The 30 Day MBA (40 page)

The company scours the shelves of big pharmaceutical companies looking for drugs that for some reason failed to get to market, perhaps because the market proved too small, the benefits too few or that in some other way won't meet the needs of an affluent Western market. Hale even persuaded The University of California, Santa Barbara to donate a patent for a discovery involving the novel use of calcium channel blockers to control the schistosomiasis parasite. Hale and her team believe that that there are huge inefficiencies in the way Western world drugs are currently devised and produced, and with $140 million from the Bill and Melinda Gates Foundation they intend to improve on that situation.

Intrapreneur

The Economist
of 25 December 1976 carried a survey called ‘The coming entrepreneurial revolution' in which Norman Macrae, the magazine's deputy editor and considered by many as one of the world's best economic forecasters, contended that methods of operation in business were going to change radically in the next few decades. The world, Macrae argued, was probably drawing to the end of the era of big business corporations; it would soon be nonsense to have hierarchical managements sitting in skyscrapers trying to arrange how brainworkers (who in future would be most workers) could best use their imaginations. The main increases in employment would henceforth come either in small firms or in those bigger firms that managed to split themselves into smaller and smaller profit centres that in turn would need to become more and more entrepreneurial.

Two years later, in an article headed ‘Intra-Corporate Entrepreneurship – Some Thoughts Stirred Up by Attending Robert Schwartz's School for Entrepreneurs', Gifford Pinchot III and his wife Elizabeth S Pinchot began the process that would lead to their coining the word ‘intrapreneuring'. Their organization, Pinchot & Company (
www.pinchot.com
), based around the proposition that you don't have to leave the corporation to become an entrepreneur, advanced the idea that the way for big business to adapt was to create an environment where managers could behave as though they were entrepreneurs, but within the business, using its resources. By 1992 the term intrapreneur had been added to the third edition of
The American Dictionary of the English Language
. 3M's Post-It Note, a product of an entrepreneurial team ‘bootlegging' company resources, is an example from one of Pinochet's list of Fortune 500 clients. Others include Apple, DuPont, Cable & Wireless, Nabisco and Proctor & Gamble.

Intrapreneurs, unlike entrepreneurs, don't have ‘doing their own thing' at the top of their list of motivators. They feel happier in the comfort zone afforded by a corporate structure and the resources and respectability that provides.

Family business

Family firms make up around 70 per cent of businesses worldwide and account for a substantial proportion of GDP. Many of the world's leading corporations originated as family firms and retain cultural distinctiveness as a result. According to Nigel Nicholson, who runs the Family business elective at the London Business School (LBS), the financial crisis has illustrated, ‘with their long time scales, adaptive cultures and vision-led leadership many are much better fitted to prosper in turbulent times than many PLCs'. Indeed the PwC (PricewaterhouseCoopers) 2011 Family Business Survey in which they talked to more than 1,600 family business owners and managers in 35 countries, the largest of its kind ever to be conducted, supports this hypothesis. Of the firms surveyed, half had achieved growth in 2011, with 20 per cent reporting significant growth. A further 20 per cent at least maintained their position. Only 14 per cent had suffered a significant reduction in sales and for the most part they were in the construction industry.

Succession planning and dispute resolution are the Achilles heels of the family business. Less than 33 per cent of family businesses are passed on to the second generation and barely 13 per cent survive through to the third generation. So much for the bad news; the ones that do manage the succession planning process effectively can be very successful. ALDI (short for ‘Albrecht Discounts'); Michelin (controlled and run by François Michelin, his son Edouard and their partner René Zingraff); and Mars (founded by Minnesotans Frank and Ethel Mars, who invented the Milky Way bar) are among the world's biggest family businesses (check out
Family Business Ma
gazine
at
www.familybusinessmagazine.com
, then ‘Oldest Family Companies' for a full list). The Family Firm Institute (
www.ffi.org
), the International Centre for Families in Business (
www.icfib.com
), Peter Leach LLP (
www.peter-leach.com
), who started the Family Business Centre at accountants BDO Stoy Hayward and now runs it as a stand-alone venture, and the Family Business Institute (
http://familybusinessinstitute.com
) are organizations dedicated to providing education and networking opportunities for family businesses, as well as help with succession planning.

CASE STUDY
  
Ford Motor Company

Ford Motor Company is the second-largest car manufacturer in the United States and one of the biggest family businesses of all time. Ford's history begins with its legendary founder, Henry Ford, who once said, ‘a business that makes nothing but money is a poor kind of business'. Ford had some practice at not making dollars. His first car finished in 1896, was built in his garden. Mounted on bicycle wheels the two-cylinder car had neither reverse gear nor brakes. While hardly a show stopper, this helped Ford to get some outside investors to back him. By 1899 Ford had raised and spent $86,000 without producing a car that could be sold. Based on a successful appearance at the Grosse Pointe Blue Ribbon track at Detroit, Ford pulled in more investors, this time selling 6,000 $10 dollar shares in a new company. This venture too was a failure but nothing daunted him; in June 1903, he found 12 more investors who between them put up $28,000 in Ford's third shot at building a successful motor company.

The Model A, Ford's first production car sold well and by 1907 he broke the $1m profit barrier. The Ford Model T, available ‘in any colour so long as it's black', is generally considered the most significant vehicle in automobile history. When it rolled off the assembly line in 1908, the Model T (or ‘Tin Lizzie') Henry Ford had achieved his dream of building ‘a motorcar for the great multitude'. Unlike other car manufacturers Ford didn't focus his dream solely on performance, but on popularity. Before the Model T, cars were the ultimate playthings for the very rich. What Ford managed to do with the Model T (after 19 previous experimental models, from A to S) was to turn the car into a vehicle for the masses.

Ford's success was based on radical economics. Instead of making money by raising the cost of the product, and therefore raising profit margins, Ford realized he could make more money by increasing sales volume and lowering prices and profit margins. At this time Frederick Winslow Taylor, a professor at Dartmouth College, was developing his Principles of Scientific Management, showing how by a close examination of manufacturing tasks work could be streamlined and made much more efficient. Ford built this information and research into his manufacturing processes.

But what differentiates Ford from its competitors is continuity of ownership and management philosophy. For more than 100 years, the Ford family has maintained control of the business and shaped its future. The founder's great-grandson, William Clay Ford, Jr, currently serves as the executive chairman and two other family members sit on the board. Despite reporting losses of $14.6 billion, Ford alone of US car makers declined the US government auto bail-out cash offered at the peak of the banking crisis of 2008. While both Chrysler and GM reported sales drops, Ford's sales rose 33.5 per cent.

Business incubators: where entrepreneurs hang out

Science parks, technology innovation centres and various permutations of the words business, incubator, venture, research and programme are all used to describe the process of incubation. With this approach, job and business creation is paramount.

Innovation centres
: In application of new research. So innovation centres are often based on a university campus where the business and research communities can meet informally and share knowledge. Germany, Taiwan, Singapore, the Netherlands, Ireland and the Scandinavian countries have plumped for innovation centres as a way to commercialize the output of university or government research. Jobs and business are created, but the main aim is to recover monies spent and to provide a war chest for future research.

Science parks
: Countries such as Korea and Japan have emphasized science parks as the approach to increasing research related activities. This means that research takes priority over any business or jobs that may be created and those that are should be directly related to the science park itself.

Business incubators
: Here the emphasis is on creating new business enterprises, with or without the use of new technologies. Countries such as China, the Philippines, Trinidad and Tobago and Nigeria (with the assistance of the United Nations Found for Science and Technology Development) have moved into the business incubation approach.

Finding an incubator

The National Business Incubator Association (
www.nbia.org/links_to_member_incubators/index.php
) maintains a directory of some 1,900 incubators in over 60 countries. They also maintain a directory of international incubation associations (
www.nbia.org/links_to_member_incubators/international.php
).

9

Ethics and social responsibility

• Owners vs directors
  
• Stakeholder groupings
  
• Ethical and responsible strategies
  
• Whistle-blowing
  
• Green pays off
  

M
BAs and ethics came together in an unflattering style on 26 November 2012. It was alleged in a UK court that Bill Lowther, the driving force behind the creation of Securency, a company that according to its website is ‘the trusted partner to many Central Banks worldwide in developing and maintaining a long-term currency management strategy', was perhaps less than ethical in his business dealings. Lowther, 72, in order to secure a £90 million printing contract colluded to get the son of a Vietnamese bank governor onto the MBA programme at Durham University, 94th in the FT Global MBA Rankings, 2012. Southwark Crown Court was told that 29 Vietnamese contracts had been awarded to the banknote printing firm Securency between 2002 and 2008. Lowther, meanwhile, arranged for the son of Le Duc Thuy, the governor of the State Bank of Vietnam, to be interviewed and subsequently offered a place on the Durham MBA programme. He was also accused of paying £18,000 in tuition fees and thousands of pounds more for student accommodation. Mr Lowther resigned from Securency in October last year, shortly after he was charged by the Serious Fraud Office.

Actions for which a person or group of people can be held accountable and so commended or blamed, disciplined or rewarded, are said to lie within their sphere of responsibility. Anything that lies outside our control also lies beyond the scope of our responsibilities. Ethics, known in academic circles as moral philosophy, is concerned with classifying, defending, and proposing concepts of right and wrong behaviour in the way in which we discharge
our responsibilities. While many responsibilities lie within the scope of the law, shareholders' protection, discrimination at work, misleading advertising and so forth (see
Chapter 6
for more on business law), both in those areas and in the grey area that surrounds them lies the province of ethics and social responsibility. Right and wrong in themselves are often not too difficult to separate out. The problem usually stems from competing ‘rights' – giving shareholders a better return vs saving the planet, for example, and the inherent selfishness of humans. Many, if not all, of our actions are triggered by self-interest. In fact, much of the justification for capitalism's attraction lies in the ‘invisible hand' theory advanced by Adam Smith in his defining book,
The Wealth of Nations
(1776):

Every individual… generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

Unfortunately, the invisible hand suggests only that businesses and consumers, in being selfish, may by accident do good, not that their actions are made ethical in the process. Many purely selfish actions, say by operating a cartel to rip off consumers, or adopting a polluting production process purely to boost the bottom line, fall firmly into the unethical bracket. Even overtly ethical actions, for example when a business gives to charity or supports a ‘not for profit' event, such as Coca-Cola's sponsorship of the Olympic Games over an 80-year period, can prove ethically questionable. In the first place Coca-Cola, McDonald's, Samsung and the other Olympics' sponsors hope for a share of the huge marketing benefits that accrue from such association. Secondly, supporting the Games may be the ‘right' thing to do, but supporting the 2008 host country, China, a regime with a questionable human rights track record, may well be ‘wrong'.

Business ethics defines the categories of duty for which we are morally responsible. Lists of moral duties and rights can be lengthy and overlapping. The duty-based theory advanced by a British philosopher, W D Ross (1877–1971), provides a short list of duties that he believed reflects our actual moral convictions:

• Fidelity: the duty to keep promises.
  
• Reparation: the duty to compensate others when we harm them.
  
• Gratitude: the duty to thank those who help us.
  
• Justice: the duty to recognize merit.
  
• Beneficence: the duty to improve the conditions of others.
  
• Self-improvement: the duty to improve our virtue and intelligence.
  
• Non-maleficence: the duty to not injure others.
  

Ross recognized that there will be occasions when we must choose between two conflicting duties. For example, should your business be involved in any way with products that facilitate abortions? On one side of that moral argument lies beneficence in improving the conditions of women and, on the other, non-maleficence in not doing injury to the unborn child. You can find out more about the theoretical aspects of ethics on The Internet Encyclopedia of Philosophy (
www.iep.utm.edu/e/ethics.htm
) and on related business issues on the Free Management Library website (
www.managementhelp.org/ethics/ethxgde.htm
).

Teaching ethics and social responsibility in business schools

This subject is perhaps the most controversial and disputed in terms of the teaching methodology and content used in business schools. A recent survey on Corporate Social Responsibility Education in Europe found that while most business schools had some content in this area, only a quarter had a specific topic, module or elective covering the ground. In 2008, courses in corporate social responsibility (CSR), ethics, sustainability or business and society are now a requirement for 58 per cent of MBAs, up from 45 per cent in 2003 and 34 per cent in 2001. Most had the subject embedded in various other subject areas, for example under titles such as a combination of ‘Accounting, Corporate Governance, Law and Public Governance' or ‘Stakeholder Management'. Others had ethics and social responsibility covered in the context of specific disciplines – ethical accounting systems or marketing and ethics. Georgia Tech College of Management's MBA set as a business ethics paper the task ‘Analyze Sarbannes–Oxley from both conceptual and implementation perspectives', which is largely a single issue of directors' responsibilities to investors.

There is widespread use of practitioner speakers from business or non-governmental organizations (NGOs) as well as case studies from industry, and these methods dwarf the more academic methods (lectures, tutorials) used in other subject areas. Tuck School of Business at Dartmouth, for example, teaches a ‘brief mini-course' based on discussions of ethical issues encountered by its faculty in cases involving their experience ‘particularly on the functional areas of business as exercised in both the US and the global marketplace, where different local practices and cultural norms seem to muddy the ethical water'. The academics, however, are on the march! Nottingham University Business School has an International Centre for Corporate Social Responsibility and a Professor of CSR (Corporate Social Responsibility). INSEAD has a chaired professor of Business Ethics and Corporate Responsibility, though the focus there appears to be very much around ethical consumerism, deception in marketing and marketing ethics.
But the University of Chicago Graduate School of Business leads the field in raising the bar on teaching in this field. It's the only business school anywhere to have a Nobel laureate – Robert Fogel, winner of the 1993 Nobel Prize in economics – teaching ‘A Guide to Business Ethics'.

Owners vs directors: the start of the ethical tug of war

Directors are appointed by the owners of a business to control a business and look after their interests in their absence. When enterprises were small and local this was an expediency rarely invoked, as owners more often than not were the directors and where they were not it was usual to ensure at least some family oversight. Now, where nearly two-thirds of all business activity is conducted by giant global enterprises, this separation of ownership from control has become both necessary and commonplace. Also, such businesses have replaced ‘owners' with ‘shareholders'. The difference is subtle but it is the key to understanding the requirement for including business ethics and social responsibility on the business school curriculum.

Shareholders only rarely own more than a small fraction of any one business, they have no special reason to identify with the founders' vision or code of behaviour and they are preoccupied with relatively simple outcomes such as growth in earnings per share. If they become unhappy in that respect they just swap their holding in that business for a similar stake in another. In fact, even if such shareholders are satisfied with financial performance when a sector is out of ‘favour', say, as retailers may be during a recession, they may well sell their holding in any event. The main holders of large shareholdings in businesses now are fund managers and pension funds and arguably these have an even greater imperative to focus their attention on earnings. True, they exert pressure from time to time but that is usually when they see too much control moving into the hands of one director, say when there is an attempt to combine the roles of chairman and chief executive. Also, when directors are trying to pay themselves more than they may be worth or are trying to improve their lot in some other way at the expense of shareholders, a fund manager may step in. Fund managers are not always honest brokers with regard to looking after shareholder interest. For example, during a takeover there is a good chance that a fund manager will find themselves with holdings in both buyer and seller.

The board of directors has in effect replaced the ‘owner' as the custodian of the moral tone and in setting standards of behaviour towards everyone the business has dealings with. They are in some ways encouraged by legal constraints placed on them to take a narrow view of those responsibilities. They are required ‘to act in good faith in the interests of the company'; ‘not to deceive shareholders and to appoint auditors to oversee the accounting
records'; ‘not to carry on the business of the company with intent to defraud creditors or for any fraudulent purpose'; and ‘to have regard for the interests of employees in general'. (See
Chapter 4
for more on the responsibilities of directors.)

Directors and managers also have responsibilities to protect their customers when using their products or services or when visiting company premises and to follow rules inhibiting pollution in the operating processes. But it is only relatively recently that companies have been required to take a wider view of their responsibilities to other ‘stakeholder' groups. Enlightened managers, or those that are particularly astute, depending on your level of cynicism, have often taken on broader responsibilities, sponsoring charities, funding social amenities such as play areas or providing low-cost housing. These initiatives are often spurred on by enlightened self-interest, say to help with recruiting and retaining employees; with getting favourable PR; or in the case of low-cost housing, providing amenities is a usual requirement in getting planning consent for a property development or a site for, say, a supermarket.

CASE STUDY

Amazon, Apple, Facebook, Google and Starbucks are finding out whether staying strictly within the law is sufficient to be ethical. Google, Amazon and Starbucks, three US companies with a widespread global presence got the answer to that question on 12 November 2012 when they appeared before a select committee in the House of Commons, the UK's parliament. The committee were told that Amazon had paid an effective UK tax rate of 2.5 per cent on 2011 earnings of £309 billion. Google paid 0.4 per cent on £2.5 billion. Starbucks paid nothing, though its UK earnings were £365 million. Starbucks has achieved this position by using a number of tax reduction strategies including paying royalties on intellectual property and using the ‘buying expertise' of its 40 staff in Switzerland. Starbucks' Swiss business trades coffee and charges the UK arm a premium of 20 per cent for the privilege. That allows Starbucks to pay 12pc Swiss corporation tax, rather than the UK's 20 pc, despite the UK being the company's main operation in Europe with some 6,600 employees.

By using a registered base in Luxembourg, Amazon was able to generate £3.3 billion of sales in the UK while paying no corporation tax at all. The same location strategy allowed it to get away with paying just 3 per cent VAT on UK book sales, a fraction of the UK's rate of 20 per cent. Amazon employs 15,000 people in the UK and operates all its warehouses there, yet drives all its sales out of Luxemburg, a country with a population of 517,000.

All of these companies use legal tax avoidance strategies, channelling much of their business outside of the United States through subsidiaries in tax friendly countries including Ireland where the corporation tax is about half the UK level. Other ploys include
paying royalty on intellectual property, commissions and fees with the aim of moving any profit to a low or no tax regime, including Caribbean tax havens.

Mrs Hodge, the Commons Committee's chair summed the situation up with this sentence: ‘We are not accusing you of being illegal, we are accusing you of being immoral.' The problem for these companies may be more immediate as the UK press has been quick to suggest UK customers vote with their wallets. For example, going to Costa owned by Whitbread who paid £15 million in corporation tax, rather than companies such as Starbucks and Caffe Nero, would be more patriotic.

Understanding stakeholders

So we can see that directors and by extension the managers of an organization first saw that their primary, often their only, responsibility was to look after the shareholders' interests. Measures were, and still are, taken to attempt to ally their interests, for example linking bonuses to share price or profits. For the most part these attempts have failed, as the case of Enron showed, where shareholders were systematically deceived. Also, in the whole sub-prime debacle bankers were rewarded for systematically repackaging toxic loans and spreading them in near-undetectable layers around the globe, to the eventual detriment of their shareholders and the taxpaying public at large who had to pick up the bill. But even where it is possible to ally directors' interests with those of shareholders, that leaves a myriad of other interested parties effectively disenfranchised, except in so far as they are expressly protected by laws.