Peter Firestein

In CRISIS OF CHARACTER, whose official publication date is today, I wrote about the rise of the socially-conscious consumer who wants to know whether a product he or she may buy harms the environment, or whether foreign workers—perhaps even children—have been abused in its manufacture. I wrote that people are beginning to choose companies with whom to do business as they do their politicians—for their values.

Experience in the year or so since that line was written has done nothing but add to the impression that consumers are realigning their relationships with companies in accordance with their opinions of how those companies should behave. In the book I suggest that the public in general wants to see an end to the “corporate exception”—the notion inside many companies that different standards of conduct apply there in society at large.

In a recent speech, John Gerzema, whose title at Young & Rubicam is “Chief Insights Officer,” referred to a new style of responsibility he perceives among consumers in the use of their own money. Like corporations, he says, people are unwinding their debt. Visa, inc., reports that more people are now using debit cards than credit cards. Companies, therefore, can no longer rely on debt-fueled consumption to float revenues. And with this new spirit of personal responsibility, Gerzema says, consumers are demanding “not just value, but values.”

People are keeping cars longer than ever. More people than ever carry library cards. Volunteerism is up. The construction of an increasing number of homes includes work by the hands of those who will live there. And conspicuous consumption has become déclassé. Some luxury retailers are offering unmarked shopping bags in which customers can carry away their goods without advertising the products they’ve bought—a stark reversal from the flashy psychology in vogue only a couple of years ago.

As a consequence investors, whom one can naturally expect to respond to such trends, have begun to see a company’s reputation as a risk factor. They are realizing that customers communicate virally by Internet, and once a negative buzz about a company gets started among people who deeply care about specific issues, there’s no telling what the damage will be. The negative effects can linger for years.

That’s why Walmart—not known for a fear of community opposition—has converted its truck fleet to reduce carbon emissions and has begun to tag products so that customers can judge the environmental impact of their manufacture. Walmart has not changed its profit-oriented culture. It’s not “nicer” than it’s been before. But its management realizes that preservation of the company’s franchise will require policies that recognize its customers’ personal values.

The number of companies demonstrating a consciousness of their social profile is growing. Apple, Pacific Gas and Electric (PG&E) and others recently resigned their memberships in the U.S. Chamber of Commerce in protest against the Chamber’s staunch opposition to climate change legislation. They understood that companies who fail to take overt steps to align themselves with their customers will lose ground to competitors who do. And investors won’t take long to notice.

As the world observes the anniversary of the financial meltdown—represented most starkly by the fall of Lehman Brothers—a great deal of anger still flows to the individuals whose actions appear to have contributed to the debacle: Not only Lehman’s Richard Fuld, but John Thain, those at the top of AIG, and others.

Business leaders as a class are not doing well in the eyes of the public these days. Yet it is they who face the challenge of reviving the enterprises on which prosperity depends—a task they must perform against a tide of disapproval. The conditions under which they are having to work merit, I think, a moment’s consideration.

Even in less stressful times, business leaders who face critical investors, aggressive and ill-informed journalists, and antagonistic interest groups can be forgiven for observing—to themselves, at least—that none of these folks has known for even a day what it means to run a company. Executives generally keep silent about their conviction that it’s easier to judge financial performance, or adherence to codes of corporate conduct, from the outside than it is actually to do the job. As a subject for discussion, CEOs generally reserve this for spouses and executive vice presidents.

While writing Crisis of Character, I was acutely aware of the dangers of making facile judgments. In attempting to illustrate the kinds of excruciating choices executives can face, I invented a term that describes one particular situation—not that uncommon, I think—where all the choices are bad ones. The expression “Structural Corruption” refers to an environment where the fundamental business model of an industry is, for a time, either illegal or has come to depend on deception. The practices that characterized a good part of the insurance industry a few years ago, where competing companies collaborated in bid-rigging and typically paid commissions that incentivized the misleading of customers, provides one example. A chief executive in that industry could choose only between participating in the corruption or exiting the business. It would have been impossible to compete without playing the game. Though this may present an extreme example, I do not believe it is unusual for leaders to find themselves in situations where competitiveness and the achievement of seemingly reasonable business goals can tempt them toward marginal activities they would studiously avoid under less trying circumstances.

Do you have to be a bad person to do bad things?

No, you don’t. And an examination of the paradox of good people and companies engaging in compromising activities can reveal much about the personal challenges chief executives face and the consequences of making the wrong choices. Let’s take weak transparency—the kind that sometimes bleeds into deceptive disclosure—as an example. A few years ago the people at Merck—one of the most admired companies on the planet—withdrew Vioxx from the market on accusations that they had failed to disclose adverse research results on the drug’s side effects. The public outrage was great and the stream of lawsuits long. Merck had always been a responsible company, and by all accounts it has been one since. But the unfortunate Vioxx interlude in which executives apparently sat around talking each other into bad ideas—apparently without the tempering effect of outside voices—brought enormous losses. Those losses included the careers of accomplished senior managers and billions of dollars in fines and business contraction. It was all about warped disclosure, perhaps the greatest source of trouble in otherwise strong companies.

If transparency is such a problem, should we assume that deception is baked into the Chief Executive DNA?

It’s no secret that rising to the top requires a talent for managing, editing, and shaping information about oneself. You don’t get to be CEO unless you have a gift for accentuating the positive and minimizing the negative in the ways others see you. So, there is little about the formula for personal success that argues for transparency. In addition, there is an overwhelming logic to continuing the practices that have proven successful in the past. Football teams preparing for the playoffs say: “We’ll go with what got us here.”

In “A Decade of the Darkside,” a just-published study by the UK consultancy PCL, Managing Director Geoff Trickey, whose talent for overstatement seems matched by his insightfulness, wrote: “We have been witnessing the downfall of great leaders and great organisations on an almost daily basis, often brought to their knees by taking the strategies that contributed to their success to extremes.”

If we examine transparency through the prism of inflexible behavior, certain vulnerabilities become clear. They lie in the gap between the need for careful news management with regard to oneself and the obligations for institutional transparency when it comes to the organization.

On top of it all, the simple disclosure of facts on behalf of the company is rarely sufficient. Investors and other stakeholders listen not only to information the chief executive offers, but they monitor the willingness with which he or she makes such disclosure. A touch of ambiguity can call into question not only the information the executive is being ambiguous about, but it can compromise trust in the company in general.

Stefan Stern, the Financial Times columnist, wrote this week about the PCL study and cited the anthropologist / psychoanalyst Michael Maccoby’s notion of the “productive narcissist” as perhaps the ideal leader. A productive narcissist is someone who puts his high self-regard to work for a greater benefit.

You want good people in management, and you want them to make decisions according to their best instincts. But you probably don’t want someone as nice as your next door neighbor running the company. All of this is why we should hold our breaths and count to three before making snap judgments about corporate leaders who face challenges few can grasp.

During the 1960s and 1970s Katharine Graham, the intrepid publisher of the Washington Post, held dinners in her Georgetown home for the liberal and intellectual elite of Washington. In those days, that meant a gathering of the post-war masters of statecraft, leading newspaper columnists, select politicians, and key policymakers. In many cases, the ideas that congealed around the Graham table found their way into the public dialogue the following week. Richard Nixon, in his lonely White House, fumed at what he imagined his anointed enemies were plotting against him around the Georgetown dinner tables of Graham and others. The Post’s publication of the Pentagon Papers, which revealed the nature of government deceptions over Viet Nam, and its Watergate coverage proved he had excellent reason.

Fast-forward to 2009. Graham’s granddaughter, Katharine Weymouth, is publisher of the Post. Like nearly everyone in the newspaper business, she faces an Armageddon as mostly-free digital media soaks up the news audience at rates that, for traditional newspapers, are unsustainable. And like any smart business person, Weymouth has been looking around for innovative ways to build revenue.

One strategy seemed to appear when a staff member hired to build the Post’s events business suggested that Weymouth host dinners at her Georgetown home, leveraging the legendary panache of her grandmother. The difference this time was that the salon evenings would have corporate sponsors, who would pay $25,000 for access to certain of the Post’s editors and reporters along with invited guests from government and the media.

A newspaper getting paid to offer a corporation access to its editors and reporters? That’s what it seemed. So, instead of reviving the singular legend of Woodward, Bernstein, Bradlee and Graham—who brought you Deep Throat and Nixon’s helicopter ride out of town—it undermined it, causing deep lacerations in the Post’s reputation.

This happened because it’s hard to keep a good idea down. The idea, in this case, is selling one’s good name, and the history that money can buy seems proportional to the money available to buy it. The principal building of the New York Public Library—whose main reading room resonates with the learning that’s been going on in it for a hundred years—has been renamed for a hedge fund manager turned philanthropist.

Well, ok—why not market the distinction of the Washington Post to improve its chances of making it through these tough times? The answer, of course, is that to do so makes the Post an ordinary player in the influence-peddling game it has gained such stature over the years in exposing. Weymouth has since apologized, taken responsibility, and published the scathing report of an ombudsman who investigated and described how it all happened.

What’s interesting, though, is how the plan got so far along as to become public, which it did through the issuance of invitations to the planned first event.

It turns out, in fact, that the idea had been giving many at the Washington Post a queasy feeling, but those with doubts were waiting for someone else to pull the plug. To quote the ombudsman: “Several [staffers] say they didn’t speak up because they assumed top managers would eventually ensure that traditional ethics boundaries would not be breached. Neither Weymouth nor [her managing editor] can recall anyone raising concerns, although both say they wish someone had.” It sounds a little like the whistling-in-the-dark that preceded the subprime derivatives crash, as those with questions about credit quality all looked for someone else—the ratings agencies, for example—to speak out if things weren’t right.

They say money talks. One of the things it can say is hush.

The testy exchanges between Apple and its investors around disclosure of Steve Jobs’ medical condition brings a fine resolution to the question of what information companies owe investors and what the latter have a right to expect. Apple has traditionally made high art out of controlled disclosure. The secrecy that surrounds the introduction of succeeding generations of iPhones, for example, serves both to heighten their attractiveness to customers at rollout and to withhold their design and features from competitors’ eyes until the ultimate moment. This benefits the company, and it certainly benefits the company’s shareholders.

Apple and its investors, however, have lost their unanimity recently in the matter of disclosure of Mr. Jobs’ health condition, and the debate over whether the company has to tell the world exactly what his physician is telling Mr. Jobs has evolved into a noisy one. Does Mr. Jobs’ right to privacy prevail, or do investors’ rights to material information about company management take precedence? Many have registered opinions. What has not been heard is that there really isn’t a conflict.

Investors need—and have a right—to know the effect of an executive’s illness on the company. Any company can convey this information without disclosing a medical diagnosis. Why does our local technology analyst at, say, Goldman Sachs have to know that an executive might have a certain cancer? Is his prognosis likely to be more reliable than the doctor’s?

No. You don’t have to disclose medical details in order to convey information that is material to investors. The company is obligated to say what it knows about the impact of an executive’s condition on the company’s business. It is certainly obligated to give its best estimate of how long the executive will be off the job. It is also obligated to convey a physician’s opinion as to the probability of the executive returning as a functioning individual within a specified length of time. The physician is free to offer his or her estimate of the likelihood of various results—of the executive returning, or not returning, or returning part time. This is the information to which investors have a right, and it should not conflict with the executive’s demands for medical privacy. After all, it’s clear he’s not on the job, and the company therefore finds itself in a position where it must say something reasonable in response to investor concerns.

The dissonance arises when the company’s internal analysis of what is diclosable and what is not runs head on into its general preference for saying as little as possible most of the time—about anything. In such a culture, the company’s internal discussion about how to address investors’ ire is likely to arrive at the privacy ploy well before anyone realizes that it’s possible to accommodate both sides. Exercising strategic secrecy where the business requires it is a strength. But a strategy that legitimately controls information for business purposes is not the same as an insular corporate culture whose purpose is to isolate the company from scrutiny. Apple may be finding that out.

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You are reading the first lines of a new blog dedicated to a discussion of the changing relationship between corporations and society. Well before the credit bubble burst, the revolution in information technology brought an uninvited transparency to corporate life—and changed it forever. The unprecedented ability of anyone with a computer and an internet connection to gather information and draw conclusions about the effects on society of government and corporate actions—and to communicate with others having similar interests—brought a need for large organizations to take responsibility for their conduct as they’d never done before. The need to assume such responsibility became closely associated with their ability to compete and thrive.

The progressive transformation of relationships between corporations and society provides the subject both of this blog and of my book: “CRISIS OF CHARACTER—Building Corporate Reputation in the Age of Skepticism,” to be issued in October by Union Square Press / Sterling. The book initiates the conversation, and the blog will extend it. Where all this leads will have a great deal to do with the contributions of the blog’s readers.

I can think of no better way to begin our discussion than to see what today’s news tells us about the relationship between transparency and power. It seems that, on the 20th anniversary of what we call “Tiananmen Square,” the Chinese Government is demanding that new computers sold in that country contain censoring software that determines what its citizens are allowed to see on the Internet. As history has played out, the government that directed its military to fire on masses of democracy demonstrators two decades ago has since then presided over one of the most remarkable economic expansions in history. Yet today its leaders believe that their continued power still depends on limiting what their citizens know. Through this censorship, they concede that they govern against the wishes of the people.

The association of power with restriction of information is hardly limited to governments—repressive or otherwise. Corporations have, for the most part, also believed traditionally that limiting the information their investors and other stakeholders receive plays to their advantage. Unlike China’s government, however, many corporations are now coming to accept the opposite: That, while information is power, it is not in the hoarding of information where power resides, but in its distribution. That is the great message of the Internet, itself.

For an individual company, power lies in providing information in a way that enables it to influence the terms that investors and the public use to discuss its affairs (in the book I call this the “communications of convergence.”). In addition, transparency has become a value in itself, so a company’s willingness to interact openly with its constituencies has become an expression of its confidence and self-belief. In my own practice of the Open Perception Study™, I’ve found that the demonstrated desire of companies to solicit their investors’ views increases those investors’ trust that its processes are open and subject to their influence. A company’s recognition of its own openness as a pre-condition of investors’ commitment is, in my experience, a primary factor in its ability to build market value.

Coca-Cola has received considerable criticism in the past for its diversion of water from communities to service its beverage plants. I’m not aware of its ever having done this without proper authority, but the effect of this practice on the social surroundings of some of its plants has brought bitter criticism, nonetheless. Coke has now made water conservation one of its “sustainability platforms” and is committed to becoming “water neutral” by 2020, meaning that it will restore as much water to the environment as the company uses. In response to objections to its water use, Coke began a few years ago with measures whose small scope made them seem to be more for PR purposes than to exert any palpable benefit. But it has apparently heard its social constituency now, and the procedures and technologies it is developing to meet its 2020 commitment are likely to find application well beyond the company’s own operations. This provides us with a memorable example of relentless public dialogue as the foundation of progress. Global companies will eventually respond to such dialogue, and, when they finally undertake a cause, their fundamental competence is likely to provide wide benefits.

China presents its filtering software as a means of protecting its children from pornography. It is not clear that this is all it does, and the government’s blocking of Hotmail and Twitter ahead of the Tiananmen anniversary betrays a broad censoring agenda. Any good propagandist can create enough confusion around small points to prevent firm conclusions from forming on those points. But no significant organization—from the Chinese government to a listed company—can dissuade its observers from making clear judgments based on the totality of its actions. Coke learned that. The Chinese haven’t.