Peter Firestein

“I’m sorry, so sorry, please accept my apologeeee. . .”

- Brenda Lee

In 1970, an insipid but highly successful movie called “Love Story,” based on an equally successful and insipid novel of the same name, lit up American screens. The plot line was exactly this: Sensitive Harvard students fall in love. Girl gets cancer and dies. Boy is sad. That’s it.

The movie was sold with the subtitle: “Love means never having to say you’re sorry,” which, in this writer’s experience, isn’t any truer about love than it is for corporations that inflict tragedy on the public.

Ask BP CEO Tony Hayward.

Hayward has now made a number of apologies for the catastrophic BP oil spill in the Gulf of Mexico. He’s said he’s sorry. And much of the public commentary amounts to questions about his sincerity – whether, in fact, he means it.

The same question arose recently when Lloyd Blankfein began making apologies for Goldman Sachs’ involvement in creating conditions that led to the financial meltdown. Was Blankfein in apology a different Blankfein? No one can say whether he’s been changing. But there’s no question that he’s learning.

One thing the current anger at the corporate sector makes clear is the importance of ingenuousness with the public. As much as anything else, people hate the dissembling and incessant spin with which they feel confronted. They now base many of their attitudes toward companies on managements’ apparent intentions. In the age of environmental awareness, people choose companies from whom to buy in much the way they select their politicians—according to their perceived values. BP’s seemingly endless delay in expressing sorrow to the families of the 11 workers who lost their lives constituted one of the major points of public resentment against the company.

In 2006, the Pasta de Conchos mine disaster in Mexico, which left 65 dead, aroused enormous resentment against the mine’s owner – Grupo Mexico – for that company’s apparent imperviousness to the sorrow of lost workers’ families. “No one from Grupo Mexico ever came to say they were sorry,” one labor leader said. An expression of regret would not pay for a single meal for a child who’d lost a father, but, among the bereaved, empathy became a kind of currency. Victimized families needed to feel their tragedy was understood by those who had brought it down upon them. They needed to be seen.

In the hard-nosed, metrics-based world of corporate life, intentions mean little; results are everything. So, it’s hard to overestimate the dramatic shift corporate managements must make when confronted with public anger. It is becoming apparent that, In BP’s case, such anger can threaten a company’s survival. In confronting this challenge, companies need more than new tactics and strategies. They need a new kind of thinking. Business has always been an objective, left-brain exercise. In most cases, if you could determine the return on investment expected from a particular initiative, you pretty much knew whether or not to go ahead with it.  But responding to angry communities, angry customers, and angry regulators requires access to the other side of one’s brain–the right side, where subjective awareness and empathy live. There may be a greater distance between those two sides of a businessman’s brain than between his corporate headquarters—just outside Washington, let’s say—and one of his factories in China.

“I’m sorry” has never been a part of the business playbook. But in the age of the Internet, where everybody knows practically everything about you (or will in the next 15 minutes), where there is no refuge from constant scrutiny, the Corporation Operator’s Manual is in drastic rewrite.

Acting without an understanding of what your stakeholders think is one definition of blindness, if not stupidity. It may be, in some cases, that companies’ reluctance to express empathy to their victims involves a fear that admitting blame increases legal liability. It may also be that companies that have inflicted harm have found ways to see themselves as victims—if only of bad luck. We know that the vibrancy of capitalism relies on self-interest. But there must be a point in the aftermath of any human tragedy where the distinctions among separate interests evaporates, where the events that have befallen a community create a unity of concern. That will be the content of the chapter on corporate life, culture, and psychology now being written.

Apology is in season. Chuck Prince, former Citi CEO, was apologizing recently–up to a point. He told a Washington commission looking into the roots of the financial crisis: “I can only say that I am deeply sorry that our management – starting with me – was not more prescient and that we did not foresee what lay before us.”

Prescient?

In other words, you’d have needed supernatural powers to see this coming. No merely mortal banker, regardless how steeped in capital reserve ratios and the quantification of risk, could have detected any new vulnerability at his bank or in the financial system.

Robert Rubin, sitting alongside Prince, agreed. The former Citi Vice-Chairman said: “Almost all of us involved in the financial system . . . missed the powerful combination of forces at work and the serious possibility of a financial crisis. We all bear responsibility for not recognizing this, and I deeply regret that.” He seemed to regret having the responsibility rather than what it was he might be taking responsibility for.

These apologies were mechanistic utterances. Prince, in his smug cynicism, blamed himself for lacking oracular powers. Rubin had been Treasury Secretary when Sandy Weill came to Washington a decade ago to repeal Glass Steagall, then collected $120 million at Weill’s bank, Citi, with few duties other than meeting clients and advising the firm. Nevertheless, he made himself a face in the crowd. There is the royal we, the editorial we, and now the escapist we. Mistakes were made.

Apologies are worthless without a palpable change in the apologizer. So, let’s give credit where it’s due—to Tiger Woods. His claim of responsibility for all that had befallen his family, friends, and partners could hardly have been less equivocal. He uttered the words that have escaped so many others—that what had happened was his fault. Those criticizing him for waiting so long to take the blame might consider the challenge he may have found in coming to terms with what he’d done. Besides, there wasn’t anything so trivial as the world financial system at stake. It was his marriage. He was speaking to someone he could no longer fool.

The report on Lehman’s fall released this week revealed more than Lehman’s predilection for ill-advised financial engineering. Issued by a former prosecutor working on behalf of the Justice Department, the report detailed Lehman’s use of a stratagem called Repo 105 to remove $50 billion from its balance sheet for a short period of time—time that just happened to coincide with its regular report to analysts on its financial health.

Lehman was so intent on using Repo 105, which it failed to disclose to regulators or investors, that it went ahead even though it was unable to get a single U.S. law firm to render an opinion on the practice. So, Lehman went to London where Linklaters came forth with the opinion the bank needed. It went on to execute the strategy through its UK subsidiary.

One pre-condition of the financial collapse (“the meltdown,” “the great recession”—or whatever we’re calling it this week) was the subordination of professional expertise to one’s own interest. Lehman’s U.S. lawyers didn’t tell it what it wanted to hear, so the firm went shopping for someone who would. Debt ratings agencies participated in the same kind of behavior: issuers of baseless derivatives went shopping among the agencies in search of the most favorable risk assessment. There was so much money to be made that the agencies, whose crucial role in the financial system was to render independent opinions, were happy to oblige.

Lehman, of course, did not invent the practice of hearing only what you want. MIT Finance Professor Andrew Lo, interviewed by the PBS Newshour March 12^th, drew comparisons between foot-dragging in investigating roots of the crisis and the refusal of NASA to recognize a clearly-defined O-ring vulnerability in advance of the Challenger disaster. Often, people just don’t want to know, and Lo points out that many parties have little interest in seeing the truth uncovered. They might be financial institutions who bet against securities they, themselves, had issued; or regulators who ignored signs of utter irrationality and, like a steroid-shooting homerun hitter, would prefer to forget the past and move on with life.

The recent publication of “No One Would Listen,” the account of Madoff whistleblower Harry Markopolos, who began shouting into the void of the SEC from the days when Madoff was a $6 billion fraud and continued to do so all the way up to $50 billion, documents the tendency in human psychology to believe what we wish, no matter what the stakes.

I’ve used the term “Concept of Convenience” to describe Toyota’s belief in the unassailability of is engineering, which blinded it to the signs of core problems that a decade of recalls should have made clear. Quality-of-engineering problems didn’t square with Toyota’s view of itself, so it treated each of the recalls as an exception—while the damage multiplied.

Concepts of Convenience virtually saturated the financial world in the years leading up to the meltdown. The big players convinced most of us that unfettered markets could cure many of the world’s ills. But it didn’t turn out that way. And corporations paid CEOs ridiculous sums of money on the bet that outsized financial beneficence would align their interests with the long-term health of their companies. The opposite turned out to be the case.

Survival of a Concept of Convenience requires insularity. Some of us may have had the experience of being closely related to a teenager whose mantra “Not Listening” seems to define a complete world view. Although they grow older, some do not grow up, which does not seem to exclude them from running large corporations and government regulatory agencies.

Pharmaceutical group AstraZeneca recently reached agreement with the U.S. government to pay over half a billion dollars for its improper marketing of schizophrenia drug, Seroquel. CEO David Brennan told the Wall St. Journal that off-label marketing (the effort to sell drugs for unapproved uses) “is a much bigger issue in the last few years as a result of the government’s position on this.”  In other words, the feds are beginning to apply the law. “It’s always been sensitive,” he said. “But now it’s even more sensitive because we’re beginning to pay fines.”

No one ever made a better argument for vigorous enforcement.

Many of the best known pharmaceutical names have found themselves in legal and reputational trouble similar to AstraZeneca’s—and many for similar reasons. In January of last year Eli Lilly settled allegations of off-label promotion of anti-psychotic drug Zyprexa for $1.415 billion. The $515 million criminal component of the fine was the largest individual corporate criminal fine ever. Lilly’s record lasted only 8 months, however—until Pfizer settled allegations of improper marketing of its painkiller Bextra for $2.3 billion, of which $1.1 billion covered criminal behavior.

AstraZeneca’s Seroquel was initially approved in 1997 and took in $4.5 billion in 2008 alone. The company agreed to a one-time fine of $520 million. That’s a terrific deal. So good, in fact, that it makes clear the reason drug companies persist in these abuses: It simply makes economic sense to do so. Fines at the frequency and level they’re imposed are a reasonable business expense.

While drug companies can’t market drugs for unapproved (off-label) use, physicians can prescribe them for anything they want. So it’s not hard to understand why drug companies pay doctors lucrative speaking fees to recommend off-label use at professional conferences. And because revenues from drug sales enable the companies to fund large and diverse research projects, big-name researchers have little trouble seeing the logic of lending their names to academic papers that endorse the products of companies that support them—whether or not those researchers have participated in the work themselves.

Merck’s practice a number of years ago of withholding negative research on its Vioxx painkiller resulted from decisions by executives for whom such behavior would most likely be unthinkable in their private lives. You could argue that, because of the pervasiveness of such practices, an individual company HAD to play the game in order to compete not only for customers, but investors.

The final analysis of our current economic crisis will certainly contain the conclusion that much of the financial and business world decided at the same time to engage in wildly immoderate practices. They nearly brought the world down, and the markets were there to record the fall moment by moment. But there is no market to chart the experience of individual patients who are administered medications as a result of manipulated communication in the healthcare professions. CNBC reporters are seldom present at hospital bedsides.

How long will drug companies engage in these practices? As long as the ratio of penalties to rewards makes it economically rational to do so. AstraZeneca’s Mr. Brennan said it all.

The Chairman of a great European corporation recently gave an interview in which he tried to justify his company’s refusal to offer financial reports at the quarterly intervals customary in most developed markets. His company—a household name worldwide—reports just twice a year. The Chairman sought to explain this longer reporting cycle by suggesting that it promoted management’s freedom to think about corporate strategy in the longer term. Because it was not subject to the reactions of investors and analysts every three months, he said, the company had given itself freedom to lay stronger foundations for its strategy.

Thinking long term is, of course, desirable, and there’s little question that a focus on short-term financial results has done damage to many companies. But the simple fact of a longer reporting cycle leaves open to debate the question of whether the Chairman was actually seeking more freedom to think long-term, or whether a reduced burden of accountability was the real goal. He was, of course, free to make his case, and offering examples of how he and his management team have used their freedom to benefit the company and its shareholders would seem to be a solid communication strategy.

Instead of offering examples that make the business case, however, the Chairman chose to set forth a cultural argument. He began by making the distinction between his own, supposedly continental, way of doing business and what he called the “Anglo-Saxon” one (meaning British and American) which he said focuses on short-term results. “Anglo-Saxon” is not a business style unless you choose to make it one. What the term refers to is a cultural history going back a millennium or two. In using this culturally-loaded language, the Chairman could only have implied that whether your are short- or far-sighted in business depends to some extent on where you come from. Whether the factors determining one’s business style include religion, education, or familiarity with Impressionist art, he did not say.

The solid example the Chairman gave was nearly 40 years old and came from a country—Chile—which could not have represented more than one or two percent of the company’s revenues. He said that a focus on the long term had enabled his company to remain in Chile even though its Marxist president, Salvador Allende, elected in 1970, showed a clear anti-business bias. No one doubts that he did. And, in raising the Allende story to defend an extended disclosure cycle, the Chairman demonstrated how his company’s long-term vision helped it hold on until the business climate improved. Though he skipped this part of the story, that improvement began to occur the day after the now-famous General Pinochet engineered a CIA-backed coup d’etat. Among its results was the disappearance of thousands of people whose mass graves Chileans have still been discovering in the last few years. To bring the story up to date, the Chairman went on to point out in explicit fashion that his company could be facing an Allende-esque situation today as it confronts Venezuela’s Hugo Chavez—another bad guy against whom less-frequent reporting may help the company defend itself.

Well, you can’t dispute it. If stock analysts at Barclays or Morgan Stanley tell the company to get out of Venezuela, management should at least listen. And if it were the case that seeing the company’s statements only every six months might make those analysts less itchy. . . that, too, is hard to argue for or against.

It’s also hard to argue that ghosts from the cultural and historical closet can make an ingenuous business case where an opportunity to tell real, constructive stories is, for some inexplicable reason, declined.