1. Good Business

Jim Thomsen, senior vice president of Member Services for Thrivent Financial, a membership-based financial services company, recalls the financial meltdown in September 2008 all too well: “I was really mad at our industry,” Jim said, “but initially I wasn’t worried about our company.” Thrivent’s solid standing compared to its competitors at the end of 2008 was well earned. In the several years leading up to the economic crisis, when “everything was hot,” some members of Thrivent’s field sales force had put a lot of pressure on company management and the Thrivent Bank to be more aggressive and to do some of the things other firms were doing. But Thrivent management resisted.

When it came to home lending, for example, we stayed with the fundamentals that have worked over time. We actually required things like 20% down payments for homes, and we used independent appraisers to determine property values. We had no subprime mortgages in our portfolio. It was hard to maintain that position when so many other companies were being aggressive and making lots of money doing so, but it was the right thing to do, and we did the right thing.

Jim thought that Thrivent had dodged a bullet thanks to its more conservative investment practices. But not completely. As Jim describes it

It was near the end of 2008. I had just been through a week where our executive team had been meeting, and we had just gotten a lot of good news. We had very little exposure to Lehman. We were well capitalized. We had no reliance on short-term debt. We were in a really strong position and prepared to weather a very difficult storm. I was feeling pretty good.

Later that evening, Jim attended a charity event at the famous Depot in downtown Minneapolis.

I was walking around the silent auction with a neighbor of mine, and he introduced me to an acquaintance of his who was an executive with another company. He asked me what I did for a living. I told him I was in the financial services industry, and he said, ‘That used to be an honorable profession!’ When he said that it was like a slap in the face. That comment to me was really an eye opener. I had been thinking we were immune because we had done the right thing, but I realized then we were going to be judged guilty by association. And I thought ‘If I’m feeling this way, [then] the men and women meeting with our clients every day must really be feeling it.’

Jim realized in that moment that Thrivent would have to work hard to differentiate itself from its industry peers:

My personal reputation and the reputation of the firm [were] taken into the cesspool along with our industry. This was very hard on our employees and our representatives, and I realized I personally needed to take responsibility and serve their needs for information and understanding. I had to support our representatives and give them the confidence to be proactive and make contact with their clients and our members. Other executives and I made sure our representatives understood why our clients could and should have confidence in the company and their representative. A lot of advisors in the industry went into hiding, but we went on the offensive and increased our communication and contact with clients.

To a large degree, the strategy Jim and his fellow Thrivent executives adopted in the wake of the financial crisis has been successful. “We’ve actually had three of our best years ever,” says Jim, “because we had the courage not to follow the lemmings. We really do make decisions with the best long-term interests of our clients in mind.”

Jim’s biggest fear today? “I worry that the world has short-term memories. Some of the leaders who took the industry down are gone, but I’m seeing some of the same behavior again that hurt the industry.”

Moral Stupidity Act 1

Jim Thomsen’s fear is well taken. In the last ten years, the corporate landscape has been through two waves of major financial misdeeds. The first part of the decade was marked by corporate accounting scandals that all had their roots in moral weakness on the part of corporate executives:

Former energy company Enron became the poster child for corporate corruption in 2001 when it was revealed that its financial status was fabricated through deliberate and extensive accounting fraud. In May 2006, former CEOs Ken Lay and Jeffrey Skilling were convicted of criminal fraud and conspiracy. In a dramatic twist, Ken Lay died—before he could be sentenced—in July 2006 of “natural causes” related to cardiovascular disease. In October 2006, Skilling was sentenced to 24 years and four months in prison. Ex-Enron CFO Andrew Fastow had pleaded guilty to fraud in 2004 in exchange for a ten-year prison sentence. In November 2006, Enron executives Andrew Fastow and his former chief aide Michael Kopper, received sharply reduced sentences because of their cooperation with prosecutors to help convict Ken Lay and Jeffrey Skilling. Between 2004 and the end of 2009, Enron Creditors Recovery Corporation paid out about $21.6 billion to Enron’s creditors and litigation related to Enron’s collapse continues.

In July 2004, cable company Adelphia founder and former CEO, John Rigas, and his son Timothy were found guilty of conspiracy, securities fraud, and bank fraud. Charges against them included concealing $2.3 billion in loans and embezzling, bankrupting what was then the nation’s fifth-largest cable company.

In 2004, the Securities and Exchange Commission charged Lucent Technologies (later acquired by French telecommunications equipment-maker Alcatel) with fraudulently recognizing more than $1 billion in revenues and $470 million in pretax income during fiscal 2000. It also charged individual executives for their alleged roles in the case. Lucent settled the SEC Enforcement Action in May 2004, paying a $25 million penalty. Ten executives who were charged in the matter reached individual settlements involving sizable penalties over the course of the ensuing two years.

In 2005, HealthSouth former CEO Richard Scrushy was acquitted in a $2.5 billion fraud scheme to overstate earnings and inflate stock prices during a period between 1996 and 2002. The acquittal was surprising to many because there had been extensive testimony that he was knowledgeable about the fraud, and because 15 former executives had already pleaded guilty and a 16th had been convicted by jurors. But Scrushy’s legal woes were not over. In August 2006, the Alabama Supreme Court ruled that Scrushy must repay $48.8 million in bonuses he received during the period of the fraud—at a time when the company was sustaining massive operating losses.

In 2006, antivirus and security software provider McAfee fired President Kevin Weiss, and its CEO and Chairman George Samenuk retired after a stock options investigation found accounting problems required financial restatements.

David C. Wittig, the former CEO of Kansas utility company Westar Energy, Inc., was sentenced in April 2006 to 18 years in prison for conspiracy, wire fraud, money laundering, and circumventing internal controls. Wittig served 13 months in prison before he was released on bond in January 2007, following a Federal appeals court reversal of several convictions.

Moral intelligence could have kept each of these companies, and their leaders, out of the courts. Instead companies, employees, and shareholders all suffered. Despite the damage caused by this raft of corporate corruption, despite the photos of executives being carried off in handcuffs, it seems that corporate America still hasn’t learned the lessons of moral intelligence. Such corporate scandals represent just the tip of the iceberg for bad business behavior.

Financial Services Take the Stage

Nowhere has the absence of moral competence been more glaring than in the financial services industry. Looking at financial services with a moral lens, a financial services firm is supposed to exist to serve the financial needs of its clients, thereby generating profits for itself. But during the last decade, many financial services firms turned that mission on its head. It certainly appears they prioritized their own financial gain, often at the expense of the clients whose financial objectives they had a responsibility to serve. In looking back over the last few years, Ken Krei, president of the Wealth Management Group of M&I Bank observes:

There’s been a great deal of momentum for the industry to sell the product that is easiest to sell, bonds, now and option rate securities earlier. Companies try to drive revenue with this momentum, but it hurts the seller eventually because eventually what’s easiest to sell is not necessarily what’s best for the buyer.

Dale Larson, CEO and president of Larson Manufacturing Company, the largest U.S maker of storm doors, echoes Krei’s sense about Wall Street’s priorities:

I’m kind of cynical about Wall Street. They think the more complicated they make the product, the easier it is to sell and everyone will think they’re smarter than anybody else. I think the derivative investments were way over the top. I think a lot of people knew what they were selling and didn’t care. In the 1950s, only 6% of profits were made by financial institutions. Now it’s about 35%, so a lot of people are making money by passing paper around.

By fall of 2008, a growing number of industry observers were convinced that greedy executives in the financial services industry were not just cheating individual clients—they were likely major perpetrators of a massive economic crisis that threatened to take down the entire global economy. In contrast to the fate of the previous generation of corporate lawbreakers, most architects of the worst financial downturn since the Great Depression of the 1920s and 1930s have so far escaped prosecution or any major sanctions.

Former mortgage lender Countrywide CEO Angelo Mozilo has been widely reported in the media as a prime suspect in the economic crisis that began to brew by 2007. On June 4, 2009, the SEC filed charges against Mozilo and two other Countrywide executives. According to an October 15, 2010 Securities and Exchange (SEC) press release:

...they[Countrywide executives] failed to disclose to investors the significant credit risk that Countrywide was taking on as a result of its efforts to build and maintain market share. Investors were misled by representations assuring them that Countrywide was primarily a prime quality mortgage lender that had avoided the excesses of its competitors. In reality, Countrywide was writing increasingly risky loans and its senior executives knew that defaults and delinquencies in its servicing portfolio as well as the loans it packaged and sold as mortgage-backed securities would rise as a result.

The SEC’s complaint further alleged that Mozilo engaged in insider trading in the securities of Countrywide by establishing four 10b5-1 sales plans in October, November, and December 2006, while he was aware of material, nonpublic information concerning Countrywide’s increasing credit risk and the risk regarding the poor expected performance of Countrywide-originated loans.¹

In September 2010, Daily Finance reported the following:

During the 2008 mortgage meltdown, Mozilo’s remarkable copper-colored visage became synonymous with executive excess. In addition to his impressive yearly salary and company-funded memberships at three country clubs, Mozilo also received millions of dollars in Countrywide stock, more than $406 million of which he liquidated to increase his bottom line. Over $140 million worth of these shares went on the block in 2006 and 2007.

While Mozilo was getting rid of his Countrywide shares, the company was also loosening its mortgage guidelines, getting deeper and deeper into the risky subprime mortgages that later proved its downfall. These relaxed standards proved very helpful to Mozilo’s friends—including Ed McMahon, Senator Christopher Dodd, and dozens of Fannie Mae employees—who received sweetheart mortgage deals from Countrywide. They were less helpful to stockholders, who were left holding the bag when Countrywide failed.²

In October 2010, Mozilo avoided trial on charges of fraud and insider trading by striking a deal to pay the SEC $67.5 million, the largest sum ever paid by a public firm senior executive in an SEC case. Those funds will be used to help repay harmed investors.

Prior to its collapse and sale to JPMorganChase in 2008, former financial giant Bear Stearns had been recognized multiple times as the “Most Admired” securities firm in Fortune magazine’s “America’s Most Admired Companies” survey, and second overall in the security firm section. The annual survey is a prestigious ranking based on employee talent, quality of risk management, and business innovation. Fortune magazine reported that in July 2007, while two Bear Stearns hedge funds holding toxic mortgage-backed securities were nearing collapse, CEO James “Jimmy” Cayne was playing bridge in Nashville. In March 2008, while the company was on the verge of bankruptcy, Cayne was again playing bridge—this time in Detroit. Two weeks later, right after JPMorgan raised its bid for the company, Cayne sold all his equity in the company, earning $60 million. Bear Stearns clients were not so lucky. Cayne later admitted some responsibility for the downfall of the once stellar firm. “I didn’t stop it. I didn’t rein in the leverage,” he told Fortune magazine.³

According to Peter Chapman, author of a 2010 history of Lehman Brothers, “Lehman Brothers died when over 150 years later a once proud institution was caught peddling junk to the world.”⁴ Lehman’s former CEO Dick Fuld, who presided over the death of one of Wall Street’s most esteemed firms, has infuriated former clients and the general public alike. Fuld is especially reviled for refusing to apologize for his responsibility for the Lehman bankruptcy (the largest in U.S. history with $613 billion in outstanding debt), As one commentator pointed out “Even Bernie Madoff said he was sorry.”⁵

Ken Lewis, former CEO of Bank of America, who helped orchestrate the acquisition of Merrill Lynch, was reported by numerous media outlets to have concealed information about huge bonuses that subsequently went to Merrill employees—bonuses funded by federal TARP funds. In February 2010, following an investigation by the SEC and New York Attorney General Andrew Cuomo, Cuomo sued Bank of America for defrauding investors and the government when buying Merrill Lynch & Co when it failed to disclose the Merrill bonus agreement. The bank agreed to pay a $150 million fine to settle a related lawsuit by U.S. regulators.⁶

Goldman Sachs initially seemed like the shining exception to the epidemic of greed that had unraveled other investment firms such as Lehman, Bear Stearns, and Merrill Lynch. But it may turn out Goldman Sachs is not immune to the moral lapses that have infected so many other firms. While the rest of the financial services industry might have felt reassured by Goldman Sachs’ capability to pay out big bonuses in the midst of epic Wall Street failures, United States government officials were puzzled about its success. On April 16, 2010, the Securities and Exchange Commission charged Goldman Sachs with fraud in structuring and marketing collateralized debt obligations (CDOs) tied to subprime mortgages. According to the SEC announcement:

The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.

“The product was new and complex but the deception and conflicts are old and simple,” said Robert Khuzami, director of the Division of Enforcement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”

Kenneth Lench, chief of the SEC’s Structured and New Products Unit, added, “The SEC continues to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the U.S. housing market as it was beginning to show signs of distress.”

The SEC alleges that one of the world’s largest hedge funds, Paulson & Co., paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events.

According to the SEC’s complaint, filed in U.S. District Court for the Southern District of New York, the marketing materials for the CDO known as ABACUS 2007-AC1 (ABACUS) all represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC (ACA), a third party with expertise in analyzing credit risk in RMBS. The SEC alleges that undisclosed in the marketing materials and unbeknownst to investors, the Paulson & Co. hedge fund, which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio.

The SEC’s complaint alleges that after participating in the portfolio selection, Paulson & Co. effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs to buy protection on specific layers of the ABACUS capital structure. Given that financial short interest, Paulson & Co. had an economic incentive to select RMBS that it expected to experience credit events in the near future. Goldman Sachs did not disclose Paulson & Co.’s short position or its role in the collateral selection process in the term sheet, flip book, offering memorandum, or other marketing materials provided to investors.

The SEC alleges that Goldman Sachs Vice President Fabrice Tourre was principally responsible for ABACUS 2007-AC1. Tourre structured the transaction, prepared the marketing materials, and communicated directly with investors. Tourre allegedly knew of Paulson & Co.’s undisclosed short interest and role in the collateral selection process. In addition, he allegedly misled ACA into believing that Paulson & Co. invested approximately $200 million in the equity of ABACUS, indicating that Paulson & Co.’s interests in the collateral selection process were closely aligned with ACA’s interests. In reality, however, their interests were sharply conflicting.

According to the SEC’s complaint, the deal closed on April 26, 2007, and Paulson & Co. paid Goldman Sachs approximately $15 million for structuring and marketing ABACUS. By Oct. 24, 2007, 83% of the RMBS in the ABACUS portfolio had been downgraded and 17% were on negative watch. By Jan. 29, 2008, 99% of the portfolio had been downgraded. Investors in the liabilities of ABACUS are alleged to have lost more than $1 billion.⁷

In the wake of the SEC charges, on April 27, 2010, Goldman Sachs was called to testify before the Senate Permanent Subcommittee on Investigations because of concern that Goldman Sachs had been “setting up the firm’s own securities to fail and betting secretly against those securities, or helping clients do so.”⁸

Behavior such as that alleged against Goldman Sachs may not be illegal, but according to many industry leaders, it is certainly unethical. Christopher Whalen, managing director of financial research firm Institutional Risk Analytics, summed up the significance of the SEC charges against Goldman Sachs in this way: “Once upon a time, Wall Street firms protected clients. This litigation exposes the cynical, savage culture of Wall Street that allows a dealer to commit fraud on one customer to benefit another.”⁹

Although Dan May, president of AdvisorNet Financial, a leading U.S. distributor of financial products, believes, “It’s appalling to think that firms in the industry with 150-year reputations responded as they did with the pressure to make more money.” He also insists that individual financial advisors, not just big firms, bear some of the responsibility for unethical sales practices:

I do believe financial advisors have some culpability. There’s no way we can control the market but advisors could have better prepared people for the certainty of uncertainty. Advisors have to ask [critical] questions and must have the integrity to lose a client if it means doing the right thing. We have to expect more out of ourselves. We have to make sure this never happens again.

More Fallout

But it isn’t only Wall Street’s customer base, the investor, that has suffered from greed in the financial services industry. As of 2011 in New York State alone, the economic collapse will have caused the loss of almost 300,000 jobs in the financial sector, with most of them focused in the combined sales and related/office and administrative support occupational category. In other words, lower-paid employees in financial services firms have borne the brunt of the mistakes made by their highly compensated superiors.¹⁰

When it comes to causing a potentially catastrophic meltdown of the global economy, you could argue there is a lot of blame to go around: greedy Wall Street executives, corrupt politicians, and derelict regulators. If all these allegations prove to be true, it will be obvious that what they all have in common is a shortage of moral competence. And though the jury is still out on the legal responsibility of numerous financial industry leaders for exposing all of us to an economic catastrophe, one thing is undeniably clear: The global financial woes we are still experiencing could not have happened if more financial industry leaders had been paying attention to the moral consequences of their business decisions. And it’s also clear that the economic crisis in which we are still engaged is not the responsibility of a “few bad apples.” What has led us to the brink of economic disaster is more like an epidemic of moral incompetence by business leaders, regulators, politicians, and yes, even consumers. But it is our business leaders who bear special responsibility for managing their enterprises within a moral framework. What has gone wrong? It’s as though corporate leaders have turned the switch off on their moral intelligence. There’s been a major power failure, and only a return to moral principles by our nation’s corporate leaders can turn the lights back on. Only a renewed emphasis on the importance of moral intelligence will restore public confidence in big business in general, and in the financial services industry in particular.

What Does Moral Leadership Look Like?

Despite the crowd of morally compromised executives who have dominated the news of the last decade, there are many examples of morally intelligent leaders to inspire us. Thrivent’s Jim Thomsen, whom we met at the beginning of the chapter, illustrates the importance of doing the right thing in the face of pressure to “follow the lemmings.” Such moral courage doesn’t develop overnight. Most successful leaders are morally gifted, but few of them are moral geniuses. They all make mistakes from time to time and, earlier in their careers, they typically made moral mistakes more often. But because of their high moral intelligence, they were quick studies. They held themselves accountable for their moral lapses, learned from them, and moved on. Consider Jay Coughlan’s story. Today, Coughlan is chairman and CEO of XATA and until 2005, was CEO of Lawson Software, Minnesota’s largest software company. But no one would have predicted his rise to that top spot back in 1998 after he fell asleep while driving intoxicated, causing a devastating accident that left him seriously injured and his father dead. The accident was the beginning of a remarkable personal transformation marked by a reawakening of his religious faith, a stronger relationship with his family and involvement in the community, and an intensive commitment to Lawson. Coughlan pleaded guilty to vehicular homicide and was sentenced to one month in jail, five months of house arrest, and ten years of probation. But because of Coughlan’s honesty and the support of the community, the judge reduced his offense to a misdemeanor after he had served more than three months of his sentence. Meanwhile, during his absence from Lawson, the health care division that Coughlan had launched was flourishing. “That’s when I learned I actually was successful as a leader,” he told The Wall Street Journal, “when you can pull yourself out of the machine and it can still run.”¹¹

Coughlan’s financial results were impressive and likely were the most significant factor in his subsequent promotions. The accident would have been a career-ending event for most people in Coughlan’s shoes, but his response to the accident was extraordinary. “Jay, to his credit, stood right up and took responsibility; there was no hesitation,” says Richard Lawson, the company’s co-founder and co-chairman of the Board of Directors. “To me that is what counts. It’s not the mistakes you make, it’s how you react to those mistakes.”

Gary O’Hagan’s story offers yet more evidence of how adversity can contribute to our growth as moral leaders. Gary O’Hagan is president of the Coaches Division of the International Management Group, the world’s largest sports marketing and talent representation agency. Gary is an intense, competitive, and imposing man who looks like the football player he once was. As a young man, he was drafted, then cut by the San Francisco 49ers, and then picked up and cut by the New York Jets. Gary was devastated but determined to find another route to high achievement. He got a job as a financial trader with Solomon Brothers and attended law-school classes every weekday night. When his grandfather died, Gary was expected to attend the wake, the funeral, and represent the agency. Gary was anxious about falling behind at work and school, so he thought he could attend the funeral, make a quick appearance at the after-funeral lunch, after which he’d head back to work. But when he got to the restaurant, the significance of his family’s loss finally registered, and Gary realized that his priorities were out of whack. He called his boss and told him he wasn’t coming in to work. His boss was concerned and upset, but Gary stayed. He knew that if he didn’t have the compassion to help his family in that moment, he would never amount to much either personally or professionally.

Lynn Fantom, CEO of ID Media, the largest direct response media service company in the United States, is another morally gifted leader. It is late in the afternoon one cool spring day when Lynn walks back to her corner office in a New York City skyscraper. The Empire State Building is visible out one window, the Met Life and Flat Iron building out the other. Lynn barely notices the spectacular view. She goes straight to her desk and opens an email from a human resources manager at her parent company, Interpublic. HR, it seems, is worried about how overloaded she is. They wonder if it is the best use of her time to respond to the employee comments and questions she gets on the “Ask Lynn” column on the company’s intranet. Her public relations folks are also concerned about her schedule. They’ve recommended that she stop spending precious time posting her thoughts on media and marketing trends on the intranet. But Lynn thinks her personal responses to employees are an important part of the ID Media culture. She thinks that “Ask Lynn” gives her an opportunity to demonstrate that she cares about her workforce. She thinks that she has a responsibility to her workforce to share her business insights. To her, it’s time well spent. Lynn is certain that employees like knowing they can ask her about anything and that she will give them an honest response. They also like knowing that she understands market trends and shares her understanding with them. “In exchange,” says Lynn, “I really get their commitment to help us succeed.” Lynn is sticking to her principles. She won’t be giving up her intranet contributions anytime soon.

Jay, Lynn, and Gary are only a few of the many leaders we know with high moral intelligence, those who do their best to follow their moral compass. They do it because they believe it’s the right thing to do. A funny thing happens when leaders consistently act in alignment with their principles and values: They typically produce consistently high performance almost any way you can measure it—gross sales, profits, talent retention, company reputation, and customer satisfaction. We think this is no accident. The successful leaders we know invariably attribute their accomplishments to a combination of their business savvy and their adherence to a moral code.

Doug Baker, CEO of Ecolab, a $4 billion dollar cleaning-products manufacturer, tells us that “living by my personal moral code is one of the key reasons I have this job.” Ed Zore, former chairman and CEO of Northwestern Mutual, says, “Being moral—which to me means being fair, predictable, up-front, and not devious—all of this has been very important in my career. Everybody knows what I stand for. People know that we will never, ever be deceitful. We won’t leave a nickel on the table, but in the end our word is our bond, and this is a real advantage in business.” Gary Kessler, senior vice president of Human Resources, Administration and Corporate Affairs, at American Honda Motor Co., Inc., credits his principles and values for his career success. “I was VP of a business unit at Bausch and Lomb when I was 36 and at Honda when I was 45. I think I had the good fortune of working with people who recognized that I had sincerity and a conviction to do the right thing along the way.”

A Special Kind of Intelligence

Most of the leaders you meet throughout the rest of this book are morally gifted. They are high in moral intelligence. Most of us are familiar with other kinds of intelligence, such as our cognitive intelligence (IQ) and our technical intelligence. IQ and technical intelligence are undeniably important to a leader’s success. Leaders need to be good learners (IQ) who have expertise about their particular business (technical) areas. We call cognitive and technical intelligence threshold competencies because they are the price of admission to the leadership ranks. They are necessary but not sufficient for exceptional performance. They don’t help you stand out from the competitive crowd because your rivals’ leadership teams have as much basic intelligence and business savvy as you do.

Intelligence That Makes the Difference

To outpace your competition, you need to cultivate different kinds of intelligence we call differentiating competencies. Moral intelligence and emotional intelligence are two types of intelligence that are difficult for your competition to copy. Many corporate leaders ignore these differentiating competencies because they are often considered “soft skills” that are difficult to measure. In recent years, however, an increasing number of organizations have realized the performance benefits of emotional intelligence. Daniel Goleman deserves enormous credit for bringing emotional intelligence out of the academic closet and into the tough-minded halls of commerce. His books on emotional intelligence provide a rich and compelling case for the importance of emotional skills to corporate leaders.¹²

Although emotional intelligence is widely recognized as a business tool, its definition is still evolving. In 1990, Professors Peter Salovey of Yale University and John Mayer of the University of New Hampshire first coined the term. Their original definition of emotional intelligence was “the ability to monitor one’s own and others’ feelings, to discriminate among them, and to use this information to guide one’s thinking and action.”¹³ They identified the components of emotional intelligence:

• Appraising emotions in self and others

• Regulating emotions in self and others

• Using emotions adaptively

Salovey later expanded those into five domains, which Dan Goleman adapted in 1995 in Emotional Intelligence: Why It Can Matter More Than IQ:¹⁴

• Knowing one’s emotions (self-awareness)

• Managing emotions

• Motivating oneself

• Recognizing emotions in others

• Handling relationships

In 1997, Salovey and Mayer recharacterized emotional intelligence as “the ability to perceive, appraise, and express emotion accurately and adaptively; the ability to understand emotion and emotional knowledge; the ability to access and/or generate feelings when they facilitate thought; and the ability to regulate emotions in ways that assist thought.” The revised components became:

• Perceiving and expressing emotion

• Using emotion in cognitive activities

• Understanding emotions

• Regulation of emotions¹⁵

Other experts in the field of emotional intelligence offer slightly different twists, but the definitions are consistent with those of Salovey, Mayer, and Goleman. For instance, Barbara Fredrickson’s recent book Positivity: Groundbreaking Research Reveals How to Embrace the Hidden Strength of Positive Emotions, Overcome Negativity, and Thrive offers scientific evidence on the importance of positive thoughts in boosting emotional intelligence and enhancing personal and professional performance.¹⁶

Moral intelligence is new to the playing field. Just as emotional intelligence and cognitive intelligence are different from one another, moral intelligence is another distinct intelligence. Moral intelligence is our mental capacity to determine how universal human principles—like those embodied by the “golden rule”—should be applied to our personal values, goals, and actions. This book focuses on four principles that are vital for sustained personal and organizational success:

• Integrity

• Responsibility

• Compassion

• Forgiveness

Integrity is the hallmark of the morally intelligent person. When we act with integrity, we harmonize our behavior to conform to universal human principles. We do what we know is right; we act in line with our principles and beliefs. If we lack integrity, by definition, we lack moral intelligence.

Responsibility is another key attribute of the morally intelligent person. Only a person willing to take responsibility for her actions—and the consequences of those actions—can ensure that her actions conform to universal human principles. Compassion is vital because caring about others not only communicates our respect for others, but also creates a climate in which others will be compassionate toward us when we need it most. Forgiveness is a crucial principle, because without a tolerance for mistakes and the knowledge of our own imperfection, we are likely to be rigid, inflexible, and unable to engage with others in ways that promote our mutual good.

Compassion and forgiveness operate on two levels: first in how we relate to ourselves and second, in how we relate to others. Because we have yet to meet a person with perfect moral intelligence, putting principles into action requires that when we make inevitable mistakes, when our behavior fails to conform to universal human principles, we need to treat ourselves with compassion and forgiveness. If we are not gentle and forgiving of ourselves, we will not have the energy to move forward to build our moral capacity. Similarly, to inspire others to enhance their moral intelligence, we need to treat others with compassion and forgiveness.

Research tells us that emotional intelligence contributes more to life success than intellectual or technical competence. Emotional intelligence can help you behave with great self-control and interpersonal savvy. But emotional intelligence alone won’t keep you from doing the wrong thing. Moral incompetence surfaces in moments when personal or business goals conflict with core values. Just about everyone has worked with someone who had great interpersonal skills but dropped the ball on a moral issue—perhaps an employee who let a colleague take the blame for something that was undeserved or a manager who gave an inflated performance rating to the boss’ nephew. But until now, no one has paid much attention to systematically developing moral intelligence—even though the best leaders know it’s their secret weapon for lasting personal and organizational performance.

Some competencies that appear on lists of emotional competencies have a definite moral flavor, such as the ones listed here (from Daniel Goleman’s Working with Emotional Intelligence¹⁷):

• Have a guiding awareness of (personal) values and goals.

• Voice views that are unpopular and go out on a limb for what is right.

• Act ethically and are above reproach.

• Build trust through their reliability and authenticity.

• Admit their own mistakes and confront unethical actions in others.

• Take tough principle stands even if they are unpopular.

We believe it is more accurate to describe them as moral competencies. They are aspects of the four principles we describe and, in this book, we explore these attributes and the other competencies we see present in integrity, responsibility, compassion, and forgiveness. Perhaps it has been safer to think of these clearly moral competencies as emotional competencies because the culture of business in the last half century has discouraged all of us from talking about the “m” word. If there is a silver lining to the recent corporate scandals, it is that moral lessons are inescapable. The time has come to openly acknowledge the contribution of moral intelligence to effective leadership and sustainability.

Although both emotional intelligence and moral intelligence come into play when moral decisions are at stake, they are not the same. Emotional intelligence is values-free. Moral intelligence is not. Emotional skills can be applied for good or evil. Moral skills, by definition, are directed toward doing good.

Emotional intelligence and moral intelligence, though distinct, are partners. Neither works in a truly effective way without the other. In Primal Leadership: Realizing the Power of Emotional Intelligence,¹⁸ Goleman and his co-authors, Richard Boyatzis and Annie McKee, tackle the boundary between emotional and moral intelligence when they discuss how good and bad leaders can use the same emotional competencies:

Given that adept leaders move followers to their emotional rhythm, we face the disturbing fact that throughout history, demagogues and dictators have used this same ability for deplorable ends. The Hitlers and Pol Pots of the world have all rallied angry mobs around a moving—but destructive—message. And therein lies the crucial difference between resonance and demagoguery:

Demagoguery casts its spell via destructive emotions, a range that squelches hope and optimism as well as true innovation and creative imagination (as opposed to cruel cunning). By contrast, resonant leadership grounded in a shared set of constructive values (our emphasis) keeps emotions resounding in the positive register. It invites people to take a leap of faith through a word picture of what’s possible, creating a collective aspiration.¹⁹

Without a moral anchor, leaders can be charismatic and influential in a profoundly destructive way. As Primal Leadership emphasizes, truly effective leadership is “grounded in a shared set of constructive values.” Without knowledge of those values—in other words, moral intelligence—the skills of emotional intelligence are ultimately ineffective in promoting high performance.

Moral intelligence is not just important to effective leadership—it is also the “central intelligence” for all humans. Why? It’s because moral intelligence directs our other forms of intelligence to do something worthwhile. Moral intelligence gives our life purpose. Without moral intelligence, we would do things and experience events, but they would lack meaning. Without moral intelligence, we wouldn’t know why we do what we do—or even what difference our existence makes in the great cosmic scheme of things.

A Renewable Asset. The more you develop your moral intelligence, the more positive changes you will notice, not only in your work but also in your personal well-being. Staying true to your moral compass will not eliminate life’s inevitable conflicts. Will you have to compromise sometimes between your beliefs and the demands of your work environment? Yes! Will you make mistakes? Will you sometimes say the wrong thing out of jealousy or greed? Definitely! But staying the moral course will give you singular personal satisfaction and professional rewards.

Your “Moral Positioning System.” Think of moral intelligence as a “moral positioning system” for your life’s journey, analogous to the global positioning system used in some cars as a navigational tool. You can be a great driver, and your car can have a powerful engine and four-wheel drive, but when it’s dark and you’ve never been in this neck of the woods before, you have directions that were given you by someone who doesn’t know street names, and you cannot see the map you got from AAA, you are lost. Despite all your tools and resources, you have no idea if you are headed in the right direction. But if your car had a global positioning system, it would be virtually impossible for you to get lost. Like having a GPS for your car, your moral intelligence enables you to better harness all your resources, your emotional intelligence, your technical intelligence, and your cognitive intelligence, to achieve the goals that are most important to you—whether on the job or in the rest of your life. Unlike today’s GPSs, moral intelligence is not optional equipment. It is basic equipment for individuals who want to reach their best creative potential and business leaders who want to capture the best efforts of their workforce.

Moral Intelligence and Business Success. Though leaders may attribute their companies’ success to their commitment to moral principles, their evidence is based only on their personal experiences. So far, there has been no quantitative research that specifically studied the business impact of moral intelligence. But there are objective indications that moral intelligence is critical to the financial performance of your business. One measure of the influence of moral intelligence on business results comes from Ameriprise Financial (formerly American Express Financial Advisors) that implemented a highly effective emotional competence training program. American Express Financial Advisors defined emotional competence as “the capacity to create alignment between goals, actions, and values.” The program emphasized development of self-leadership and interpersonal effectiveness and demonstrated how those emotional skills led to business and personal success. The bottom-line impact of the program was impressive, with participants in a pilot group producing sales that were 18 percent higher than a control group that didn’t have the benefit of the training—no small change in a company that managed or owned assets in excess of $232 billion at the time. At the heart of the program was a special subset of skills that helped people to discover their principles and values and then create goals and action steps that flowed from those deeply held principles and values. American Express Financial Advisors’ leaders realized that it was this overriding moral framework, that is, the emphasis on principles and values, which accounted for much of the success of the program. American Express Financial Advisors had already found from internal studies that the most successful advisors were highly confident, resilient under adverse circumstances, and, most important, acted from a strong core of principles and values. To form trusting partnerships with clients, advisors needed to be genuinely trustworthy. To be seen as trustworthy, advisors had to act in accordance with worthwhile personal values. If advisors practiced the self-management and social skills they learned in the training, but failed to operate from moral principles and values, they would fall short of sustainable success.

Although American Express Financial Advisors’ data demonstrates the importance of an individual advisor’s moral intelligence to financial performance, other businesses have discovered that they produce the best results when their company overall is known for its moral intelligence. Market research tells us that consumers judge a company’s reputation mainly on the basis of its perceived values. A company’s reputation translates straight to the bottom line: A recent study jointly conducted by Cone and Duke University provides behavioral proof that consumers prefer to make purchases from companies that are known for their ethical practices.²⁰

The business case for moral intelligence gets another boost from a study done at DePaul University in Chicago. Researchers from the School of Accountancy and MIS compared the financial performance of 100 companies selected by Business Ethics magazine as “Best Corporate Citizens” with the performance of the rest of the S&P 500. Corporate citizenship rankings were based on quantitative measures of corporate service to seven stakeholder groups: stockholders, employees, customers, community, environment, overseas stakeholders, and women and minorities. The study found that overall financial performance of the 2001 Best Corporate Citizen companies was significantly better than the rest of the S&P 500. The average performance of the Best Citizens, as measured by the 2001 Business Week rankings of total financial performance, was more than 10 percentile points higher than the mean rankings of the rest of the S&P 500. According to Strategic Finance magazine, which reported the study, “It casts doubt on the persistent myth that good citizenship tends to lead to additional costs and thus negatively impacts a firm’s financial results.”²¹

Moral Intelligence and the War for Talent. Everyone agrees that talent is a key corporate asset, no matter what the state of the economy. A company’s best employees can walk out the door at any time. They are much more likely to take their expertise and potential elsewhere if they don’t like the ethical or moral tenor of their workplace.²² Nancy Jones, chief marketing officer, Allianz Life Insurance Company of North America, believes that when the job market recovers from the Great Recession, companies that aren’t treating employees with integrity and compassion now won’t keep them later:

The environment of constant sacrifice being expected of employees these days is not sustainable. People get burned out and start looking for other jobs. Leaders have to establish a balance between what the business result is and how business gets done. Otherwise productivity suffers and eventually you lose talent. As the economy improves, companies will discover that they can’t maintain so much pressure on their people. Today people stay where they are if they can because there are no other options. But when the opportunity comes up, people will start looking for better hours, the chance to be more creative, make more money, or whatever. Then belatedly, companies will try to create incentives to get people to stay, and it won’t work.”

Don MacPherson, president of Modern Survey, underscores the scope of the problem, noting: “In a survey we conducted and released in 2010 we learned that the level of workforce disengagement in America is at or near historic highs across virtually all industries. And it is especially high in the financial services industry.”

When good employees leave, sometimes it is a reaction to an entire organization that lacks a climate of moral intelligence; at other times, employees leave simply because their immediate supervisor or boss is lacking in moral competence. A number of years ago, a young man we know abruptly quit a job that he had been thrilled to get only a few months before. He loved the work and loved the product—selling sports hospitality packages of high-profile sports events to large corporations—but couldn’t tolerate the moral climate. Some years before beginning his job, his company had run afoul of a major sports association for using misleading and unethical tactics to get people to buy tickets for a major golfing competition and was now under a court order that prevented them from lying to get people to buy tickets. The company’s solution was to create two sales scripts for the golfing competitions—an “official” sales script for marketers to keep by the phone and show to the CEO if he stopped by. The actual sales script used by the marketers was the same kind of misleading pitch that had gotten the company into hot water in the first place. The final straw for this young man came when he was asked to start selling tickets for a major tennis event using the same misleading pitch.

It’s not just current employees who yearn for a morally intelligent workplace. First-time job seekers increasingly rate the ethical character of prospective employees as a consideration in their decisions about where to work. Patrick Gnazzo, vice president of business practices for the manufacturer United Technologies Corp. in Hartford, Connecticut, reported in The Wall Street Journal article that a growing number of their job candidates apply for positions with UTC based on the job seekers’ research into the company’s ethics program.²³ Since 2005, United Technologies Corp. has worked diligently to create the kind of ethical climate that inspires employees’ best efforts and strong business results. Today it boasts an unusually robust corporate ethics program, and in 2010 UTC received the Ethics Resource Center’s prestigious annual Leadership in Ethics award in 2010.²⁴

Moral Intelligence and the Consumer. Most perpetrators of the recent economic meltdown have escaped legal prosecution. However, they haven’t escaped moral condemnation in the eyes of the public. The business impact of bad behavior in the financial services industry of moral incompetence is substantial. According to a 2009 survey, 59% of investors state that they have been let down by the financial markets; 48% now distrust financial institutions in general; and nearly half of investors have lost trust in government.²⁵ Imagine how investor confidence will impact the health of financial services firms over the long term. If investors can’t trust the financial services industry in general, to whom will they turn for financial advice? If they haven’t given up on the whole industry, it’s likely that investors will be checking out their financial advisors much more carefully in the future to ensure that their financial well-being is in the hands of professionals with high integrity. Lack of trust in government, another key player in the recent economic disaster, was a major factor in the outcome of the November 2010 United States mid-term elections. Many formerly “safe” political incumbents, especially Democrats, were defeated in a populist wave of antigovernment sentiment. Voters appeared to be particularly upset about the governing Democratic Party’s inability to make a dent in an exceptionally high unemployment rate. First-time Republican candidates for Congress helped the Republicans regain control of the House of Representatives.

If the public doesn’t trust you, it will vote you out, no matter what business you are in. Business leaders across industries should not rest easy about their reputations. Last year’s annual Gallup poll on Honesty and Ethics showed that only 12% of the public rates business executives’ ethical standards as high or very high.²⁶

Today, more than ever, consumers are likely to shun unethical companies, and they won’t hesitate to make their displeasure known. More than 70% of American consumers have, at some point, punished companies they view as unethical, either by avoiding a company’s products or speaking negatively about the company to others. A recent study demonstrated that consumers punish unethical practices more than they reward ethical practices. Automobile manufacturer Mitsubishi felt the effects of consumer punishment when its Japanese sales dropped 40% in fiscal year 2005 after it was discovered that company officials had suppressed information about widespread vehicle defects. The rapid rise of social networking sites such as Facebook and Twitter has turbocharged consumers’ ability to use word of mouth to reward ethical companies and punish unethical ones.

The evidence is clear—moral intelligence plays a big part in sustainable corporate success. Without it, your organization risks devastating financial failure. What are the implications for your personal leadership effectiveness? If you pay attention to your own moral intelligence as a leader and encourage development of moral intelligence throughout your organization, you will inspire trust in your customers and vendors, as well as the best efforts of your workforce. That’s the formula for ensuring sustainable optimal performance. It is possible to get ahead without moral intelligence: The corporate accounting villains and disgraced financial industry executives who have caused so much pain in the last decade are proof that you can do well despite moral lapses—for a while. But without moral intelligence, long-term business success is ultimately not sustainable.

Obviously, moral intelligence isn’t the only determinant of sustainable business performance. You also need solid business skills, and you need a product or service that people want to buy. It’s hard not to wonder what the financial services industry and the economy in general might be like today if more industry leaders had used both their business smarts and their moral smarts to execute their firms’ strategy.

Moral intelligence won’t completely immunize your company from the financial ups and downs of doing business in a volatile economy. But you need it to stay in business over the long haul. So, take your leadership to the next level—go beyond the usual formulas for leadership success.

But how do you begin? Exactly how does moral intelligence produce better business performance? What are the specific moral skills you need to inspire the best efforts of your workforce? How can your organization—whether large or small—use moral intelligence to create high-performing work environments? You find answers to these questions in the pages that follow.

Endnotes

1. http://www.sec.gov/news/press/2010/2010-197.htm.

2. Bruce Watson, “Where Are They Now? Seven Villains of the Financial Crisis,” Daily Finance, September 15, 2010. http://srph.it/9bTrGJ.

3. William D. Cohan, “The rise and fall of Jimmy Cayne,” Fortune, August 25, 2008. http://money.cnn.com/2008/07/31/magazines/fortune/rise_and_fall_Cayne_cohan.fortune/index.htm.

4. Peter Chapman, The Last of the Imperious Rich: Lehman Brothers, 1844–2008, Penguin, September 2010.

5. Gary Weiss, “No Need to Apologize,” Portfolio, September 7, 2010. http://www.portfolio.com/views/columns/2010/09/07/no-regret-from-former-lehman-ceo-dick-fuld/#ixzz14L75yUtB.

6. Karen Freifeld and David Scheer, “Ken Lewis, Bank of America Sued by Cuomo for Fraud (Update5),” Bloomberg Business Week, February 4, 2010.

7. http://www.sec.gov/news/press/2010/2010-59.htm.

8. John D. McKinnon and Susanne Craig, “Goldman Is Bruised, Defiant in Senate,” The Wall Street Journal, April 28, 2010.

9. Stevenson Jacobs, “Guilty or not, Goldman’s reputation takes a hit,” Associated Press, April 18, 2010.

10. “Turmoil on Wall Street: The Impact of the Financial Sector Meltdown On New York’s Labor Market,” New York State Department of Labor Division of Research and Statistics Bureau of Labor Market Information, June 2009. http://www.labor.ny.gov/stats/pdfs/wall_street.pdf.

11. Reported by Marcelo Prince, “Manager Discovers Leadership in an Accident’s Aftermath,” The Wall Street Journal, April 5, 2002.

12. For example, Daniel Goleman, Emotional Intelligence: Why It Can Matter More Than IQ. New York: Bantam, 1995, and Working with Emotional Intelligence. New York: Bantam, 1998.

13. Salovey, P., & Mayer, J. (1990). “Emotional intelligence.” Imagination, cognition, and personality, 9(3), 185–211.

14. Daniel Goleman, Emotional Intelligence: Why It Can Matter More Than IQ. New York: Bantam, 1995.

15. Mayer, J. D. and Salovey, P. (1997). What is emotional intelligence? In P. Salovey and D. Sluyter (Eds). Emotional development and emotional intelligence: Implications for educators (pp. 3–31). New York: Basic Books.

16. Barbara Fredrickson, Positivity: Groundbreaking Research Reveals How to Embrace the Hidden Strength of Positive Emotions, Overcome Negativity, and Thrive, Crown Archetype, 2009.

17. Daniel Goleman, Working with Emotional Intelligence. New York: Bantam, 1998.

18. Daniel Goleman, Richard Boyatzis, Annie McKee, Primal Leadership: Realizing the Power of Emotional Intelligence. Harvard Business School Press, 2002.

19. Ibid.

20. For example, the 2008 Cone/Duke University Behavioral Cause Study and the 2008 Cone Cause Evolution Study. http://www.coneinc.com/stuff/contentmgr/files/0/8ac1ce2f758c08eb226580a3b67d5617/files/cone25thcause.pdf.

21. Curtus C. Verschoor, “Best Corporate Citizens Have Better Financial Performance,” Strategic Finance, Vol. 83, No. 7, p. 20, January 2002.

22. Reported by Kris Maher, “Wanted: Ethical Employer: Job Hunters, Seeking to Avoid an Enron or an Andersen, Find It Isn’t Always Easy,” The Wall Street Journal, July 9, 2002.

23. Ibid.

24. “United Technologies Corp. and CEO Louis Chênevert Win ERC’s 2010 Pace Award for Leadership in Business Ethics,” Ethics Resource Center (ERC), October 28, 2010. http://www.ethics.org/news/pace2010.

25. Sullivan Insight on Affluent Investors for Financial Marketers, 2009.

26. Gallup, 2009, Honesty and Ethics of Professions poll. http://www.gallup.com/poll/124625/Honesty-Ethics-Poll-Finds-Congress-Image-Tarnished.aspx.