By Nick A Shepherd,
The Current Business Model Conspires Against Truth
Will Laws Be Required to Enforce Greater Truth Telling?
Companies Cannot Tell the Truth Until They Can Be Truly Proud of Their Practices
Do businesses generally tell the truth? Many people have become so skeptical about business and marketing, the immediate answer is: business always lies. Others may be more charitable, accepting that occasionally business may lie or that sometimes we have to put a positive spin on things.
The fact is that most cannot tell the truth because much of the way they conduct business would not be palatable if publicly disclosed.
A theme this year of the World Economic Forum Davos summit focuses on rebuilding trust. Yet how? I did not see much about that on the agenda. A report by Oxfam, Inequality Inc., was released at the Davos Summit as a public relations shot across the bow. The overall theme of the Oxfam report is that in the current shareholder-focused system most organizations do not primarily focus on value creation but rather on rewarding the wealthy, not the workers, and on dodging taxes, profiting from privatization, polluting, damaging public infrastructure, and driving climate breakdown. It’s no wonder that so many organizations cannot tell the truth in their advertising and corporate communications. The report argues for revitalizing the “state” to give it greater leverage over the super-rich; further regulate business and give tax incentives or other support for stakeholder-oriented enterprises. Is that what free enterprise is asking for?
The reality is that it is almost impossible to achieve trust when the current economic model conspires to make truth telling difficult. A focus on enhancing returns by cutting corners by its very nature creates a culture of check-off-the-box compliance if required and the need to make misleading statements in marketing and corporate communications.
The entire financial system is founded upon faith in the future: confidence in debts being paid and people living up to their commitments. So, anyone in senior management including boards and investors will be biased towards exuding confidence. Plus, as leaders they often believe in their positive view of the future because they feel genuine passion for their vision and their job is to manage their way through problems. Thus, many deliberately or inadvertently build their brand story on false claims.
The marketplace is based on leveraging any competitive advantage an organization can legally adopt. This has led to a proliferation of misleading claims from the dawn of capitalism that became more sophisticated in advertising in the 1960s when leading agencies had long-since disbanded “motivation” departments led by psychologists to literally manipulate people—but the mentality continues to thrive in so many misleading claims and terms, confusing pricing, package shrinkages, promises broken, and more recently greenwashing, so that surveys by Edelman indicate that less than 50% of people immediately believe claims made in advertising.
The challenge, especially at larger organizations, is that a focus on extracting value requires organizations to mislead all stakeholders in one way or another, because no one wants to hear that a company is paying employees as little as possible or providing inadequate health insurance and safety precautions; cutting corners on customer service or product safety, making pricing impossible to understand, changing package sizes without clear disclosure; offloading infrastructure and environmental costs on to communities; manipulating taxes, or encouraging or looking the other way at discrimination or harassment, etc.
The disconnect just gets buried into the bottom line.
Many people may already have concluded that business simply cannot be left to its own devices and that laws and audited reporting of large organizations will be required, as the European Union has concluded with its “anti-greenwashing” Corporate Sustainability Reporting Directive. The new law requires audited reports and the potential for criminal sanctions. Sensing the increased desire for transparency, business and government have begun to move in the direction of disclosures. Over 150 companies have signed on to the voluntary World Economic Forum Stakeholder Capitalism Metrics, and a few have adopted audited ISO 30414 Human Capital disclosures.
The challenge is that forcing companies to comply with disclosure laws is much more likely to foster a spirit of compliance than a focus on value creation. In the world of manufacturing, it was not until competitive forces led primarily by the Japanese in the late 20th century that many organizations began to employ a holistic strategic and systematic approach to quality manufacturing involving all stakeholders that the Japanese have continued to more successfully deploy than most US companies. The Japanese continue to put a focus on the human element the US continues to overlook, witnessed by the latest US automotive strike, hardly conducive to employee engagement. The Japanese automakers still dominate the top 10 list of Consumer Reports most reliable cars in the US.
In free markets, competitive forces are a far more sustainable driver of change than laws alone. To tell the truth, and create a more sustainable business model, organizations will need to focus on value creation rather than value extraction. As the last three years of anti-ESG backlash has confirmed, trust cannot be earned by hiring corporate communications firms and publishing corporate sustainability reports. It requires a fundamental focus on a new business model that cannot be faked and for which companies welcome audited disclosures as an invaluable marketing and engagement tool for all stakeholders.
Organizations cannot focus on telling the truth until they can be proud of what they do. If they are making money by cutting corners, of course they must be deceptive. Only by focusing on enhancing profits by creating value for stakeholders can they authentically move to messaging based on truth.
A recent study by the SAID Business School at Oxford University for the Institute for Real Growth, Driving More Humanized Growth, finds that stakeholder-oriented organizations outperform shareholder-focused organizations in most critical organizational domains. These findings are supported by dozens of independent research studies and common sense that companies whose employees, customers, supply chain and distribution partners, and communities are highly engaged will do better over time than organizations with dis-engaged stakeholders.
Yes, a company can make a short-term killing for insiders in the same way Ponzi schemes succeed, but there is no evidence that companies that focus on shareholder capitalism systematically outperform over time stakeholder capitalists that focus on value creation rather than value extraction. In fact, there is much evidence to suggest that a focus on value creation rather than extraction provides a competitive edge. As well documented in the books “The Power of And” by R. Edward Freeman, Professor of Business Administration at the Darden School of Business at the University of Virginia, and colleagues Kirsten E. Martin and Bidhan L. Parmar, and “Grow the Pie” by Alex Edmans, and the Enterprise Engagement Alliance library of research, pursuing an organizational purpose focuses on enhancing returns for investors only by creating value for customers, employees, supply chain partners communities and the environment in most cases provides a competitive advantage and lower risks over the long term.
One may wonder why the proponents of this stakeholder approach aren’t more publicly vocal. Maybe it’s because they have discovered that the competitive advantages, reduced risks, and healthier lifestyle are not worth sharing with their competitors.
Can business ever start telling the truth? Only when forced to do so by government or there is a competitive benefit to doing so.
About the author. Nick Shepherd is a former CFO, chartered accountant in Canada with over 50 years of business experience, including decades running an advisory practice.
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