Bottom Line Ethics

A couple of weeks ago, optimistic Aggies were brimming with confidence about our basketball teams. And then it happened: the men lost 63-61 in overtime. Then the women lost 72-71. Bummer.

It was probably good for me to wait a week to write this column, because the emotions of disappointment tend to warp my perspective of what has happened in an entire process by focusing on the final outcome. I would be lying to say that I was angry after either loss; there was just a nagging sense of an opportunity missed, particularly by the women. I stepped off a plane from Nashville to see the Gonzaga score staring at me from the TV screen. It was late at night, and I still had close to two hours to drive home.

But perhaps the drive allowed me to begin processing what was going on inside. Disappointment arises because we have expectations, and we generally have expectations because we are experiencing success at some level. So disappointment is not just for the perennially downtrodden. It is a fact of life for those doing best among us. It occurs to me that there are three basic steps that I ought to take when I am disappointed.

The first is to listen. My tendency when I am disappointed is to ignore others’ explanations for what happened and to meditate on my grievances against those who disappointed me. I also have no desire to hear from those on the other side. But sometimes there is something to be learned. If you are going to read opposing fans’ blogs, you might want to skip the comments from “aggiehater” or some other aptly named participant. But as hard as it is, read the column recapping the game. Listen to at least a little critical analysis of why your candidate or cause lost an election. Ask your professor what might have gone wrong in your preparation, and then think about what you hear in response.

The second step for me is to be quiet. I sometimes listen to what people have to say, but I am quick to correct their mistaken assumptions about why I fell short of my goal. The tough thing to do is to sit still without squirming and to be willing not to respond. Being right and making clear why others are wrong seems like a fundamental right; just listen to talk radio. But if I am going to speak, it ought to be just to make sure that I understand what the other person is saying. There will be plenty of time to get things fixed if they are wrong.

Finally, I need to lower the temperature, and the best way I have found to do that is to laugh. It is so important for me to laugh on a regular basis, and the most critical time of all to do it is when the bottom is falling out. I have a friend or two with whom I can be almost completely honest. They know me well. They empathize, but they will not lie to me and tell me that I am better than I am. When I explain a disappointing situation to them, it almost always results in self-deprecating humor, with me being able to see my fallibility clearly enough to mock it. And the healing begins when I am able to laugh at myself.

So listen, be quiet, and lower the temperature. A week later you will feel perfectly comfortable saying, “Congratulations, men’s and women’s teams—we are really proud of you!”

I received a letter a while back from a not-for-profit that notified me that they were looking at borrowing against, or leveraging, the fundamental set of assets that allowed them to exist.  In other words, if they lost those assets because they could not make the payments, they would simply no longer be around.  They were doing so because of significant operating cash flow shortfalls that were systematic in nature.  In fact, they had invested in capital assets that they hoped would increase operating cash flows, and had since seen a dramatic downturn in their fortunes.

No matter what the plan given for rectifying this situation, donors are likely throwing their money down a rat hole.  From a business perspective, this not-for-profit is leveraging the assets they cannot afford to lose under any circumstances, a sign of desperation.  Of course, this happens frequently in business, because the large majority of business start-ups are bankrupt within a few years.  Sometimes it can actually save the business.  But there is the smell of death to it, and the vultures are usually circling within a short period of time.  This not-for-profit probably has few other assets to borrow against, so their behavior is understandable.  But when you have a choice, be careful what assets you leverage.

Though I largely try to avoid debt, there are some assets that it makes sense to leverage.  For example, as loyal Sienna owners, Toyota is willing to sell us a new Camry at 0% interest.  Since our cars have a combined 6,000,000 miles (approximately) on them, this is an attractive offer, especially if you are not bothered by the prospects of sudden acceleration.  Of course, this affects the price of the car, but assuming I can negotiate the price I want, it makes sense to leverage this asset.  If I can’t pay it back, they will come and take the car.  On the other hand, as my readers can readily attest, it would be financial suicide to take out a second mortgage on my house to syndicate this column.

The most important asset any of us have is reputation.  A reputation for truth-telling or dependability enables us to enjoy opportunities that would otherwise be unavailable to us.  There are times I leverage my reputation in order to recommend a student to an employer.  In most cases that is a low-risk decision, but there are a few students that require me to put some conditions in the recommendation so that I protect my reputation.  It is an asset I cannot afford to lose.

We read almost every day about people who have leveraged their reputation for short-term returns—in money, in romance, in success, or in fame.  They leverage their most precious asset, the asset that is their reason for existence, in order to acquire other assets that are not central to who they are, and that are likely to be fleeting.  And when they wake up on the due date for the debt, they have lost forever what allowed them to be who they are.

They are much like that not-for-profit who sent me the letter.  I wish only the best for that organization, and I am hopeful that they will be able to retain those core assets that define them.  But I have heard this song before, and they will not be getting a check from me.

Yesterday we took our daughter on her final, final college visit, the one that cements the decision to attend the college that had your heart all along, and that seems the right fit for you. As I sat on the bench in the sunshine with my wife, waiting for Katie to emerge from a dormitory, I recognized what a crossroads these moments are. My daughter is making decisions that will affect her for the rest of her life. The stakes are higher than they used to be for her and, for the most part, the stakes will remain relatively high for the rest of her life.

Katie is a unique and wonderful girl, and I am confident that hers will be a life that greatly impacts people for good. We have been blessed to raise her for the past eighteen years, but being on campus with her reminded me how much she will need wisdom in the years ahead to make good choices. As a dad, my tendency is to protect my children and to minimize risk in their lives. As a business professor, looking around on that campus, I thought to myself, “Higher risk, higher return.”

But the truth is that every day we are making decisions that require significant wisdom and that will affect future decisions and opportunities. The decision to write this column has helped me more effectively wrestle with some of these issues rather than avoiding them. Teaching ethics helps as well. But there is nothing in life like raising children that makes me truly want to understand what it is to be wise. And it makes me want to help my daughter live wisely as well.

This search for wisdom will likely be a regular theme of this column in the months ahead. Though people disagree over what wisdom means, most people seem to recognize it when they see it. It involves, at a minimum, being teachable and listening to those with more insight than you have. It also involves developing a long-term perspective, rather than just looking at short-term pleasure or returns. In other words, there is not much wisdom in the business world nowadays.

We are susceptible to certain fallacies in thinking that short-circuit wisdom, and I will talk about some of these in the weeks ahead. One of the most common ones among college students is a sense of invulnerability that makes them believe that the crushing consequences of others’ decisions could never happen to them. Practically every day we read about middle-aged men like me or star athletes who have fallen prey to that same fallacy.

But today, as a dad, I sit here quietly praying for my daughter to be wise, and to choose well. A great adventure lies ahead of her. May she ignore the siren song that calls her to the rocks. May she have courage to live by the values she has learned and embraced. And may God’s grace blow full in the sails that call her to her destiny.

If you wake up as Alan Mulally, it’s not as good as waking up as Warren Buffett, but nowadays it has to feel pretty close to it. Ford’s CEO and Automobile magazine’s 2010 Man of the Year, Mulally has shown himself to be a skilled leader, both at Boeing and at Ford. But even he knows it could have turned out very differently.

In November of 2008, he was being treated contemptuously by Congress and the media, along with Bob Nardelli of Chrysler (one of the all-time bad CEOs and worth a column of his own) and Rick Waggoner of GM, for his pay package. In the end, he really did not apologize for his salary and perks, and as is often the case, it turned out he was worth what he was making.

Mulally’s job was not an easy one. He took over his role from Bill Ford, who walked out the door scratching his head at what was apparently unsolvable slippage in the company’s fortunes. He cleaned house to the extent necessary and focused on cars the public wanted, including hybrids. He even seems to be succeeding with bringing back the Taurus. (Note: I have often told my students that the two great evils on earth are Enron and the 1995 Ford Taurus Wagon.)

But the most important thing Mulally did in his time of crisis was to state his values, and Ford’s, clearly. No bankruptcy. No bailout. We will do it ourselves, whatever it takes. Then he went out and got the financing to turn the boat. Now Ford has passed GM in unit sales. This may only be temporary, but it is psychologically empowering for his company, at the very least.

There is a moral component in these statements of self-sufficiency that resonates with the American people. They do not like sycophants like GM who take bailout money, and they do not root for incompetents like Chrysler’s Nardelli. They love to support folks who stand on their own. And they are not very fond of ethical calculators who put a price on human life. Ford learned that lesson long ago with the Pinto’s exploding gas tanks.

Not all the waters will be smooth for Alan Mulally in the days ahead. But it is entirely possible that Ford’s clearly stated values will help them solidify their gains and compete at a new level, particularly in the United States.

This is a lesson for all of us, and one I am taking to heart as I begin my Ethics class again in a few weeks. What I am interested in hearing from readers in the response area below is this: In 50 words or less, what values drive you?

Well, there goes my political career. A statement like, “Fraud is not a bad thing,” can follow you around like Gordon Gekko’s, “Greed, for lack of a better word, is good.” But as someone who prepares auditors to prevent and detect fraud, I want to make a case for why I believe fraud is a symptom of something good.

Fraud does not happen in a vacuum. Fraud can only take place when there is trust between parties, since fraud involves the intent to deceive. You cannot readily deceive someone who does not trust you. But trust is necessary for personal relationships and business relationships.

Divorce and infidelity happen, too. Infidelity involves a kind of fraud, but it is largely able to happen because spouses trust one another. If they had detectives monitoring each other 24 hours a day, it would be expensive, but you would have a lot less infidelity. There would also be a lot fewer people getting married. Divorce is not a good thing, but it is an inevitable by-product of a good thing, the long-term commitment of a trust relationship called marriage.

What has happened in the American economic marketplace has led to an environment that is exceptionally low in trust. If you want to avoid infidelity, don’t get married. If you want to avoid fraudulent loans, don’t lend money at all. The government pumped money into banks and banks would not lend it out. People were infuriated. But banks had just been excoriated for making all kinds of liar loans in a real estate bubble, and doing so had endangered their capital levels. Why start dating again so soon when you have been burned?

The market was well lubricated with trust (and had a few bad incentives mixed in), and that provided a significant opportunity for fraud. Long-term economic success will do that. But in addition to high levels of trust, people were involved in transactions they didn’t understand, like derivatives and mortgage-backed securities. When people trust and they are poorly informed about something, there is frequently someone willing to take advantage of them.

Trust is the lubricant for markets. It can only be maintained when there is a habit of truth-telling in a market, whether that market is for love or money. If everyone is lying, immense resources are consumed verifying the truth from outside sources. And when lying is revealed in the form of fraud, it takes a while to recover.

Of course, banks could do a much better job verifying income, and in some cases verifying it at all. And people could do a lot better job verifying the character of the people they marry before they marry them.

Fraud does not make me feel good, and neither does divorce. But both of them signal something positive, the existence of a trusting atmosphere based on the goodwill that derives from a habit of truth-telling. And if you don’t interfere and turn either markets or marriage into a police state, you can be pretty sure that, given freedom, people’s desire for love and money will insure healthy markets for both.

Fraud is not a good thing. But as a guy who has studied it for a long time, I have to say that, much like marriage, the risk of trusting is worth the return.