/ Spring 2019/Issue 94

The short life of enlightened leadership (and how to extend it)

Most companies that try to do well by doing good can’t make it last. Their leaders need to think more carefully about their philosophy and governance.

As recently as the 1980s, many publicly traded U.S. corporations idealistically sought to spread their wealth among their employees. Generous benefits such as profit sharing, stock ownership, lifetime pensions, career-long training, and even job security were routine at such companies as AT&T, General Electric, Hallmark, J.C. Penney, Procter & Gamble, and Sears. But these practices mostly vanished before the turn of the millennium. In today’s companies, as New York Times reporters Nelson Schwartz and Michael Corkery noted in an October 2018 front-page article, employees tend to “lose benefits while shareholders grab the spoils.” For example, Amazon’s employee stock program was canceled in 2018 to offset the cost of a salary hike. When today’s business leaders wish to demonstrate their commitment to social responsibility, they tend to do so through environmental practices and transparency policies. And if history is any guide, these too are likely to be short-lived.

For nearly five decades, I have studied the social performance of some 50 U.S. and British companies that could be deemed enlightened — enterprises with unusually admirable organizational practices benefiting both their shareholders and society. The leaders of those companies attempted to address the world’s most deeply entrenched problems: unemployment, poverty, unsafe and unhealthy working conditions, low-quality goods, and environmental degradation — all while meeting the necessity of making a profit. Significantly, they sought to address social problems through their business practices and not through philanthropy. Their ethical and responsible acts were not add-ons, afterthoughts, or atonement for bad behavior; instead, they were integral to the way these companies did business, incorporated in how they made products and delivered services. To an unusual degree, those leaders consistently practiced what they espoused throughout their careers.

Yet these virtuous practices seldom survived through one, or at most two, successions of company leadership. At some point — often just after a socially pioneering CEO retired, died, or was forced out of office, or the company was acquired — the CEO’s successors abandoned the very practices that had made the company both financially successful and publicly admired. In particular, investors at publicly traded companies have looked askance at such practices whenever earnings have dipped.

Of course, all companies change over time. But these changes weren’t happenstance; they involved the deliberate cessation of successful, socially desirable practices. Indeed, precious few modern-day companies have managed to sustain enlightened practices — particularly corporations operating in economies characterized by the Anglo-American variety of laissez-faire shareholder capitalism. Even companies such as Herman Miller, Hershey, J.C. Penney, and Marks & Spencer, once widely admired for their exceptional attention to the welfare of employees, customers, and host communities, have lost their status as role models.

I have found only a few notable exceptions among companies that are not family-owned: the John Lewis Partnership (a giant U.K. retailer), the American Cast Iron Pipe Company (ACIPCO, in Birmingham, Ala.), Lincoln Electric (a Cleveland-based manufacturer of arc welding machines), and W.L. Gore and Associates (the Maryland-headquartered producer of Gore-Tex). These “virtuous four” companies have thrived financially for decades — the Lewis Partnership was formed by John Spedan Lewis in 1929, John Joseph Eagan started ACIPCO in 1905, James Lincoln assumed the leadership of Lincoln Electric in the early 1920s, and Bill and Vieve Gore founded W.L. Gore and Associates in 1958 — in ways that reflect their enlightened practices, and that continue despite numerous changes in leadership. Three interrelated factors appear to be critical for their long-term success: the carefully articulated business philosophies of their founders, their unusual governance structures, and their nontraditional forms of ownership. Leaders who are trying to build their own enlightened, successful businesses probably need to consider all three of these factors, or their vision seems far less likely to survive after they exit.

Virtuous Business Philosophy

The founders of these four companies were atypical leaders: They developed fully fleshed out business philosophies in which they identified higher purposes for their enterprises than simply making a profit. Their primary ethical value was respect for people. Whether that value was rooted in the religious Golden Rule or in the humanistic values of the 18th-century Enlightenment, they tried to use their organizations as vehicles for what Thomas Jefferson called the pursuit of happiness. Most unusually, they maintained a commitment to their values through good times and bad, creating sustainable business models buttressed by a strong corporate culture that institutionalized virtuous behaviors. That meant introducing organizational structures, legal strictures, and ownership bulwarks designed to “bake in” attitudes and practices that would last for generations.

The ethical philosophy that motivated Spedan Lewis took hold in 1910, when he examined the company books at his father’s clothing store, and calculated that his family reaped a larger share of its total revenues than did all its employees combined. Believing that approach to be unfair and damaging to morale, he decided to find an efficient way to share his company’s wealth more equitably. He spent the next four decades gradually converting the company into what he called “a far-reaching experiment in industrial democracy.” The obstacles in his way included two world wars, a depression, and the challenge of creating a viable, legal framework for the John Lewis Partnership’s governance and ownership (described below). Most challenging was the presence of his ever-disapproving father (for all intents and purposes, the company’s owner), who lived on until 1929, nearly two decades after the younger Lewis had assumed company leadership, effectively holding back the introduction of meaningful reforms.

 
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Spedan Lewis thought deeply about future generations. In 1954, he wrote that the John Lewis Partnership couldn’t be considered firmly established until some future time when his successor’s successor (this would be the fourth chairman of the firm) was found supporting the company’s constitution. Today, the partnership is on its fifth chairman (Sir Charlie Mayfield) and still holds to the constitution and, more importantly, the philosophy behind it. It has more than 90,000 partners working in approximately 40 modern department stores and 300 Waitrose supermarkets. It is still employee owned, still manages with a long-term perspective, and is still known for its exceptional customer service. It has become a national leader in environmental stewardship and community involvement, and a major innovator in electronic retailing.

The American Cast Iron Pipe Company has a similarly long-lived philosophical commitment behind it. In 1905, about the time Spedan Lewis first went 
to work for his father, John Joseph Eagan became ACIPCO’s founding president. A devout Christian, Eagan based the company’s guiding principles explicitly on the Golden Rule. Despite the segregationist milieu of the American South at that time, Eagan extended to African-Americans his commitment to treat others as he wished to be treated. His philosophy led him to introduce a stakeholder approach to management (although he didn’t call it that), in which the well-being of employees and customers was considered as important as that of shareholders and owners.

Like Lewis, Eagan translated his ideals into a series of business practices and structures. For example, he made binding legal arrangements for the company to pay no more than 6 percent of its profits annually to shareholders; the rest went to employees as profit sharing. Around 1922, he penned a will in which he left all his own stock in a trust, the profits of which would be used for the benefit of the company’s employees. He stipulated that his ACIPCO stock could never be sold because his employees were “not servants but friends,” thus the business’s profits “belonged” to them. He made it clear that this was not an act of charity; the trust would be worthless unless the company was successful. The employees would reap only what they earned, and would bear most of the company’s financial risk.

Today, ACIPCO continues to operate for the benefit of its employees under the terms of its original constitution. It is still a leader in occupational health and safety, and is the preferred place of employment in Birmingham for blue-collar workers of all races. Its employees receive extensive on-the-job training, and they and their children are eligible for college tuition remission. Turnover among its 2,554 employees is less than half a percent per year, and its workers, a third of them African-American, enjoy a state-of-the-art wellness center that is also open to their families. The company’s workers, their families, and company retirees also have access to the company’s on-site medical center.

The philosophy at W.L. Gore and Associates has more to do with fostering innovation and creativity. Bill Gore had been a highly creative and innovative young chemist, working in DuPont’s laboratories. When he invented a way to coat metal wires in multiple colors, with a polymer called PTFE, DuPont passed on the opportunity to develop it. (This innovation later proved to be worth hundreds of millions of dollars.) Gore and his wife, Vieve, set out to create a new company where innovative, self-starting employees would be treated more encouragingly — a business devoid of the barriers, structures, and bureaucratic nonsense that can hamper the free play of imagination, creativity, and initiative.

Over subsequent decades, Gore designed an organizational system that came to be known as “un-management,” in which there were no titles, bosses, job descriptions, ranks, or rules. To avoid the deadly pyramidal hierarchies found at DuPont and other big companies, Gore’s organization had a “lattice” structure, where everyone was equal. Because there were no bosses, if Gore associates wanted to put a title on their business card, they were free to invent one. One imaginative young associate titled herself “Supreme Commander.” Whenever new Gore associates were hired, they were simply told to “go find something useful to do.”

One might reasonably expect such a nonsystem to result in chaos; in fact, it has resulted in decades of product innovation. Through constant discussions, Bill Gore’s “associates” came to understand fully why the company was structured as it was, and what they should do to make it succeed — without the need for constant supervision or time-wasting approvals from higher-ups. Gore believed that when his people understood what he was trying to achieve, he could trust them to act as he himself would act in any given situation.

Along the way, Gore developed a theory of emergent leadership: One becomes a leader by attracting followers. For example, when an associate had an idea for a new product or project, the first step was to enlist others to work on it with him or her. Once a team was assembled and a project proposal written, the effort would be funded. If, after a time, the project didn’t work out, there would be a small celebration, the team would disband, and the former leader might join a new team headed by another emergent and temporary leader. Each team was self-managing, and each set its own work schedule. Moreover, to make the time needed for creativity, each associate was given 10 percent “free time” to work on new projects.

Over the decades, employees have come to own greater percentages of the non-traded company stock in partnership with the Gore family and, after three successions of leadership, Bill Gore’s system remains firmly and profitably in place. But maintaining such cultures is not easy. Indeed, it takes more than a philosophy — it takes a set of rules.

Enlightened Governance

The history of socially responsible companies shows that when virtuous programs and policies exist primarily because an individual leader cares about them, his or her successors have no problem removing them. These practices are far more likely to last when they are institutionalized in rules of governance. Thus, a few enlightened capitalists have attempted, in one form or another, to institutionalize their practices in an organizational structure. Sometimes this involves a family business structure; sometimes, as with England’s 174-year-old Economist magazine, it involves a board of independent trustees charged with safeguarding its corporate and editorial independence. It can also rely on an independent trust or foundation that owns most of the company stock. Among the companies that have tried this solution are the Encyclopedia Britannica (owned until 1996 by a trust of which the University of Chicago was the sole beneficiary); the tea company Camellia (governed by a foundation holding 52 percent of its stock, with conditions that trustees must provide housing, schools, and hospitals for the company’s 79,000 employees on tea plantations in Kenya, India, and Bangladesh); and some of Continental Europe’s largest corporations, including IKEA, Heineken, and Bertelsmann.

In the U.S., by contrast, there have been relatively few such arrangements during the last 50 years. As University of Denver political scientist David Ciepley documents in a May 2018 Journal of Business Ethics article, ownership by a trust or foundation can offer enormous organizational, economic, and social benefits. Unfortunately for organizations in the United States, it has been more difficult to accomplish this since 1969, when, as Ciepley puts it, “Congress passed legislation that effectively prohibited a nonprofit from owning more than 20 percent of the voting shares in a corporation.”

Though trust and foundation ownership structures have proved central to sustaining virtuous practices in many companies, they are not easy to fund, design, and implement in a way that guarantees admirable behavior after the founder is gone. Indeed, Spedan and Eagan spent years constructing ironclad documents that bound future generations of trustees to conform to their aspirations for their companies. Another high-minded founder, Milton Hershey of the chocolate company that bears his name, also set up a trust, but he dictated its terms in almost cavalier fashion, and it thus gives incentives to the trust’s directors that undermine Hershey’s intentions.

The history of socially responsible companies shows that when virtuous programs and policies exist primarily because an individual leader cares about them, his or her successors have no problem removing them.

Shortly after his father’s death, Spedan Lewis encoded his philosophy into a formal, written constitution for the company, which, from that point on, would be called the John Lewis Partnership. That 1929 covenant states that the ethical aim of the partnership is to employ and retain “people of integrity who are committed to working together and to supporting its Principles,” with “relationships…based on mutual respect and courtesy,” with this common purpose: “to deal honestly with its customers and secure their loyalty and trust by providing outstanding choice, value, and service.” Although that document has been altered somewhat over the years — largely in the direction of giving more power to partners — it is still in effect and credited as the prime source of the John Lewis Partnership’s extraordinary success and sustainability.

The constitution covers most facets of organizational activity. It delineates the firm’s governance structure, the roles of its chief executives and partners, a process for internal elections at various organizational levels, a bill of partner rights and responsibilities, and a list of responsibilities to the following stakeholders: customers, suppliers, competitors, local communities, the law, and the environment (the latter two added in later revisions to the document). Lewis also created a complex system of checks and balances designed to limit the ability of trustees to stray from that commitment, even while it gave them the strategic flexibility needed for innovation and to meet future competitive challenges. The company’s employees are all beneficiaries of the trust that owns the company, and their annual profit share is typically about 15 percent of their salaries. The vast majority of profits are, by constitutional requirement, earmarked for reinvestment in future growth. Perhaps the most notable feature of the constitution is Article 12, which requires the company’s officers and directors to swear to uphold its principles.

The John Lewis Partnership is not a democracy in the political sense; Lewis called it a “constitutional monarchy.” The partners are not entitled to choose the company’s professional team of executives, are not empowered to make key managerial and strategic decisions, and do not have the right to vote on such decisions. The constitution instead provides for their participation through (1) an extensive communication system that gives them full access to managerial information, and (2) an elaborate structure of committees, each with clearly defined roles, responsibilities, and authority.

At ACIPCO, John Joseph Eagan also penned a company constitution. It spells out the roles and responsibilities of ACIPCO’s board of directors, which must include two members elected by employees, one representing customers, and one chosen by the Federal Council of Churches (since merged into the National Council of Churches). The constitution prohibits the board from taking actions on employee pensions, living conditions, working conditions, housing, or wages without first consulting an elected employee advisory board. Eagan explicitly directed the trustees to use dividends from his shares in three ways: as profit sharing; as income to workers if the plant shut down for any reason; and as support to the families of deceased workers.

Alas, the vast majority of enlightened leaders do not give the same care and attention to their legal and organizational infrastructure. For example, most have done little to educate their board about the need to protect legacies of virtue — with, for example, legal barriers to hostile takeovers, or mandates on management priorities. For their part, most boards are reluctant to insist on such measures, fearing they will hamper a company’s future ability to make necessary strategic changes. The upshot is that few such legacies have been maintained in publicly traded corporations.

Although a good governance structure is necessary for long-term enlightened management, it is not sufficient. Rather, it should be regarded as a prerequisite for a more potent element: control of company stock.

Ethical Ownership

After studying the stories of enlightened capitalists for the better part of my career, I believe that ownership is the most significant predicator of virtuous business practices and the key to their sustainability. As history demonstrates, the virtuous practices of such admired leaders as Lever Brothers founder William Lever, retail magnate James Cash Penney, and the Body Shop’s innovative leader Anita Roddick came to an end once they lost financial control of the organizations they founded. In contrast, the cultures of stewardship at ACIPCO, Lincoln Electric, the John Lewis Partnership, and W.L. Gore have been sustained, in large part, because control of those companies has remained in the hands of the founder’s descendants and employees.

This was not by chance. All four founders had an aversion to public ownership of their company. James Lincoln, founder of Lincoln Electric, felt that the greatest threat to his people-oriented management practices came from Wall Street and the short-term dictates of the stock market. “The usual absentee stockholder contributes nothing to efficiency,” he wrote. “He buys a stock today and sells it tomorrow. He often doesn’t even know what the company makes. Why should he be rewarded by large dividends?”

When many commentators think about enlightened business ownership, they focus on the advantages of privately held family businesses. Besides serving as society’s primary engines of innovation and job creation, these small and medium-sized enterprises are frequently linked closely with commitment to meaningful business purpose and values. But they often have too few resources for any but the most minimal forms of social engagement. There are exceptions, of course. The giant family-owned Mars Corporation has, over four generations of leadership, offered exceptionally enlightened employee development programs; in 2017, it pledged to spend US$1 billion on renewable energy and cut its greenhouse emissions by 27 percent by 2025. The company recently introduced a line of healthy snacks and vowed to cut back on the amount of salt, fat, sugar, and butter in its chocolate products. Mars’s CEO, Grant Reid, has told the Financial Times that running a privately owned company makes it easier for him to make such costly long-term commitments.

Unfortunately, because most small, privately held businesses are not profitable enough to compensate their entrepreneurial founders for the hard work and long hours they invested in creating those businesses, those founders typically seek to get payoffs for their efforts in one of two ways: doing as the Body Shop’s Anita Roddick did, selling their company to a big corporation, or doing as Control Data Corporation’s William Norris did, selling shares to investors. Either way, founders risk losing control, the fate of both Roddick and Norris. Even entrepreneurs who continue to own and manage their companies often find it necessary to sell equity in them to finance growth. That act often turns out to be a devil’s bargain: When founders’ (or their families’) ownership is diluted, they begin to lose control of how the business is managed, as the family that founded Marks & Spencer discovered. And when shares are bought and sold on financial markets, investors inevitably gain the upper hand; eventually founders and their families lose influence as their companies come to be led by professional managers. When that occurs, investor demand for short-term profit increases, and the sustainability of virtuous practices becomes imperiled. All this is reinforced by concepts related to shareholder primacy, which dictate that managers are simply the agents of stock owners, and no other constituency has any claim. When the purpose of a corporation is seen as only maximizing shareholder profit, enlightened capitalism — even when it is linked to long-term financial success — tends to fall by the wayside.

Sustaining a Values-Based Company

There have been an increasing number of calls for greater corporate social engagement in recent years. But when I studied the actual behavior of publicly traded companies, I was unable to find much real progress beyond executive rhetoric and relatively costless activities such as employee community volunteer programs and swapping out incandescent lightbulbs for LEDs. Some companies come under tremendous shareholder pressure to abandon (or greatly scale back) their social and environmental efforts. For example, Unilever — widely considered the world’s most socially responsible giant company — has struggled to keep its commitment to provide fair salaries and generous benefits to employees in the developing world. Another example is Whole Foods. CEO John Mackey (a cofounder of the conscious capitalism movement) was forced to sell his company to Amazon in a rushed effort to save its enlightened policies from the hands of activist investors, who wanted it sold to a conventionally managed supermarket chain.

Given these precedents, and a multitude of others, it is doubtful that many executives of publicly traded firms will buck Wall Street by introducing enlightened employee- and community-oriented practices that appear to diminish profits. If they do, they will run up against the same kind of investor headwinds that Mackey recently encountered. The silver lining of that cloud is the existence of alternative forms of ownership, such as the trusts, foundations, and employee ownership models used by the four companies described here, along with traditional family ownership and cooperatives.

Most encouraging has been the recent emergence of “benefit corporation” charters. Such charters allow companies to be legally structured in such a way that their officers and directors are permitted to make decisions benefiting society even when those actions are not in the immediate interest of shareholders. Twenty-seven U.S. states now offer benefit corporation status to 860 companies (the best known is sports clothier Patagonia), thus shielding them from the dictates of “shareholder primacy.” As more national and state governments pass legislation enabling the formation of benefit corporations, the sustainability of enlightened practices just might become the norm rather than the rare exception.

In the meantime, we have the example of enlightened leaders such as Lewis, Eagan, Lincoln, and Gore — and current first-generation leaders such as Yvon Chouinard of Patagonia and Jack Stack of Springfield Manufacturing. And we have our ability to learn from history. Although the record shows that few publicly traded companies have sustained enlightened practices over time and through changes in leadership, the companies owned by families, trusts, foundations, and employee stock ownership plans have fared far better. One might conclude that businesspeople wishing to create sustainably virtuous organizations are more likely to succeed in companies with such alternative forms of ownership than in publicly traded organizations. But publicly traded companies should not be written off. They are too influential; too much capital passes through them; and they, too, have a strong interest in attracting good people, doing good work, and creating a sustainable legacy.

My reading of business history is that a pluralistic economy with a healthy mix of private, public, and nonprofit organizations offers the best prospect for prosperity and a just society. Does this mean that enlightened corporate leadership can be compatible with all the forms of corporate governance, including shareholder capitalism? On that question I agree with the closing of the novel Pontoon by Garrison Keillor: “You get old and you realize there are no answers, just stories.”

How Lincoln Electric Thrives in the Rust Belt

Lincoln Electric is the United States’ greatest continuing corporate success story. In 1914, James Finney Lincoln, the younger brother of the company’s founder and his successor as chief executive, began to build an enterprise in which even undereducated men and women could develop their talents to the fullest and be richly rewarded for doing so. As he later wrote, “I knew if I could get the people in the company to want to succeed as badly as I did, there would be no problems we could not solve together.”

One century and six major changes of leadership later, Lincoln Electric has become the world’s largest manufacturer of electric arc welding machines — a highly profitable, productive, US$3 billion multinational enterprise with 3,300 U.S. workers and 6,000 workers in 19 other countries. Since 1947, the company has not laid off a single permanent employee, and for more than 80 years, it has paid bonuses to its workers averaging 25 to 120 percent of their annual salary. (In 2017, the company paid out about $100 million in bonuses on $300 million in net profit.) Lincoln’s U.S. workers have consistently earned two to three times the average income of people in the U.S., in good times and bad.

James Lincoln was a rock-ribbed conservative and a vocal advocate of free markets who nonetheless attempted to create a classless society within his company. He believed that the primary task of business leaders was to create conditions under which people’s talents could be developed — and the success with which leaders used that talent would determine the progress of industry and society. To make employee development a reality, Lincoln worked diligently over four decades to create a unique system he called “incentive management.” The system has four key elements.

1. Communication and participation. The Lincoln Electric Advisory Board, elected annually by employees, meets every two weeks with the company’s top management, and they jointly make almost every major decision at the company. The board is empowered to make suggestions, lodge complaints, criticize management, propose new ways to improve productivity and product quality, and raise any other concerns on workers’ minds. Lincoln’s domestic U.S. workers have agreed to create new jobs abroad, instead of at home, reasoning foreign expansion was necessary for the long-term viability of their enterprise. That unprecedented decision represents a degree of employee cooperation with management found in no other U.S. enterprise.

2. Piecework. About a third of Lincoln Electric’s employees are factory workers. They earn a base wage comparable to that of unionized workers in their region, but with no upper limit on additional pay, which is based on the number of “pieces” they complete. This system also gives employees an incentive to work themselves out of their jobs by finding ways to automate their tasks. When they do so, they are rewarded and promoted to jobs requiring higher human skills.

3. Merit-based bonuses. The company motivates all its workers with a uniquely generous form of profit sharing. Annually, roughly one-third of total company profits are paid out to employees as merit-based bonuses. The bonus metrics for white-collar employees include such factors as customer focus, innovation, decision-making judgment, and working without supervision. In 2017, the typical Lincoln employee took home roughly $74,000 in total annual compensation, about $25,000 of that in the form of a bonus.

4. Guaranteed employment. In 1958, the company introduced a guaranteed continuous employment plan still in place today. The plan does not guarantee jobs for life; instead, Lincoln’s domestic, permanent employees (those with three years of service in Cleveland) are promised at least 30 hours of paid employment per week, even when there is low demand for its products. In exchange for the guarantee, workers agree to work overtime when Lincoln products are in great demand.

Lincoln’s success has made it a mainstay of the communities in and around Cleveland, where the company’s main plant is located — which might instead have become abandoned neighborhoods. Today, as Ohio’s top exporter, Lincoln Electric remains a bright spot in Cleveland’s otherwise troubled economy. Its enormous, ultraclean plant glows under a giant wind turbine (the largest of its kind in an urban area) providing power to the plant without adding pollution to the community’s air.

The Lincoln Electric Company is still going strong today, even though the company went public in 1995. Its executives now participate in quarterly phone calls with Wall Street analysts, and in annual meetings with investors. Hence, they are under pressure to put the interests of investors ahead of the constituencies James Lincoln believed deserved precedence. Additionally, the company has acquired smaller firms at which employees have opted not to participate in the Lincoln bonus system, and most of the company’s growth has been overseas, often in countries where laws and customs preclude the introduction of some, or all, of Lincoln’s traditional employment practices. In light of these developments, it is anybody’s guess how long the culture created by James Lincoln can be sustained.

Author Profile:

  • James O’Toole is professor emeritus at the University of Southern California’s Marshall School of Business, and founding director of the Neely Center for Ethical Leadership. Beginning with his 1973 book, Work in America, he has steadily chronicled the link between business and values. He has been a contributor to strategy+business since 2001.
  • Adapted from the forthcoming book The Enlightened Capitalists: Cautionary Tales of Business Pioneers Who Tried to Do Well by Doing Good, byJames O’Toole. Copyright © 2019 by James O’Toole. Published Feb. 26, 2019, by HarperBusiness, an imprint of HarperCollins. Excerpted by permission.
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