How Can Business Regain the Trust it Has Lost?
Why do smart business leaders so often get it wrong? How could they make more ethical, responsible and sustainable decisions? Decisions that are not only more reasonable, but also more wise?
Trust in corporate executives remains shaky.
The 2016 Edelman Trust Barometer “indicates that the focus of CEOs is misaligned with what the general population believes to be most important”, with almost 70% of people noting an over-focus on short-term financial results.
Observers have typically blamed shortfalls in trust on a series of evils: unethical, short-termist or self-serving behavior, lop-sided incentive systems, weak corporate governance, biased decision-making.
Yes, misguided financial incentives can lead to inappropriate or downright unethical behavior. Whilst this may bring short term financial benefits, it will ultimately damage a firm’s performance. Furthermore, the performance of stock markets fails to really support the ‘shareholder primacy’ thesis.
And yes, in cases such as the criminal failures of Enron’s leadership, or the unscrupulous actions of Bernie Madoff, unethical intentions really were at the root of corporate debâcles, and inflicted enormous collateral damage on the people who were in some way connected.
Business Reality is Not Black Or White
But no, not all bankers or business people wake up one morning and decide to do the wrong thing. Ethical transgressions in business are often hard to spot. They slowly build up into damaging behavior. Although banking in particular acquired a nasty odor in the wake of the financial crisis, we can assume most bankers are honest. Again, they do not set out to maximize their bonusses in the full knowledge that their decisions will harm their organizations or society.
Business reality is not black or white. We all behave in a less-than-consistent way. We are all more fragmented, less true to ourselves, more malleable, than we might wish to be. We are a tangled nexus of emotions, dispositions, desires and traits which pull and push us in different and occasionally contradictory ways.
Still, the trust and legitimacy of business leaders remain under scrutiny. How can leaders rectify this? It’s unlikely the thorny problems and dilemmas of business can be formalized in a codex or algorithms. The answers lie elsewhere.
The Vital step From Smart, to Wise
Have you ever taken a lucky risk based on instinct and used hindsight to justify the innate wisdom of your gut? How often have you witnessed a leader being hired on the basis of his or her powerful self-confidence and commercial acccomplishments? Or noticed overconfidence luring executives into disastrous decisions?
Smart leaders are aware of their biases. And this awareness can help drastically improve their decision-making. Smart, or reasonable decision-making is important. It is even a pre-condition for wise decision-making. Unfortunately, it is not enough. Wise decision-making brings an additional set of critical variables into the equation. It has an ethical and socio-ecological component. It takes account of values and responsibilities. It counts not only in satisfying stockholders, but in satisfying stakeholders.
The global challenges we now face beg for policy makers and executives who are not just smart, (allocating scarce resources in the most effective and innovative way), but wise.
Wise decision-makers have some vital signs
Wise leaders look beyond internal interests (organizational finances and their own interests) to the external concerns that affect humanity, to areas in which a firm and its responsible leaders can make a difference. They are aware of the biases and errors that haunt presumed rational thinking, especially when it comes to the way supposedly smart people deal with ethical dilemmas – or fail to.
Making judgments in these cloudy areas will require business executives to think as reasonable and responsible optimizers. Even more, it will require them to think as human beings, whose decisions may not only affect themselves, their organization and their subordinates, but humankind in general.
Beyond Profitability, to Purpose
Smartness alone, then, is unlikely to equip leaders to address the complex business circumstances affecting society. Ethical, ecological and other constraints must be taken into account. And leaders need to help their teams, managers, peers and board members to broaden their perspective, giving them the tools to become more mindful and the courage to address the difficult gray questions that require a tough, fair and thus reasonable and responsible decision. One which steers the organization from profitability to purpose.
In a nutshell, smart leaders turn into wise leaders when they can help themselves and others to holistically address and resolve the difficult socio-ethical dilemmas we all face in business.
Step by Step From Smart to Wise
There is a strong business case for smart. Business is ultimately about creating innovative solutions whilst minimizing risky errors in an informed way. Optimizing insights to create value. This is the balancing act of smart-reasonable decision-making.
There is a stronger business case for wise. Highly “principled” CEOs outperform “self-focused” CEOs by a factor of five, according to a recent study (see full article). Yet smart prescriptions provide little guidance in non-financial goals, values, or socio-ethical dilemmas. Smart leaders may be able to reduce errors and biases and avoid costly mistakes, but still destroy long term value via unsustainable - or even outright unethical - decisions.
Smart Leaders Apply Processes to Avoid Errors
- Working on the wrong problem
- Failing to identify key objectives
- Failing to develop a range of good, creative alternatives
- Overlooking the crucial consequences of those alternatives
- Failing to consider trade-offs
- Disregarding uncertainty and ambiguity
- Failing to account for their risk tolerance
- Failing to plan when decisions are linked over time
- Smart Leaders Are Confident, Not Hubristic
If confidence is vital, too many executives over-estimate their understanding of uncertain situations. Smart leaders combine System 1 (fast, intuitive) and System 2 thinking (slow, rational, analytical) to strike the balance.
Smart Leaders Apply 3 Conditions
- Conscious thinking processes, switching from ‘auto’ to ‘manual spotlight’
- A continuous learning attitude
- Grit and gravitas.
Wise Leaders Are Not Just Smart. They Also…
- Are more aware of the impact of their attitudes, emotions and behavior
- Are more mindful of ‘blind spots’
- Leverage long individual experience and organizational processes
Wise Leaders Dive Deeper
In making a difficult decision, they ask:
- What are the net consequences?
- My core obligations?
- What can I live with as a [virtuous] human being?
Wise Leaders Have a Moral Compass + MQ
Guided by a strong moral compass, wise leaders possess integrity, responsibility, compassion, patience and forgiveness. These add up to moral intelligence (MQ) or ‘character’ - beyond the minimum leadership criteria of:
- Competence (IQ)
- Risk sensitivity (RQ)
- Emotional intelligence (EQ).
Read the full article here.