What does it mean to TRULY maximize wealth? Tenet one of Return Driven Strategy has an answer to that.
In my 30+ years in the industry, one of my observations is that most successful businesses have one thing in common: They value ethics as a significant part of their business strategies and wealth creation. This is similar to what I read about the first tenet of Return Driven Strategy, which is explained in detail in Professor Joel Litman and Dr. Mark L. Frigo’s book, “Driven.” Do you want to learn more about the importance of ethics in the creation and maximization of a firm’s wealth? Read the article below to find out.
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What does it mean to TRULY maximize wealth? Tenet one of Return Driven Strategy has an answer to that. “Is wealth creation ethical?” Some think being wealthy or wanting to be wealthy primes individuals to act greedily. In fact, according to a study from Harvard University, money changes the way people think and behave, and usually negatively. However, there’s more to wealth creation than simply making money. As an article from the World Youth Alliance said, it is not completely unethical to want to generate wealth. When taken into the context of businesses, wealth creation and maximization is only possible through being ethical. In the book, “Driven,” authors Professor Joel Litman and Dr. Mark L. Frigo said societies that support economic freedoms in the pursuit of wealth creation and need fulfillment have prospered. On the other hand, societies that don’t have suffered dramatically. According to them, it’s because economically free societies know what is best for the citizens, support businesses that meet the needs of the people, and operate accordingly to achieve that goal. They also quoted the words of Bart Madden, author of the book, “CFROI Valuation,” who said: “… specific company track records reveal that the long-term, mutual interests of customers, employees, and shareholders are served by the ‘maximize shareholder value’ guide for taking corporate actions. Clear, concrete examples such as Bethlehem Steel (showing economic wealth and job destruction) or Medtronic (showing economic wealth and job creation) may convince some people of this solid ground when abstract arguments about the greater good have failed.” What does Madden’s comment on the value of wealth creation mean? The power of a firm’s constituents―customers, employees, investors, and managers―can drive a company’s performance and valuation to new highs or record lows. When these groups decide that a company has engaged in gross unethical conduct, that business will be affected negatively. You might find it strange to talk about business strategy and valuation with a discussion on ethics. That feeling is valid, though. In fact, some even question how business analysis and cash flows are connected to ethics. Here’s the thing: In the book, Professor Litman and Dr. Frigo said that talking about ethics in the context of business strategy and valuation is driven by thorough cash flow analysis across thousands of companies for over 30 years. This shows that the first tenet of the Return Driven Strategy framework―“Ethically Maximize Wealth”―plays an important role in the success of businesses, especially in the area of wealth creation. Ethical behavior helps reduce the risk of failures and losses. Professor Litman and Dr. Frigo’s valuation analysis shows that firms that engage in gross unethical conduct are those that experience the deepest and biggest losses. “Business success requires STAYING in business.” Firms that operate unethically are likely to lose money because their constituents will refuse to transact with them again or even sue them. When that happens, no amount of assets, technologies, historical performances, or resources―no matter how big and great they are―would be able to do anything to prevent a particular brand from losing phenomenal amounts of money. Simply said, it would be EXTREMELY difficult to reverse the negative impacts of violating a community’s values or ethics. If business owners and managers want to record great business performance, they must uphold ethical values in the first place. In the words of Professor Litman and Dr. Frigo in the “Driven” book, “Management should put at least as much effort in ensuring against the downside as in working for the upside.” No business can be separated from the society in which it is immersed. The belief that a company can profit for a long duration at the expense of its constituents goes against the odds of a healthy and ethical wealth generation in a global economy. Extensive cash flow analysis demonstrates this principle over and over again. Sure, achieving incremental success by cutting corners is possible. However, business owners and managers must remember that it’s only possible in the short term. Once their illegal practices pile up, it will eventually be exposed and in that scenario, the pressures from constituents will haunt the organization. The main point? If investing giant Warren Buffett says the first rule of investment success is not losing money, so then is ethical conduct the first rule of a successful business strategy. Avoiding the Downside In a past “Return Driven Strategy” article, we took a closer look at Tyco International’s fraud scandal, one of the biggest corporate scandals in 2002. In that article, we saw how unethical leadership, unethical business practices of subordinates, and questionable auditing practices caused irreparable damages to the firm. … and it’s not just Tyco that was involved in unethical conduct in 2002! Other companies such as WorldCom and Enron also experienced losses and even declared bankruptcy due to illegal practices in the form of misreporting the real expenses or assets of the firm, using special entities to record revenues that did not exist, and funneling company funds into the hands of unscrupulous individuals. As a result, these firms destroyed their billions of wealth. What else? Thousands of people lost their jobs, savings, and even retirement investments and benefits. Not only did the companies lose, but their constituents also lost. Take note: Tyco, WorldCom, and Enron all had innovative business models and they leveraged technologies in unique ways. However, the negative impacts of their unethical practices overpowered the otherwise healthy attributes of their businesses. This supports our previous statement that no amount of assets or resources will be able to cancel the negative effects of unethical conduct. — Professor Litman and Dr. Frigo emphasized in their book that when customers feel they are victimized by a firm, they respond in class action lawsuits, boycott that brand’s offerings, and simply avoid its goods and services. Meanwhile, employees in a company that operates unethically will restrict their time and creativity. They will work dispassionately until the day they leave the firm for a better job offer. Lastly, investors will withhold their monetary capital from businesses with questionable practices. They recognize that unethical conduct has a myriad of negative consequences not only to the firm but also to its constituents. See? Questionable business practices, values, and ethics lead to these responses. When a certain organization reaches this point, it will have to face the implications of its inappropriate actions. Remember: Customers, employees, investors, and managers do not like being lied to. That’s why being ethical is important to be successful AND stay successful in the business industry. We hope you’ve learned a lot from today’s article! Keep in mind that while being ethical doesn’t guarantee success, it does guarantee a reduction in financial risks and losses. The lesser the risks, the more the business will flourish. When a business performs well, it will ethically generate wealth at its maximum potential, thereby reflecting its positive impact in the society where it operates. Hope you found this week’s insights interesting and helpful. Follow us on LinkedIn. Stay tuned for next Tuesday’s Return Driven Strategy! “A mentor is someone who allows you to see the hope inside yourself.” Learn more about how you can accelerate your career in next week’s article! |
