We, Incorporated

More than neighborhoods and churches, corporations define our values. But they're not up to the task.

"Organizations are not just places where people have jobs. They are our neighborhoods, our communities. They are where we join with other people to make a difference for ourselves and others. If we think of them only as the places where we have jobs, we not only lose the opportunity for meaning, but we endanger the planet."

Doug Smith is on a tear, and why not? Just look out the window and see, as he does, what's happening. Well, not out his window: Out there, you'll just see fields and hay rolls and, past those, the fog-shrouded hills of Dutchess County, New York. No, look out the bigger window.

All is not well in corporate-ethics land. It's not just debacles like Enron and MCI; what went on at those companies was unquestionably sinister and, probably, illegal. More telling are episodes between the foul lines, as Smith would say -- subtler organizational transactions and human encounters that don't break the rules per se, yet expose our ethical underbelly.

How, for example, could Shell Oil trumpet its commitment to corporate and environmental sustainability while lying about its petroleum reserves? Why did Google Inc. discover that its search engine was, in one case, producing a disturbing anti-Semitic result -- and then wait until someone else noticed to confront the problem?

Smith has been thinking about stuff like this for 20 years. He has seen it play out in hundreds of companies. If you have a morning, he'll explain to you, thoughtfully, passionately, what's really going on. It's not what you think. Not exactly.

Smith, a 55-year-old former teacher, lawyer, executive, and McKinsey consultant, has written a book called On Value and Values: Thinking Differently About We ... in an Age of Me (Financial Times Prentice Hall, March 2004). It's both a philosophical treatise on the nature of ethics in organizations and a call to action. His argument: We must learn to exercise our values through the organizations -- notably, business organizations -- to which we belong. It is a subtle book that, though elegantly written, is not easy to read nor to distill -- which is why it may be overlooked. And that would be a shame.

Here's why: A few decades ago, our lives were centered in places. We had the most in common with our village or city neighbors, with the people geographically closest to us. Place formed our connections to the social groups that mattered most: our tribes, churches, jobs, and schools. The defining politics -- and so, defining values -- were those rooted in physical communities.

Today, place has lost relevance for most of us in a connected, global world. We reside in places, of course, but that's basically a lifestyle choice. Rather, Smith writes, "it is in markets, organizations, and networks, and among family and friends that you spend your time, pursue your most pressing purposes, and find meaning in your life." So "Where do you live?" is an interesting question, but "What do you do?" is more telling.

Think of your kids. How much time do they spend playing near home with other neighborhood children, as you probably did at their age? More likely, they divide their afternoons among a raft of organized activities, from baseball to dance to religious studies. They have friends from any number of these groups, plus school, and their experience is a function of the amalgam. Like them, we now form myriad communities around "shared paths" -- our common interests, experiences, and desires.

Smith sees the shift in community from place to "purpose," as he says, as profound. For while place-based communities historically understood how to make the values-based decisions that shaped society, organizations -- especially corporations -- are flailing. They have the power to change the future for better or worse, but not the ethical will or know-how.

If you care about the future, that's a problem.

Smith compares his writing On Value and Values to the journey of Buddha: A privileged prince, disenchanted by the excess around him, sets off on a lonely, difficult journey into the unknown. It is an egregiously heroic metaphor for him to choose, of course, but not a bad one. For Smith, writing this book has been about finding his way back.

"Doug has always been interested in 'What can I do to make the world better?' " observes Dwight Raiford, a friend from college at Yale. So progressed a mission of sorts: a year off from Yale to teach school in Gambia; law school, to pursue the Perry Mason ideal of public service; and then a hasty abandonment of the profession. "I learned that, as a lawyer, you're guiding clients with regard to legal matters, but not with regard to purpose in the world. That's what I try to do now, to connect what goes on in organizations to larger spheres."

Smith spent 11 years at McKinsey, where he ultimately co-led the organizational practice, a worldwide group of more than 100 consultants. With Jon Katzenbach, then another McKinsey guru, he wrote The Wisdom of Teams: Creating the High-Performance Organization (Harvard Business School Press, 1993), widely considered a classic. And then, in 1993, he left. He did so, he says, at a time when the firm was caught in a battle between profit-obsessed partners and those who would have pursued a broader mission. But more important, he wanted to consult on his own terms.

So Smith has passed the years since consulting for a jumble of corporate and nonprofit clients -- and thinking and writing. It's not exactly an ascetic existence: This is a guy who made some serious money over the years. But he is, in some ways, a modest person (his ambition to alter the course of humanity notwithstanding). He is not a showman and never won the notoriety of a Tom Peters or Jim Collins. The farmhouse he shares with his wife, Jane, is appropriately remote, and his Saab is showing hints of rust.

Gradually, he has found his way. A few years ago, he traveled to Alaska to work with the Arctic Slope Regional Corp., one of a dozen native Alaskan companies formed to ease construction of the oil pipeline. The shareholders were the Inupiat people, spread primarily around Barrow and seven other remote villages across a region the size of Minnesota. But, in pursuit of scale, the ASRC had expanded rapidly into a bunch of doggy businesses.

Here, he saw, was an organization populated by people living in the traditional world of places, as well as those in the world of purposes. The company's board of directors struggled with its dual mission of preserving Inupiat culture and providing economic opportunity -- two goals directly in opposition and, disastrously, left disconnected. Economic value fought moral values: Which would prevail?

And this was the problem: In our way of thinking, one or the other had to prevail. Markets, networks, and organizations, Smith argues, are the new communities, but they "are peculiarly vulnerable to dangerous fundamentalism" that limits their ability (and therefore ours, as individual employee-citizens) to connect value and values.

Most profoundly, in the business world of the past 20 years, that fundamentalism has taken the form of a near-religious obsession with the primacy of investors -- the belief that public corporations operate, ultimately, in the service of shareholder value. In such organizations, discussions of ethics, if not their practice, become marginalized. At best, Smith says, ethics have been seen as something that serve economic value -- something nice to have, as long as it doesn't get in the way.

That's what he thinks happened at Royal Dutch/Shell Group. Through the 1990s, Shell went to remarkable lengths to distance itself from crises in Nigeria and the North Sea -- indeed, to distance itself from the public's traditional perception of an oil company. Its "Listening and Responding" program tries "to educate everyone from our business partners, employees, and investors to the media and general public in Shell's business practices," according to the company's Web site. Its annual "Shell Report" presents an accounting of environmental and social impact. Shell even operates a public-access online bulletin board that allows critics to take shots at its performance.

Yet, beginning in 1997, according to a report commissioned by Shell's group audit committee, company units began aggressively booking questionable oil and gas reserves as proven. As early as mid-2001, the report indicates, managers raised the problem -- but were rebuffed by Shell's new chairman, Sir Philip Watts, with the knowledge of other senior executives. Watts directed that "no stone [be left] unturned" in the pursuit of financial targets.

No one knows for sure why Shell apparently lied, leading to the stunning admission in January that it had overstated reserves by 3.9 billion barrels. But for Smith, it smacks of investor fundamentalism and the marginalization of ethics.

"This is not cynical. This isn't Shell people saying, 'Let's manipulate the bastards,' " he says. "This is Shell people saying, 'Let's do the right thing, but within the orthodoxy of value.' So Shell pursued sustainability in the name of shareholder value -- but not at the level that says unless we truly incorporate a blend of value and values, deeply and substantively, we're going to blow up the planet. That difference is all the difference."

Smith doesn't condemn shareholder value. "If we don't have financial pressure, then what's real about any decision we make?" he asks. He just wants to connect the financial to the ethical. If Shell is a political community, then decisions driven primar-ily by financial measures cannot be sustainable -- for Shell, its people, or the world. "Neither valueless values nor valuesless value are worth much, and we know it," he says. Reconnecting the two "is a concern for all of us -- collectively and individually."

If anyone, Google would seem likely to make that connection. It is famous for pursuing great technology -- both because there's money to be made and because great technology can make the world better. The "letter from the founders" in its initial-public-offering document was adamant about values: "Don't be evil. We believe strongly that in the long term, we will be better served -- as shareholders and in all other ways -- by a company that does good things for the world even if we forgo some short-term gains."

Yet even at Google, linking value and values can be complex and painful. In early April, some troubling emails began trickling in. Someone had noted that, when he searched for the term "Jew" on Google's search engine, the first result was for an anti-Semitic site called Jewwatch.com.

The search result surely was alarming -- cofounder Sergey Brin, among other Google execs, is Jewish, and the notion of abetting a hate site was abhorrent to everyone. But Google's brand, and so its commercial success, depended in large part on the "purity" of its search technology. It had become an article of faith at the company never to mess with the results that the algorithms delivered.

And so, Jewwatch.com remained atop the search results. But Google also inserted its own link to a page that apologized for the "upsetting nature of the experience" while explaining why it was sticking to ideological neutrality. It was an admirable solution, one that appeared true both to Google's values and to its economic well-being, and Smith applauds Google for taking the Jew Watch question seriously.

One thing bugs him, though: Google actually knew about the Jew Watch result as early as three years before the public flap. Why didn't it act then? "It was a nonissue," says a spokesman. "We didn't post an explanation because no one was searching for it." If no one notices the problem, in other words, then there's no problem.

But "if our communities are only reactive," Smith notes, "where does that leave us?" As consumers, we must rely on the judgment of companies and their employees when we use their products and services. If they act on moral values only after we notice something wrong, they fall short of their responsibility as political communities. "I don't think that's good enough," Smith says.

What is, then? In a world of purpose, Smith says, organizations must actively blend value and values to sustain competitive advantage. He isn't talking about a "balanced scorecard," where dedication to social and environmental goals merely serves financial performance. Rather, value and values feed each other: Employees deliver value to customers, who create returns for shareholders for providing opportunities for those employees. Smith calls this the "ethical scorecard."

It's up to employees to participate in defining the blend of value and values a company promises and delivers to customers. Employees must work together to communicate to investors and analysts how that blend sustains performance. And employees need to help shape the learning that will foster individual and shared success.

There's a construction crew, for example, that's based in a barn on Smith's property. (It's a symbiotic relationship: They get the space discounted in exchange for work on Smith's house.) Most of the eight men have worked together for at least eight years; the newest member joined up three years ago.

The men come from different places and have different interests. But on the job, says boss Chip Hoagland, borrowing Smith's language, "we have shared paths." Those paths coalesce around important values: respect for one another, a willingness to take on different tasks, and working hard.

And one more: "We have a collective interest in doing a good job and in getting the next job." The crew understands acutely that their reputation as a group, their brand, drives their long-term economic security. "Every day you work on a job," Hoagland says, "you're one day closer to being unemployed. So good work, and good values, keep us all employed."

The crew has embraced Smith's ethical scorecard: Value and values form a virtuous circle. One can't exist without the other. So can Shell or Google comprehend that relationship the way an eight-man construction crew does? Can business organizations effectively come to terms with their new roles as political communities?

And can we? As much as the problem resides in organizations, the solution is for us to find. As Smith writes: "Who will guide organizations to adopt and implement such strategies? Who is responsible for the choices organizations make about value and values, and how those choices get communicated in markets and networks?

"The answer is obvious. We are."

Fast Take: How to travel the world of purpose

Doug Smith argues that individuals must marry economic value and moral values through organizations, markets, and networks. Don't know where to start? Here are some of his 27 "illustrative suggestions."

Annual report to the people of the enterprise Public companies issue reports to shareholders -- but rarely do these documents address all the concerns that matter to those responsible for corporate performance: employees. A dedicated report, balanced and objective, would provide employees the chance to review direction and performance.

Brand-values committee of the board of directors This group would monitor promises made and delivered by an organization's brand. The focus would be on all values: economic as well as social, political, and environmental. The committee would set policies to ensure the company delivers the values it promises.

Customer and employee participation on the board Boards that invite participation of customers and employees are more likely to blend value and values for the common good of all stakeholders. Participation could range from formal membership to committee posts to information and review functions.

Minimum values standards in qualifying vendors Big companies have seized on purchasing power to improve quality, speed, and cost. They can also use purchasing to ensure minimum standards on family, environmental, and other values. The more companies that do, the more likely that networks across industries will share values.

Keith H. Hammonds is Fast Company's deputy editor.

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