The Responsible Organization

Doug Lennick and Fred Kiel

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. Philip Morris is an example of a company that struggles with the tension between a dangerous core product and its desire to be socially responsible. Philip Morris sells cigarettes. No one can ignore the dangers of their core product. But Philip Morris also sponsors antismoking advertising aimed at children and contributes generously to charitable causes. Admittedly, Philip Morris’ 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 Philip Morris’ efforts to be responsible as nothing more than a public relations smokescreen. You might be right. But it is possible that Philip 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 Mayer 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 Philip 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 and 1980s 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 was a hectic noisy place with stockbrokers crowded together talking on phones and calling out across the room to one another. Right in front of me, I saw a man on the phone put someone on hold, then yell out, “What do we have for a buck with a half?” Someone yelled back, “XYZ stock.” The man got back on the phone and proceeded to extol the virtues of XYZ stock. As I left, I asked my friend to tell me what a buck with a half meant. He told me that it is a stock for which you pay a dollar for the stock with a fifty cent load—meaning the customer paid a dollar for a stock that was only worth fifty cents. It was obvious that the guy who promoted XYZ stock didn’t care about gouging his customer and was only interested in maximizing his earnings.

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 (later renamed American Express Financial Advisors or AEFA) by putting its customers front and center. He made a commitment that the financial planning documents prepared for clients would be objective. IDS’ recommendations would not be biased toward 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 (AEFA) increased profits by at least 15% every single quarter, taking the company from $60 million to more than $1 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 America and current CEO of Jamba Juice:

We owe it to everyone, including shareholders and ourselves, to get results, and to get consistent results; we owe it to ourselves to have open and honest dialogue around what’s working and what’s not. The leadership team has to convey that it’s all right to make a mistake; it’s all right to bring up an issue. Sometimes the best we can do is to make sure we are honest about flawed assumptions. If you’re not, it doesn’t take long for things to go wrong. In our business, we are dependent on young people. If you are going to get people to really commit, then you have to be honest about what is working and what isn’t.

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 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, 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’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 (NHTSA). 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 “responsibility checklist” on the following page.

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.