A founding father of public-opinion research explains why shareholder value isn’t enough.
I found this in my archives recently. It is dated 2007, and comes from the McKinsey Quaterly. I have no idea how I got it. It is an excellent read, and supports much of what we do at TomorrowToday. Enjoy!
As a founding father of public-opinion research and its preeminent practitioner, Daniel Yankelovich has been probing attitudes toward business and other issues for more than four decades. Yankelovich, 82, introduced the New York Times/Yankelovich poll in 1975, has written 11 books, and served as a consultant to business and political leaders. He has also established four companies, including his latest, Viewpoint Learning, which helps organizations to develop special-purpose dialogues to expand their options, anticipate obstacles, and broaden support for difficult decisions. Yankelovich is no stranger to the boardrooms of large enterprises, having served as a director of Arkla, CBS, Educational Testing Service, Meredith, U S West, and other companies, as well as foundations, universities, and nonprofits.
Throughout his career Yankelovich has unwaveringly stressed the need for organizations to embrace ethical integrity in their operations and their ties to the outside world. He recently sat down at his home in La Jolla, California, with Lenny Mendonca, a director in McKinseys San Francisco office, and Matt Miller, an adviser to McKinsey, to discuss the current and future contract between business and society.
The Quarterly: What does your research show about businesss standing with society today?
Daniel Yankelovich: The social contract with business is in a state of flux. Milton Friedman has had an enormous influence on the outlook of US business, especially his interpretation of Adam Smiths concept of the invisible hand, which argues against a corporations broader engagement with society. Friedmans view is that social good comes about automatically when companies make a profit. So its a narrow adherence to the bottom line.
But McKinseys own research is in complete agreement with the idea that you need a broader engagement.HYPERLINK “1 And thats where we are now moving. Friedmans influence and the ideology of shareholder value reinforce each other and cater to only one constituencyshareholders. Now there is growing agreement that the engagement has to be broader and that profitability doesnt always automatically enhance the public good. In other words, a more pragmatic approach.
The Quarterly: What should executives take from that?
Daniel Yankelovich: Were at the stage of implementing new forms of engagement. In the McKinsey survey, executives were self-critical about their current means of implementationthey felt that lobbying and PR and spin werent the right ways; the right ways included transparency and more ethical policies. Theres a recognition that the engagement process ought to be broader and less legalistic. Over the next few years I expect implementation to improve. Its what every CEO is struggling with on issues like backdating options and outsized executive compensation. These are out of phase with this new societal conception of business.
The Quarterly: Thats not familiar ground for executives, is it?
Daniel Yankelovich: Theres lots of controversy in business circles. Some executives think that the broader approach is woolly headed, and some think its good business. Last year the Economist published an article in which it argued that every corporate strategy had to pass two testsdoes it enhance the companys long-term profitability, and does it serve the public good? But once you introduce two criteria, you undermine Friedmans doctrine that if its profitable, it automatically serves the public good.
So a door has been opened to a broader conception: can business strategy meet both criteria at the same time? Thats what business is struggling with todaywithout necessarily grasping the severity of the conflicts between serving shareholders in the short term and serving the public.
The Quarterly: Where is this tension playing out?
Daniel Yankelovich: Some pharmaceutical companies are one example. They are subject to high expectations having to do with the health of people. But through their pricing and some high-profile cases of excessive executive compensation and poor performance, some drug companies represent a contradiction between the broader conception and their own actions. HMOs,HYPERLINK “2 another example, are also responsible for peoples health. Currently, they sit at the very bottom of lists of institutions people trust.
The Quarterly: How is this mood different from the backlash against the accounting scandals of several years ago?
Daniel Yankelovich: A lot of businesspeople are under the impression that because there isnt as much talk about the scandals, mistrust of business has receded. Research shows the opposite: the lack of trust in business has grown. At the peak of the scandalssay, in 200236 percent of the public agreed that you could trust business leaders to do what is right most of the time or almost always. Since the scandals now seem to be behind us, you would think that the level of trust would rise. Instead, it fell to 31 percent in 2004 and to 28 percent in 2006. So theres a continuing erosion of trust.
The Quarterly: Can you put that decline in some historical perspective?
Daniel Yankelovich: A tremendous amount of tracking data point to three waves of mistrust in business and other institutions over the past 75 years. The first wave came during the Great Depression, from 1930 to World War II, and its cause was massive, unyielding unemployment. The targets of the mistrust were business and our system of market capitalism. A second wave of mistrust lasted from the late 60s to about 1980. It was tied to Vietnam, Watergate, severe stagflation, and changing moral norms in the country. It created a climate of cynicism about all our institutions. The current wave of mistrust starts with Enron in 2001. Its causes are the business scandals, the failure of gatekeeper systems, and an overall decline in social morality. The main targets are business and government.
The Quarterly: Where does the distrust go from there?
Daniel Yankelovich: I dont see any quick turnaround. Its interesting that the other two waves lasted about 12 years, and we are now in the fifth to sixth year of this one. We dont know how its going to play out. But you shouldnt be misled by the lack of media attention to the scandals, because the mistrust continues to grow.
The Quarterly: What does the public want from its institutions?
Daniel Yankelovich: Todays better-educated Americans want their voices to be heard. The values of the generations that grew up before 1950 are embodied in the concept of enlightened self-interestnot naked self-interest, but enlightened self-interest. Enlightened self-interest is when you make a profit by meeting a need, by fulfilling a social function. The unintended consequence of the shift in moral values during the 1970s has been the ascendance of unenlightened self-interestwinning for yourself; I win, you lose. The Enron psychology was winning for yourself, being out for yourself. The rationalization was, We didnt do anything wrong, because we didnt break the law. Well, Enron did break the law, but many of the people who are undermining the trust of the public hold the view that morality simply means not breaking the law. To my generation, thats moral blindness.
The Quarterly: Is that contradiction at the base of the publics current attitude toward business?
Daniel Yankelovich: The current mistrust of business reflects higher public expectations of business morality. The pressure on executives is to rediscover and redefine enlightened self-interest for our own era. It means something different today than it did in the 18th century.
The Quarterly: Whats the litmus test for whether this new social engagement is taking hold?
Daniel Yankelovich: It will take both concrete behavior and a shift in business philosophy. Boards and CEOs are going to be the main carriers of a new business philosophy. You cant have a huge hypocrisy gap. Ordinarily, the US public attitude is generous and open minded toward profits and compensation. If somebody makes a lot of money the response is, Great, someday it might happen to me. What drives people crazy is when you make a lot of money at peoples expense. This is a powerful political form of resentment. Its resentment at being exploited. Americans want companies to make a profit but to make it by doing some good for others, not just themselves.
The Quarterly: What in business ideology would have to change to arrive at that point?
Daniel Yankelovich: Business doctrines have to change. Ideologies like shareholder value are being abused to rationalize and justify outrageous behavior. One of the tests for whether companies are aligning themselves with a broader social engagement is the extent to which the doctrine of shareholder value loses credibility. I dont think its going to be openly repudiated, but I suspect that, gradually, executives will stop making as much reference to it to justify their actions. It privileges one group, one constituency, over all the others, and it carries so much baggage now because its been so perverted and linked to short-term profits.
The Quarterly: Wouldnt it still be one relevant metric of what a company is doing?
Daniel Yankelovich: There’s nothing wrong with shareholder value if the shareholder is served through long-term profitability. Im sure that what some companies will do is say, Look, we got off on the wrong trackwe let a bunch of 32-year-old fund managers on Wall Street pervert the true meaning of shareholder value. Its a variation on a theme we hear from Warren Buffett and others. Most companies will either try to go back to the original, long-term conception of shareholder value or just quietly let it recede into the background.
The Quarterly: What needs to happen in order to build trust?
Daniel Yankelovich: The causes of mistrust are reasonably clear and addressable. The public believes that the ethical standards of business are too low. The mistrust will begin to dissipate when those standards improve. Ive served on a number of boards and became familiar with their ethical standards. Visualize a pyramid. At the base of the pyramid are companies for which the main questions of ethical standards are Is it legal? Can we get away with it? The next level up the pyramid is the smell test. In most companies there will be one or more directors who will say, Look, I dont care whether its legal or not. Does it pass the smell test? Those two levels currently cover most of the pyramid.
Now, both these levels are too negative to dispel public mistrust. They simply say, Dont do anything illegal or dishonorable. Only a handful of companies, at the apex of the pyramid, hold a broader conception of truly enlightened self-interest that actively seeks to serve the public good instead of winning for yourself. Hopefully, within a decade the pyramid will show that the bottom two layers have shrunk and the top layer has broadened. That will be a real sea change and will introduce a new era of market capitalism.
The Quarterly: Is that task complicated by the more global setting of business?
Daniel Yankelovich: In some ways, yes; in other ways, it makes the transition easier. In todays global economy many problems cut across national lines, like poverty, disease, and global warming. These are issues that international corporations are in a somewhat better position to address than are national governments. To the extent that business is seen as taking on global responsibilities, it will gain lots of credit. The hybrid versus the Hummer is the almost perfect symbol of that shift in outlook. You see Toyota, GE, P&G, and a number of other leading companies recognizing this new global responsibility and taking it on. Its a way of building what my colleagues call trust equity, and I think it will prove to be a major competitive asset in the future.
The Quarterly: What’s the appropriate role for business leaders in public policy? For example, a US CEO at the helm of a global enterprise doesnt have the same stake in the quality of public policy in the United States or in any one country as that CEO might have if the company was basically a US one.
Daniel Yankelovich: Some situations are more ambiguous than others. Say a US company needs engineering talent. In a global economy it can outsource talent and jobs anywhere in a worldwide market. Thats more ambiguous than how US executives confront an issue like health care in their home country. Health care is a clear-cut example of an unambiguous challenge. The costs of health care are crushing US companies, and theyre not speaking out or responding effectively. Why arent they? I think it has to do with a fear that they would be subject to criticism if they took public-leadership positions that arent closely aligned with short-term profits.
If businesspeople start speaking out, it would be a sign that they are recognizing that one of the new demands on business is for leadership. In anthropology theres this familiar concept of the big man. In any village there is always some big man, someone who is richer than everyone else and is expected to give feasts and make things happen.
The Quarterly: How should these big men act?
Daniel Yankelovich: Well, they cant hide behind shareholder value. They must respond to expectations of leadership…
The Quarterly: How are these leaders going to emerge?
Daniel Yankelovich: Corporate culture shapes ethical standards. Todays corporate culture needs repair work. The tools that business is usingthe lobbying, the PR, the advertising, the clever lawyeringare the wrong tools. Sometimes you get a business culture dominated by a charismatic individual. There are many charisma-challenged CEOs who have the courage to rise to the occasion, but to do so they have to be more strongly supported by the culture of their companies.
The Quarterly: Is that a board issue?
Daniel Yankelovich: I think it is. Ethical issues dominate board meetings. They may appear under the guise of normal business decisions, but most of them come back to this notion of corporate culture. No one but the board has real authority. CEOs dont have the authority, because they cant go against the board. The CEO contributes, but it is the board that makes the decisions that then radiate through the company.
The Quarterly: Whats the role of opinion research in this evolving contract between business and society?
Daniel Yankelovich: Sound opinion research is a useful tool for leadership. It gives leaders a sense of where the public stands. Think of the concept of the tipping pointthe point, in this case, at which policy makers can no longer ignore the public. Now, you can live with a lot of public dissatisfaction before you reach a real tipping point. But when you do reach it the whole game changes.
In the business world punitive laws and regulations are the penalty for letting corporate behavior get beyond the tipping point. So if you want to stay ahead of the curve its very useful to have the concept of the tipping point in mind and to look to opinion research to tell you where you stand in relationship to that point. From the point of view of damage control, when you cross the tipping point its too late. Youre not going to be treated with understanding, subtlety, and finesse. The reaction against you is going to be crude, even unfair. Abuse breeds abuse.
The Quarterly: Say that you have someone who is going to be named CEO of a major public company in the next six months. That person comes to you and says, I really want to learn how to behave in this ethical way and to lead my company accordingly. What advice would you give?
Daniel Yankelovich: I would say first that you and your board ought to be totally aligned on the companys real ethical standards. Your predecessor may have been good at managing the board and avoiding most ethical concerns. But if youre going to change corporate culture you need the board and its active support. You have a lot to say about who the board members are. Consider the current board, understand who you can live with, who you cant live with. Develop a relationship of trust with the board.
The Quarterly: And then?
Daniel Yankelovich: Settle in your own mind how youre going to deal with pressures from the investment community. Think through whether you can take a stand that doesnt lock you into the tyranny of quarterly earnings. You cant forget about the short term. You have to learn how to balance the long-term growth of the company with enough short-term results so that you dont have Wall Street eating you alive.
Then I would suggest disbanding the compensation committee and its corrupt practice of working with outside consultants. Its just a Kabuki dance. It didnt start out that way, in the same way that shareholder value didnt start out perverted, but its become perverted…
Lenny Mendonca is a director in McKinseys San Francisco office, and Matt Miller is an adviser to McKinsey.
Web source: McKinsey Quaterly