In the light of yet more corporate scandals in public, private and charitable sectors, we are struck by how both the American and European models of corporate governance have proved wholly inadequate. NEDs and trustees, despite good intentions, seem unable to exercise appropriate levels of control.
One response has been that organisations need tighter regulation to control their tendency to corporate excess. In the aftermath of the 2008 crash, financial services companies have been extensively and intrusively regulated.
Likewise in July 2018 the FRC updated it's corporate governance code following the "recklessness, hubris and greed" that led to Carillion's plight. But what have we learnt from this experience? It is becoming increasingly clear – and many regulators tell us this – that rules alone are not enough.
In the UK, for example, the FCA has publicly acknowledged that wrongdoing increased as its rule book increased 27 per cent in the period 2005-8. Indeed, the FRC’s recent investigation of the ways in which corporate boards might influence the evolution of organisational culture confirms the limits of regulation.
In addition, engagement levels remain stubbornly low around the world despite it being the obsession of HR departments for more than a decade. About 40 per cent of employees are actively disengaged with their work. Think about this problem in terms of lost productivity or perhaps more importantly in terms of human misery.
As a consequence individuals are rethinking their relationships with organisations. Some are deserting the corporate world as they enthusiastically embrace the gig economy. Others are demanding more of organisations – more accountability, more transparency and more opportunities for self-expression and development. Just earning a living is not enough anymore.
This disenchantment with organisations is not limited to employees. Customers too are losing faith. Well informed marketeers talk of them ‘falling out of love with brands’.
All of this suggests that organisations need to discover their moral purpose. It has become an organisational cliché to say ‘don’t just do things right, do the right things’.
This takes us squarely into the realm of moral philosophy – that branch of philosophy which elucidates the question ‘what is good?’ This has led us to ask what would truly moral organisations look like. Our argument is that they and their cultures have three key characteristics: shared purpose; moral values and good rules. And each of these are deeply connected.
Waking up to the power of purpose
BlackRock manages $5.7 trillion in assets. Every year, its chairman and CEO Larry Fink writes to the chief executives of the corporations it invests in. In 2018, Fink’s letter focused on purpose and governance and he was very specific that ‘companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate’.
He goes on to say that, ‘without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders. It will succumb to short-term pressures to distribute earnings, and, in the process, sacrifice investments in employee development, innovation, and capital expenditures that are necessary for long-term growth’.
In December 2016, the Korn Ferry Institute published research demonstrating that consumer sector companies with an authentic focus on purpose achieved compounded annual growth rates of 9.85 per cent compared with just 2.4 per cent for the whole S&P Consumer Sector. The report goes on to state that ‘by doing good, people and enterprises also can do well’.
At the personal level, research by Amy Wrzesniewski, Clark McCauley, Paul Rozen and Barry Schwartz has shown us that people tend to be motivated by one of three purposes, which they describe as:
- Work as a vehicle for material reward, but not fulfilling in and of itself
- Work as a means toward social status, achievement, and prestige
- Work inherently meaningful and rich in purpose
But it is only in the third group that greater personal and professional satisfaction is found and that this also correlates strongly with greater success and higher performance.
Values need to be moral
Along with ‘purpose’ we are also familiar with the language of ‘values’ in business. Almost any enterprise of scale has a set of values. Of course, many organisations have gone through the mechanics of establishing explicit values. Indeed, it’s become boom time for consultants supplying toolkits for shared values. How many times have the words ‘excellence’, ‘quality’, ‘teamwork’, and ‘innovation’ been used?
But in many cases, this amounts to little more than ticking boxes – the values never embed in the organisation. For example, Oxfam’s values include Empowerment, Accountability and Inclusiveness, which might surprise those alleging abuse by Oxfam aid workers in Haiti. This familiar pattern merely feeds organisational cynicism.
But how many of these values are what we might call ‘moral’ values? Moral values are principles (not rules) that guide our decision-making in order to achieve our moral purpose in life and at work. If we think about our own lives with family and friends, we can see these clearly.
Moral philosophers from Aristotle to Patricia Churchland have argued, for example, that without the moral value of Love, it’s difficult to imagine how we would survive and thrive as fragile infants from the moment we are born. Evolutionary psychologists might interpret this as a response to the necessity to protect future generations – but it is nonetheless experienced as a moral value.
Or as Rawls argues, without the moral value of Justice as Fairness, it’s difficult to see how we share scarce resources to meet our needs. In philosophy, these moral values are the root of character and virtue. Other moral values that virtue ethicists such as Socrates, Aquinas and MacIntyre would recognise are Wisdom, Patience, Courage, Faith, Honesty, Humility, and Hope.
But do moral values in organisational life impact performance? There are signs that the zeitgeist is changing. In 2014, the Chartered Management Institute published research based on the ‘MoralDNA’ of over 2,000 managers that indicated significant correlations between managers and organisations that scored highly on these moral values; and their performance across a range of factors including customer satisfaction; quality of goods and services; and ability to attract staff. In terms of long-term financial performance, we can also correlate the moral values implicit in achieving a moral purpose.
Good rules matter
However, moral values and purpose are necessary but insufficient conditions for organisational coherence. Despite our earlier comments on the limits of regulation, organisations big and small are held together by rules. But the concept of rules is a slippery one and sociology has much to say on this.
For example, Etzioni’s classic schema matches types of rules with patterns of involvement. Firstly, he describes coercive rules which generate ‘alienative’ involvement – a grudging form of compliance. Secondly, utilitarian rules, which rest upon remunerative power, give rise to calculative involvement – ‘I’ll follow the rules as long as it’s in my short term interest to do so’. Finally, normative rules produce moral involvement – ‘I’ll follow the rules because I believe in them’.
The uncomfortable reality is that we experience most large scale organisations as driven by coercive or utilitarian rules. Remember the early factories of the industrial revolution were locked to stop workers leaving – coercion par excellence. Scientific management – the dominant managerial theory of the 20th century – argues for the primacy of utilitarian rules.
The problems persist. In our recent research for ‘Why should anyone work here?’, for example, we found that frustration with inappropriate rules represented the most significant source of dissatisfaction for people at work – as well as for customers, consumers and citizens.
Arguably, a defining characteristic of modern society is that, as individuals, we are forced to deal with increasingly faceless organisations bound by rule systems that appear overwhelmingly apathetic to our needs. Think of your interactions, for example, with energy companies, telecom businesses, airlines, and the various state agencies with which we are obliged to do business.
This does not mean that organisations should obliterate all rules. Engineers must follow procedures and rigorous quality controls, or buildings will collapse. Organisations need structure. Markets and enterprises need regulation.
But are there universal characteristics that might distinguish formal rule systems which people find enabling rather than constricting, where rules would be regarded as sensible rather than stupid?
We think there are. Indeed, the overwhelming evidence is that people value:
- Fairness – rules are applied equally to all
- Clarity – rules are simple and clear as possible
- Discretion – rules allow for the appropriate exercise of discretion
- Agreement – rules are widely shared and their purpose is clear
- Workability – rules can be realistically followed and enforced
- Authority – rules are based on the legitimate exercise of authority
These criteria form the basis for good rules. Another way of expressing this is that the moral organisation develops rules that allow systematisation without bureaucratisation.
The distinction is important. When organisations systematise, we know what the rules are for; when they bureaucratise, the rules seem to have no function. Healthy rules, in effect, become the conditions for freedom. They protect what is good in the organisation rather than undermine it.
But is it the case that all rules should be formalised and written down? Organisations will always generate informal sets of rules – and these are at least as important as the formal ones.
We know of no organisation, for example, that has a rule that no women should be represented amongst the top 50 executives – or equally paid. Yet there are many companies whose informal rules make it virtually impossible for women to reach comparable levels.
These norms of behaviour effectively determine the nature of organisational culture and they are, in turn, shaped by both organisational values and purpose as we have outlined above. However, organisations are held together by power relationships, or as Max Weber describes them, they are ‘imperatively co-ordinated associations’ and power distorts communication. But in a ‘moral’ culture it is safe for people to speak truth to power.
If you want to open the pages of the Financial Times or the Wall Street Journal and not be shocked by another corporate scandal then the challenge is to build moral organisations resting upon shared purpose, moral values and simple agreed rules.
Taken together these characteristics build a distinctive culture. The concept of culture has been around organisations for a long time but we expect it to be centre stage once again.
Rob Goffee is Emeritus Professor of Organisational Behaviour at London Business School. Gareth Jones is Visiting Professor at IE Madrid. They are co-founders of Creative Management Associates. Roger Steare is Corporate Philosopher in Residence at Cass Business School.
Image credit: Strels/Shutterstock
This article was first published in March 2018.