There is another pragmatic consequence. In times of high suspicion, leaders are presumed guilty and all sorts of rotten motives are attributed to any ambiguous action. Business leaders don’t get the benefit of the doubt that they ordinarily enjoy from the public. And they often don’t recognize when this tide has shifted. It can carry all the way to the destruction of the firm.
I think the acquittal of Arthur Andersen [on June 1, 2005] is an interesting case in point. In the original 2003 trial [in a U.S. District Court], the jury was even instructed, in effect, to not give the company the benefit of the doubt; they were told they could convict even if they believed the company acted unknowingly. Then, two years later, the U.S. Supreme Court decided that this instruction made the firm, in a technically legal sense, not guilty. By that time, it was too late; the firm had already been destroyed. It was down from 28,000 employees to 200.
Merck’s recent Vioxx episode didn’t destroy the company, but it was a terrible blow, and disproportionately harsh; no company has had more of an ethical commitment over the years. Vioxx, their very profitable arthritis drug, was suddenly linked with heart attacks and strokes, and the CEO, Raymond Gilmartin, immediately ordered the drug recalled. He undoubtedly assumed that he would get the benefit of the doubt. But that wasn’t enough, not in this climate. The stock crashed and in June 2005, he had to leave under a cloud.
The forced resignation of American International Group CEO Hank Greenberg in March was terrible for AIG. The accounting scandal that ousted CEO Franklin Raines in January was a huge blow, certainly, to Fannie Mae. When Fannie Mae’s new CEO, Daniel H. Mudd, took over, his first statement said that he was put in office to restore trust.
Profits and Stewardship
S+B: An observer might say that these troubles apply only to corporate leaders who misbehave, flout the law, or deserve punishment in some other way.
Yankelovich: Well, for a number of years, the theme song in business was “a few bad apples” were causing all the problems. But it’s very hard to maintain that premise with so many scandals making headlines. It’s useful to distinguish dramatic scandals, where people go to jail, from everyday scandals that involve inherent conflicts of interest, and that get settled through large fines. The mutual fund industry, for instance, routinely pushed its clients into the funds that paid the biggest brokerage fees. That wasn’t just a few bad apples; that was general practice. So was the rigging of bids in the insurance industry. Companies that exempt themselves from these trends do so because they take a stewardship approach to their customers and their employees. Those companies can probably develop a competitive edge as a result.
I know that most American corporate leaders do not correlate stewardship with their company’s growth. And I think I understand why. Consumers learn that General Electric has done some wonderful things for Zambia. The reaction is: “Oh, that’s nice.” But they still reach for the Westinghouse lightbulb that costs five cents less. Business is familiar with that reality.
Also, the corporate social responsibility movement unintentionally helped to create a backlash against itself. It would be too strong to say it poisoned the well. But social responsibility had nothing to say about growing a company. It drove executives crazy because it was a movement of assistant professors who didn’t know anything about business and who adopted a tone of moral superiority about profits. Their attitude toward profit ranged from casual to distrustful.