Like many who are not fans of the kind of journalism practiced by the News Corporation in its tabloids and cable news channels, I must admit to feelings of schadenfreude at their current problems in the UK as a result of the phone hacking and related scandals. The scandal has already derailed their planned takeover of British Sky Broadcasting, led to the shutdown of News of the World, caused the resignation of a number of senior executives and the arrest of a few present and former News Corp employees.
Given that the formal investigations are just starting, we don’t know how the UK scandal will evolve. It is also possible that the scandal will reach across the Atlantic, given that the FBI is now launching its own investigation as to whether similar phone hacking incidents took place in the US. We have to wait to see how this incident will play over time, and what its impact will be on the News Corporation and its various media holdings around the world.
But, even at this early stage, it is instructive to look at the problems News Corp is going through, - one of the world’s most successful media conglomerates run by executives who are undoubtedly among the best and brightest in their industry, - and reflect how such powerful companies get into such serious trouble. For me this is particularly interesting, given that organizational culture is one of the topics I often discuss in my university seminars. In addition, just last month we celebrated IBM’s Centennial, and along with the many who have written articles on the subject, I kept asking myself: “why is IBM still alive and thriving after so long?”
Solid financials are necessary but not sufficient. In order to do well in good times and survive the bad times that it will inevitably encounter, a company also needs the trust and respect of the communities in which it operates, - what is increasingly being referred to as reputation capital. We much prefer to interact and do business with people and brands that have earned positive reputations based on their past actions.
While reputation capital might be a new term, the concept goes back at least to the days of Adam Smith, the Scottish philosopher who is considered the father of free-market, free-trade capitalism, and whose Wealth of Nations, written in 1776, is generally regarded as the beginning of modern economics.
Smith believed that wealth creation in a capitalist economy required not only the pursuit of profits and self-interests, but also the trust and confidence needed for such an economy to work efficiently. Like any complex system, a well functioning capitalist economy requires the proper checks and balances between its various forces, - the fierce competition inherent in open, free markets, and the ethical behaviors necessary to safeguard the interests of society.
In a recent paper, “Trust and Reputation in the Age of Globalization”, Mark Eisenegger of the Institute for the Public Sphere and Society at the University of Zurich writes:
“It is trust - not power, wealth, or even love - that is the most important operational resource in our society. Why? Without trust, we would simply be unable to act. If we were not able to trust third parties to act as we expect them to act, we would do anything to avoid getting ourselves involved with them. . . The more we have learned to trust an agent (for example, a company), the more comfortable we are likely to be relying on that agent in the long term. For trust is based on the experience that an agent has fulfilled our expectations in the past. And trust creates confidence that that agent will also fulfill our expectations in the future. For this reason, trust cements existing relations and at the same time acts as a magnet for future relations. Obviously, this applies not only in business. The same law holds in politics and other areas, even in our everyday lives and personal relationships.”
So, how does a company establish a culture of trust, especially large, large global company like IBM or the News Corporation? To begin with, the company needs a simple, concrete set of values that helps establish its identity and drives all its actions.
In 1963, Thomas Watson Jr, IBM’s second Chairman and CEO and son of its founder, published a remarkable book, A Business and its Beliefs, which remains as relevant today as it was when it was first published almost fifty years ago. At the beginning of the book, Mr. Watson wrote:
“I firmly believe that any organization, in order to achieve success, must have a sound set of beliefs on which it premises all its policies and actions.”
At IBM, he felt that three core beliefs formed the foundation for the company to succeed: Have respect for the individual; Give the best company service of any company in the world; and, Pursue all tasks with the idea that they can be accomplished in a superior fashion.
These Basic Beliefs, as they came to be known, served IBM well for the next several decades. The values of the company were then reexamined in 2003 in a 72 hour Values Jam in which all IBM employees around the world were invited to contribute. The result was the present IBM Values: Dedication to every client's success; Innovation that matters, for our company and for the world; and, Trust and personal responsibility in all relationships.
The IBM Values, as was the case with the Basic Beliefs before, are part of the education of all IBM employees, from the very day they join the company. I can personally attest to how seriously they are taken by the management of the company.
But, having a good set of values is not enough. Walking the talk - that is, actually living by the values you espouse - is more important than ever, especially for large companies with employees all over the world. Walking the talk is much easier said than done. Competitive and market pressures will sometimes pull companies into behaviors that may go against their established culture and values. It is not so hard to behave in an exemplary fashion when times are good. But, in the heat of battle, - be it trying to win a large, highly competitive bid or achieving the sales quota, every quarter of every year, on which your bonus is based, - transgressions will occur, some of them quite serious.
IBM, for example, faced serious bribery scandals in Argentina in 1996 and in South Korea in 2004. Less serious financial issues are not uncommon in large, public companies. Even in the most ethical and best managed companies, it only takes a small percentage of its employees not adhering to its values and business guidelines for trouble to ensue. It is thus inevitable that a company, no matter how hard it tries, will run into problems now and then, - most of them, hopefully minor, but a few more serious. What should the company then do?
First of all, you need decisive management action. It has to be clear to everyone, both inside and outside the company that such transgressions will not be tolerated, and that employees who cross the line, no matter how high up in the management chain, will be dealt with severely.
But, you also need friends. There is no time when you need people rooting for you more than when you are in really big trouble, be it financial, ethical or legal. It is very important that the company has established cordial relations with key stakeholders in the various communities and nations in which it operates, - including clients, business partners, government officials, press, financial analysts and the public at large. Most people will accept that bad behaviors and mistakes happen. If they generally like and respect you based on past behaviors and cordial relationships, they will be rooting for you to get over the problems, pay whatever penalties need to be paid, and get on with business.
But, if they don’t like you, if you have a history of bad relations with stakeholders, have abused your powers and are viewed more as a bully than a member of the community, then it’s payback time. If you have been guilty of arrogance and hubris while at the heights of your powers, you may find yourself like the hero in a Greek tragedy trying to fight the Olympian gods as well as Adam Smith’s invisible hand.
Business leaders must ensure that their companies are financially successful. But, at the same time, they must set the tone embodied in the company's culture and values. As we are reminded when serious problems occur, these leaders should heed the advice offered by Thomas Watson Jr in A Business and its Beliefs back in 1963:
“To keep a company ethical and clean is the responsibility of top management. It can never be left to chance.”