Hire for Character, Train for Competence Round Table – Tuesday, March 12th

Pope Francis yesterday closed the Vatican meeting of Catholic Bishops and Cardinals especially called to stop sexual abuse of minors by priests, an insidious failure of good character on the part of those chosen to be God’s ministers on earth.

On the one hand, the failures were ones of individual responsibility – by the priests who did wrong. But on the other hand, they were failures of the institution, in hiring, in supervising, in investigating and in punishing. Those institutional failures arose out of the long-established organizational culture of the priesthood.

The root cause of the malfeasance was in values, values not held by perpetrators and values held – which either provoked or aided and abetted the wrongdoing.

The Catholic Church is not alone in fostering malfeasance. I would argue that all corporate scandals, from the explosion of BP’s Macondo well in the Gulf of Mexico, through ENRON and Wall Street’s 2008 destruction of global credit markets, to today’s misuse of private data by Facebook or UBS’s helping wealthy French dodge their country’s tax laws, arise first from a failure of organizational culture. What is the remedy?

Our colleague, Matt Bostrom, former Sheriff of Ramsey County, has a good answer. He is working now on a Ph.D. at Oxford University gathering data to support his solution. Matt believes that every organization, in his case police departments, should hire for character and then train for competence.

In our modern, professionalized, elite culture of expertise, we do the reverse: we hire for credentials and hope for good character.

Matt has been organizing community focus groups to gather information on the criteria people want to see in their police officers. It turns out hiring for character is easy.

Please join us for a round table discussion at 9:00 am on Tuesday, March 12th, at the University Club of St. Paul to learn about Matt’s research and how we can reduce organizational failures across the board by hiring for character.

Registration and a light breakfast will begin at 8:30 am and the event at 9:00 am.

Cost to attend is $15 for Business and Public Policy Round Table members and $35 for non-members. Payment will be accepted at the door.

Space is limited.

To register, please contact Jed at jed@cauxroundtable.net or (651) 223-2863 (email preferred).

The University Club is located at 420 Summit Ave in St. Paul.

Parking will be available along Summit Ave.

The event will conclude at 11:00 am.

 

Vindication of a Moral Capitalist

Two years ago, Warren Buffet teamed up with Kraft Heinz to takeover Unilever with an offer to purchase its shares from owners. Kraft Heinz was a merger of two companies, each owned by 3G Capital in Brazil. 3G’s business model is to strip costs down, leaving only sinews and so boost short-term profits. The Buffet/3G alliance proposed to do the same to Unilever and so to maximize its profitability – survival of the fittest and no remorse for those deemed expendable in the drive to spend less and less.

My friend and our supporter Paul Polman, CEO of Unilever, stood up to them, saying the Unilever strategy for sustainability would be better for shareholders in the long run than selling out to Buffeet/3G for a premium of 20% over the market price of shares (depressed due to a lower British Pound as a result of Brexit anxieties).

Well, on Saturday, it was revealed that Kraft Heinz has been forced by market prospects to write down the value of two of its brands by $15.4 billion, a hefty loss for its owners, 3G and Warren Buffet. Turns out a focus on cutting costs while ignoring shifting customer preferences has cut down the equity value of Kraft Heinz.

Buffet’s Berkshire Hathaway investment company then had to book a loss as well – a $3 billion write down last year arising almost entirely from their equity interest in Kraft Heinz.

Polman’s moral capitalism business model has been vindicated. Unilever is better off – and its owners, employees and customers – under his stewardship than it would have been if Kraft Heinz were running it. Paul worried about all stakeholders first and foremost and how to make the company sustainable for the long haul.

Intense to the point of viciousness, cost-cutting does not invest in keeping up with the times, with responding to competition, new customer tastes or fading allure of old brand names. This is what I described as “brute” capitalism in my 2004 book, Moral Capitalism. Failure to invest properly compromises future ability to earn profits reliably, thereby lowering present discounted cash flow and company value.

The failure of the 3G Capital business model points to the need to re-think how we calculate the financials of business success over the long run.

A Very Early American Rejection of Intolerance

The intransigence of American political leaders leading to the recent partial shutdown of our federal government shows intolerance of the views of others.

Stalemate in the United Kingdom between those who want their nation to remain in the European Union and those who don’t also shows narrowness of spirit in reaching out to others.

Thirdly, the rise of populist resentment and prideful visions of our own tribe as better than yours also reflects this constriction of empathy and care.

The Caux Round Table for Moral Capitalism’s Principles for Government call for government to be a trust for beneficiaries. This presumes a moral sense open to the needs, concerns and views of those reliant upon public power to do them justice.

In 1657 in the young American colony of New Amsterdam, Governor Peter Stuyvesant issued an edict proscribing Quakerism. In the small community of Flushing, now a part of Queens in New York City, citizens refused to obey the Governor. Their letter of remonstrance (PDF) makes the case for openness to those of good heart and goodwill.

Why Socialism Falls Short

The cover of this week’s Economist magazine features a discussion of millennial attraction to Socialism. But the track record of socialism in reality is dismal in advancing human happiness. Why might that be?

A good place to start in analysis is human nature. Not everyone does a good job in building up and exercising their Moral Sense. Especially when, as economists say, they can extract rents from the economy due to their political positions. If you live off rents – cash which just flows to you, come hell or high water, why be accountable to others, who are pestering you about your shortcomings? Whether French aristocrats under the Bourbons or today’s tenured faculty or civil servants, those who extract rents are walled-off from the stresses and strains of ordinary life.

In public administration, this aspect of bureaucracy is called public choice theory. It seeks to explain why bureaucrats on average don’t provide good personal service to the public or, rather, put personal advantage over the common weal.

A recent example of rent-extractors at work is the demise of the A-380.

Government bureaucrats and a government-led company, Airbus, could design and build a remarkable airplane the A-380. But they could not get customers to use it. So they had to stop making it.

Ultimately the values of ordinary people – where they chose to fly -did not provide enough money to pay for the making of more such giant planes.

Second, it may also be that high tax (Socialist) administrative regimes encourage rent-extraction behaviors. A recent commentary in the Feb 20 Wall Street Journal assembled data to illustrate the point that American states which collect the most taxes don’t deliver high quality infrastructure. In these administrations public employees and union members aligned with the ruling party collect a growing share of tax revenues.

So, for example where Europe and Japan can build subway tunnels for between $160 to $480 million per mile, New York City paid $2.8 and $2.1 trillion per mile to extend two subway lines. Unionize tunnel workers earned $111 an hour in New York while Detroit paid $38 per hour and Germany $40.

Wealth extraction in the form of zoning regulations restricting construction of apartments increases housing prices to the advantage of those with higher incomes.

From The Wall Street Journal: Key Investors Are Unhappy With SoftBank Tech-Investment Fund

Key Investors Are Unhappy With SoftBank Tech-Investment Fund — The Wall Street Journal

How much is a company worth? How much is anything worth?

Prices are the basis for all transactions; they make businesses succeed or fail; they favor some and exclude others; they are the basis for contractual agreements which provide capitalism with its fundamental morality and capacity to respect human dignity.

But prices can be nominal. Prices can be illusions as to real worth. Prices can be set out of stupidity or greed or fantasy.

There can be disagreement about prices – a nominal price has no truth to it, only the chance that someone else will accept it as reasonable or the basis for a deal.

For example, see story above.

Investors in the fund from Saudi Arabia and Abu Dhabi think that the Vision fund incorrectly valued companies in which it invested capital – over estimating their “real” worth.

Who’s to know?

 

‘Moral Capitalism,’ the Kennedys and Minnesota in The Star Tribune

‘Moral Capitalism,’ the Kennedys and Minnesota – StarTribune.com

My job for the Caux Round Table is to promote ethical principles for business and finance. And when one of “those” Kennedys wants to work on your idea for the good of the country, it’s a special gift.

Now, what’s important here is not me or my book, but the Minnesota roots of the idea of Moral Capitalism the book explains.

Read more of Steve’s editorial at the link above.

Jobs and Steel Tariffs in Wall Street Journal

Jobs and Steel Tariffs – WSJ

Well, what do you know? Trump’s trade war tariffs on steel imported into the United States have seemingly proved that Adam Smith was right to oppose trade wars and mercantilism.

As tariffs on imported steel raise prices, American steel companies are adding new capacity to profit from price rises and less competition.

But who is paying American Steel companies for their product at higher prices? Americans! Who are thus being “taxed” for their consumption by government policy.

The Wall Street Journal editorializes that Ford lost $750 million in potential 2018 profits from the tariff; Caterpillar expects to lose $200 million in profits in 2019; Whirlpool estimates $300 million. Crown Holdings passed its higher cost on to its customers.

Ayatollah Khomeini’s Revolution in Retrospect

Iranians just observed the 40th anniversary of the establishment of a theocratic state by the Ayatollah Khomeini. What lessons are there for us in this social experiment so at odds with the trend of modernity?

The Ayatollah and his followers and admirers practice Shi’a Islam, which originated among the Arabs as a consequence of arguments over who should lead the community of Muslims after the death of the Prophet Muhammad. But it seems to me the Shi’a faith found its deepest roots among the Iranians, an Indo-European people who over many centuries expressed themselves in the Persian Empire and successive regimes. Persian influence spread into what is now Iraq, where the Shi’a faith first grew into importance.

So perhaps it is not a coincidence that there are striking similarities between Indo-European Zoroastrianism, practiced in Persia for centuries, and Shi’a beliefs. The similarities pose a challenge to my understanding of ethics and right-minded, decision-making in a pluralistic, human community where human frailty and error are the norm.

Pluralism denies enforcement of any claim to possession of absolute truth and to the associated right to compel others to submit to such truth on pain of punishment or death.

Human frailty and error raise doubts as to the accuracy of any person to his or her claim to possession of the single, absolute truth.

Modernity, with its rationality and privileging of critical analysis, has pretty well exposed assertions to the possession of ultimate truth as pretentious. Nihilism is the current foundation of our authority to assess faith-based beliefs, leaving us intellectually in a live-and-let-live world community.

Perhaps as early as the second millennium BCE, Zoroaster, in what is now Iran, wrote poems (the Gathas) setting forth his perception of truth and reality. He believed there was a created cosmos, a divine order, which was good and true (Asa) but that there were oppositional forces (Druj) of ignorance and evil thinking which threatened that order with chaos. There was good in the world but he believed that it could be corrupted. Experienced life for him was a struggle between the tendencies towards good and right order and the tendency towards evil and chaos.

Humans had free will but were fallible. Our lot was to choose between either of two irreconcilable extremes: truth or lies; good or evil.

For Zoroaster, there was only one true path. All others were inferior. That path was to think good and do good, to be a co-worker with the spirit of Asa and so refresh creation.

In Shi’a faith, there is a conviction about ismah – that there are those without fault who are free from error and only they can show us to the right path with its right thought and right deeds.

Refusing to follow the path aligns such a reprobate with evil forces, with Satan. Thus, for the Ayatollah Khomeini, the United States was the “Great Satan” in the world, deserving unrelenting opposition until its power was fully suppressed for the good of creation.

Secondly, there is a calling among the Shi’a to direct others towards the good and away from evil.

Shi’aism points us towards a bipolar reality of only good and only evil, where toleration gives in to corruption and evil and compromise is impossible. Such a vision of life can easily justify violence against and oppression of those who are not seen as good.

It is not at all obvious to me that such bi-polarity is fundamentally good. It exacerbates our deeply rooted human tendencies to fear, despise and marginalize others.

But such bi-polar antagonisms between good and evil seem to be congenital to modern revolutions, from the Jacobins on down. When a revolution seeks to bring society back (to re-volve) to unquestionable first principles, it sets up a reign of oppression of free will, even of terror, in the name of virtue.

In the French Revolution, at the foot of the guillotine which was about to take her life, Girondist Madame Roland cried out “Oh Liberty, what crimes are committed in your name!”

Whoever or whatever created our cosmos and us did so leaving us imperfect creatures, condemned to live within limits and frustrations but also giving us a moral sense and the freedom to use it to link ourselves to others and to our surroundings in constructive and life-giving ways.

Reading the Qur’an has encouraged me to think that one can hold to an absolute truth, if at the same time one does not tread far from humility. Qur’an guides us to avoid Shirk, or making of ourselves, or anything else for that matter, the equal or partner of God.

The Old Testament book of Micah instructs us “to act justly and to love mercy and to walk humbly with your God.”

Aristotle thought that finding the Mean was the basis of ethics and that we needed inner strength (virtue) to do just that.

In the Confucian tradition, we find the Doctrine of the Mean, which advised us to keep to the balance of the Tao. And Buddha taught us in his first sermon to avoid extremes and find the middle path.

Our colleague Klaus Leisinger, by coincidence, just sent me this quote from Dietrich Bonhoeffer:

“Responsible action is no longer fixed from the outset and once and for all but is born in the given situation. It is not a matter of implementing a principle that ultimately breaks with reality but of grasping what is necessary, what is ‘commanded’ in the given situation. It must be observed, weighed, evaluated, all in the dangerous freedom of one’s own self.”

At the Caux Round Table for Moral Capitalism, we seek to follow this wisdom – to find principles of the good which must be applied in life in context where a humble, open-minded consideration of conditions avoids extreme judgmentalism and inflexibility.

Moral Capitalism Starts Going Mainstream

U.S. Representative Joseph Kennedy III has picked up “Moral Capitalism” as his program for the U.S. He called asking for my help, which I said I would give him.

Last week, he gave a talk on the subject at Harvard Law School, which you can read here (PDF).

A commentary in Bloomberg by Harvard Law Professor Cass Sunstein notes Kennedy’s attachment to Moral Capitalism.

This adoption of Moral Capitalism is a compliment to the authors of our Principles for Business and to the Minnesota heritage they brought forward.

Taking Care of Employees

I saw recently in the Wall Street Journal this anecdote (PDF) about a “boss” looking out for an employee.

It reminded me that even in the throws of making a living, we can make life better for those around us, especially those who can rise or fall thanks to our powers and decisions made as to how we use them.