1: After Enron: The Ideal Corporation

Following the abuses of the '90s, executives are learning that trust, integrity, and fairness do matter --and are crucial to the bottom line

Every summer for the past 10 years, Jack Stack has been going to Massachusetts Institute of Technology's Sloan School of Management to speak with young chief executives about the ideals and values of the engine manufacturing company he helped to make a management paragon. In the late 1980s, Stack's Springfield ReManufacturing Corp. emerged as a model for how management and labor could successfully work together in a culture of trust and ownership. Thousands of managers flocked to his company to hear his ideas while others gathered to hear him during his annual trek to MIT for its Birthing of Giants program for new CEOs.

But as the dot-com era took hold in the late 1990s, Stack saw a change in the attitudes of the business leaders who showed up at MIT. They seemed far more ambitious for themselves than for their companies. They were building organizations to flip, not to last. They were more interested in the value of their stockholdings than the profits of their companies. They told him his ideas for tapping into the enthusiasm, intelligence, and creativity of working people were antiquated. And they said he was out of touch.

quote
Stack says that even he began to think of himself as a dinosaur. "So many young CEOs were mesmerized by getting a $1 million or $2 million pop, selling out, and then getting out of town," he says. "They forgot that business is all about values."

Suddenly, leaders like Stack--people who take concepts like ethics and fairness seriously--are back in vogue in a big way. In the post-Enron, post-bubble world, there's a yearning for corporate values that reach higher than the size of the chief executive's paycheck or even the latest stock price. Trust, integrity, and fairness do matter, and they are crucial to the bottom line. The corporate leaders and entrepreneurs who somehow forgot that are now paying the price in a downward market roiled by a loss of investor confidence. "The chasm that separates individuals and organizations is marked by frustration, mistrust, disappointment, and even rage," says Shoshana Zuboff, a Harvard Business School professor and co-author of a new book called The Support Economy.

quote
The realization that many companies played fast and loose with accounting rules and ethical standards in the 1990s is leading to a reevaluation of corporate goals and purpose. Zuboff and many other business observers are optimistic that the abuses now dominating the headlines may result in healthy changes in the post-Enron modern corporation. What's emerging is a new model of the ideal corporation.

Business leaders say corporations will likely become far more transparent--not only for investors, but also for employees, customers, and suppliers. The single-minded focus on "shareholder value," which measured performance on the sole basis of stock price, will diminish. Instead, companies will elevate the interests of employees, customers, and their communities. Executive pay, which clearly soared out of control in the past two decades, is already undergoing a reassessment and will likely fall back in an effort to create a sense of fairness. And corporate cultures will change in a way that puts greater emphasis on integrity and trust.

The new agenda, say management observers, will require greater investment in financial systems, ethics training, and corporate governance. It may also demand a resetting of expectations so that investors are more realistic about the returns a company can legitimately and consistently achieve in highly competitive markets. Growth rates of 20% and up, even in technologically-driven industries, are likely to be a thing of the past.

In the anything-goes 1990s, too many companies allowed performance to be disconnected from meaningful corporate values. "A lot of companies simply looked at performance in assessing their leaders," says Larry Johnston, CEO of Albertson's Inc. (ABS ), the food retailer. "There have to be two dimensions to leadership: performance and values. You can't have one without the other."

This and other changes will be driven less by the threat of government intervention and more by the stigma of being branded an unethical enterprise. That's why the government's newfound zeal to indict individuals and even companies carries such power, regardless of how the cases are resolved. "Social sanctions may eclipse the law in imposing penalties for misconduct and mischief," says Richard T. Pascale, a management authority and author of Surfing the Edge of Chaos. "The corporation of the future has to think about this new development as an increasingly formidable factor to be reckoned with."

That's a change from the 1990s, when pressure from Wall Street and the dot-com mania led to much of the corporate excess. During those years, when Stack found his ideas decidedly out of favor, he stuck with the "open-book management" culture that had made him something of a celebrity years earlier. By sharing all of the company's financials with all employees and giving them an ownership stake in the company, Stack had built a level of mutual trust and respect unusual in business.

There were other organizations that clung to similar beliefs, from Southwest Airlines Co. (LUV ) to Harley-Davidson (HDI ). "We all stayed close together because we knew the dot-com model didn't have legs," says Stack. "But many of us wondered if the world would get back to companies with real values." Right now, Stack's ideas about leadership and management are resonating with many who feel disillusioned about business.

quote
If there's one change that nearly everyone foresees today, it's a move to make the corporation far more transparent. That's obvious when it comes to investors, who are demanding truth in the numbers and clarity in disclosure. But it's also important for employees if they're to have a true sense of ownership in their company's affairs. At Stack's company, there are weekly huddles with workers and managers, prominent scorecards on factory walls charting work progress, and ongoing emphasis by managers on building a company and not just a product. Workers undergo training so they can understand the numbers on a balance sheet and an income statement.

That need to make the inner workings of the corporation visible to all constituencies is expected to drive lots of change. "In some sense, there aren't going to be many secrets in business anymore," believes consultant James A. Champy, chairman of Perot Systems Corp.'s (PER ) consulting practice. "Even customers are calling for it today. Wal-Mart Stores Inc. (WMT ) wants to know what the costs of its suppliers are." The end result: It will put greater pressure on companies to clean up their management processes and become more efficient, and it will cause yet another reexamination of less-profitable businesses.

Corporate cultures, which in many cases veered out of control in the 1990s by emphasizing profit at any cost, are also in for an overhaul. More than anything else, those beliefs and attitudes are set by the top execs. The values they espouse, the incentives they put in place, and their own behavior provide the cues for the rest of the organization. "The CEO sets the tone for an organization's culture," says Alfred P. West Jr., founder and CEO of financial-services firm SEI Investments Co. (SEIC ), which operates the back-office services for mutual funds and bank trust departments.

Like Stack, West is a rather uncommon CEO. As the company's founder, he does not take stock options and pays himself a sober $660,000 a year. Rather than a spacious corner office, he has the same open-plan office space and desk as anyone else at company headquarters in Oaks, Pa., and he shuns the perks that are commonly demanded in the executive contract. Why? "If you separate yourself from everybody else with corporate aircraft and enormous stock options, your employees are going to get the wrong message," says West.

To make sure they get the right message, West spends a lot of time banging home his vision of the company to the people who work there. His goal of building an open culture of integrity, ownership, and accountability is a harbinger for what organizations will look like in the future. "We tell our employees a lot about where the company is going. We overcommunicate the vision and the strategy and continually reinforce the culture." Companies are also using that kind of openness to make it easier for their employees to report ethical lapses and unfair practices with whistle-blower hotlines and open procedures for airing grievances. And to give employees an incentive to use all that newly available information, many companies will help them acquire stakes through discounted stock plans. And even stock options are in for a revamping--with longer vesting periods and perhaps mandatory holding periods as well.

quote
Through the current dark period, there's reason for optimism. Harvard's Zuboff notes that capitalism has avoided devastating crises because it is a robust economic system that changes and adapts. The unprecedented economic expansion of the 1990s was widely seen as the triumph of managerial capitalism. Highly motivated business people used public capital to bring to life creative ideas and concepts for new companies and products. Corporate ownership was dispersed among many shareholders, but control and the lion's share of rewards were concentrated at the top of the managerial hierarchy--whether the company was a startup or an incumbent.

The next stage, believes Zuboff, will be something she calls "distributed capitalism," in which ownership will be more widely spread and organizations will be as responsive to their employees and communities as they have been to their shareholders in the past decade.

Wishful thinking? Perhaps. But the first task of the post-Enron corporation is to acknowledge that a company's viability now depends less on making the numbers at any cost and more on the integrity and trustworthiness of its practices. In the future, leadership that preaches this new ethos and reinforces it through value-driven cultures will be far more likely to reap the rewards of the changing marketplace.

By John A. Byrne

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE