December 1, 2021
December 1, 2021
When the subject of ethical and responsible business behavior arises, Warren Buffett advises managers to evaluate every action they take—and not just by legal standards, but also by what he calls the “newspaper test.”
When managers have any doubt about whether a decision or action is right or wrong, they should imagine how they would feel if it were reported the following day in the local newspaper and read by their family, friends, and neighbors. Buffett’s bottom line: If a decision or action passes this test, it’s OK. If it doesn’t, it’s not.
This test isn’t just about transparency. It’s also about consequences, as illustrated by another well-known Buffett quote: “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
The test itself is not a morality play. It’s more about the reality of losing one’s legacy and the specter of permanent damage to one’s personal brand.
We frequently see examples of individuals failing the test, such as using sales practices that deviate from a company’s core values, cutting corners on safety to reduce costs, or installing software to defeat environmental emissions tests. Regardless of who is involved, exposure is inevitable. Even if you don’t yet know how or when it will happen, one thing is certain: when the story breaks, the societal response will be swift.
Given discovery is just a matter of time, why is it that smart people fail the test? Psychologists point out that motivations vary. They span a continuum that includes narcissism, sociopathic tendencies, lack of empathy, and falling prey to the slippery slope of starting with small acts and progressing to larger, more noticeable ones. Greed can also be a driver, as there is a fine line between that and acting aggressively in a business environment.
For those who aspire to act ethically and responsibly, decision-making processes are the ultimate reflection of how corporate values manifest through action. If a decision is likely to drive consequences that will lead the C-suite and board to “stop the show,” circle the wagons, and engage in damage control once the sunlight shines on it, then someone has to ask, “Why do it?”
For directors and their CEOs, this conversation is about preserving their personal brands and recognizing that their respective legacies are inextricably tied to the corporate brand itself. Thus, for the company’s leaders, incorporating the Buffett test into decision-makers’ thinking is a reputation play. To that end, below are three actionable steps for boards to consider:
1. Focus on aligning the organization around core values and supporting the brand promise. Given the mobility in the workplace, winning hearts and minds is an imperative that never ceases. To that end, the CEO’s message from the top around core values and what the company stands for has never been more important. The board should understand the message—and encourage the CEO to implement processes to ensure that it makes an impact.
For example, confidential employee surveys conducted by an independent third party can provide feedback on the “mood in the middle” and the “buzz at the bottom” of the organization. These surveys can be quite effective if the CEO really wants to know the unvarnished truth about organizational alignment, is committed to implementing necessary improvements, and supports making the survey results and resulting improvement efforts transparent to employees.
2. Set appropriate boundaries to reduce risk. Ultimately, the CEO and board own the responsibility to protect the enterprise’s reputation. Their task: encourage key decision-makers across the company to engage in ethical and responsible business behavior consistent with the organization’s core values. That task revolves around laying out the “sandbox” within which decision-makers function based on applicable laws, regulations, and internal policies.
That entails articulating boundaries around which risks the organization is willing to accept and which risks it intends to avoid at all costs (such as exposing the public to health and safety risks). Strategic, operational, and financial parameters should also be expressed; many of these are often communicated during the CEO’s road show for investors.
Yes, it’s important to be aggressive in pursuing entrepreneurial opportunities, but it’s also crucial to clarify the parameters around those pursuits. Performance incentives are a critical component of creating this clarity. Extreme financial incentives should be avoided.
3. Foster diversity and a participatory culture. Building a trust-based, resilient corporate culture founded on mutual respect starts with valuing differences in thought, experience, gender, sexual orientation, ethnic background, and more. When diversity and inclusion are embraced as core values and open dialogue is encouraged and expected, it’s easier to avoid the unconscious biases that contribute to missing long-term growth opportunities and emerging threats to the business model.
Building trust also begins with a passionate focus on improving the customer experience and interactions with other key stakeholders. It’s supported by data-driven systems that inform and underpin decision-making with a single version of the truth. A participatory, speak-up culture also requires effective escalation processes.
This discussion is not about morality. It’s about focusing employees on what the company stands for and having the necessary plumbing in place to reinforce expected behaviors.
Periodic training can be helpful, but it only builds awareness of the importance of ethical and responsible business behavior. A commitment to doing what is right can help instill buy-in and ultimately lead to ownership, strengthening the commitment to the company and its brand promise.
NACD: Tools and resources to help guide you in unpredictable times.