operation.

This is spot-on.  The reason why Porter and Kramer are right to argue that businesses, if they do, should stop seeing a trade-off between profitability and societal benefit is because there are diminishing returns in their focussing on the production of things.  The commoditisation of material goods and the abundance of choice that now faces consumers mean that addressing social needs is the next area of competitive advantage.  As Abraham Maslow might have recognised, companies have done such a good job of taking care of people’s lower level material needs that its the higher level social needs that now present the best opportunities for profits.

The old debate about the social responsibility of companies for employee welfare or sustainability in the value chain concerns how companies do business.  The new discussion about the social purpose of companies concerns what businesses they are in.  The opportunity exists for businesses to create economic value for business owners by applying corporate ingenuity to social problems that governments and communities find it hard to address.