Chapter 10. Leading Large Organizations

The Fabric of Values

It is a blazing summer day outside the conference room in Sedona, where American Express executives Dave Edwards and Brenda Blake have gathered their two teams of international managers. Brenda is stepping to the podium to roll out the company's two new corporate values. Amex had long espoused six values; now it has eight. For the past two weeks, Brenda has been pondering how to make the values memorable so that people will be more likely to practice them.

She has decided to group the values into three categories—moral values, social values, and business values. Pushing aside her concerns about how her audience will react, she reminds them that success depends on a clear sense of what American Express stands for. She explains how values drive both business practices and business results.

Then, before launching into the new values, she puts one more PowerPoint slide up on the screen. It says this:

In making that claim, Brenda was out on a limb. It certainly wasn't a politically correct thing to say. No one had authorized her to say it. She hadn't even reviewed it with her superiors.

Indeed, it was only following the meeting in Sedona that Brenda e-mailed the presentation material to her boss. It would be two weeks before she found out his reaction. Over dinner, the night before she was to repeat her presentation to a group in London, he approvingly quoted the new mantra back to her: “If you don't subscribe to Amex's moral values, you probably shouldn't work here.”

It turns out that Brenda, one of 25 designated “culture champions” at American Express, needn't have worried about her presentation. Employees at every level say that when she talks about the three sets of values—moral, social, and business—they immediately “get it.” No one blinks an eye at the mention of moral values. The only question asked by some is how to reconcile conflicts between a new business value, “the will to win,” and the longstanding value of “integrity.” The Amex answer comes easily: Amex will win with integrity. It is not winning at any cost. If there is a conflict, integrity comes first. So far, though, the conflict has not come. Any senior manager at Amex will insist they can win in their markets without sacrificing an inch of their other values.

Brenda Blake's presentation captures lesson one about moral leadership of any large organization: Effective leadership depends upon the successful integration of moral, social, and business values. You cannot just be a moral leader, even as you cannot just be a strategic leader. The values that drive an organization do not work in isolation. Choices about moral values are an intrinsic part of the cultural fabric of every organization. Ask great business leaders about their values and you will inevitably hear them mix “integrity” in the same breath as “beating the competition”; “quality” along with “giving back to the community” along with “honesty.”

Is There Such a Thing as a Morally Intelligent Organization?

In the last chapter, you considered the concept that the major task of moral leadership is to bring all of an organization's values to life, so that employees can connect to them personally and understand how to translate those values into action. With that goal in mind, every aspiring leader will at some time ask: Is it my job to influence individuals or groups? Does one lead organizations, or does one lead people? Is it even possible to talk sensibly about a morally intelligent organization?

A morally intelligent organization is one whose culture is infused with worthwhile values and whose members consistently act in ways aligned with those values. A morally intelligent organization's major characteristic is that it is populated with morally intelligent people. After all, if you put enough morally intelligent people in one place, the culture will eventually catch on. But moral leaders realize that their job goes beyond simply hiring others who act in a certain way, just as a morally intelligent organization is more than the sum of its individual members. Moral leaders accelerate and enhance high performance by actively encouraging everyone in the organization to apply their moral principles to their individual actions while also creating organization-wide policies, practices, and reward systems based on moral values.

The Morally Intelligent Organization—An Aerial View

Not long ago, PBS aired a program on Italy that consisted of nothing more than exquisite video of the Italian countryside shot from a helicopter. No sound track, no plot, just moving pictures of mountains, valleys, and water as the camera followed the curves of landscape from north to south. Unlike the normal tourist's eye view, the video shot from high above the terrain gave a context for understanding the character of the country in a way that would be impossible from the ground.

If we had an aerial view of the ultimate morally intelligent organization, what would we see? First of all, we would not see people being simply moral, or simply social, or simply focused on the technical aspects of their work. We would see moral values lived out in their “natural habitat,” interwoven with other social and business values important to a successful large enterprise. We would see leaders who believe that there are some shared human moral values that apply to humankind all over the world and therefore apply both at work and outside of work. We would notice leaders who speak passionately about their beliefs and the values that their company stands for. We would also notice that the leaders are as morally competent as they are strategically gifted.

As we rose higher, so that we could see the entire organization, we would see job candidates being scrutinized to ensure that their beliefs and values are consistent with the beliefs and values the company upholds. We would see employees given opportunities to develop com petencies that translate values into action. We would see people solving problems and making decisions in ways that are consistent with the organization's values. We would see managers at all levels sharing their personal values and goals and inviting their peers and employees to hold them accountable to those values and goals. We would watch as employees go the extra mile for their leaders and their company because they feel respected and trusted by their leaders. We would observe employees being rewarded, not for being workaholics, but for results. We would see employees who deliver superior results, while reserving adequate time for their families, for community service, or for other passionate interests. If we looked closely, we would even see people make mistakes. We would also see that mistakes are usually treated as normal byproducts of innovation and growth and that people are given a chance to correct them and move on without being negatively branded.

Higher yet, we would see an organization that does not abandon its values when the economy sours, or a disruptive technology threatens, or a natural disaster strikes. We would see a company that has a long track record of profitable growth. We would see the organization dedicate a certain amount of its resources to helping others in the larger communities where it is located.

If our vantage point were high enough, we would see in the global organization the intertwined threads of moral, social, and business values reaching across countries and continents to join together people of different languages, social customs, and traditions in pursuit of a shared dream of individual and professional performance.

Morally Intelligent Policies

McKinsey co-founder, Marvin Bower,¹ observed that virtually every successful company codifies its culture, rather than letting it growthrough an inevitable self-molding process. Many effective leaders have discovered the wisdom of this advice. A senior management team of a defense laboratory attended a session on managing conflict during an especially stressful period of organizational change. Their workshop leader suggested that one way to prevent conflict in organizations was to develop a “social contract”—a code of behavior that everyone in the organization would agree to. The management team thought that was a good idea. They asked their employees to get together in small groups and talk about what should be in their “social work contract.”

Managers admit they were somewhat apprehensive. Most of the laboratory's employees had worked there for decades. They had seen management fads come and go. Would they be cynical about the idea of a social work contract? But when the groups met, they were thoughtful and engaged. When it came time to merge the results of the small groups into a social work contract for the whole laboratory, their managers were surprised and relieved to see that the small groups' proposals were remarkably similar.

They didn't call it a statement of moral values, but what they developed was clearly a shared moral guidance system. With the support of their leaders, they did the collective work of codifying how they wanted to be treated and how they believed they should treat one another. Many months later, it is clear that the words still mean something to this group. Employees display copies of the contract in their cubicles and on corridor walls—reminders of how they want to be at their best. In a year of massive change and unremitting workload, when people are overtired and tempers could easily unravel, there have been no meltdowns. The people in the laboratory have kept their act together. The social work contract has been a powerful influence on the laboratory's ability to weather the organizational changes that continue to surround them.

The Principles that Matter Most

Earlier, we described the universal principles we believe are key to leadership effectiveness—integrity, responsibility, compassion, and forgiveness. These same principles are essential to organizational effectiveness. The organizations whose values reflect these principles are the most likely to be successful over the long term. Companies that embed these principles into their cultures will succeed because they will keep more than their fair share of the world's most talented employees. These are the principles that resonate strongly with employees, so that they want to stay and are inspired to give their best efforts to the organization. But if integrity, responsibility, compassion, and forgiveness are absent from the life of an organization, there is dissonance between what the organization stands for and its employees' hopes and beliefs. If employees' moral compasses don't line up with a company's code of conduct, it is unlikely that they will give the company their best.

Organizational Integrity

How important is integrity? According to Paul Clayton, CEO of Jamba Juice, integrity is the central requirement for sustainable performance:

An organization that acts with integrity is more likely to have trustworthy, loyal employees. But integrity is also essential because shareholders relish it. Everyone has heard enough cautionary tales about cooking the books and the inevitable stock price slumps when accounting shenanigans come to light. In contrast, consider this example of how a company's candor helped turn around a company at risk.

Cultivating a High Integrity Organization. Companies should assign four to eight values as their “core values”—including among them the very principle of integrity itself. Based on these core values, organizations can use three key strategies that promote and demonstrate integrity. The first is for senior management to plot a communications strategy in which they engage with their employees and the public at large to identify and promote their organization's values. Ideally, the CEO leads this strategy: He or she should talk about the company's values—the core of the corporate culture—at every possible opportunity.

Second, the senior team needs to practice what they preach and enforce adherence to the company's declared values. Managers in many companies fail in this regard. They may not be guilty of fraud or terrible dishonesty but of a common white lie: It is common for managers to give annual performance reviews that fail to confront poor performance or behavior that is not aligned with core values. We've all heard stories of companies giving someone a bonus on Friday for “outstanding performance” and then firing them on Monday, but this behavior pattern has a high cost: Everyone in the company can see that their management does not practice integrity or really believe in it.

The third strategy is for senior management to invite their workforce to hold them accountable. An example of how to establish accountability is to set up a Leadership Alignment Task Force, a group of no more than 12 people from all layers of the organization—from Joe in the mail room to Debbie, a marketing director, or Sam, the head of production—to join this task force on a volunteer basis. The task force is charged with giving the CEO and the senior team an annual “alignment review.” During the alignment review, the task force offers feedback from their workforce on their perceptions of how well the CEO and senior managers behavior is aligned with the organization's values. Alternatively, companies can use intranets to collect confidential feedback from their workforce on senior management practices and their integrity.

Integrity produces substantial rewards for organizations who embrace it. All stakeholders—employees, vendors, investors, business partners—prefer doing business with organizations that have strong integrity. It is simply easier to engage with an organization that is honest, that states its mission and values, and does not diverge from them. It's common sense: Organizations that attract employees and customers by virtue of their integrity are likely to be highly successful in the long run.

The Responsible Organization

There are two hallmarks of the responsible organization. First, it embraces its responsibility for being of service to others. Second, it acknowledges mistakes and failures. With respect to serving others, there are two levels of service. The first level of responsibility is that the organization provides worthwhile products or services. This does not mean that your organization is only a responsible one if it invents the cure for the common cold. It is, however, important that your organization has a socially worthwhile mission. In a 2002 letter to shareholders, Jeffrey Immelt put GE's mission this way: “Let me put it as simply as I can. Customers win when we provide better products; they win when we provide better service; they win when we can generate productivity through information management; they win when we can provide needed capital.”

Companies that make dangerous products or provide questionable services put their long-term performance at risk. They may be profitable for a time, but eventually will falter. Phillip Morris is an example of a company that struggles with the tension between a dangerous core product and its desire to be socially responsible. Phillip Morris sells cigarettes. No one can ignore the dangers of their core product. But Phillip Morris also sponsors anti-smoking advertising aimed at children and contributes generously to charitable causes. Admittedly, Phillip Morris's social responsibility efforts were court-ordered as a result of litigation. One could argue that the company has not been as aggressive as it should in diversifying its holdings so that cigarettes are no longer their only revenue stream. You might dismiss Phillip Morris' efforts to be responsible as nothing more than a public relations smokescreen. You might be right. But it is possible that Phillip Morris genuinely wants to behave responsibly, rather than creating the disaster for shareholders that an abrupt exit from their core business would provoke.

Another example of a company dealing with adverse consequences of some of its products is Kraft Foods, maker of Oreo cookies, Oscar Meyer bacon, and Easy Mac macaroni and cheese. In 2003, Kraft announced that it would stop selling high-fat foods to schools and launched a series of initiatives to promote healthy eating. As of 2003, it had spent more than $17 million to increase the amount of fruits and vegetables distributed by U.S. food banks. You might conclude that Kraft is simply trying to forestall the kind of litigation first seen by fast-food chains by some obese customers who blame the food purveyors for their health problems. Hopefully, Kraft is making a good faith effort to ensure that its products are used in ways that do no harm. Whatever its full range of motives, Kraft does serve its broad customer base by encouraging people to make wise nutritional choices.

While companies like Phillip Morris and Kraft try to be responsible without altering their core product, other companies demonstrate responsibility by literally changing their product into one that better serves their customers. Harvey Golub did just that as CEO of IDS, a financial advisory company. He transformed IDS from a transactional services company to a company that offered objective financial planning services. To understand how profound a change that was, recall that the 1970s and1980s were a time when the financial services industry had a well-deserved reputation for questionable transactions. Consider the comments of one person who worked for a brokerage house:

It is no wonder people were suspicious of brokers, many of whom were more interested in lining their own wallets than helping their customers. It was the “me generation,” an era of excess, a time when “Wall Street” was synonymous with greed. Enter Harvey Golub, a McKinsey consultant called in by American Express to analyze a promising potential acquisition in the financial advising business. Golub examined IDS, a small company in Minneapolis that focused on creating wealth for its clients by offering long term investment and insurance products. Golub's studies showed that IDS advisors gave good financial advice. Clients could benefit from their advice, even if they decided to purchase financial products elsewhere. They didn't use hard-sell tactics. Their first priority was helping clients reach their financial objectives. Golub thought IDS had the right idea. IDS was small, but its principles were scalable. So he recommended that American Express buy IDS.

American Express agreed, but on one condition—that Golub take over as CEO. Golub grew IDS (eventually American Express Financial Advisors) by putting its customers front and center. He made a commitment that the financial planning documents prepared for clients would be objective. IDS's recommendations would not be biased towards IDS products. They would recommend IDS products that fit client objectives, but also acknowledge that clients could do well if they chose to go to another company to purchase financial products. He also insisted that financial planning had to be independent from the sale of products, even though he knew the company wouldn't be profitable if it only sold financial planning services. But Golub said, “We are going to be a financial planning company and help customers make financial decisions prudently and carefully.” It was curious advice at a time when the financial industry's high flyers were just “doing deals.”

A lot of industry insiders thought IDS would fail, especially after his predecessor lowered the sales charge customers paid for each transaction. There was a revolt in the ranks of the sales force. Many advisors threatened to quit. But Golub was confident it was the right thing to do, so IDS lowered its sales load. It lost some advisors, but, importantly, kept those who understood the values that drove Golub's strategy.

Although pundits had their doubts, Golub's values-driven strategies paid off spectacularly. From 1984 until 2000, IDS (later renamed American Express Financial Advisors) increased profits by at least 15% every single quarter, taking the company from 60 million to over one billion dollars in gross earnings. In recent years, AEFA has helped keep American Express profitable through the worst of the post 9/11 doldrums. Providing a valuable service and being a responsible organization is no doubt the morally right thing to do—but, as the success of AEFA demonstrates, values-based business practices are also strategically smart. At AEFA, financial advisors feel energized by providing a worthwhile service for their clients. Most financial advisors would hate having to pressure their clients to buy a product. Clients, in turn, value solid advice that helps them achieve their financial goals. Being a responsible, service-oriented organization resonates powerfully with employees and customers alike.

There is a second dimension that marks the responsible organization: its willingness to admit mistakes and failures. According to Paul Clayton, former CEO of Burger King North American, and current CEO of Jamba Juice:

If admitting mistakes is crucial to maintaining employee commitment, it is essential to maintaining customer loyalty as well. Some companies seem to know this in their bones; others go down in flames trying to hide the truth about their mistakes. Taking responsibility for mistakes may be painful in the short run, but admitting failure and taking steps to compensate for errors cements customer loyalty. Customers know that they can trust an organization that tells them the truth.

In 1982, the fate of Johnson & Johnson was in the balance when bottles of Tylenol capsules were laced with cyanide, killing seven people. James Burke, CEO at the time, knew exactly where to look for direction—the company's 40 year-old “Credo,” a single-page document that began with these words: “We believe our first responsibility is to the doctors, nurses, and patients; to mothers and fathers; and all others who use our products and services.” Johnson & Johnson ordered an

unprecedented recall of all 30 million bottles of Tylenol capsules in circulation. They immediately stopped production of the capsules and replaced them with tamper-resistant caplets. They communicated constantly with the public and the media, and it was their openness and concern for public safety that that helped Johnson & Johnson to overcome its initial losses and recover its market share within a matter of months.

More recently in 2004, drug manufacturer Merck & Company voluntarily withdrew its widely used arthritis pain medication Vioxx after a three-year clinical trial showed a higher incidence of heart attacks and strokes among users of the drug. Merck has a reputation for concern for those who use its products. It developed and distributed at no cost a drug that cures river blindness in underdeveloped regions of the world. According to Thomas Donaldson, Wharton professor of legal studies and ethics,² Merck “has always emphasized, in effect, that the company puts the health care of the customer first, and if we do that, we will make money. If we ever just put making money first, we will lose our business.” Donaldson adds, “You can question the extent to which Merck follows this, but it's not something that just appears [once in a while]. It is repeated fairly consistently.”

Contrast Merck and Johnson & Johnson's handling of product defects with Firestone Tire's handling in 2000 of the recall of tires that were implicated in fatal SUV accidents. Firestone was initially very reluctant to replace the defective tires, claiming that it was the vehicle rather than the tire that was at fault. The media later discovered that Firestone had prior knowledge of the problem and did nothing. It was also reported that Firestone had earlier refused to recall another defective tire sold in Saudi Arabia because a recall would mandate reporting the problem to the U.S. National Highway Traffic Safety Administration. Instead, it had launched a quiet replacement program that left the NHTSA in the dark. The result? Daniel Eisenberg, reporting on Firestone's tire debacle for Time magazine concluded, “Thanks to a generally dreadful crisis management, marked primarily by silence and denials, the Firestone brand has very little credibility left. The public is becoming increasingly skittish about any of Firestone's tires—the vast majority of which are safe.”

To promote responsibility, CEOs should carefully consider what it means to be a “responsible person,” communicate this to managers, and encourage the promotion of responsible people within the organization. A company made up of responsible people is a responsible company.CEOs can assess managers according to the following “responsibility checklist.”

Responsibility Checklist

Taking responsibility for personal choices

When I make a decision that turns out to be a mistake, I admit it.

When I make a mistake, I take responsibility for correcting the situation.

When things go wrong, I do not blame others or circumstances.

Admitting mistakes and failures

I always own up to my own mistakes and failures.

I am always willing to accept the consequences of my mistakes.

I use my mistakes as an opportunity to improve my performance.

I discuss my mistakes with coworkers to encourage tolerance for risk.

Embracing responsibility for serving others

I believe and show through my actions that an important aspect of my leadership approach is to find ways to serve and support others.

I pay attention to the development needs of my co-workers.

I spend a significant amount of my time providing resources and removing obstacles for my co-workers.

Rather than simply use this as a tool for self-examination, CEOs should discuss this checklist with senior management and ask them to rate their own responses on a scale from 1 (never does this) to 10 (always does this). The CEO should then discuss his or her expectations with management: which statements are the most important, which need to be adhered to the most closely, and work with them to improve their scores if necessary. The managers can then, in turn, work on responsibility within their individual departments.

The Compassionate Organization

When it's business as usual, acts of compassion are small or subtle in the great organizational scheme of things. But when a major crisis strikes, it is easy to see the difference between the truly compassionate organization and one that gives lip service to values. Aaron Feuerstein is the former president and CEO of Malden Mills, a company best known for producing the revolutionary fabric, Polartec. On a cold December night in 1995, a devastating fire tore through his factory in Lawrence, Massachusetts. In a time of corporate downsizing, many of his peers urged him to re-open operations overseas—a decision that would lead to the loss of 3,000 jobs at home. Shunning their advice, Aaron pledged instead to rebuild the mill at home—and to pay his employees during the three-month reconstruction. “I think it was a wise business decision, but that isn't why I did it. I did it because it was the right thing to do,” says Feuerstein.

Malden Mills battled insurance companies and government officials not just to rebuild the plant, but also to spend the additional money necessary to build the safest textile plant possible and to take care of his employees while the new plant was under construction. By 1997, just two years later, he had proved to the doubters that it was the right thing to do. Malden Mills was recording $400 million in annual sales—more than it ever had before the fire. Although Feuerstein's sometimes controversial decision-making led to financial problems and a bankruptcy filing, the company has recently emerged from bankruptcy intact.

Sometimes, though, despite a company's best intentions, layoffs must be made for the good of the company—its customers, its shareholders, and its remaining employees. The way an organization handles layoffs says more about its corporate character than any other activity. It is a test of its ability to weave moral, social, and business values into an effective whole. Answering the call of compassion in isolation might tempt an organization to avoid a layoff at the cost of fiscal survival. But a moral organization that doesn't attend to its bottom line won't be around long enough to keep any of its workforce gainfully employed. So the task of a moral leader facing serious financial difficulties is not necessarily whether or not to reduce the size of the workforce, but how to do it in compassionate way that provides a soft landing for those affected and in a way which preserves key talent.

Not so long ago, Safeco was on the verge of extinction when Mike McGavick took the reins. The clock was ticking, so he had to move quickly, cutting the workforce by 10% while consolidating 15 major offices into 5. Although the relocations and layoffs were difficult, they did not blindside Safeco's employees. Mike McGavick decreed that Safeco's leaders would tell employees what they knew when they knew it. When it came to delivering bad news, Mike decided that was his job. So he showed up at every regional office that was closing and told employees what they could expect.

Allie Mysliwy describes McGavick's visit to Indianapolis:

When jobs were eliminated soon after, reductions were made based on comparative performance. That may have been a blow to the egos of those who left, but it turned out to be a morale boost for remaining employees. Prior to McGavick's arrival, Safeco had been a haven of entitlement. Employees' number one complaint in their employee survey was the company's tolerance for poor performance. Instead of rewarding longevity, Safeco decided to keep its strongest performers, thus solidifying the new performance-based culture it desperately needed to get back on track. According to Allie, those who were asked to leave were treated with compassion and respect. There were none of the all too common layoff scenarios in which notified employees are summarily escorted out of the building, with little or no severance or support. Safeco provided generous severance packages by industry standards, but also tried to individualize its severance offering to meet special needs of employees. Employees who left appreciated how Safeco had treated them. Employees who remained were proud of how Safeco treated their departing employees.

In our high achieving business culture, self-recrimination is very common. We often find that our executives are far more critical of themselves (and less forgiving) than their bosses. One of the best ways a morally intelligent leader can show compassion is to challenge the executive about his or her excessive self-criticism. Of course, this implies that the leader has enough interpersonal skills and rapport with the subordinate to find out what their critical self-talk is all about. Yet, this challenge can be a superb way to embrace compassion and make it central to your organization. To the extent that an employee is spending his or her precious energy engaging in negative and self-critical inner dialogue, he or she is not giving it to the company in pursuit of the strategic plan!

The Forgiving Organization

Organizational forgiveness is an organization's capacity to accept mistakes and failures among its workforce. Forgiveness is critical for two reasons. First, employees need to know that they have room to fail. If mistakes are invariably punished, the emotional climate of the organization will be unattractive to your best employees, who will go elsewhere in search of a more favorable work environment. Second, forgiveness is fundamental to innovation and growth. Innovation entails venturing into the unknown, where no formulas exist. Risks will be taken; mistakes will be made. Some things will work, and some things will fail. Organizations cannot pioneer new territory unless they accept that they will spend some time going around in circles or down dead-end paths.

When asked whether 3M's reputation for innovation is legitimate, Ray Langer, a 3M project engineer, says, “Yes, it really is. We're encouraged to try new things in our projects, and if they don't work out, no one is punished. As a result, we have created many, many engineering processes that no one else in the world comes close to.”

Interestingly, the United States Marine Corps is an organization that has institutionalized forgiveness. “Most managers like to say they give their subordinates room to fail,” says David Freedman, author of Corps Business: The 30 Management Principles of the U. S. Marines,³ “but the Marines practice failure tolerance to a degree that would raise most manager's hair. To a certain extent, they demand failure: a Marine who rarely fails is a Marine who isn't pushing the envelope enough, goes the logic.”

A final incentive to practice forgiveness is that without a climate of risk tolerance, employees will be too intimidated to acknowledge mistakes or offer feedback, thus perpetuating problems that may be costing your company millions each year. When Safeco began to encourage employees to communicate about problems with senior management, senior management e-mail from employees went from a few contacts a month to 30 to 40 a day. Everyone, from Mike McGavick on down, takes feedback from employees very seriously. In the process of encouraging feedback, Safeco learned from its employees about long-standing process problems that they were finally in a position to correct. In the last several years, Safeco has saved millions annually thanks to information from its employees, information that they would never have felt safe enough to relay in the old environment.

While the most forgiving companies are often the best innovators, these companies also know how to set limits. If you want to increase forgiveness at your company, establish “curbs” for innovative behavior—for example, set out the percentage of work time team members can use to engage in innovative projects that are their own or their team's creation or set budgetary limits, allowing employees to spend a certain percentage of their department's budget on innovation. But then, if you wish to establish a truly forgiving company, make sure you celebrate this activity—not just the positive results. Honor your team members' mistakes as learning episodes. Edison is quoted as saying something like, “I didn't make any mistakes. I just tried ten thousand things that didn't work;” if you want to build an organization of budding Edisons, celebrate the innovation process and the failures that come with it, not just the results.

Another way to encourage your organization to increase forgiveness is for you to establish a learning organization (rather than a punitive organization). Praise your team members for embracing the learning process. Allow mistakes to be forgiven and analyzed and not punished harshly.

But, as with all values, forgiveness cannot be practiced in isolation. Peter Georgescu of Young & Rubicam recalls a time when some young employees discovered racist jokes on the Internet and began passing them around. In all likelihood, they did not intend to offend anyone; they were just completely thoughtless. Georgescu struggled and worried over this. Anyone could make a mistake, he realized—but the company also had a policy of zero tolerance for such activity. People's lives and self-respect were at stake. In a move that he judged to be not only best for his business, but also for the moral development of the two employees, he let them go. It was an action that won acclaim throughout the business community. By understanding the implications of each possible choice, Peter demonstrated moral intelligence. By taking the action he did, he demonstrated moral competence. As Peter showed, the leader who consistently puts both skills into practice creates resonance with those whom he or she leads.

Recruiting for Values

The basic unit of your organization is its people. Your organization's ability to engage in principled actions rests squarely on its people. Hiring the right people—the ones who already share your company's values—and have a track record of acting consistently with those values—is the most important lever you have in creating a morally competent organization.

Jim Collins, author of Good to Great,⁴ found that hiring the right people was a key differentiator of companies that had significantly outperformed the S&P over many years. When FastCompany.com asked him what his research suggested was the best way to respond to economic slowdown, he said this:

Don't delegate recruitment to your human resources department. Take charge of your own hiring process as much as you can while still conforming to employment law. When possible, avoid anonymous newspaper adds. Instead, network continuously so that you always have a large pool of potential candidates or referral sources. Let your network know what kind of people you are interested in having work for your company. Don't hesitate to talk about your organization's values. Recruiting from your personal network is likely to lead to significant jump in the retention rate, and contribute positively to your organization's performance Why? Because new jobholders who know you or are connected to you through your network, are much more likely to share your values, and are much more likely to stay when the going gets a little rocky.

Reinforcing Values Starts at the Top

In Primal Leadership: Realizing the Power of Emotional Intelligence, Daniel Goleman, Richard Boyatzis, and Annie McKee describe their model of leadership.⁶ The best leaders, they say, are resonant leaders. Resonant leaders use their emotional intelligence to create a positive emotional work climate in which the best work happens. To that equation, we would add this: The best leaders create resonance through their moral intelligence as well as their emotional intelligence. People naturally wish to follow leaders who demonstrate commitment to moral principles and values. When people believe that their organization and its leaders practice the values they preach, they become energized. When people work in an organization that operates from a set of beliefs that resonate with their own, they are naturally inclined to give their best efforts to their work.

In the real world of organizations, we never have the luxury of working with a fully morally competent workforce. Maintaining organizational alignment with values is just as challenging as it is for any single individual. That is why leaders should look for any opportunity to reinforce values. Training is key to reinforcing values and enhancing moral competencies. Senior executives may act allergic to training sessions in the misguided belief that they are finished products who don't need further education. But values start at the top, so senior level managers need to hone their moral judgment just like the rest of the workforce.

The 2003 American Express Executive Conference is a case in point. Held during a difficult time in the global economy, you might expect the conference to be focused on financial challenges. But this executive group spent little time talking about money. They talked almost exclusively about leadership and spent an afternoon in facilitated small groups discussing cases in ethics and their recommended solutions. Think about the investment in salaries, time, and travel expense involved in putting that high-octane group together. The message from the top was not subtle. Ethics is important. Making principled decisions is a key leadership competency. It takes practice, even if you are a top executive.

The Power of Formal Rewards

Psychologists tell us that people do what gets rewarded. It is critical that reward systems reinforce morally competent behavior as well as goal attainment. Unfortunately, corporate reward systems that violate the principle of integrity are not unusual. Media reports of fired CEOs laughing all the way to the bank, CEOs who get multimillion dollar bonuses despite staggering year-end losses, and pyramid compensation systems that routinely reward executives far in excess of their relative contributions are common. Contrast that with Best Buy CEO Brad Anderson, who declined 200,000 stock options in 2004. He already owns company stock worth roughly $78 million dollars, and asked that the declined options be distributed to non-executive employees.⁷ Anderson's action was an effort to create more equity in the distribution of corporate rewards, although no one—Anderson included—would argue that he will feel too much of a pinch. But his recognition that he does not need more sends a powerful message to other companies' executives about corporate excess—while creating a richer source of rewards for rank and file employees who do the right things.

Paul Clayton is insistent about sending positive messages through meaningful rewards. Paul recalls a time when he was president of Burger King North America, and had to convince his own executive team that he was serious about rewarding employees.

Success Stories

Given that moral values are embedded and intertwined with other values in the conduct of your business, how do you link moral values to performance? American Express does it by storytelling. The Amex team in Australia had just won the prestigious “Chairman's Award.” The country manager wasted no time assembling his team to congratulate them. He did it in a way that explicitly linked Amex values to their success. He told stories about how individuals acted on Amex's values and how that contributed to their getting the Chairman's Award. This manager celebrated not only their accomplishments, but the values that led to their success. Leaders in morally competent organizations never take values for granted. They promote them, they apply them, and they make sure that their people see how values translate into business performance.

Ideal Versus Real

Even within an organization that is committed to values, you can always find managers who fail to apply them. Wherever there are imperfect managers, there are cynical employees who look at them and say, “He, or she doesn't live the values, so…why should I follow the values if my boss ignores them?” Or, “…why should I go the extra mile for a management that doesn't respect me?” If employees complain about someone who works for you, it is your responsibility to deal individually with unacceptable behavior. It is also critical that you convey the message that Ken Chenault gives to his employees: “There is no excuse for personal behavior inconsistent with Amex's values. You can't wait for everyone to behave in alignment with values before you do. The only way for people to start acting on values is to do it independently of whether others do. Do not expect perfection from leaders.”

Values and the Global Organization

More and more companies not only do business internationally, but are actually global companies with offices throughout the world, employing local workforces in numerous countries. Imagine how difficult it would be to communicate with a multi-national workforce in the absence of some shared beliefs. Without common values, business would be impossible. Common values, based in the universal principles, can knit together a diverse global workforce. In an era marked by international conflict, we believe it will be in the world of business—rather than in the political arena—that people from different ethnic, racial, and religious heritages will discover their common path.