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A New Paradigm for Evaluating CEOs in the Age of Creativity

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Abstract

We are no longer an industrial economy characterized by assembly lines; we are now in a knowledge economy where creativity is what matters and the old ways of running a firm simply do not work. Using the value of the stock as a way of measuring CEO performance makes no sense and can actually destroy an organization. This paper discusses a new paradigm for rating CEOs that includes factors that provide long-term value such as employee engagement, diversity, building a learning organization, corporate social responsibility, and the reputation of the organization.
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A New Paradigm for Evaluating CEOs in the Age of Creativity
Hershey H. Friedman, Ph.D.
Professor of Business
Department of Business Management
Murray Koppelman School of Business
Brooklyn College, CUNY
email: x.friedman@att.net
Miriam Gerstein
Assistant Professor of Accounting
Department of Accounting
Murray Koppelman School of Business
Brooklyn College, CUNY
email: mgerstein1@gmail.com
Abstract
We are no longer an industrial economy characterized by assembly lines; we are now in a
knowledge economy where creativity is what matters and the old ways of running a firm simply
do not work. Using the value of the stock as a way of measuring CEO performance makes no
sense and can actually destroy an organization. This paper discusses a new paradigm for rating
CEOs that includes factors that provide long-term value such as employee engagement, diversity,
building a learning organization, corporate social responsibility, and the reputation of the
organization.
Keywords: leadership, employee engagement, creativity, diversity, learning organization,
workplace bullying, servant leadership, ethical tone at the top, compassion, conscious capitalism.
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Globalization, the knowledge economy, and the Internet have made it imperative to throw
out the rule book when it comes to organizational leadership. Scholars are referring to the time
period in which we live as the conceptual age, digital age, age of chaos, age of flux, and/or
global Internet Age. One thing is clear, the rules of conducting business are no longer the same.
Unfortunately, “most big firms still have a factory mindset oriented to economies of scale”
(Denning, 2012). This type of thinking is a good way to destroy a healthy company. Today’s
competitive business environment is characterized by an increasingly rapid rate of change
producing a morphing business environment that has to focus on continuous innovation. Safian
(2012) coined the term “generation flux” to explain how the “dizzying velocity of change in our
economy has made chaos the defining feature of modern business.” Hirt & Wilmott (2014)
highlight how digitization is “rewriting the rules of competition” making it very easy for an
existing firm to become the next Blockbuster.
Digitization often lowers entry barriers, causing long-established
boundaries between sectors to tumble. At the same time, the “plug and
play” nature of digital assets causes value chains to disaggregate, creating
openings for focused, fast-moving competitors. New market entrants often
scale up rapidly at lower cost than legacy players can, and returns may
grow rapidly as more customers join the network (Hirt & Wilmott, 2014).
Pink (2006: 3) believes that “the defining skills of the previous era –‘left-brain’
capabilities that powered the Information Age -- are necessary but no longer sufficient.” The
skills that are valuable today, in the Conceptual Age, include such factors as creativity, empathy,
happiness, and meaning. Friedman & Friedman (2015) provide a technology timeline that
demonstrates that the number of innovations today is staggering and more than at “any time in
human history” and conclude: “... by examining the above timeline, it will become obvious that
the job of corporate leaders today is to foster creativity.” The key asset of an organization is its
intellectual capital, i.e., the knowledge, abilities, and talent of its employees. In seeking to
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control a seemingly out-of-control environment, scholars are suggesting that we look to
paradigms from biological systems, which seem to manage chaos by being “adaptable, resilient,
and capable of generating perpetual novelty” (Taylor, 1994). In 2009, The Economist surveyed
349 executives from all over the world and found that 90% identified organizational agility as a
“core differentiator in today’s rapidly changing business environment” (Economist Intelligent
Unit, 2009).
It is becoming clear that leaders that do not have the ability to tap into this creativity and
transform their organizations so that they are adaptable, nimble, creative, and innovative, can
doom their firms to obsolescence (Raphan and Friedman, 2014; Friedman & Lewis, 2014). Carr
(2010) cites a 60-country survey of 1,500 CEOs and public leaders who were asked which were
the most important leadership qualities. Creativity was ranked first (60% indicated that it was the
most important leadership quality); integrity was second (52%). The Management Innovation
Exchange (2012) sponsored a “hackathon” in which hundreds of management innovators
attempted to find major management problems that prevented companies from thriving in
today’s environment. They found that some of the major problems included: an unwillingness to
adapt to the rapidly changing world; preference for doing things the old way; a lack of
experimentation; insufficient resources devoted to develop a culture of creativity; too much
bureaucracy; and ineffective leadership which lacks vision and does not encourage creativity.
What makes matters more complicated is that it is difficult to convince shareholders to
take a long-term perspective. Alofs (2012: 132-133) posits:
According to McKinsey studies, building a profitable business takes
between five and seven years. But the market is impatient. It can’t wait
that long for a business to be profitable, and it doesn’t wait for existing
businesses to realize their goals. The average time frame that investors
held a single stock used to be seven years; today it’s closer to seven
months. The ADD generation is creating a short-term world whose short-
term strategies are killing innovation and productivity – and almost killed
capitalism itself. It takes courage to create a strategy that might scare
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shareholders in the short term but benefit all stakeholders in the longer
term (Alofs, 2012: 132-133).
This paper will discuss a new paradigm for rating CEOs. The old ways of running a firm
simply do not work. Autocratic CEOs are not effective leaders; "Farsighted, tolerant, humane
and practical CEOs returned 758% over 10 years, versus 128% for the S&P 500" (Tischler,
2007). The first task of the board of directors of a firm is to abandon maximizing short-term
shareholder value as a goal of the firm. Jack Welch, former CEO of General Electric, definitely
got it right when he called maximizing shareholder value the “dumbest idea in the world”
(Denning, 2011). Actually, it is among the most destructive ideas and contributed to the Global
Recession of 2008. Researchers have found that maximizing shareholder value does not even
benefit shareholders. Denning (2012) describes the disastrous economic effects of maximizing
shareholder value and how it is actually counter-productive to its avowed end:
The net result can be seen in the disastrously declining ROA [Return on
Assets] and ROIC [Return on Investment Capital] over the last four
decades in large US firms as documented by Deloitte’s Shift Index.
Shareholder value has many other drawbacks. It encourages hierarchical
bureaucracy. It destroys employee morale: only one in five workers is
fully engaged in his or her work. The sole focus on profit is anti-social in
nature and has given business a bad reputation. It cripples job growth:
according to a study by the Kauffman Foundation, large firms have
created zero net new jobs over recent decades.
Before this goal became popular, pre-1976, the compound annual real shareholder return
was 7.6; after this goal became popular, post-1976, this return dropped to 5.9% (Adams, 2012).
Hansen, Ibarra & Peyer (2013) aver:
Everyone in the business world seems to agree that executives should be
less obsessed with quarterly earnings and more focused on the long
termeveryone, that is, except the decision makers who hire and fire
executives and the people who buy and sell company stock. The short-
term emphasis won’t change until a new paradigm for evaluating
performance emerges. Talk alone won’t bring about that change; we also
need a whole new method of evaluating CEOs.
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They make the point: “We don’t foresee a time in the near future when measures of social
performance will be as objective as the measure of long-term financial performance we’ve
developed.” CEOs should be rated on long-term financial performance but this paper posits that
there are other values that CEOs should foster if they wish to be successful in the contemporary
marketplace: employee engagement, diversity, building a learning organization, corporate social
responsibility, and the reputation of the organization.
Employee Engagement
The Gallup organization has been measuring employee engagement using what they refer
to as the Q12 Employee Engagement Survey, which uses an instrument consisting of 12 items.
Engaged employees are enthusiastic and passionate about their work. Because they care about
their organizations and are emotionally committed, they will do everything possible to enhance
the reputation of their organizations. Gallup’s research shows that approximately 70% of
American workers are disengaged, with much of this due to poor leadership (Harter & Adkins,
2015). The average engagement score on a 5-point scale (1 = “highly disengaged”; 3 =
“moderately engaged”; and 5 = “highly engaged”) is an anemic 3.6. At the Gallup Daily
website, one can see what percentage of Americans are engaged at work. On March 14, 2016 it
stood at 32.8% (http://www.gallup.com/home.aspx).
There is quite a bit of evidence that employee engagement can provide a company with a
huge competitive advantage. It is therefore important for leaders to focus on this key metric and
find ways to improve it (Christian, Garza & Slaughter, 2011; Crim & Seijts, 2006). The lost
productivity due to employees that are disengaged has been estimated to cost the United States
economy approximately $370 billion each year. Moreover, “Performance against revenue
expectations is 23% greater for companies with high engagement capital compared to those with
low engagement capital” (ADP, 2012). It should be noted that most firms probably do not even
use 50% of the collective brainpower of their employees (Caroselli, 2011: 4).
It is important to understand the difference between engagement and satisfaction; the two
are not the same. It is quite possible for one to be satisfied with one’s job and at the same time be
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unwilling to do anything extra for it and act as a minimizer. It is easy to imagine an organization
where there is so much bloat that little serious work gets done but employees are quite happy.
ADP (2012) defines the two terms as follows:
Employee Satisfaction: A measurement of an employee’s “happiness”
with current job and conditions; it does not measure how much effort the
employee is willing to expend.
Employee Engagement: A measurement of an employee’s emotional
commitment to an organization; it takes into account the amount of
discretionary effort an employee expends on behalf of the organization.
It is imperative to understand the difference between the two concepts since there
are factors that are important for job satisfaction but have minimal impact on employee
engagement (e.g., job security, compensation, and benefits). Organizations that are
concerned about such factors as employee productivity, customer satisfaction, and the
bottom line should be rating leaders on this crucial measure. The following quotation of
Malcolm Forbes resonates with many CEOs today: “I think the foremost quality there’s
no success without it – is really loving what you do. If you love it, you do it well, and
there’s no success if you don’t do well what you’re working at.” People who love what
they are doing are going to be engaged and happy. Indeed, happiness and levity in the
workplace is seen by many researchers and CEOs as a positive force, one that provides a
competitive edge in an age where creativity and engagement are so important (Gostick &
Christopher, 2008).
During the 1930s and 1940s, employees on the assembly line at Ford Motor
Company were fired for laughing or smiling while working. Ford’s philosophy was:
“When we are at work, we ought to be at work. When we are at play, we ought to be at
play. There is no use in trying to mix the two.” Today, many firms are concerned about
the happiness of employees at work since they feel it increases engagement, productivity,
and profits. Moreover, it improves employee retention; happy workers are less likely to
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look for other jobs than dissatisfied ones (Pink, 2006: 186-187; Collinson, 2002). One
study found that happiness improved productivity by 12%; unhappy workers, on the other
hand reduce productivity by 10%. The researchers conclude that “Positive emotions
appear to invigorate human beings” (Revesencio, 2015).
A successful CEO should do everything possible to make sure that employees are
engaged in their work. Ensuring that employees are paid well is not sufficient
Diversity
An organization that wants to be creative must encourage diversity, i.e., people from all
kinds of backgrounds with all kinds of views working together (Phillips,2014; Hewlett, Marshall
& Sherbin, 2013; Chadefaux & Helbing, 2012; Page 2011; Page, 2007). Desmarias (2015) sees
diversity as the secret ingredient that leads to creativity:
It's the holy grail of business success--a creative team that can innovate your
company into unchartered and untapped markets. There's no shortage of advice
about how to foster it, but really the shortest route to creativity lies in one simple
ingredient: a diverse team made up of people who spring from widely varying
backgrounds. When placed in close proximity, they're like flint on steel,
producing sparks that can ignite brilliant ideas.
Thus, racial and gender diversity has been found to correlate with economic performance,
i.e., more customers, increased sales, and greater profits (Herring, 2009; Patrick & Kumar,
2012). Unfortunately, women only account for 17% of Fortune 500 company board seats and
hold only 3% of board chairs (Kristof, 2013). Firms should endeavor to have more women on
corporate boards. One global study that examined 2,360 companies found that organizations that
had women on their board of directors had better growth and higher average returns on equity
than those that had only men (Phillips, 2014). Jack Ma, founder of the huge Chinese e-commerce
firm Alibaba believes that “women think about others more” and that “women balance the logic
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and the instinct.” He considers women the “secret sauce” that makes his company so successful
(Kokalitcheva, 2015). At Alibaba, 34% of the leadership positions are held by women and 40%
of the total workforce is female. By comparison, only 21% of Google’s leadership consists of
women, and 30% of its employees are female (Kokalitcheva, 2015).
In the knowledge economy where people tend to work in groups what matters most is the
“c factor,” the collective intelligence of the group. There is evidence that firms with senior leader
teams consisting of multicultural and female members had significantly higher growth rates than
firms with teams consisting of white males exclusively (Weaver, 2001). It appears that women add
something unique to the success of a team. The collective intelligence of a group is not additive; it
is the social sensitivity of group members that determines how well the group will function. A
team consisting of many geniuses that cannot work together will probably not accomplish as
much as a cohesive team that taps into the creative energies of each member. According to
Thompson (2015):
A general collective intelligence factor explains a group’s performance on
a wide variety of tasks. This “c factor” is not strongly correlated with the
average or maximum individual intelligence of group members but is
correlated with the average social sensitivity of group members, the
equality in distribution of conversational turn-taking, and the proportion of
females in the group.
Women appear to be better than men at social sensitivity, i.e., the ability to correctly
perceive, interpret, and respect the feelings, viewpoint, and opinions of others in the group. This
is why having women in a group improves its c factor, i.e., it becomes collectively smarter
(Thompson, 2015).
An organization that wants to maximize its innovativeness has to be concerned about
obvious as well as subtle, less intentional and possibly unconscious discrimination (Friedman,
Friedman & Leverton, 2016). There may be unintentional discrimination against people with
foreign names, those wearing strange clothing (hijab, yarmulke, turban, snood, etc.), or the
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physically unattractive. A recent study using data from approximately 120,000 British
respondents found that heavier women and shorter men had fewer “life opportunities”
(education, job status, and income) than thinner women and taller men, respectively; they also
tend to make about $2,100 less annually (Walton, 2016). Diversity and innovation work together
and highly-effective employees come in all sizes, shapes, and backgrounds.
The world is changing too rapidly for an organization to tolerate a toxic
workplace where employees taunt or bully those who are different. The
only workplace culture that makes sense in the Creative Economy is one
which is inclusive and embraces all kinds of people regardless of
appearance. When a team consists of Chassidim, stutterers, overweight
women, unattractive people, short people, and individuals wearing turbans
and hijabs, a firm will have truly overcome the challenges of diversity
(Friedman, Friedman & Leverton, 2016).
The job of a CEO is to make sure that a company is welcoming to all types of people. All
it takes is one great idea to make a company thrive. Similarly, the loss of a key person because
he/she does not feel included at his/her job can help destroy a company (Friedman, Friedman &
Leverton, 2016).
Building Learning Organization/Silo Busting
The greatest asset of a firm is the creativity of its employee and creativity has been
shown to thrive in collaborative work environments. This is why knowing how to work in teams
is a critical skill for employees. According to a NACE (National Association of Colleges and
Employers) survey, one of the most important skills that employers seek is the “ability to work
in a team structure” (Adams, 2014). Don Tapscott (2013), author and futurist, has the following
to say about collaboration:
Collaboration is important not just because it's a better way to learn. The
spirit of collaboration is penetrating every institution and all of our lives.
So learning to collaborate is part of equipping yourself for effectiveness,
problem solving, innovation and life-long learning in an ever-changing
networked economy (Tapscott, 2013).
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Karlgaard & Malone (2015) insist that to compete in today’s global economy, a CEO
must know how to build great teams. There are few jobs where people work alone and hence
workers’ ability to act as part of a team and to collaborate with each other is crucial to the
success of any enterprise. Working in teams enhances the creativity of employees and it is the c-
factor discussed above that determines how successful a group will be in solving problems.
According to Shenk (2014), creativity, rather than occurring in the domain of the “lone genius,”
often comes about when people work in teams.
For centuries, the myth of the lone genius has towered over us like a
colossus. We canonize stories of rare geniuses—the ones who made the
Sistine Chapel or Hamlet, the lightbulb or the iPod. On closer inspection,
however, the primary creative unit is actually the pair. Whether it’s Marie
and Pierre Curie, or Tiger Woods and his caddy, a dyad is the most fluid
and flexible of relationships—and it naturally arouses engagement, even
intensity (Shenk, 2014).
The Council of State Governments asserts (2015: 38):
Studies have shown that teams produce more creative and impactful
research than single authors do. From 2004–2013, single-authored
publications in the U.S. achieved a field-weighted citation impact of
0.80, below the world average field-weighted citation impact of 1.00
and well below the U.S. overall average of 1.49. The percentage of the
United States’ total research publications that were single-authored
declined from 17.5 percent in 2004 to 12.4 percent in 2013, consistent
with the global trend (Council of State Governments, 2015: 38).
Unfortunately, the natural tendency of people is to try to hoard their specialized
knowledge and expertise since they want to be perceived as vital to the success of the
organization and therefore indispensable. A silo mentality occurs when groups or different
departments within an organization refuse to share knowledge. Silo busting has become
important in management today because silos breed tribalism (Tett, 2015). Indeed, organizations
that get too large often find themselves with rigid silos and consumed with turf battles. To
succeed in today’s economy, people from different departments within a firm must collaborate.
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Effective CEOs not only have to engage in silo busting, they must also encourage the
transformation of their firms into learning organizations. A learning organization is “an
organization skilled at creating, acquiring, and transferring knowledge, and at modifying its
behavior to reflect new knowledge and insights” (Garvin, 1993). It is characterized by the
utilization of shared knowledge; an emphasis on cooperation, not turf; a commitment to
constant learning and personal growth; an infrastructure that allows the free flow of
information and ideas; and an ability to adapt to changing conditions.
Peter M. Senge (1990) popularized the concept of “learning organization” in his seminal
book, The Fifth Discipline, which sold more than one million copies and was identified as a
seminal management book by Harvard Business Review. Senge earned the title of ‘Strategist of
the Century’ and was acknowledged by the Journal of Business Strategy as one of 24 individuals
who have “had the greatest impact on the way we conduct business today” (Smith, 2001).
One of Senge’s “laws” discussed in his book is that the problems of today come from
“yesterday’s solutions.” This is why it is so important to create an organization that can adapt to
an evolving business environment. The old top-down leadership model that implicitly assumes
that people do not have any vision and cannot deal with change is rejected in a learning
organization. The job of a leader in a learning organization is to build an organization where
people “continually expand their capacity” by constant learning and sharing information. Firms
that set up the technological infrastructure to allow branches throughout the country and the
world to share knowledge will be better able to serve customer needs globally. Every person in
the organization has to buy into this vision and the job of the leader is to sell it to all staff
members.
In the knowledge economy, it is even more important for employees to work together in
teams, be open with each other, motivate each other, and share knowledge, insights, and
experiences than it was hitherto. According to Casarez et al. (2009: xxiii), Google and Toyota
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have been exceptionally successful because they tap into the collective knowledge of all
employees. For example, at Toyota, an employee who thinks of an improvement that might help
production may stop the entire production line. Ideas can come from anywhere in the
organization and ideas originating from employees are just as valued as those coming from top
management.
The right kind of CEO strives to build a learning organization.
Eliminating Workplace Bullying
What is workplace bullying? According to SHARP (2011):
Workplace bullying refers to repeated unreasonable actions of individuals
(or a group) directed towards an employee (or a group of employees),
which are intended to intimidate, degrade, humiliate, or undermine; or
which create a risk to the health or safety of the employee(s)…Bullying
behavior creates feelings of defenselessness and injustice in the target and
undermines an individual’s right to dignity at work.
In a nutshell, it involves verbal, physical, and/or emotional abuse of co-workers. Bullies
use some of the following techniques: treating another employee in a demeaning way, ignoring
the employee, threatening the employee with demotion/loss of job, spreading nasty rumors, or
instituting work rules that make no sense. It is important to note that bullying is not harassment
(e.g., sexual or racial), a type of illegal discrimination of protected classes which is illegal.
Whereas harassment laws are concerned with protected classes such as women and minorities;
the objects of bullying are often not in a protected class and hence bullying in the workplace is
not illegal in the United States (Einarsen et al., 2002).
Companies that are serious about encouraging diversity and creating a learning
organization have an obligation to do everything in their power to ensure that all managers and
executives are sensitive to the issue of bullying. After all, in most cases, the bully is a person in a
position of authority. According to the Workplace Bullying Institute, 68% of executives consider
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“workplace bulling a serious problem” and 48% of American workers indicate that have been
affected by bullying (http://www.workplacebullying.org/tag/bullying-statistics/). Forty percent
of employees believe that nasty co-workers reduce productivity (Zeitlin, 2015). Norton’s (2014)
research demonstrates that people who are treated poorly will pay it forward since “bad behavior
leaves more of an impression on us than good” and that “people pay greed forward as a means of
dealing with negative emotions that being treated badly engender.” Employees who are treated
poorly by management will become disengaged and not be pleasant to customers (Norton, 2014).
Several books have been written about toxic workplaces and workplace bullies (Namie &
Namie, 201; Sutton, 2010; Kusy & Holloway, 2009). Workplace bullies create a toxic, hostile
work environment that may not only have a large negative impact on their victims, but can also
have a long-lasting, deleterious impact on their organizations.
Reed Hastings, CEO of Netflix, asserts that his company does not need “brilliant jerks”
since the “cost to effective teamwork is too high” (Korn & Feintzeig, 2014). An organization that
wants to be productive and efficient must create a jerk-free environment. One thing is certain:
toxic personalities can cause great harm to a company:
These toxic personalities are known as the ‘dark trio’: They are three
personality types recognized by psychologists as having the most toxic
effect in the workplace, namely; narcissism, Machiavellian personality,
psychopathy… these three personalities types share one common trait–
lack of empathy; for them it’s an egocentric world… use of people
without regard for their well-being. Research into the behavior of these
personalities in corporate culture has consistently shown that while
occasionally they may seem to do the organization good, they eventually
bring it crashing down… (BizShifts, 2014).
A CEO has to ensure that there is zero tolerance for workplace bullying and jerky
behavior.
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Creating Meaningful Work/Spiritual Workplace
The National Society of High School Scholars surveyed millennials — who now
comprise more than 33% of the labor force and growing to 50% by 2020 — about the ideal place
to work. It is not surprising that Google (#1), Apple (#4), Microsoft (#7), and Facebook (#29)
did quite well. The surprises were that the FBI (#5), Central Intelligence Agency (#8), and the
National Security Agency (#19) also made it to the top of the list; St. Jude Children’s Research
Hospital came in at second place and the Army at #42 (Wortham, 2016). Wortham (2016)
observes that “Survey after survey shows that millennials want to work for companies that place
a premium on employee welfare, offer flexible scheduling and, above all, bestow a sense of
purpose.”
An organization that wants to hire and retain the best employees has to create a corporate
culture where employees feel that their work is meaningful, i.e., “bestow a sense of purpose.”
Employees that perform work that makes a difference - i.e., work that benefits society -
demonstrate much higher levels of job satisfaction than those not engaged in meaningful work.
Moreover, “having meaning in your life increases life satisfaction twice as much as wealth”
(Barker, 2014; Thottam, 2005). There is a strong relationship between performing meaningful
work and employee engagement (Bersin, 2015). Meaningful work is more important than the
size of the paycheck in providing happiness (Myers & Diener, 1995). One study found that
custodians in a hospital would go out of their way to joke with patients and help family members
since this made their jobs more meaningful and made them feel valuable (Schwartz, 2015).
Meaningful work is especially important to women, even more than security and
opportunities for a promotion (Tolbert & Moen, 1998). Women are not interested in pursuing
fields such as mechanical or chemical engineering if they feel that these majors result in jobs that
are not societally meaningful. Framing the engineering major in a way that stresses solving
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societal problems attracts women to the field (Nilsson, 2015). M.I.T. has a program that “focuses
on developing technologies that improve the lives of people living in poverty” and that program
is 74% female (Nilsson, 2015).
Bock cites research by Adam Grant, Professor at Wharton, which states “when people are
able to connect their jobs to something meaningful, their productivity increases as much as five
times” (Goudreau, 2015). Employees today want more from a job than just a good salary. There
are three major reasons that 60% of millennials leave their companies within three years: they
want workplace flexibility and economic security and they prefer working at purposeful,
meaningful jobs (Taylor, 2013). Indeed, in light of the fact that 45% of millennials prefer
workplace flexibility over pay, Taylor (2013) predicts that the “9 to 5 job may soon be a relic of
the past..
People want to feel appreciated and that they work at meaningful jobs that make a
difference. This is why Google ensures that employees feel that the work they do is meaningful
and important (Goudreau, 2015). One survey found that 80% of respondents aged 13-25 want to
work for a firm that “cares about how it impacts and contributes to society” (Meister, 2012).
According to Colvin (2015):
The best ones, especially among millennials, want to work for
organizations pursuing a worthy mission. And through social media and
employment websites, they’re continually aware of other jobs available to
them and how other workplaces stack up against their own. It’s no use
trying to push them around.
Very closely related to meaningful work is the concept of a spiritual workplace. First, it is
important to make a distinction between religion and spirituality. Both are important but religion
tends to be associated with an organization or institution and spirituality tends to be more
individualistic and personal. A recent Gallup survey indicated that approximately 65% of
Americans affirm that religion is important in their daily lives; 47% agree that the “the Bible is
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the inspired word of God” and 28% agreed that “the Bible is the actual word of God” (Blow,
2014). A large number of people who are not religious are spiritual. Young people in particular
tend to be disillusioned with organized religion but are still quite spiritual. In fact, one third of
Americans describe themselves as spiritual but not religious (SBNR). SBNR has become a new
way of describing oneself (Shakespeare, 2014).
Rhodes (2006) avers: A spiritual workplace provides resources to help people uncover
their creative potential and to practice creativity within the organization.” Spiritual people want
their lives and jobs to have purpose and meaning and thus prefer working for a firm that does not
exploit its employees in order to maximize profits. They are concerned with making a difference
in the world and desire to make the world a better place. Karakas (2010) reviews 140 papers
dealing with spirituality and concludes:
a) Spirituality enhances employee well-being and quality of life;
b) Spirituality provides employees a sense of purpose and
meaning at work;
c) Spirituality provides employees a sense of interconnectedness
and community.
McGhee & Grant (2008) summarize the literature and conclude that spiritual employees
in the workplace are more likely to
Demonstrate enhanced teamwork
Show greater kindness and fairness
Be more aware of the needs of fellow employees
Exhibit greater honesty and trust in the workplace
Express more servant leadership behavior
Show a higher sensitivity to corporate performance
Inclined to perceive the ethical nature of business issues
Enron, under CEO Jeff Skilling, was the opposite of a spiritual workplace. He created a
corporate culture where human dignity was irrelevant (Shermer, 2008). Skilling was a social
Darwinist who wanted to set up a firm where there was “survival of the fittest.” All employees
were ranked on a scale of 1 to 5; 20% of those ranked 5 had to be fired. These rankings were on
a website along with pictures of the employees. Humiliation was used as a way of motivating
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employees. As Shermer notes: “Once you set up an environment like that, people begin
violating rules.”
Servant Leadership
There is no question that leadership plays a major role in supporting creativity and
creating the organizational climate that fosters innovation. Some significant factors identified in
the literature when it comes to the job of corporate leaders include: “innovative role modeling,
stimulating knowledge diffusion, providing vision, showing support for innovation, and
providing resources” (Isaksen & Akkermans, 2011). We are no longer an industrial economy
characterized by assembly lines; we are now an information/knowledge economy where
creativity is what matters (Levine, 2015). Several decades ago, one CEO – Robert Malott of
FMC said: “Leadership is demonstrated when the ability to inflict pain is confirmed” (Colvin,
2015). Such an autocratic and cruel approach to leadership may have been widespread 40 years
ago but would not work today. Contrary to what most boards believe, it is not the egocentric
CEO that can transform a company into a huge success. Egocentric CEOs are too concerned
about their own needs—money, power, and adulation. The good news is that the autocratic
manager appears to be on the way out – at least in organizations that require creativity -- and
that companies are starting to look for servant leaders or a variation thereof.
The new management buzzwords include humility, responsive leadership, and servant
leadership; it is not “in” to be arrogant (Korn & Feintzeig, 2014). Engardio (2006) declares that
we are seeing what is called “karma capitalism” or “inclusive capitalism.” Brady (2006) makes
the point that senior executives seem to be “battling for the congeniality prize.” Indeed, many
firms want CEOs that pursue the goals of value creation, virtue, and social justice (Blanchard,
2003; Blanchard, 2007; Covey, 1991; Pava, 2003). The philosophy of care ethics, which has its
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roots in feminism, stresses compassion and caring for others and is being introduced into
business models (Held, 1993: 228-229; Hawk, 2011).
Seppӓlӓ (2016), author of The Happiness Track, affirms that “compassion is good for the
bottom line, it’s great for your relationships and it inspires lasting loyalty. In addition,
compassion significantly boosts your health.” Moreover, “the more compassionate the
workplace, the higher the performance in profitability, productivity, customer satisfaction and
employee engagement” (Global Focus, 2016). Williams (2012) also supports the view that what
companies need to succeed are leaders with kindness, compassion and empathy. Compassionate
leadership is correlated with a 27% reduction in sick leave and a 46% reduction in disability
pensions (Williams, 2012).
Collins (2001) argues that the greatest leaders are what he refers to as “Level 5” leaders.
These are individuals who have humility and fierce determination to make their organizations
succeed. They have no interest in adulation. Yes, they are very ambitious but “their ambition is
first and foremost for the institution and its greatness, not for themselves” (Collins, 2001). Baker
& O’Malley (2008) believe that a management style that combines the traits of compassion,
gratitude, authenticity, humility, humor, and integrity will improve employee retention and
employee performance and thereby improve the bottom line.
What we are seeing is that there is a great deal of research suggesting that the kind of
leader that is needed in an organization that needs inventiveness and creativity to succeed in the
information age is different from what was needed in the industrial age. The CEO that attracts
creative people to his/her firm will have empathy, compassion, kindness, humility, integrity,
adaptability, persistence, and determination. Miller (2015) asserts: “In the tech industry, for
instance, it’s the jobs that combine technical and interpersonal skills that are booming, like being
a computer scientist working on a group project.” The finest jobs now require social skills and
corporate leadership must role model these traits.
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The type of CEO that is urgently needed in the knowledge economy is a servant leader
(Friedman & Lewis, 2014). A servant leader has the ability to motivate employees to share
knowledge and be as creative as possible. A servant leader makes sure that the needs of
individuals are addressed. Servant leaders are committed to the growth of others and know how
to listen. A firm that wants community within the organization needs this type of leader.
Shakweh (2014) asserts:
In today’s business environment where intellectual properties, creativity
and innovation are a real competitive advantage, the emphases on qualities
of human interaction have never been greater. As market conditions and
technologies evolve at an astonishing pace, today’s organizations and
future business strategies must adapt accordingly or risk becoming
irrelevant. Consequently, CEOs of the future will need to master the art of
managing and leading change.
The construct of servant leadership, which has its roots in the Bible, was first introduced
by Robert K. Greenleaf in an essay he wrote in 1970 (Greenleaf, 1970). The servant leader is the
antithesis of the autocratic, authoritarian leader whose primary pursuits are adulation, wealth,
personal aggrandizement, and power; one who believes in “leader first.” Servant leaders focus on
the needs of others; they care about people, empower others, and want everyone to be successful.
They tend to see themselves as facilitators (Greenleaf, 1978; Greenleaf, 1977). Hess (2013)
studied effective CEOs and found that they tended to be servant leaders:
These leaders were servants in the best sense of the word. They were
people-centric, valued service to others and believed they had a duty of
stewardship. Nearly all were humble and passionate operators who were
deeply involved in the details of the business. Most had long tenures in
their organizations. They had not forgotten what it was like to be a line
employee. They believed that every employee should be treated with
respect and have the opportunity to do meaningful work. They led by
example, lived the “Golden Rule,” and understood that good intentions are
not enough — behaviors count. These leaders serve the organization and
its multiple stakeholders. They are servant leaders.
Spears (2004) identify ten characteristics in the servant leader:
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Listening -- Listening intently and receptively to what others say. This, of
course, means that one has to be accessible.
Empathy -- Having empathy for others and trying to understand them.
Healing -- Possessing the ability of healing the emotional hurts of others.
Awareness -- Possessing awareness and self-awareness.
Persuasion -- Having the power of persuasion; influencing others by
convincing them, not coercing them.
Conceptualization -- Possessing the knack of being able to conceptualize
and to communicate ideas.
Foresight -- Having foresight; which also includes the ability to learn from
the past and to have a vision of the future.
Stewardship -- Seeing themselves as stewards, i.e., as individuals whose
main job is to serve others.
Commitment to the Growth of People -- Being firmly dedicated to the
growth of every single employee.
Building Community -- A commitment to building community in the
institutions where people work.
Russell and Stone (2002) reviewed the literature dealing with servant leadership. They
found that there are 20 attributes of servant leadership, with nine classified as functional
attributes and 11 as` accompanying attributes. The functional attributes are “the operative
qualities, characteristics, and distinctive features belonging to leaders and observed through
specific leader behaviors in the workplace.” The nine functional attributes are: vision, honesty,
integrity, trust, service, modeling, pioneering, appreciation of others, and empowerment. Note
that many are quite similar to Spears’ 10 attributes.
Barbuto & Wheeler (2006) developed a scale to measure the construct of servant
leadership and found strong correlation with such positive outcomes as “employees’ extra effort,
employees’ satisfaction, and perceptions of organizational effectiveness.” Servant leadership
even has positive effects on the health of followers (Hayden, 2011). This finding is consistent
with the fact that the more autonomy workers have, the happier they are with their jobs (Barker,
2014).
Lynch & Friedman (2013) identify a weakness in the construct of servant leadership:
One of the shortcomings of the concept of servant leadership is that
servant leaders might easily focus too much on the needs of followers
rather than the needs of the organization. A servant leader might also be
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more concerned with the needs of followers without considering the needs
of society. In fact, a servant leader might do what is best for his followers
without necessarily considering the higher values of truth, justice, peace,
compassion, and human dignity (Lynch & Friedman, 2013).
Is there a place in the business world for an autocratic leader? Andersen (2013) discusses
the question as to whether greedy, self-centered people make good business leaders. She offers
some situations in which this type of leader can succeed. Basically, greedy leaders may succeed
under the following conditions: if all that’s required is short-term profit; if the product or service
is a commodity; if the employee base shares the CEO’s philosophy; if the CEO creates a layer of
people-oriented leaders. Andersen (2013) concludes:
If you, as a leader, need to build a sustainably profitable business that
relies upon innovation and/or great customer service to succeed, then I’d
suggest the following approach: hire the best people you can find, support
their development and their creativity, and establish an environment that
both demands and rewards great results. I predict you’ll make lots of
money – all without having to avoid telling your mom how you run your
business.
Although servant leadership may not be suitable to all organizations and may not be a
sine qua non of business success, it has been shown to offer distinct advantages to business
success in the contemporary age of information and technology.
Ethical Leadership
There is a leadership crisis in the United States and the entire world. According to a
recent study (Ketchum, 2013), only 24% of people globally believe that leaders – in business and
politics are in fact providing effective leadership. Gentry (2013) makes the point that the 21st
century is a “golden age” when it comes to scandals involving ethics. There are quite a few CEOs
who have become infamous for destroying or nearly destroying successful companies. Here are some
of the names – it is quite easy to find more names to add to this list embroiled in scandal:
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Ken Lay and Jeffrey Skilling of Enron, Bernie Ebbers of WorldCom,
Dennis Kozlowki of Tyco, the Rigas family of Adelphia Communications,
Mark Hurd of Hewlett-Packard, Richard S. Fuld, Jr. of Lehman Brothers,
former U.S. Senator John Edwards, Bernie Madoff, Martha Stewart and
Lance Armstrong, to name just a few (Gentry, 2013).
There are several websites dedicated to the worst CEOs of all time a daunting task after
the Great Recession of 2008. Lennick & Kiel (2011: xxxii) assert: “The integrity crises of the
first decade of the 21st century have been devastating. But they have not yet convinced enough
leaders of the importance of morally intelligent leadership. How many wake-up calls do leaders
need to get the message that their ultimate success depends on moral leadership?”
The Gallup Organization conducts an annual poll in which respondents are asked the
following question: “Please tell me how you would rate the honesty and ethical standards of
people in these different fields ― very high, high, average, low, or very low?” Business
executives are near the bottom of the list (only 17% rate their ethics as “very high” or “high”).
The only professionals who score significantly lower in honesty ratings than them are lobbyists
(7%), Members of Congress (8%), and telemarketers (8%) (Gallup, 2015). The Pew Research
Center Survey conducted between August 27, 2015 and October 4, 2015 found that only 11% of
respondents felt the term “honest” describes business leaders “very well”; 33% did feel that
“selfish” is an apt descriptor (Blow, 2016).
Untrustworthiness is a major cause of leadership failure (Kouzes & Posner, 2010;
Nahavandi, 2003:79). Unfortunately, employee distrust of management is quite prevalent among
American workers. A key factor contributing to the lack of credibility is that leaders are not
providing transparent, open communication (Ketchum,2013). According to the American
Psychological Association’s 2014 Work and Well-Being Survey only 50% of American workers
feel that their “employer is open and upfront with them” (APA, 2014). Only 47% of respondents
indicated that they were satisfied with employee recognition practices (APA, 2014). It is
23
important for employees to feel valued by employers since those who do feel appreciated are
more likely to be in good psychological health, more likely to be engaged in their jobs, and less
likely to feel stressed than those who do not feel valued (APA, 2014).
Another factor that may contribute to the lack of trust in leadership may have to do with
how poorly workers are being compensated relative to top management. A number of CEOs have
destroyed their organizations in the pursuit of maximizing shareholder values (and their own
compensation). Excessive compensation of CEOs is a problem that has gotten worse. One study
conducted by the Economic Policy Institute found that the CEO to average worker pay ratio
went from 20 in 1965 to 303:1 in 2014 (Mishel & Davis, 2015). A different study showed that
CEOs earn approximately 331 times as much as the average worker; and the CEO-to-minimum-
wage worker pay ratio was an outrageous 774:1 (Dill, 2014). There is evidence that CEOs are
reaping the rewards of successful performance of their firms when they have little to do with it.
It appears that 70% of corporate performance may result from chance or luck, which thus dwarf
the abilities of even capable CEO’s as prime factors in corporate success (Fitza, 2013).
Jared Bernstein, former chief economist for Vice President Biden, believes that
employers feel “that labor costs must be held down at all costs because maximizing profits is the
be-all and end-all” and hence the share of corporate income that goes to employees is currently
at its lowest point since 1951 (Greenhouse, 2015). The real wage for blue-collar workers in the
manufacturing sector has not changed for 35 years, yet productivity is up 200% (Bernstein,
2016). According to Greenhouse (2015), “the decline in labor’s share of corporate income since
2000 costs workers $535 billion annually, or $3,770 per worker.” In this context, the egregiously
excessive compensation of CEOs takes on added relief.
Many companies insert clauses into employment contracts with that require arbitration to
settle any disagreements between the firm and its employees. They do so in the knowledge that
arbitration tends to stack the deck in favor of the company and against employees because
24
arbitrators often consider the companies their clients. Thus employees are forced to deal with
intermediaries whose loyalties lie with their adversaries, rather than with impartial judges and
juries. To make matters worse, appeals are very difficult in arbitration. In some cases, firms
specify in contracts with employees and customers that all cases would be handled by one
arbitration firm exclusively. Some firms use the same arbitrator for numerous cases. In fact, in a
five-year period, the same arbitrator was used 40 times by one firm (Silver-Greenberg &
Gebeloff, 2015a; Silver-Greenberg & Gebeloff, 2015b).
The literature on organizational trust has identified three components leading to trust in
leaders – ability, integrity, and benevolence (Mayer, Davis & Schoorman 1995). There is no
question that integrity and credibility are the foundations of effective leadership (Kouzes &
Posner, 2010: 15). Leaders who are not trusted by subordinates will not be effective in “selling”
their vision to followers (Kouzes & Posner, 2010: 15-20). Few people are willing to follow
leaders they do not trust. Of course, the vision has to make sense and leaders also have to be
seen as capable (Kouzes & Posner, 2010). An effective leader is perceived as trustworthy and
competent, compassionate and humane (Fox, 2010).
Alex Brigham, executive director of the Ethisphere Institute, which uses a ratings system
known as the Ethics Quotient to create a list of the “The World’s Most Ethical Companies,”
states:
… studies show that employees increasingly want to work for an organization that
aligns with their own personal values. They are more loyal to such organizations.
In addition to providing a competitive advantage in workforce recruitment, many
companies also display the designation in their marketing materials to attract
customers, particularly in new markets, where the company may not be well-
known (Smith, 2013).
Ethical leadership has assumed great importance in the accounting profession (Copeland,
2015). The accounting profession has concluded that if an organization is truly concerned about
behaving ethically, it must start with the leadership.
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The emergence of the twenty-first century was plagued with extensive, evasive
and disheartening leadership failures. Despite the accounting profession’s
standards of professional ethics, it was also tainted with ethical leadership
indiscretions during this era. In response to these ethical leadership failings,
renewed interest in developing accounting professionals with strong ethical
principles and ethical leadership behaviors has emerged (Copeland, 2015).
The term used by the accounting profession is “tone at the top.” The expression “tone at
the top” refers to the fact that the leadership of an organization creates the “tone of an ethical
or unethical – atmosphere in the workplace” (Malley, 2013). COSO, The Committee of
Sponsoring Organizations, stressed the importance of leaders setting a tone at the top by
establishing honesty and integrity as the very first principle of internal controls (COSO, 2013).
The Institute of Internal Auditors (2012) states the following regarding the crucial need for
auditors to create a corporate culture where ethical decisions are made.
What rationalization does a company make to justify a corporate culture
where ethics are ignored? In recent years, greed, fraud, and a lack of
ethical conduct have led to the collapse of many organizations. A variety
of internal and external pressures can lead companies down the wrong
path. And once the first misstep is taken, it’s a slippery slope to hurting
stakeholders, the community, and your reputation (The Institute of Internal
Auditors, 2012).
If the accountants, auditors, and executives at the top of the corporate hierarchy are concerned
about integrity and ethics, this goal will trickle down to all employees.
Customer/Client Satisfaction
Clients/customers constitute a major stakeholder and firms must be concerned about
them. One reason that the corporate goal of maximizing shareholder value was referred to by
Jack Welch, former CEO of GE, as the “dumbest idea in the world,” and a good way of
destroying an organization in the long-run was that it caused firms to ignore client/customer
satisfaction (Denning, 2011). McSweeney (2008) cites studies that conclude:
26
A corporate purpose focused on providing value to customers not only is
competitively superior to a purpose of maximizing shareholder wealth, but
also typically produces greater long-term returns to shareholders.
Accounting firms have to measure client satisfaction and do everything possible to ensure
that it is being maximized. One study found that 51% of accounting firms are not measuring
client satisfaction (Caragher & Telberg, 2010).
Cohen (2011) provides 72 definitions of marketing. The definition below is from Julie
Barile, Vice President of eCommerce, Fairway Market:
Marketing is traditionally the means by which an organization
communicates to, connects with, and engages its target audience to convey
the value of and ultimately sell its products and services. However, since
the emergence of digital media, in particular social media and technology
innovations, it has increasingly become more about companies building
deeper, more meaningful and lasting relationships with the people that
they want to buy their products and services. The ever-increasingly
fragmented world of media complicates marketers’ ability connect and, at
the same, time presents incredible opportunity to forge new territory
(Cohen, 2011).
The various definitions of marketing indicate that marketing is ultimately about
providing value for clients/customers and satisfying needs. Three of the key questions Peter
Drucker posed to every business were: “What is our business/mission? Who are our
customers? What do our customers value?” Drucker also stated in one of his famous quotes
(Drucker, 2005):
Because it is the purpose [of business] to create a customer, any business
enterprise has two–and only two–basic functions: marketing and
innovation. Marketing is the distinguishing, the unique function of
Business (Drucker, 2005)
.
Drucker made it clear what marketing is all about: “The aim of marketing is to know and
understand the customer so well the product or service fits him and sells itself.” This is why
customer satisfaction surveys are a key part of marketing research. A company that is indifferent
to its customers’ needs, will not survive for very long in the highly-competitive digital age.
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Corporate Social Responsibility (CSR)
Closely related to the idea of meaningful work is corporate social responsibility (CSR)
An organization should be concerned with advancing various social goals; this is in essence what
CSR is all about. The following is from a statement by the Business Roundtable trade group:
Corporations have a responsibility, first of all, to make available to the
public quality goods and services at fair prices, thereby earning a profit
that attracts investment to continue and enhance the enterprise, provide
jobs, and build the economy. The long-term viability of the corporation
depends upon its responsibility to the society of which it is a part. And the
well-being of society depends upon profitable and responsible business
enterprises (Yang, 2013).
There are numerous definitions for CSR (Smith, 2011). The European Commission
recently changed its definition of CSR to the following (http://europa.eu/rapid/press-
release_MEMO-11-730_en.htm):
CSR is defined by the European Commission as "the responsibility of
enterprises for their impacts on society." The Commission encourages that
enterprises "should have in place a process to integrate social,
environmental, ethical human rights and consumer concerns into their
business operations and core strategy in close collaboration with their
stakeholders."
This definition stresses “human rights and ethical considerations in addition to social,
environmental, and consumer considerations.” CSR “concerns actions by companies over and
above their legal obligations towards society and environment” (http://europa.eu/rapid/press-
release_MEMO-11-730_en.htm). Researchers have theorized that there are six ways that
corporate social responsibility might help an organization’s performance: “reducing risk,
reducing waste, improving relations with regulators, generating brand equity, improving human
relations and employee productivity, and lowering the cost of capital” (Heal, 2005). Numerous
studies have found a positive relationship between CSR and the financial performance of a firm
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(Gross & Holland, 2011; Dam, 2006). CSR and employee engagement are also strongly related
(Gross & Holland, 2011).
A 2015 Cone Communications study dealing with corporate social responsibility found
that 87% of Americans “Would be more loyal to the company (i.e., continue buying the
company’s products/services)” if it supported a social or environmental issue; 48% would
boycott a company’s products/services if they found that the company “behaved irresponsibly”
(Cone Communications, 2015). Millennials in particular are concerned about CSR and are
willing to use social media to spread the word if a company is behaving responsibly or
irresponsibly (Cone Communications, 2015). A survey by NetImpact found that 53% of
employees indicated that working at “a job where I can make an impact” was “essential” as far
as happiness; with students the percentage shot up to 72% (Meister, 2012). Most young people
are even willing to take a 15% pay cut to work for an organization with good values (Meister,
2012).
The term triple bottom line (TBL), i.e., people, planet, and profits, or the three Ps is
sometimes used in lieu of CSR. According to Savitz: “The TBL captures the essence of
sustainability by measuring the impact of an organization’s activities on the world …including
both its profitability and shareholder values and its social, human and environmental capital”
(Slaper & Hall, 2011). Call it CSR or TBL, one thing is clear, there is an interdependence of
society and business; corporations have to be concerned about society and not just profit (Porter
& Kramer, 2006). Porter & Kramer feel “that CSR can be much more than a cost, a constraint, or
a charitable deed — it can be a source of opportunity, innovation, and competitive advantage.”
Martinuzzi, Krumay & Pisano (2011) describe what the European Union is doing to
ensure that all companies take corporate social responsibility seriously. They start with the
pyramid developed by Carroll.
Carroll (1991) developed a so-called pyramid of corporate social
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responsibility, including economic, legal, ethical and philanthropic
aspects. Economic responsibilities form the basis of the pyramid,
comprised of providing goods and services, being profitable and
competitive - the most basic responsibilities of a company. On the next
level, legal responsibilities reflect a “social contract” between the society
and businesses and incorporate basic notions of “right” and “wrong”
which can be codified. Legal responsibilities build a kind of framework
constituting “the rules of the game” between businesses as well as
between businesses and the society. On the next level, ethical
responsibilities of business go beyond codified norms, including non-
codified social values and expectations of society. For companies, this
means a level of social performance higher than currently required by the
law. Ethical responsibilities correspond to the basic principles of moral
philosophy such as justice, rights and utilitarianism. On the top level of the
pyramid, philanthropic responsibilities embrace those activities of
businesses that are reactions to society’s expectations that businesses
should be good corporate citizens. They can achieve this by contributing
to the arts, education and local community development.
There are now several firms that scrutinize companies for CSR. Just Capital, a new firm
started by billionaire Paul Tudor Jones II and Deepak Chopra, plans on rating corporations -- and
making them available to the public for free -- on CSR, i.e., on how well they are treating their
employees, the environment, and society (Stanley, 2015). Mr. Jones, in a TED tale makes the
point that “Traditionally, there are three ways to change income inequality: by revolution, higher
taxes or wars. His alternative is Just Capital” (Stanley, 2015).
The Conscious Capitalism organization is a network of corporate leaders committed to
the idea that business is about more than just making money. The credo of conscious capitalists
is at their website where the “Four Principles of Conscious Capitalism” are discussed (Conscious
Capitalism, 2016):
We believe that business is good because it creates value, it is ethical
because it is based on voluntary exchange, it is noble because it can
elevate our existence and it is heroic because it lifts people out of poverty
and creates prosperity. Free enterprise capitalism is the most powerful
system for social cooperation and human progress ever conceived. It is
one of the most compelling ideas we humans have ever had. But we can
aspire to even more (Conscious Capitalism, 2016).
30
The CEOs who are joining the Conscious Capitalism organization want to use capitalism
to “elevate humanity” by serving all stakeholders, not just shareholders. They want to use
capitalism to improve the world. Research on firms that practice conscious capitalism
demonstrates that these firms outperformed the S&P 500 firms by 14 times (Lewis, 2014).
Mackey & Sisodia (2013) note that the term “capitalism” was coined by Karl Marx, an
individual who was extremely critical of it. Marx believed that capitalism could only result in a
nightmare for most of the world. Greedy capitalists would be using cheap labor working for
subsistence wages to enrich themselves. In actuality, capitalism has done more to alleviate world
poverty than any economic system the world has known.
After tens of millennia in which 85-90% of human beings lived on less
than a dollar a day in today’s terms, worldwide per capita incomes
have increased nearly fifteen-fold in constant dollars. Today, about 16% of
the world’s population lives on less than a dollar a day. Adjusting for
quality and affordability, it is estimated that the average American is 100
times better off today than 200 years ago. Average life expectancy has
climbed from about 30 to over 67 years in that time span, and human
population has risen from one billion in 1820 to over seven billion today
(Mackey & Sisodia, 2013).
Businesses run by conscious capitalists create caring cultures where there is concern for
all stakeholders. Employees feel that they are engaged in meaningful work and have a sense of
professional fulfillment (Mackey & Sisodia, 2013). There is evidence that the investment returns
to brands run on conscious capitalistic principles have been 1025% over the past 10 years vs.
122% for the S&P 500 (King & Fromm, 2013). Coleman (2016) also states that socially-
responsible investing (SRI) produces greater returns than regular investing. This kind of
investing now accounts for 18% of all United States assets under management. SRI investments
are “shareholder value-enhancing” (Khan, Serafeim & Yoon, 2015).
In other words, when companies treat workers better, reduce energy waste
or support local communities, they don’t just make the world a better
place. They can also improve worker retention, save money and generate
brand loyalty – thereby increasing their chances of long-term success and
boosting their stock prices (Coleman, 2016).
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CEOs that imbue their organizations with virtue, believe in treating people with
compassion, care about social justice, and encourage creativity and meaningful work will ensure
that their organizations thrive. They may even save capitalism. It is interesting to note that CEO
activism, even when it comes to controversial social issues such as gender equality or race
relations, can influence public opinion and help sales of the company’s products (Chatterji &
Toeffel, 2016). CEOs can make the world a better place by taking strong positions and do not
have to be afraid of hurting the bottom line of their companies.
Enhance Reputation of Organization
Reputation is an “intangible asset” but is important in when it comes to attracting and
retaining the best employees. Eccles, Newquist & Schatz (2007) underscore the importance of
corporate reputation. They feel that firms have to proactively manage risks to their reputations,
and not to wait until something negative occurs that threatens it and then respond. This is known
as crisis management. They strongly believe in managing reputational risk by taking the
following five steps: “assessing your company’s reputation among stakeholders, evaluating your
company’s real character, closing reputation-reality gaps, monitoring changing beliefs and
expectations, and putting a senior executive below the CEO in charge” (Eccles, Newquist, &
Schatz, 2007). They state the following about reputation:
Executives know the importance of their companies’ reputations. Firms
with strong positive reputations attract better people. They are perceived
as providing more value, which often allows them to charge a premium.
Their customers are more loyal and buy broader ranges of products and
services. Because the market believes that such companies will deliver
sustained earnings and future growth, they have higher price-earnings
multiples and market values and lower costs of capital. Moreover, in an
economy where 70% to 80% of market value comes from hard-to-assess
intangible assets such as brand equity, intellectual capital, and goodwill,
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organizations are especially vulnerable to anything that damages their
reputations (Eccles, Newquist & Schatz, 2007).
The following memo below was sent by Warren Buffet, CEO of Berkshire Hathaway, to
his senior managers:
The top priority — trumping everything else, including profits is that
all of us continue to zealously guard Berkshire's reputation. We can't be
perfect but we can try to be. As I've said in these memos for more than 25
years: We can afford to lose money — even a lot of money. But we can't
afford to lose reputation — even a shred of reputation (Baer, 2014).
The memo echoes Buffet’s famous statement about the importance of corporate reputation:“It
takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do
things differently.”
Back in 2005, the foremost business leaders who attended the World Economic Forum
were asked to name their leading measure of success. Only 20% mentioned profitability; the
majority mentioned the reputation of the corporation, integrity, and high quality products
(Hindery, 2005: 10). In the same vein, Professor Cronin of Lancaster University stressed the
importance of the corporate brand value:
Thus a brand’s reputation as an employer, its treatment of workers and
consumers, its upkeep as a good corporate citizen, and its capacity to
maintain and develop positive relationships with its customers all become
important factors in cementing a particular image and awareness in the
psyche of the public (Hilpern, 2015).
An effective CEO enhances the value of his/her company’s brands (Hilpern, 2015) and
hence it is important to rate CEOs on this factor.
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Conclusion
According to a 2014 World Economic Forum study, young people are distraught over the
lack of values displayed by leaders. Corporate leaders seem to be only concerned about finding
ways to inflate their own salaries rather than in ensuring fair wages for employees. What kind of
leaders are needed by today’s organizations? It is clear that in the knowledge/creative economy
not being able to adapt quickly can be dangerous. Just as problematic is the inability to see
opportunities in new technologies. According to legend, Xerox did not recognize the value of the
computer mouse and graphic user interfaces because they did not fit within the company’s focus
on making copies. Steve Jobs and his Apple collaborators did see its potential and capitalized on
this technology. Jobs remarked: “If Xerox had known what it had and had taken advantage of its
real opportunities, it could have been as big as I.B.M. plus Microsoft plus Xerox combined—and
the largest high-technology company in the world” (Gladwell, 2011).
It is especially difficult to change the trajectory of an organization that is heading in the
wrong direction. This is why it is important for an organization to have the right kind of leader as
well as the right kind of employees. Good leadership is about creating a culture where employees
are engaged and want their organization to thrive. The ideal leader must be one who appreciates
the importance of diversity in enhancing creativity, encourages teamwork by building a learning
organization, eliminates workplace bullying, understands the importance of meaningful work,
believes in servant leadership, wants to set an ethical tone at the top, is concerned with
maximizing customer/client satisfaction, supports CSR, and wants to build a strong, positive
reputation for his/her organization. There are CEOs that believe in the above; Johan Karlstrom,
CEO of Skanska, a multinational construction and development company, states that diversity
and ethics are the keys to corporate success (Brzezinski, 2014). His company focuses on the
“five zeros: zero accidents, zero ethical breaches, zero environmental incidents, zero losing
34
projects, and zero defects.” He is emphatic that it is not only about shareholder value but also
about improving the world (Brzezinski, 2014).
This vision of a just and moral capitalism has to be communicated to employees so that
they understand that they are working for an organization that is built on a foundation of
conscious capitalism and the triple bottom line. Unquestionably, it is time to do away with the
extremely dangerous notion that the ultimate goal of corporate leadership is the maximization of
shareholder value and to avoid hiring leaders who subscribe to this line of thinking. Moreover,
firms that want to prosper in the knowledge economy must rate organizational leaders on their
commitment to the above-mentioned values that produce long-term corporate success and, not
myopically on how well the company stock is doing at any given moment.
35
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