Category Archives: Business Development Ethics

Is Maximizing Shareholder Value Poisonous?

If you grab your favorite marketing book and boil away process diagrams, statistics, and literary fluff, just two words will remain: create value.  Easy-sounding advice, but for most executives, it’s wicked hard. An ideal place for opportunists to step in and promote simple answers and quick remedies.

Business leaders have an insatiable appetite for how-to’s on value creation. And they get a nonstop barrage of erudition from practitioners, self-anointed experts, and academics who cobble salads of trendy verbs, nouns, adjectives and industry jargon, producing inscrutable sentences to solve the insoluble. Maximize/Optimize/Leverage [fill in words]! Measure this! Control that! Be laser-focused on [name of thing]!

Some recommendations show great insight. But others are obvious admonitions and bland platitudes hawked as panaceas, hacks, and fixes for whatever strategic impediment wanders into a CXO’s crosshairs. Useful or not, many are shamelessly aimed at a goal few have dared to question: maximizing shareholder value.

Until now. People have started to recognize that maximizing shareholder value has a central role in harming other stakeholders. The problem is growing. In the name of maximizing shareholder value, crucial employee benefits are being slashed, workers and contractors are hired and churned at whim, and producers with sketchy labor and supply chain practices are awarded contracts – as long as they maintain the highest quality at the lowest cost. Who cares if the widget was made in a firetrap factory by laborers required to work 80-hour weeks, with no overtime pay differential?  Magnanimity and fairness, once emblems of corporate pride, have been expunged from C-Suite vocabulary. Hey, stock prices don’t increase without trade-offs!

Customers are suffering, too – mentally, physically, and financially. Faulty product designs cause injury or death, as we saw recently with GM and Takata. Companies weaken customer service, often under the guise of improving it. “As part of our commitment to our loyal customers, we are now automating . . .” Every customer support rep I’ve spoken to this year has dutifully reminded me that I can take care of my transaction or inquiry through a website. “I can step you through setting up a profile, if you like . . .” Part of the script, I suppose, but what a humiliation to be required to pull the rug out from under your own job, one conversation at a time!

With public trust in corporations waning, a new type of social-media superhero has emerged: the “disaster specialist,” to rush in post-debacle and patch things up with aggrieved customers. They bring “field-tested industry best practices.” Reassuring to know, if you’re prone to repeating widely-publicized mistakes. And when employee morale tanks, a different group of consultants waits at the door, promoting “surefire” ways to rekindle worker passion. Meanwhile, in the executive office, all’s well. Why worry, when your stock price streaks on a heavenly trajectory? There’s a hefty bag of bonus money waiting at the end of the rainbow.

This is a perverse system, in every sense of the word. In the name of maximizing shareholder value, companies routinely decimate their vital infrastructure and brand equity, then pay steeply to repair and rebuild. Some companies complete this circuit more than once. “The non-investor stakeholders? Let them eat cake!”

Maybe if we humanized those likeliest to get hurt, things could improve. For starters, we should stop calling investors, employees, customers, and vendors stakeholders, and instead refer to them as people. “It would be a funnier story if it weren’t for the tragic aspects of American capitalism in the 21st century,” wrote Matthew Stewart in a Wall Street Journal review of Duff McDonald’s book about Harvard Business School, titled The Golden Passport (Schools of Mismanagement: a Modern Business Education Provides Theories and Metrics But No Moral Center, April 22, 2017).

How did this happen? Stewart writes that in the 1980’s, Harvard Business School “suddenly embraced the notion that managers are just a shareholder’s idea of roadkill – and that it is positively bad for shareholders to possess anything resembling a moral conscience. If there is a villain painted in a single shade of black in Mr. McDonald’s version of history, it is Michael Jensen, the economist and Harvard Business School professor who supplied the intellectual rationalizations for the leveraged buyout boom, the CEO compensation boondoggle, and the rampant financialization of the economy. In Mr. McDonald’s tale, Mr. Jensen shows up ‘spewing out ridiculous blanket claims such as . . . “shareholders gain when golden parachutes are adopted.”’ Forty years ago, I drank the same Kool-Aid as an undergraduate business student.

For his part, Jensen was influenced by an op-ed article by Milton Friedman that appeared in The New York Times Magazine on September 13, 1970 (A Friedman Doctrine – The Social Responsibility of Business is to Increase Its Profits) that has become “the most read, misread, and referenced article ever written by a Nobel Laureate economist.” wrote James Heskett (Should Management be Primarily Responsible to Shareholders?, Harvard Business Review, May 9, 2017). “And It’s still being argued today. Friedman argued that the best way for managers to contribute to the social good was by maintaining a single-minded focus on profit, acting as agents for shareholders who put their capital at risk investing in their companies . . . Of greater importance than the issue posed in the article’s title was the proposition that followed: Because shareholders are owners of a corporation, professional managers and directors are their agents, primarily responsible for carrying out their wishes and creating value for them.”

According to Stewart, Harvard Business School produced “magic sticks that promised to answer every human need with a handy spreadsheet. In the more recent chapters of the history, the scariest parts are where the faculty take the spreadsheets off campus.” Among the locations Stewart is referring to is the customer-facing side of business. The retail sales floor. The Point-of-Sale terminal at Target, Home Depot, and Walmart. Online commerce. B2C, B2B and B2G. Neighborhoods monitored hundreds or thousands of miles away by wonky marketers and data scientists using predictive analytics dashboards.

Friedman’s and Jensen’s ideas have permeated into a “river of self-love that is America’s management-ideology complex,” as Stewart describes it. Every day, putrid bubbles of pomposity rise up from the sediment: United Airlines drags a paying passenger from one of its planes, initially defending its action. Wells Fargo systemically exploits its customers and employees so its president and senior managers can receive multi-million dollar bonuses tied to stock price. Theranos coerces its employees into silence to conceal the dangerous technology flaws in its widely-installed blood assay equipment. This is Mr. Friedman’s “single-minded focus on profit” at work. If he were alive today, Friedman would object to my characterization. “There is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud,” he wrote. It took society nearly fifty years to fully recognize that Friedman’s view had great potential for harm. Today, many people simply ignore every word he wrote after profits. No doubt, some believe his sentence ends with that word.

In the 1990’s, the privately-held company I worked for was acquired by a firm traded on the NASDAQ, and a massive cultural shift overtook the sales organization almost immediately. Some salespeople who regularly provided great support for their customers became pariahs for not making goal. They were flushed, to use the indelicate vernacular of the profession, meaning they were fired. “Everything’s changed,” we were regularly reminded at our monthly sales pep talks. “Investment analysts are looking closely at our revenue performance, and it’s imperative that we hit our number every quarter.” Did our buyout and concomitant obsession with satisfying the analysts’ revenue expectations increase customer satisfaction? Did it motivate the company to invest more in customer support? Did it improve morale? It’s a fallacy to believe that on-target revenue production means employees and customers are happy, or that “top revenue producers” have delighted customers.

Should we replace maximizing shareholder value as management’s objective? If so, what goes in its place? The core issue is allegiance. “Harvard Business School Professors Joseph Bower and Lynn Paine propose that the primary allegiance of managers and their boards should be to the health of the corporation, not the maximization of shareholder value [emphasis, mine]. The rationale for this includes the arguments that managers can be held legally accountable while shareholders ‘have no legal duty to protect or serve the companies whose shares they own,’” writes James Heskett. And it’s immaterial whether investors have morals or personal integrity. Under maximize shareholder value, governance is not automatically granted a role in how companies are managed. In fact, governance can threaten shareholder value. In business, there’s no such thing as an immutable truthEven the notion of shareholders as owners of a company has been called into question.

The widespread practice of prioritizing shareholder value maximization seems odd, given the ambiguity over their role and rights in the development and implementation of corporate strategies and tactics. This becomes especially problematic when ensuring high returns to shareholders exacts heavy costs on others who are similarly vital for creating value.  For example, decisions that benefit shareholders, such as increasing short-term profitability through downsizing, can be catastrophic not only for customers and employees, but for the communities and the ecosystems of enterprises that depend on them to thrive. To make financial ratios more attractive, companies often reduce or eliminate essential long-term investments in research and development. In some cases, a company’s most valuable assets can be sold or leveraged to provide investors with immediate, substantial financial returns, while jeopardizing a company’s overall vitality. Few could argue that outcomes for customers, employees, and suppliers are fairly protected under this system.

If maximize shareholder value is so bad, why have so many companies embraced the idea? First, companies need investment capital to launch, grow, and fund new development. Those who put their money at risk deserve to be rewarded – and should be. Second, according to Heskett, “One reason the theory has predominated is that it is simple and straightforward. Shareholder value is easy to measure. Agency theory [the idea that a company’s managers and directors are responsible for carrying out the wishes of an organization’s owners and shareholders] simplifies the mission for managers; they need only serve one primary master [emphasis, mine].”

The problem is, converting to another corporate edict – one that is ostensibly healthier, more egalitarian, and more long-term focused – is complicated, as this passage from NCR Corporation’s annual report, excerpted from an article, Two points of view: The Point of Shareholder Wealth Maximization, illustrates:

“. . . board of directors no longer believe that shareholders is [sic] the only constituent to whom they are responsible”. (Wang, Jia and Dewhirst, H. Dudley, 1992). Explicitly, shareholder value maximization is not the only goal of the company, a company can’t do well without caring the interests of customers, suppliers, employees, or government environment . . . Stakeholders are constituencies who play an important role in the fortunes of the company. Their primary mission is to create value for stakeholders.”

That can work when the activities involved in value creation for all stakeholders are harmonious and aligned. But they are not. A point that Michael Jensen picks on:

“Stakeholder theory effectively leaves managers and directors unaccountable for their stewardship of the firm’s resources . . . plays into the hands of managers by allowing them to pursue their own interest at the expense of the firm’s financial claimants and society at large. It allows managers and directors to devote the firm’s resources to their own favorite causes – the environment, arts, cities, medical research – without being held accountable.”

I think his worry that managers will pursue disparate goals like aiding environmental causes or solving world hunger is overblown. Isn’t that the role of leadership – to keep everyone in the organization on the same page, so to speak? Here, Jensen backpedals, and provides a tiny concession:

“But . . . No company can create great value for its shareholders without stable growth of revenue, which comes from the relationship with customers, suppliers, bankers or government and so on.”

I agree with this last point. But I also recognize that with diminishing consumer trust, growing wealth inequality, and information power skewing back to corporations, Jensen and I are looking at business through the same rose-colored glasses.

Society cannot assume that by focusing on fulfilling the interests of shareholders we will produce consistently benign outcomes for others. We need something better than maximizing shareholder value as a managerial marching order. I’m just not sure exactly what it should be.

Doused Fyer: Does Our Obsession with Audacious Innovation Make Us Suckers for Scams?

 

What’s the difference between aggressive marketing and a sales scam?

The aftermath of the 2017 Fyer Festival  explores this question, and lawyers are debating the answer. Was the event a wayward business venture, or a get-rich-quick scheme? The festival’s originator, entrepreneur Billy McFarland, claims honest intentions, but blames faulty planning and bad circumstances for the festival’s demise.

Over-promise, then don’t deliver. Embedded within the debate lies a festering boil, epidemic in sales: the gap between a company’s marketing speil, and what customers get. With the Fyer Festival, though, it’s not a gap, but a chasm. Some question whether McFarland even had the wherewithal to deliver the flamboyant sales vision he created. Was he committed to keeping his promises? There are at least eight lawsuits pending against McFarland and his company, Fyer Media, and the courts will sort out the answers. The Fyer Festival has become “the focus of a criminal investigation, with federal authorities looking into possible mail, wire and securities fraud,” The New York Times reported on May 21st. This is not your run-of-the-mill business belly flop.

What was promised.  In 2016, McFarland promoted a mega-party scheduled for April, 2017 featuring music, celebrity chefs, gourmet food and luxury accommodations. Fyer Media showcased the venue as an island in the Bahamas called Fyre Cay – which doesn’t exist. One ticket package, the “Artist’s Palace,” was offered for $400,000, and provided four beds, eight VIP tickets and dinner with one festival performer.

To prospects, McFarland scrupulously maintained the festival’s high-end image. Rapper Ja Rule (whose real name is Jeffery Atkins) was touted as a celebrity business partner. Advertising listed musical acts by G.O.O.D Music, Major Lazer, and Migos. Fyer Media targeted millennials, and they sold about 8,000 tickets. To pump up revenue, the company also encouraged customers to pay $1,500 in advance for a digital Fyer Wristband to facilitate cashless transactions for “incidentals.” That added nearly $2 million to the top line.

But a few weeks before the event, as the Fyer hype engine was rocking at full throttle, a harrowing story was unfolding behind the scenes. According to a May 21 article in The New York Times,  In Wreckage of the Fyer Festival, Fury, Lawsuits, and an Inquiry,

“Expenses were swelling: Bed frames and beach chairs were rush-ordered; beach umbrellas had to be flown in, rather than shipped, because of late payments, according to three production staff members. Essential production tools, like walkie-talkies, never even arrived. Back at Fyre Media, the company credit cards were being declined for everyday office purchases.

Employees said they feared that their boss was using funds from their booking app to fund the festival. But Mr. McFarland reassured them in April when he said that Comcast Ventures, the investment arm of the cable and media giant, had agreed to invest up to $25 million in Fyer Media. In fact, Comcast had considered a deal, the company said, but passed ‘after conducting thorough due diligence.’ Mr. McFarland did not tell his employees.

As the festival date neared, the production crew’s wages, paid by wire or cash, arrived late, or short, and then stopped altogether, five members of the crew said.”

“As late as that Thursday evening [before the first weekend of the festival], Mr. McFarland and Ja Rule had continued to assure talent agents that all systems were go. But by Friday morning, both weekends of the festival had been cancelled. Within a few days, Mr. McFarland and the rest of his executive team had left the island, their site strewn with mattresses, empty Champagne bottles and other detritus.”

On April 1st, McFarland was still scrambling to find a location to accommodate the prospective partiers, scheduled to arrive on the 27th. McFarland finally secured a venue, Roker Point on Great Exuma Island. It was too little, too late. The festival was doomed.

What was delivered. Instead of luxurious digs and lavish buffets, arriving customers got tents, and cheese sandwiches on white bread. And lots of horseflies. Vendors lost money, too. Luca Sabatini claims his Miami-based company, Unreal Systems, lost about $10 million. Adding to the dismal ambience, a storm dumped heavy rain on the disappointed partygoers.

The Fyer Festival became a safety crisis. Many attendees could not leave readily. As they struggled to make arrangements, Fyer Media provided them this message on their website:

“Fyre Festival set out to provide a once-in-a-lifetime musical experience on the Islands of the Exumas. Due to circumstances out of our control, the physical infrastructure was not in place on time and we are unable to fulfill on that vision safely and enjoyably for our guests. At this time, we are working tirelessly to get flights scheduled and get everyone off of Great Exuma and home safely as quickly as we can. We ask that guests currently on-island do not make their own arrangements to get to the airport as we are coordinating those plans. We are working to place everyone on complimentary charters back to Miami today; this process has commenced and the safety and comfort of our guests is our top priority. The festival is being postponed until we can further assess if and when we are able to create the high-quality experience we envisioned. We ask for everyone’s patience and cooperation during this difficult time as we work as quickly and safely as we can to remedy this unforeseeable situation. We will continue to provide regular updates via email to our guests and via our official social media channels as they become available.”

The Fyer Festival provides an iconic recipe for a business fiasco: combine a shaky business model, lame assumptions, empty promises, opaque management, unpaid workers, stiffed vendors, jilted customers, and environmental wreckage. Blend and pour. Top off with a generous dollop of management arrogance. Serve.

Selling the vision is the easy part . . . Was McFarland dishonest in selling something he didn’t yet have? Before you answer, remember that selling things before they are available is not new or uncommon. Real estate agents sell resort property “under development,” and companies in many industries sell future services like maintenance plans, for which they may not have capabilities to provide. Lately, Tesla accepted deposits for its solar energy roof tile systems pending future installation. I’m not sure if anyone batted an eye.

What drives sales of not-yet-available products is the abiding hope that vendors will deliver what’s expected. That – and legal contracts. Contracts are created to protect sellers and buyers, and that helps facilitate transactions. But customers must never forget that when vendors write contracts, they prioritize and protect their own interests. Always. Check the fine print: customers generally bear whatever risks the vendors don’t want or can’t afford, and absorb the costs when they come home to roost. The truth about whether the Fyer Festival’s terms of sale offered adequate – or any – protection to its customers will unfold in the coming weeks.

McFarland’s “killer skill.” Customers of McFarland’s earlier entrepreneurial venture, Magnises, “complained that offers, like Beyonce tickets, never materialized, and that annual dues were charged to their credit cards months early . . . Still, he had a way of engendering trust.”

This irony galls me. But I shouldn’t be surprised. It’s rare to find anything written about strategy, tactics, and best practices that’s coupled to maintaining moral or ethical foundations. It’s all about money. We worship revenue production and profit performance. We laud “audacious risk takers” and developers of “the next great thing.”

We enthusiastically offer them advice and encouragement, but we don’t scrutinize their premise, motives, or intent. Senior managers fire functionaries for what they deem misbehavior or “not living up to the company’s ideals,” but they don’t banish their peers after they exploit customer trust. Had the US government not stepped in, Elizabeth Holmes, who admitted that the blood analysis company she founded, Theranos, is a fraud, would still be enriching herself while imperiling her customers. Now she has been forbidden from running another lab for . . . two entire years!

The same apathy allowed a company like SwanLuv to get launched. And the same apathy enabled Billy McFarland, a checkered serial entrepreneur, to execute a harebrained venture like the Fyer Festival, and sell 8,000 tickets. As long as there’s a pot of gold at the end of the entrepreneurial rainbow, who cares if people get hurt or die as the result of someone’s misguided aspirations?

“We’ve moved from an industrial economy to a consumer economy to a service economy to an information economy to what you might call a flagrant-exploitation economy – one in which branding and ‘storytelling’ have replaced advertising and possibly even reality. It’s not just that we’re being sold the sizzle more than the steak. It’s that we’re being sold the sizzle instead of and at the expense of the steak,” Carina Chocano wrote in a New York Times article, False Front.

“Cultivating authenticity” – the new watchword for marketers. “If everything lived up to its hype, the world would be burdened with far fewer bad movies, miracle vitamins and optimistic campaign promises,” Chocano says. “Wells Fargo employees spent five years creating millions of fake accounts for unsuspecting customers in order to charge them additional fees; the year before this practice was uncovered, a news release introduced the bank’s new brand campaign as one that would ‘eschew product promotion for storytelling.’ [President Trump] has agreed to pay millions in fraud settlements to thousands of students of his ‘university,’ with its $35,000 ‘Gold Elite’ program; his daughter, whom he has employed for much of her career, has published a book in which she writes about ‘cultivating authenticity’ and presents herself as an accomplished businesswoman. It’s a brand that she’s selling – the have-it-all sizzle of a self-actualized career woman and loving supermom in fashionable shoes. Who cares whether, somewhere behind it, there may be the equivalent of an undeveloped gravel pit and some unboxed disaster tents?”

Say it loud! I’m fake and I’m proud! Chocano believes that the scam economy might be entering its “baroque phase.” Even for the wary, it’s difficult to distinguish between real products and knockoffs, legitimate email from phishing, and honest companies from scammers. For the latest artifacts, check out Hoax Slayer or the US Federal Trade Commission website. Our culture and basic antipathy for commercial regulation has made the US fecund for “dissemblers, operators, and downright swindlers,” Duke University professor Edward Balleisen writes in his book, Fraud: An American History from Barnum to Madoff.   “Some of the psychological impulses that show up again and again in the history of business fraud reflect widespread aspirations or anxieties,” Balleisen says. In particular, “the passion for easily attained wealth.”

If you want an antidote, ask a preschooler. The Muppets, featured on the children’s TV show, Sesame Street, help young children develop skepticism, and might inoculate them to scammers. In one episode, a character named Lefty offers to sell Ernie one of his products. “I got something you need, and I can sell it to ya real cheap,” he says. Ernie gives Lefty five cents for a bottle of air, which he accepts. After pouring the air into Ernie’s furry hands, Lefty keeps the bottle, explaining that Ernie’s payment did not include the packaging. Other episodes show Lefty selling Ernie similarly worthless products, including an empty box and the number 8. Kids as young as three understand Ernie’s folly. In just 15 years, however, a child’s skepticism gets neutralized. Blame it on powerful sales messages, clever “content marketing,” or the constant drumbeat of honors bestowed to those who got rich quick. It’s a shame such memorable consumer lessons are only offered to the very young.

“The big generational shift since [the ‘70’s],” Chocano writes, “is from cynicism and avoidance to an admiration of the hustle and an enthusiasm for all the enthusiasm, which has dovetailed perfectly with the new laissez faire. The more Wild West the business environment, the more the hustler is elevated to folk hero or legend, much the same way that the robber barons once were.”

What distinguishes aggressive marketing from a con artist is intent. A revenue-driven marketer who lacks moral scruples meets the criteria for the archetypal con artist.  Companies should care about how they generate their revenue. So should the people who work for and support those companies. In the meantime, watch out for more Billy McFarland’s breathlessly hyping their digital snake oil online, and for more Fyer Festivals.

After the Festival debacle, Ja Rule, McFarland’s business partner, reportedly said in a Fyre Media Company meeting: “That’s not fraud, that’s not fraud . . . False advertising, maybe – not fraud.” Three denials in the same sentence – a scammer’s telltale tic. Lefty couldn’t have expressed it any better.

Why Companies Must Care about How They Achieve Revenue

“I don’t care how you make your number, as long as you make it,” my district manager admonished his sales team back in 1993. He chuckled, but he was dead serious. His laissez faire attitude was risky. We could have interpreted his statement as permission for dishonesty – a gremlin that regularly meanders into sales organizations. In an odd way, my manager was lucky. I brought moral boundaries when I joined the company. So did most of my colleagues. But a few did not . . . “If I told you all that went down, it would burn off both of your ears.”

I don’t malign my former manager. He didn’t care how his team made quota because his boss didn’t care. Neither did his boss’s boss, or any of the bosses above him. That’s how things often work in sales. When you have a razor-sharp pink slip dangling over your neck, scruples can interfere with job security. The choices are stark: eat, or get eaten. Making goal and focusing on how much you will earn at plan matter more than ethical interpretations. In fact, over my many years as a sales rep, I remember countless meetings and communications dedicated to how to make quota, but I don’t recall a single instance where ethics, honesty, and integrity were even mentioned.

Since before the advent of double-entry accounting, revenue has been glorified, particularly in marketing and sales. Companies heap recognition on top sales producers. They’re consecrated as “Rock Stars” – a term that grates on me when used in this context. Pundits slather on the puppy love, lavishing praise and attention on entrepreneurs and companies that have achieved “explosive revenue growth.” If you’re on the margins of this frenzy, you can tap into “proven” ways to replicate the selling dynamite. Around the world, revenue is the most revered financial metric. And the word carries additional positive meanings: income, earnings, gain, and profit – not to mention connotations of success and power. “Revenue is king!”

Search online for “crush your quota” and “outstanding revenue growth,” (in quotes) and you’ll get about 5,500 and 7,700 results, respectively. These glimpses reveal society’s unflinching adoration not just for revenue, but for its fast and furious capture. But we pay a price. When sales are ill-gotten, revenue reeks. And when we become immune to the stench, there’s pain and suffering. Some of it lasts forever.

In its 2016 annual report, 21st Century Fox, parent company of Fox News, wrote,

“The Fox News Channel, under new leadership, is stronger than ever, and is on track to have its highest rated year in its 20-year history. There has been some speculation that Fox News’ unique voice and positioning will change. It will not.”

and,

“Selling, general and administrative expenses decreased 3% for fiscal 2016, as compared to fiscal 2015, primarily due to the sale of the DBS businesses and Shine Group partially offset by higher selling, general and administrative expenses at the Cable Network Programming segment.”

VW’s 2014 annual report reported revenue this way:

“The Volkswagen Group continued its successful course in fiscal year 2014, again generating record sales revenue and operating profit in an ongoing difficult market environment . . . The Volkswagen Group generated sales revenue of €202.5 billion in fiscal year 2014, 2.8% higher than in the previous year. The clearly negative exchange rate effects seen in the first half of the year in particular were offset by higher volumes and improvements in the mix. At 80.6% (80.9%), a large majority of sales revenue was recorded outside of Germany.”

Yet, at both companies, sordid activities were fully underway at the very time these bland sentences were crafted. At both companies, the activities had direct connections to revenue. And at both companies, senior executives knew what was happening. In the case of 21st Century Fox, hush money was paid to victims of host Bill O’Reilly, whose show, The O’Reilly Factor, was a cash cow for Fox News. And at VW, a clever engineering tweak made it possible to sell nearly 500,000 vehicles illegally.

Of course, it’s ludicrous to think 21st Century Fox would choose to write,

“Revenue and profits were up this year at Fox News due to lower than expected payouts to silence Bill O’Reilly’s sexual harassment victims. Legal costs decreased as well. As a result, SG&A expenses as a percent of revenue achieved its biggest decrease in five years. We expect that trend to continue, despite the obvious risks from Mr. O’Reilly’s predilections.”

Or for VW to share, “While our vehicle portfolio has achieved dramatic improvements in average mileage, VW has not reduced fleet CO2 emissions. However, the company has developed technology to circumvent environmental standards enforcement worldwide, resulting in unhindered sales, and significantly higher profits than could be achieved with compliant vehicles.”

The content in these financial reports, and others, are lies by omission. Providing broader information about legality or ethics would seem the right thing to do, but financial reporting has been a longstanding showcase of corporate self-interest. What emboldens companies to remain opaque about their dirty revenue laundry is the knowledge that the word revenue carries a pleasing blend of excitement, gravitas, and respect. Whether on a financial report, blog, or press release, consumers of financial information want to be awed, impressed, and amazed. And apparently, deceived. That, and accounting standards don’t require CFO’s to distinguish ethical revenue from unethical. Most companies lump everything into a single account, and present the consolidated figure.

Even respectable business publications bow at the revenue altar. On April 3, 2017, Forbes published an editorial stating that O’Reilly’s job was “safe” at Fox News. The reason? One word: “Money.” The article continued with forceful facts: “The O’Reilly Factor generated $446 million in advertising revenue for the network from 2014 through 2016, according to Kantar Media. Last year, the show brought in an estimated $110.8 million in ad revenue, according to iSpot.tv. That compares to the 2016 of $20.7 million in advertising for MSNBC’s biggest star, Rachel Maddow, who is on an hour later. Fox News makes up about 10% of its parent company 21st Century Fox’s revenue and about 25% of its operating income.” No wonder O’Reilly felt his crude behavior was beyond reproach.

“’21st Century Fox certainly has an economic incentive to keep Bill O’Reilly on air,’ says Brett Harriss, an analyst at Gabelli & Company, adding that any backlash the company faces from advertisers would be temporary.” Just 16 days after the Forbes column published, Fox fired O’Reilly. Yes, Mr. Harriss, preventing a valuable brand from winding up in the dumpster is a powerful economic issue, too. To the women who suffered from O’Reilly’s depredations, there’s little solace that the company’s numb executives eventually kicked him to the curb. It should have happened much earlier.

My former boss’s attitude about making quota isn’t unique. In fact, it has spread far and wide. A rogues’ gallery of corporate apathy that recently splashed into the news:

In making goal . . .

We don’t care if employees are grievously harmed. (Wells Fargo)
We don’t care if innocent people are sickened. (Peanut Corporation of America)
We don’t care if the people who use our products die. (Takata, GM, Turing Pharmaceuticals)
We don’t care if our customers are hurt. (United Airlines)
We don’t care if our customers are deliberately deceived. (Wells Fargo, Trump University)

What’s the remedy? The problem defies simple approaches, but here’s a start:

1. Care. “I don’t care how you make your number, as long as you make it,” isn’t inspiration. It’s infection.

2. Stop rewarding executives, marketing professionals, and sales staff exclusively for revenue achievement. Select other measures that include customer value delivered.

3. Stop obsessing over maximizing shareholder value. One reason that many strategic decisions ultimately cause harm. According to Professor Bobby Parmer of the University of Virginia’s Darden Graduate School of Business, “Shareholders don’t own the corporation. Public companies own themselves. Shareholders own a contract called a share. There is no legal reason to put shareholder interests above anyone else. It’s a choice, but not mandated. There is no legal duty to maximize profit. As long as executives aren’t violating the law, the courts won’t interfere with their decision making . . . Across hundreds of studies, there is no evidence that companies that maximize shareholder value are more profitable.”

Would these tactics eliminate all corporate harm? Probably not. But they would reduce the likelihood. We need to redirect our revenue infatuation into pursuing outcomes that bring broader benefits. We need to abandon our consistently polite, reverential rhetoric about revenue. We will always have good revenue and bad revenue. First, we must learn to distinguish between the two, and to appreciate that the difference matters.

Disobedience: A How-to Guide for Managers and Employees

Somewhere, a manager just ordered an employee to take a questionable action. To do something immoral or stupid. Something that causes harm to customers. There – it just happened again! In less than the time it takes to read this paragraph. Relentless wrongdoing. It happens all over the world.

It was a demand to ignore a customer’s legitimate complaint. An instruction to deny a refund when it was owed. An assignment to use big data to exploit vulnerable customers. A request to physically remove a passenger from an airplane because his seat was needed for someone else. “Follow the rules. Your job depends on it.”

The rule-following edict is a painful artifact of an abiding corporate culture that champions profits uber alle. Millennials, listen up: free thinkers are an impediment to efficiency. They don’t mesh with our manic, bottom-line obsessed business environment. “Objections are a luxury. We have a quota to meet, and there are only so many hours in the day.”

Tell that to the management of United Airlines, who are suddenly scratching their heads, wondering how to foster employees with less malleable backbones. Employees who don’t tremble when saying, “maybe we should consider another approach . . .” Good luck with that. The company just spent decades beating their employees into supplication.

When videos such as Dr. Dao’s violent removal from United Flight 3411 go viral, pundits echo the same three conclusions:

1. The corporate culture of the offending company is toxic,
2. There’s too much insistence on sticking to policy,
3. Employees need to be allowed to use their own judgement

If you’re looking for epiphanies, I suggest not reading any blog titled, What United Did Wrong. By now, we know. And among the “fixes,” you’re guaranteed to find employee empowerment, or some derivative of the idea. Hooray! Embedded in an Official Corporate Apology, we can expect a well-crafted sentence that contains the phrase, “our employees are now empowered to . . .” [Interesting note: that phrase – in quotes – received 175,000 search results].

When all else fails, try empowerment. We’re about it hear it like never before: Employee empowerment – or rather, employee empowerment! – get on the bandwagon now if you need a panacea for misguided corporate goals, bad policies, and ambiguous instructions! If only correcting scandals, scams, and commercial transgressions were that easy. Au contraire! Righting wrongs is not like flipping a switch. Or perfunctorily telling employees, “you are now empowered to . . .  Now, let’s get on with business as usual . . .” Alas, empowerment is never one-and-done.

In the context of an enterprise, empowerment, defined as authority or power given to someone to do something, is more a process than a word. For employees, empowerment assumes the ability to disobey immoral orders. I’ll go further: it imparts an obligation to do so.

To understand the complexities of this idea, I’ll revive a 1961 experiment by Yale professor Stanley Milgram, who wanted to learn whether men of various backgrounds would administer an electric shock to a stranger when asked by an authority figure to do so. The experiment resulted in 64% of the participants obeying the order, and 36% refusing. At the time, Milgram’s experiment concluded that there was no factor – demographic, age, occupation, marital status – that predicted whether a given person would be an order follower or resister. Not a comforting insight.

Fast forward to 2017. University of Virginia professor Bidhan L. Parmar conducted a new analysis on Milgram’s data, and he discovered heretofore unknown commonalities within the two groups. According to a February, 2017 article, Remove the Blinders: How to Disobey Immoral Orders, “After reviewing more than 1,000 pages of audio transcripts from the experiment, Parmar noticed subjects who ultimately disobeyed demonstrated distinctive speech patterns. They tested their assumptions, exercised “moral imagination” and speculated out loud about the consequences of their actions. (“Suppose he gets all these wrong, and I get up to a level where it’s going to be extremely painful?” asked one resistor.) The resistors were also quicker to personalize the issue and made more “I” statements. Said one resistor, “I can’t keep doing this to him” while another noted, “I don’t think I want to be part of this any longer.

“On the flip side, subjects who obeyed showed different verbal patterns. They dug into the procedural details of the task, which was to read word pairs and administer a shock if the unseen person could not correctly associate them (typical comments included ‘Do you want me to read these  fast or slow?’ or ‘Do you want me to write down the ones he gets wrong?’) The obeyers kept moral blinders on and read out word pairs, even as the ‘shocked’ person cried out.” (Note: nobody was physically harmed in the experiment. Milgram used actors as subjects, and the cries were recordings that were not created under duress.)

Parmar’s conclusion: “Resistors developed a moral understanding by asking questions, speculating and empathizing with “I” statements. Ultimately, they were able to override the authority’s instructions and make their own judgments.” Creating that outcome requires more – way more – than simply telling employees, “you’re empowered to . . .” Putting Parmar’s discovery into operation takes fortitude, planning, coaching, and – most important – giving employees room to question management’s requests, and to discuss their concerns. When executives cop an attitude that their policies are sacrosanct, when they lose ability to see wisdom from anyone other than peers, you get Dr. Dao bloodied while being dragged from his seat. That, and many, many lesser-known incidents resulting from the same hubris.

“In daily life, most people face choices in which there is a lot of ambiguity and the ‘problem’ isn’t always apparent,” Parmar says. “All of us are embedded in environments where we get conflicting orders, and often it’s not obvious what the right thing to do is.”

To boost the chances for employees to voice conscientious objection, Parmar recommends that managers should:

• Seek out dissenting views on key issues.
• Question routine actions: Ask why something needs to be done (or not) and what purpose it serves.
• Speak up when business imperatives conflict with personal morals.
• Protect those on your team who ask questions.
• Consider data from multiple angles.
• Make ethical reflection and discussion a regular part of team work sessions: How does our strategy affect customers, community, employees, the environment? Who might gain under this plan? Who might suffer?

Disobedience. Today, calling it moral imagination makes it sound more productive. That will keep the C-Suite happy. But it also might be the best liability protection a company can have.

Personalization: Gateway to Dystopia

Back in the ‘90’s, Robert, a project manager at a systems integrator, asked me for some technical guidance about automated identification. “I want to track people,” he said. “Basically, I want to know when a person enters a room, when he exits, when he’s out in the hallway. Wherever a person is, I need to track it, and to know.”

“That sounds like a prison!” one of his colleagues quipped. The colleague was right. Robert’s client was a correctional facility, and the need was not trivial. Robert shared many reasons for keeping tabs on an inmate’s whereabouts, 24/7. To achieve his goal, I helped him cobble a network of barcode printers, scanners and other devices. In the 20 years since, technological advances and the IoT (Internet of Things) has immensely simplified this task, making it both inexpensive and quick to deploy. I predicted this. At the time, uses for RFID and related technologies were rapidly expanding. I also anticipated that consumers would similarly become coveted targets for surveillance. But in my wildest imagination, I never expected how compliant they would be in allowing others to monitor them.

Surveillance carries a sinister ring, unless, I suppose, you’re a professional spy. Understandably, marketers skate around the term whenever they create ads, web pages, press releases, and other content. Fortunately, they can substitute a related word, one that’s friendlier, with proven sales mojo: personalization. In a digital economy, that helps clear the path to the crown jewels of marketing: detailed personal records.

The sales speil for Ocean Medallion, a new wearable offering from Princess Cruise Lines, gets an A-plus for cleverness. “You don’t need to introduce yourself to your Ocean Medallion Class ship; it knows you already. Your crew? They answer your requests before you even ask them. We’re giving you more than elevated personalized service; we’re creating personal moments.”

Providing personal moments for passengers doesn’t happen without surveillance and amassing a trove of valuable personal data, and other information. Princess has invested accordingly. To track its Medallion-wearing guests, Princess equips its vessels with around 7,000 sensors. What do these sensors sense? Well, remember the prison example I mentioned. Then, let your imagination soar!

Thanks to Sting, a darker, more poetic way to express the same idea:

Every breath you take/
Every move you make/
Every bond you break/
Every step you take/
I’ll be watching you

Personalization involves feeding a ravenous data engine, and sensors provide much of the input. The output cascades through colorful displays. Throughout every Medallion-equipped ship, Carnival has strategically positioned 4,000 15” plasma screens to push personal messages to passengers. “Hi Candace! Karabela dresses are now 25% off in the women’s boutique on D-Deck.” Candace receives this information because Princess knows about her buying habits, including when she’s likely to purchase what. It also helps that Princess owns an archive of her activity since the start of her voyage, and an algorithm knows that every day around 4 pm, Candace wanders to the bar on D-Deck, ambling right past the boutique. Ka-ching! “Imagine how many more margaritas, massages and shore excursions [the company] will sell by making it so simple to book by using a Medallion on your wrist that unlocks personalization for you everywhere,” Chris Peterson wrote in a blog, 5 Things Retailers Can Learn from Booking a Smart Cruise.

Indeed. For Princess, research about individual customers starts before they embark. Thanks to social media, Princess has a ready-made repository of fungible insight. “The goal of pre-planning is learning more about our guests,” said Michael G. Jungen, Carnival’s Senior Vice President of Experience, Design and Technology  (Carnival is a Princess brand). According to a New York Times article, Coming to Carnival Cruises: a Wearable Medallion That Records Your Every Whim, (January 4, 2017), Jungen “noted that passengers would have the option of linking their medallions with social media accounts, allowing Carnival to delve even deeper . . . As Carnival designed the Ocean Medallion system inside an unmarked building here in suburban Miami, it built a replica set of staterooms, corridors and other ship facilities to test concepts. Scribbles on a monumental white board in one area contained algorithms and personalization ideas.” Examples: when you eat dinner and what you watch on TV. More? . . . Oh yeah!

Jungen and colleague John Padgett, Carnival’s Chief Experience and Innovation Officer, brought their CX and data collection skills from Disney, where they developed a wristband system called MyMagic+. Disney invested over $1 billion in the project. “The ultimate goal here,” Padgett said, referencing a Disney aphorism, “is to delight and surprise our guests.” He makes a good point. Cruise vacationers like to feel pampered. They want special seats in restaurants. They want food brought to them whenever and wherever they are. They don’t want to stress about knowing where their kids are on a massive ship. Wearable guest-tracking devices make these perks possible.

Carnival, and other companies that collect and store large amounts of customer information, explain that their motivations are benign, and that their intent is to provide consumers unprecedented conveniences and outstanding experiences, or CX. That may be true, but it’s not the full story. The same detailed digital customer profile that enables the bartender to custom-pour Candace’s Negroni also feeds finely-tuned algorithms that are superb at separating her from her money. That includes long after the cruise ship returns to the dock. For Carnival, Candace’s digital profile is a cash cow that keeps on giving. Little wonder that Carnival would like every passenger to wear an Ocean Medallion. They just don’t divulge ongoing cash flow and data monetization among the reasons.

Customers should consider what they sacrifice to experience those personal moments. With wearable devices, it’s no longer theoretical to ask which intimate details can be captured and recorded. The correct question to ask is not, “why would a company want that kind of information?” but rather, “what’s stopping them from getting it?” With over 7,000 sensors aboard a ship, I suspect very few people know where all of them are placed, or what activities they monitor. I’d start with the stateroom.

In 2012, President Obama said that “companies should present choices about data sharing, collection, use, and disclosure that are appropriate for the scale, scope, and sensitivity of personal data in question at the time of collection.” In other words, businesses should tailor privacy rules to the data itself. But when I visited the Princess website, I did not see any disclosures or policies specific to Ocean Medallion. And their latest privacy statement was updated in December, 2014, before Ocean Medallion was introduced. “Some data collected from wearables may be relatively trivial, but other data can be highly sensitive,” said Kelsey Finch, Policy Counsel for the Future of Privacy Forum (FPF), which has published a paper providing recommendations for wearable privacy practices.

Before donning an Ocean Medallion, or other wearable device, what should consumers want to know? The US Federal Trade Commission offers sensible guidelines for companies to include in privacy statements:

• identification of the entity collecting the data

• identification of the uses to which the data will be put

• identification of any potential recipients of the data

• the nature of the data collected and the means by which it is collected if not obvious (passively, by means of electronic monitoring, or actively, by asking the consumer to provide the information)

• whether the provision of the requested data is voluntary or required, and the consequences of a refusal to provide the requested information

• the steps taken by the data collector to ensure the confidentiality, integrity and quality of the data

And I’ll add a couple of my own:

• How long will the data be retained?

• How will it be protected?

For now, these guidelines unevenly used – if they are used at all. And I’m not bullish that consumers will demand that companies adhere to them. There are two reasons: first, I don’t think consumers care. Many are digital natives who are jaded about digital surveillance. And thanks to clever marketers, the “wow!” of personalization – like having a waiter just hand you your favorite drink whenever and wherever you want – supersedes consumer concerns over data governance. Please – the next type someone spouts hype about customers having all the information power, remember Ocean Medallion.

Second, Congress just emasculated the already-weak consumer protections regarding data privacy. If Trump signs the joint resolution of congressional disapproval, Internet providers are free from any obligation to get a consumer’s approval to “share or sell things such as your geolocation, your children’s information, your financial information, your Social Security Number, your browsing history, your app usage history, or the content of your message data plan . . . Internet providers will also be free to use customer data in other ways, such as selling the information directly to data brokers that target lucrative or vulnerable demographics”, according to a March 29th Washington Post article, Congress Pulls Plug on Internet Protections.

You’ve probably gathered from my polemic that I’m not a good prospect for Princess or Ocean Medallion. You are right. But if I became their customer, I suspect Princess could quickly learn more about me than maybe I even know about myself. Thanks to Congress, all it now takes is transferring personal data from my Internet Service Provider, blending it with Ocean Medallion’s personalization data, and voila! – digital gold! The worst part (or best part, depending on your perspective): no consumer disclosures are required. A chilling thought that signifies how many more miles we’ve traveled on the road to dystopia.

Surveillance enables personalization, and personalization brings customers personal moments. But those wonderful times won’t be free, and they won’t give people freedom. Being watched never does. There will always be more personal details revealed, and an accompanying monetary transaction.  Personalization delivers marketers an unprecedented ability to know customers intimately, and to hone how they sell to them.  That should give every consumer momentary pause.  Meanwhile, expect vendors to continue hawking the wonderful CX that personalization enables. For them, the value of what customers so willingly sacrifice is incalculably high.